The Carmakers’ Conundrum — An Economist’s Perspective

By Paul Wildman and David Waterworth

Legacy car manufacturers now need to restructure their organizational structures rather than just adding divisions for electric vehicle production. Ford and GM have just done this recently by splitting their organizational structures in two.

Factors slowing down the innovation cycle in the fossil fuel auto world are a combination of multi-year subcontracts, outsourcing of component manufacture (sometimes seen as horizontal, rather than vertical, integration), and reliance on the dealership model. These all increase sunk costs, reduce momentum, and slow the momentum for innovation. It is the “The Carmakers’ Conundrum.”

Not to mention the inertia of internal company culture. The boardroom battles of BMW and Volkswagen are a testimony to this. How can a manufacturer have over-the-air (OTA) upgrades on everything from the UI (user interface) to the powertrain to the self-driving components if these components are all made by different subcontracting companies!

Despite recurring claims that Tesla Killers are coming, legacy carmakers still haven’t made a car that can compete with the 2012 version of the Model S let alone the Model 3. Why? Because Tesla makes everything and spends 10 times more per vehicle on R&D.

Innovate or die — the carmakers’ conundrum.

In the 1980s, rates of change in the automotive industry were such that in the US an innovation took about 3 years to bring to the showroom floor. Then the Japanese came along and slashed this to 9 months, while the US manufacturers’ innovation cycle period stayed the same. So, in effect, everything in the US auto and British motorcycle industries went silent.

When your rate of innovation is slower than your competition’s, no one can hear you scream! The Japanese got inside the innovation response loop of the Americans and it’s as if the US had no car industry at all. This is a difficult concept to grasp, but it is central to the position taken here. The Innovation Cycle Period (ICP) for Tesla is not 3 years or even 9 months but about 1 month for the same car, with new and improved features coming from OTA updates.

Furthermore, the innovations from the Japanese automakers were things like: radios, heaters, windscreen wipers, brakes (disc), carpeting, tires, larger motors — frankly, in today’s terms, ALL standard fitments and seen as relatively trivial, but even then the US car manufacturers could not keep up.

Now, what is the rate of non-trivial innovation in Tesla? It happens over the air every month and sometimes more frequently.

Without OTA updates. The legacy manufacturers’ Innovation Cycle Period (ICP) is still years — a fossil fuel model’s cycle is around 5 years. So, if Tesla: (1) is already 5 years ahead of its EV competition, (2) keeps innovating within the ICP of the legacy manufacturers, then (3) the legacy auto manufacturers will go silent – even when they are making EVs!! BMW and Toyota are presently silent, even though they have EVs. Tesla is innovating faster than they do or can, so their offerings are in effect “from a previous period.”

Dr Paul Wildman is a retired crafter and academic. He was director of the Queensland Apprenticeship system for several years in the early 1990s and is enthusiastic to demonstrate the importance of craft, peer-to-peer manufacture, collaboration and “our commons” in social, economic, and technological innovations such as EVs. Paul is long on Tesla and trying to prove a Fox Terrier can be trained. Paul’s crafter podcasts: The paulx4u’s Podcast.


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