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May 27, 2014 at 08:00 PM
The past decade has been tough on investors in U.S. car companies. It brought huge stock price volatility, bankruptcies and bailouts by Uncle Sam. A foreign automaker had to be brought in to save one of the Detroit Big Three. Having suffered such damage, it’s understandable that investors remain apprehensive. But the future for the auto industry suddenly looks much brighter, as the high-tech revolution starts to shape the automobile of the future. U.S. companies are likely to be among the greatest beneficiaries of this trend.
The famous quote of Charles Erwin Wilson, the head of GM in the mid-1950s, who reportedly said “What’s good for General Motors is good for America, and vice versa,” encapsulates the problems of the U.S. auto industry over the past few decades. Detroit was simply too big and too full of itself to think anyone could dent its dominance in car-making.
The industry famously missed the challenge from Japanese carmakers in the 1970s, and it slept through various other trends in the U.S. and abroad, such as the decline of industrial unions, falling production costs, new corporate management techniques, globalization, the rise of high-income buyers and the technological revolution.
Failure to Capitalize
Other U.S. multinationals were able to benefit from the opening of Eastern Europe and the rise of emerging economies, expanding their global footprint and dominating international markets. U.S. automakers were a notable exception. Even though GM and Ford had a jump on their competitors in international presence—they owned numerous top flight brands in Asia and Europe; and GM, was an early, successful entrant in the Chinese market—they weren’t able to parlay their advantages into global domination. While a majority of companies on the Forbes list of the world’s hundred most valuable brands are U.S.-based, Ford holds only the 44th place, behind two Japanese and three German brands. No GM or Chrysler nameplates are included.
Detroit was also remarkably slow to embrace Silicon Valley. To be sure, computers have long been part of motor vehicles. Electronic control units (ECUs) monitor and control engine and transmission functions; the average car has some 100 ECUs under its hood. However, even though the U.S. leads the world in innovation, its automotive companies have not been leaders in automotive innovation. Instead, they have tended to follow in the footsteps of Japanese and German producers.
The net result has been low profitability, depressed stock prices and bankruptcy—not just for companies but for the city of Detroit. The highly profitable top tier of the automotive market has been virtually monopolized by the Germans, with a smattering of British and Japanese brands; the green segment has been left to the Japanese and French, and U.S. manufacturers compete mainly in the crowded and unprofitable middle-of-the-road and economy segments.
Yet all this appears to be changing. In 2009, near-death experiences in the global automotive industry pushed car companies to change their ways. While the crisis was wasted by governments, which continued to borrow and expand public debt, automakers used it as impetus for introducing greater managerial expertise and innovation.
Earlier this year, a Boston Consulting Group report on innovation in the auto industry found that patent applications by original equipment manufacturers and their suppliers rocketed over the previous four years, while spending R&D expanded by an average of 8% annually over the past four years. The group saw the pace of innovation quickening and predicted that the auto industry is at a threshold of a technological revolution.
Tech Show
This year’s Consumer Electronics Show in Las Vegas featured something really new. Even as traditional auto shows in Detroit, Frankfurt and elsewhere lose their luster, the International CES effectively turned into an auto show of its own. Carmakers and their suppliers showcasing new automotive technologies outshone other innovative companies with their gadgets.
Google unveiled its Open Automotive Alliance to enhance connectivity between the car and mobile phones using its Android operating system. Car dashboards, which already look very different from a decade ago, are about to become unrecognizable. Google and other tech giants are also working on self-driving vehicles, another major step into the automotive future.
