KITE RADMA Advanced Workshop September 2008
Knowledge integration as a key competence -contrasting technology and sourcing strategies for the development of hybrid-electric vehicles
Thomas Magnusson and Christian Berggren Kite Research Group Department of Management and Engineering Linkรถping University SE-581 83 Linkรถping thomas.magnusson@liu.se
Abstract In this paper we argue that the introduction of the hybrid-electric power train represents a technological discontinuity for the automotive industry. The purpose of the analysis presented is to understand how incumbent manufacturers try to manage this discontinuity. Our findings suggest that ccapabilities of integrating knowledge from diverse and highly different technological fields seem to play a key role in the evolving competition in hybrid-electric vehicles. Experiences from the market leader Toyota indicate that such integrative capabilities need to build upon detailed technical knowledge on a component level and that they need to reflect experiences from both R&D and manufacturing. The importance of integrative capabilities seems to be even more critical due to the severe cost pressures, which the car manufacturers are exposed to.
1
Introduction Long-term increases of petrol prices and regulatory efforts to curb the threat of a global climate change are initiating a new kind of technology-based competition within the worldwide automotive industry. This competition, which is based on technological innovation in the very core of the vehicle, the automotive power train (i.e. engine and transmission), comes in addition to a process-based competition with the aim of driving down production and supply costs, which has been a focus are for this industry for several decades. The abilities of vehicle manufacturers to develop and launch new and substantially more fuel-efficient power trains will be of a decisive importance for their future competitive positions. So far European car manufacturers have been focused on developing more clean and powerful diesels, whereas their Japanese competitors Toyota and Honda have invested massively in developing and marketing more complex gasoline fuelled hybrid-electric power trains. Especially for Toyota this has paid off in terms of soaring US sales. Modern diesel engines have captured a majority of new car sales in the European Union, and the European makers forecast a rapidly increasing market potential for clean diesels also in the US. After a long period of improvement, however, diesel technology is leveling off and it is becoming increasingly difficult to improve fuel efficiency. Therefore also European makers are announcing introductions of new hybrid models. By contrast, more futuristic technologies such as fuel cell vehicles have failed to take off and face very severe cost and infrastructure problems. In a comparative study of 10 different power train configurations, from an “evolving baselineâ€? car (gasoline fuelled combustion engine) to fully fledged hydrogen fuel cell vehicles, Schäfer et al (2006) have shown that in a 25-year timeframe, hybrid electric power-trains, combining diesel and electric technologies, are the most promising alternative from both a cost and environmental performance perspective. Thus there are strong reasons to believe that hybrid power trains will be a very important part of the automotive future. This implies difficult challenges for this highly capital-intensive industry, all of them related to the need for firms to acquire significant new knowledge and integrate this new knowledge with their present evolving knowledge base. The result may be a new round of restructuring and a shift in the locus of technological innovation capabilities, away from the established car manufacturers. In this paper, we suggest that the new knowledge base required makes it reasonable to consider the introduction of the hybridelectric vehicle (HEV) and the emerging electrification of automotive power trains as a case of technological discontinuity for the automotive industry (Anderson & Tushman, 1990). 2
However, it is a discontinuity of a particular type: it is not the standard case where a new technology, involving a new S-curve, replaces an established technology (Utterback 1996, Cooper and Schendel, 1988). Rather it is a case where new technologies and correspondent knowledge bases need to be integrated with a still evolving old technology to result in a superior new technological system. Literature on technology life cycles and industry dynamics presents a number of models on the emergence of technological discontinuities and the competition between technologies (Tushman & Anderson, 1986; Tushman & Rosenkopf, 1992; Foster, 1986). Taking the analysis to a technology strategy level, this paper will focus on technology-based competition between firms rather than competition between different technologies per se. In a study of technology-based competition in another mature industry, Bergek et al (2008) argue that the ability of firms to compete in a sector disrupted by discontinuous technological change is determined by firms’ technological capabilities. In particular, their study of industry dynamics in the advanced gas turbine industry showed that deep technological capabilities were required both to develop superior product systems and to be able to correct technical problems that were discovered in the field. In particular, the ability of firms to respond to and correct these “after-delivery” problems was a prerequisite for survival in the industry. While technological capabilities can be expected to play a vital role for the competitiveness of automotive manufacturers in the emerging “hybrid race”, the automotive industry displays fundamentally different characteristics than the advanced gas turbine industry. The advanced gas turbine is a typical case of a Complex Product System and the industry is thus characterized by e.g. unit or small batch production systems, high unit costs of products and professional buyers (Hobday, 1998). By contrast, the automotive industry has different characteristics in terms of e.g. production volumes and buyer behaviors. Therefore, we expect that different kind of technological capabilities will be decisive in this emerging competition. Hence, the purpose of the analysis presented in this paper is to understand how incumbent automotive manufacturers in this mature, but once again turbulent industry, try to manage the discontinuity represented by the hybrid-electric power train. Specifically we focus our analysis on the following questions: 1. What kind of technological capabilities are needed to succeed in this new competition? 2. What kind of technological strategy and capabilities characterize the most successful company in the hybrid electric-field so far?
3
Moreover, we discuss if this strategic approach is the only possible, or if there may be other ways to succeed in the future. The case of hybrid-electric vehicles presents a unique opportunity to study a technology based competition in its unfolding and to reflect upon the dynamic developments resulting from the introduction of a new complex technology in a mature industry. Although we cannot see the full consequences of the introduction of hybridelectrical vehicles on competitive positions and market entries/exits yet, it is nevertheless useful to map out the present situation, outline possible explanations and discuss implications for strategy.
Overview of paper Firstly, we discuss the hybrid power train technology in relation to innovation studies as a particular case of technological discontinuity. Specifically we discuss architectural versus modular innovation in relation to system integration versus component specialization. We then explain the hybrid power trains in technological terms, including an overview of different kinds of hybrid configurations and the multiple challenges posed by hybrid power train development. Thereafter we outline the research methods that were used in the study. The following three sections describe the emerging capabilities and strategies of car manufacturers in the field of hybrid-electric vehicles: •
their technological (inventive) capabilities as measured by patents;
•
their product development capabilities as measured by product launches and announcements;
•
their industrialization and production capabilities as measured by sales.
We summarize this part of the paper by pointing out four crucial HEV challenges. Thereafter we discuss the technology strategy and capability profile of the most successful HEV-company to date – Toyota Motor Corporation, with a special emphasis on its knowledge integration capabilities and technology sourcing strategy. This analysis is intimately related to the first research question “what kind of technological capabilities that are needed to succeed in this new competition”.
4
Next, we compare these findings to the literature on architectural versus modular innovation and the issue of internal versus external capability building. We elaborate one of the main findings in the article, namely that capabilities of integrating knowledge from diverse and highly different technological fields have played a key role in the evolving competition in hybrid-electric vehicles, something that may contradict previous trends of modularization and outsourcing of component design and manufacturing in the automotive industry. Finally we discuss if there are other ways to compete, and what kind of technology sourcing and capability development this would entail. In the concluding section we summarise our findings and contrast them with the other case of technological competition and discontinuity in a mature industry that we brought up in the introduction section, namely advanced gas turbines.
The hybrid vehicle: radical innovation in a mature industry Historical studies of innovation patterns and industrial dynamics in the automotive industry illustrate the industry’s predilection for continuous improvement based on process innovation, incremental product innovation and adoption of new component technologies to add functionality and performance and to reduce costs (Abernathy, 1978; Abernathy & Clark, 1985). However, few industries display such a long-term stability in their selection of core technologies. Although there have been numerous attempts to promote alternative technologies for automotive propulsion (e.g. by the Californian government through their emission regulations and Zero Emission Vehicle mandates during the 1990ies), the position of the internal combustion engine has remained largely unchallenged ever since mass production of cars was initiated almost 100 years ago. Vehicles based on alternative propulsion technologies have either failed to proceed beyond an experimental concept stage, or have been withdrawn only after a short period on the market. An infamous example of the latter is the electric car EV1, which was offered for lease by General Motors in the in the late 1990ies. Examples of the former are Rover’s experiments with gas turbine powered cars in the 1950ies and the fuel cell vehicles programmes, which several car manufacturers have been running since the mid 1990ies. Whereas these programs received a lot of public attention, the real action in engine development, particularly in Europe, were related to diesel development. Solving the problem of diesel emissions, especially the emissions of NOx and particulate matters equally efficient
5
was long perceived to be almost impossible. In the 1990s, however, 100 years after its birth, European diesel technology embarked on an impressive improvement trajectory, stimulated by high fuel taxation, advances in component technology, and stepwise tightening of emissions legislation (from Euro 1 in 1993 to Euro 5 in 2008/9). By incorporating advanced turbo chargers, modern control electronics, new injection systems (common rail injection), and composite after-treatment systems, diesel engines could improve both performance and convenience and at the same time reduce emissions markedly. As a result sales started to soar. In 2007 more than 50% of new cars in Western Europe were powered by diesel engines. European producers such as Peugeot CSA, Volkswagen – Audi and Renault dominate this market. In Japan and North America, however, diesel engines did not attract any significant market share and instead of sticking to the industry’s tradition of incremental innovation, two Japanese firms, Honda and Toyota embarked on an exceptional route of radical innovation, by developing and marketing the first series-produced hybrid-electric vehicles (HEVs), in the late 1990s. Technological innovation in assembled product systems can be categorized as modular innovation, with a focus on the changes in the individual component, or as architectural innovation, changing the product configuration and combining components in new ways without introducing any fundamentally new component technologies (Henderson and Clark, 1990). In the automotive industry, the recent evolution of the diesel engine can be seen as a typical case of modular innovation, involving significant redesign and additions of components (injection systems, turbochargers, exhaust treatments systems), but not changing the basic architecture of the automotive power train. In contrast, the evolution of hybridelectric vehicles requires innovation in both components and in product architecture. Modular innovation, as in the case of recent diesel engine developments, assumes some degree of modularization and standardisation of technical interfaces. The modern personal computer is a good example of a modularized product, where components, such as disk drives and CD-drives, are easily interchangeable. Contrasting examples are aero engines or gas turbines, in which the components are very much inter-dependent. Hence these products are characterised by integral (non-modular) product architectures. According to Christensen et al (2002), integral product architectures are favored in markets where superior functionality and product performance constitute prime means of completion. However, if the level of performance, which is possible to reach, exceeds what customers actually can use, the basis of competition tends to shift towards speed-to-market, convenience and customization. In turn,
6
this will favor standardization of technical interfaces, the development of modular architectures and outsourcing of component design and manufacture. Christensen et al present the automotive industry as an illustration, predicting that competitive forces will favor increasingly modularized automobile designs. This in turn may reduce the added value of systems integration, which is a core activity for automotive manufacturers, and instead favor a limited number of suppliers, who may attain a competitive edge based on functionality and performance at the component level. In contrast to this argument, Takeishi and Fujimoto (2003) maintain that the car is still very much characterized by integral product architecture, arguing that the trend of modularization in the automotive industry is only in the “trial and error stage� (p. 273) and that systems integration still constitutes a critical activity in car design. This means that although the automotive manufacturer does not have to manufacture the complete vehicle in-house, it is necessary to retain a broad technological knowledge base to understand interdependencies in the product system and cope with imbalances as a result of different rates of development in different technologies (Brusoni et al, 2001). These different positions concerning technology sourcing and capabilities needed in the auto industry were articulated before the advent of the new technological competition and the race to develop hybrid power trains. In this paper we will take a new look at the argument, in relation both to the approach of the most successful firm so far, and to possible responses by its competitors. Our study suggest that hybrid power train development calls for a particular focus on knowledge integration, and thus a need to reinterpret and qualify the analysis of previous trends of modularization, standardisation of technical interfaces and outsourcing of component design and manufacturing in the automotive industry (cf. Takeishi and Fujimoto, 2003; Christensen et al, 2002).
The hybrid power train: technology and configurations In a traditional car, the internal combustion (IC) engine is dimensioned according to the maximum power needs of the car during e.g. acceleration. This means that there is an excess capacity in normal driving and this excess capacity results in efficiency losses. By combining the internal combustion engine with an electric motor, the engine in a hybrid power train can be down-sized and thus efficiency is gained. Moreover, being assisted by the electric motor, the operation of the internal combustion engine is allowed to consistently operate its most efficient range in terms of engine speed (rpm) and torque. The electric motor can also be
7
reversed and used as a generator to recover breaking energy and idling losses are minimized through automatic shut-down of the engine at idle. Hence, the combination of the virtues of electric machines and internal combustion engines enables significant fuel efficiency gains, especially in driving conditions, which are characterized by repeated starting/stopping and acceleration/deceleration, such as urban driving. When cruising in the countryside, however, the hybrid system is rather a disadvantage with its extra weight and complexity, and a hybrid electric gasoline system cannot match the fuel efficiency of a modern diesel. This differences in performance related to driving conditions make the technology choices of companies significantly more difficult. Furthermore, the fundamentally different characteristics of internal combustion engines and electric machines pose severe difficulties. Combustion engines are based on an entirely different knowledge base than the knowledge needed for developing components such as high-voltage electrical machines, new energy storage technologies (batteries), as well as power electronics and energy management systems, which are needed in hybrid-electric power trains. Thus product architecture and configuration pose a number of difficult choices for automotive manufacturers. HEVs can be classified according to how the system is configured (Chau and Wong, 2002; Ehsani, 2005). In a series hybrid, the IC engine drives an electric generator, which is connected to a battery pack via an electronic converter (rectifier). A single electric motor propels the vehicle and the electric motor may also be reversed to recover breaking energy. The IC engine in a series hybrid can always operate in its most efficient and low-polluting load range. However some of the efficiency gains are lost through energy losses in the conversions from motive power to electric power and then again back to motive power. In a parallel hybrid, the IC engine is assisted by an electric motor. Hence, the IC engine and the electric motor are both mechanically connected to the vehicle transmission. As the most efficient combination of IC engine and electric propulsion can be selected at any given situation, the main advantage of the parallel hybrid is its fuel efficiency. The series-parallel (or complex) hybrid is a combination of the series and the parallel hybrid. It comprises an additional mechanical link compared to the series hybrid and it also comprises an additional generator. The series-parallel or complex hybrid possesses favorable characteristics of both series and parallel hybrids; but it is also more complicated and more expensive. Another means of power train classification refers to the extent the vehicle relies on the IC engine and the electric motor respectively for propulsion. At one end of this spectrum is the traditional vehicle, which only uses an IC engine and at the other end of this spectrum is the
8
pure electric vehicle, which only relies on an electric motor for propulsion. All HEVs can be found somewhere in between these two extremes. Mild hybrids comprise relatively small electric motors, which primarily assist the IC engine during acceleration from standing still and at low speeds. A full hybrid comprises a more powerful electric motor which is integrated in the automotive power train to assist the IC engine at both lower and higher speeds. The next step is the plug-in hybrid, which comprises a larger battery that may be charged via the electric grid. The electric motor is the prime source of motive power in the plug-in hybrid for all short-range driving (H책kansson, 2008). As argued by Hekkert and van den Hoed (2006), from the perspective of life-cycle analysis and ease of introduction the hybrid electric vehicle might be considered as a winner in the battle with more visionary alternative power train technologies such as fuel cells. However, as Chanaron and Teske (2007) contend there is still a huge strategic dilemmas facing by the key players of the automotive industry related to the current competitiveness of diesel engines and the complexity and high cost of hybrid technology. This is especially true for small cars, which are affected disproportionately by the added costs of hybrid systems, for the introduction of diesel hybrids since diesel engines are more expensive than gasoline engines, and for plug-in hybrids since they require much larger (and thus significantly more expensive) batteries. In this situation, a mistake in technology decision-making might turn a big player into a take-over candidate. Thus, it is important to study on how vehicle manufacturers manage their technologies and product strategies related to hybrid technology.
Research Methods Technology strategies represent corporate top-management intentions and de facto actions related to what technological resources to engage and how these resources should be utilized in the market (Collins et al, 1996). While we do not position us in the academic debates as to whether corporate strategies are the results of long range planning activities or if they are continuously evolving as results of managerial responses to emergent contingencies (Mintzberg & McGugh, 1985), our prime interest lies in what incumbent manufacturers actually do in the HEV field. Thus we interpret the concept of technology strategy as a reflection of choices that have been made and actions that have been taken. Particularly, we have focused technological capabilities and technology sourcing, which may be considered as two aspects of technology strategy (Bergek et al, 2008).
9
Technological capabilities consist of several different categories, which may or may not coexist in the same company. One category is inventive technological activity, as indicated by patenting. This was one of our key measures at the start of this study. With the exception of software development, patents can in most cases be considered as the best available indicator of R&D activities (Holmén & Jacobsson, 2000:336). Patent data may be used as an indicator of the latest R&D efforts of firms and it may also reflect the technological capabilities of a firm (Miyazaki, 1994:110). To facilitate a comparison between the two largest markets for automobiles, USA and Europe, we used two different patent databases: the US Patent and Trademark Office (USPTO) and the European Patent Office (EPO). To identify relevant patents, we applied a tree step procedure. Firstly we searched all patents related to hybrid technology. In the USPTO case, we searched all patents data that comprised the words “hybrid” (abstract) and “vehicle” (all fields). We limited the search to patents granted between 1990 and 2007. In a slightly different way, for the EPO case, we put “hybrid vehicle” as the search term. By so doing, the search engine showed all patent documentations that include those two words. Similar to the USPTO search, we set time limits between 1990 and 2007. In the second step, we scrutinized the abstracts and eliminated irrelevant patents. We also checked the text describing the background of the invention (particularly the paragraphs “Field of the Invention” in USPTO patents and “Technical Field” in EPO patents) to ensure relevancy. In the third step, we compiled information on the title, assignee, issue date and classification the relevant patents. In order to identify capabilities of vehicle manufacturers in the area of hybrid technology, we sorted the relevant patents based on the assignee. A lot of inventive technological activity is not documented by patent applications, however, and the propensity to patent differs widely across companies. Therefore patent data give a highly incomplete view of inventive technological capabilities in the studied firms. Another aspect technological capabilities is integration competence (or capability; we use those terms interchangeably. cf. Prencipe, 2000), e.g. the capability to integrate diverse knowledge and components into effectively functioning technological systems. This is particularly important, we contend, for hybrid power train development. Unfortunately patent data give no indication of these integration capabilities, and we have not been able to identify any other robust direct indicator. Here we rely on the “revealed integration competence” indicated by new products launches. To measure this aspect of the innovation process we use data on product releases, gathered from automotive trade journals, especially the Detroit-based weekly Automotive News. In addition, to get an inside view of how manufacturers perceive different the
10
challenge of technological integration, we have interviewed technology managers at Toyota Europe, Volvo Cars, Volvo power train (trucks and construction equipment), Scania (heavy trucks), GM Powertrain and Volkswagen. We also make use of an earlier case study of the first and second Prius projects conducted by the authors in Japan 1999 (Magnusson & Berggren 2001). A third aspect of innovation is the capabilities to industrialize the new products, i.e., to develop external partnerships, design efficient production systems and ramp-up production in reliable and cost effective ways. Here we use data on sales volumes and market plans, collected from trade journals and business journals and press releases available via official corporate web sites. To gain additional insight in hybrid power train technologies and configurations, we also interviewed the leading Swedish hybrid power train expert, who has also been engaged as a consultant by several automotive firms.
Inventive activities in hybrid power train development – the patent picture Hybrid power train development involves challenges in a number of technical subfields, which are stimulating inventive activities both in component technologies (batteries, transmissions, etc.) and in control systems and integrative technologies. Of the automotive manufacturers, Toyota pioneered patenting in the US in the early 1990s. Ford was also an early patentee, but with a much more instable performance. In the early 2000, Honda outperformed Toyota in its effort to catch up with the market leader, but its performance has been falling, maybe a result of disappointing sales. GM started late but emerged as a leader in the last period of 2006-2007, a testimony of its late awakening and accelerated efforts to develop technologies that can compete with Toyota in the next round of hybrid evolution. Figure 3 shows US patenting activities of incumbent automotive manufacturers in the field of HEVs 1990-2007 and figure 4 shows a corresponding graph illustrating patenting activities in Europe.
11
Total number of granted patents related to Hybrid Vehicle (USPTO, 1990 - 2007)
60 50 40 30 20 10 0 1992/1993 1994/1995 1996/1997 1998/1999 2000/2001 2002/2003 2004/2006 2006/2007
Toyota
Honda
GM
Ford
Nissan
Figure 3
Total number of patents related to hybrid vehicle (EPO, 1990-2007) 30 25 20 15 10 5 0 1992/1993 1994/1995 1996/1997 1998/1999 2000/2001 2002/2003 2004/2005 2006/2007
TOYOTA Group
HONDA
NISSAN-RENAULT
FORD Group
BOSCH GMBH ROBERT
Figure 4
Both the USPTO and EPO graphs show that that Toyota started patenting hybrid vehicle technology earlier than any other vehicle manufacturer, except for Ford in the US. In addition, both graphs also tell us that the vehicle manufactures patented in both USA and Europe, regardless their countries of origin. In the case of Renault-Nissan, for an example, its patents 12
in Europe were contributed both by Nissan (Japan) and Renault (France). Nevertheless, Nissan’s contribution (60 patents) is dominant compared to the Renault’s (11 patents). Remarkably, other European manufacturers are virtually non-existent, with the exception of one of the major European component suppliers, German Bosch GmbH. The weak performance of European makers in the patent area is somewhat difficult to explain: is it mainly an indicator of a relatively low level of technological activities so far, or is their a major difference in propensities to patent between European and Japanese makers?
From inventions to products – overview of recent HEV launches The first hybrid-electric car to enter the market was the compact size Toyota Prius in 1997. Prius is a full hybrid that uses a complex hybrid configuration with a planetary gear as a mechanical “power split device”, connecting the IC engine with an electric motor and a separate generator. A prime reason for selecting this configuration was to reduce the twitches in changeovers between different drive modes. The market introduction was preceded by an extensive development effort. In an analysis of the Prius development project, Magnusson & Berggren (2001) show how the challenge of developing a gasoline–electric hybrid power train made it necessary to go beyond established principles for product-development management and form a new kind of project organisation. Engineers were transferred from the advanced engineering division and close interaction was established within the project team and with key suppliers. During the first two years after market introduction, Prius was exclusively sold on the Japanese market and when Prius was introduced in the US in 2000, it was an upgraded version of the original car. US sales were initially slow, but following the introduction of a redesigned and upgraded Prius in 2004, sales increased when fuel prices and environmental concerns started to take off. Honda launched their less expensive and simpler mild/parallel hybrid power train in the model “Insight”, shortly after Prius. Actually, Honda introduced their Insight on the American market before Toyota introduced their Prius. The American competitors first reacted to the introduction of hybrids with disdain, and their early R&D activities in the field were not followed by actual product launches. Why invest in complex and uncertain new fuel-saving technologies when the big American gasoline-engine powered SUVs were enjoying brisk sales and good margins? However, when gasoline prices started to soar in 2004-2005, SUVs sales began to fall, and Detroit started to feel the heat.
13
Since 2007, GM has ramped up its technological activities in the hybrid area. Both GM and Ford have also launched their own hybrid cars. On the auto show in Detroit in January 2008, hybrid technology occupied a pride of place, with all manufacturers offering hybrid models, either as ready to launch or in more conceptual stage. Several European manufacturers have also presented hybrid concept cars on auto shows, but none has been introduced to the market. The makers have concentrated on the development of diesel engine technology and various forms of “micro hybridisation”. One example is the start-stop function offered by Peugeot on some of its models since 2005, and to be launched in small FIAT models in 2008. Another is the technologies BMW offers under the “Efficient Dynamics”-umbrella, such as start-stop automatic, some brake energy regeneration, increased uses of electrical instead of belt-driven support systems, etc (Chanaron & Teske 2007: 281). See overview of product launches and announcements in table 1. Table 1 Mild Hybrids
Current Products
Announced product releases 2007/08
Honda: Accord, Civic
Full Hybrids
Toyota: Prius, Highlander, Camry
Ford: Escape, Mercury Mariner, Mazda Tribute Nissan: Altima
GM: Saturn Vue Greenline
Lexus: RX400h, GS450h
GM: Chevrolet Equinox, Malibu
GM: Chevrolet Tahoe, GMC Yukon, Dodge Durango, Saturn Vue Greenline
Honda: Fit, CR-V
Lexus: LS600h
Ford: Fusion, Mercury Milan
Mercedes S-Class
Toyota: Sienna
VW: Touareg Audi: Q7
Announced product releases 2009/10
Hyundai Accent / Kia Rio
Toyota: Prius
Ford: Lincoln MKX
Honda: 'Global Small Hybrid'
Ford: 500, Edge, Montego
VW: Tiguan Porsche: Cayenne, Panamera
Source: UBS
14
Increasing hybrid sales – in the US The new Prius quickly turned into a symbol of the modern environmental car on the US market (UBS, 2007). 88,000 hybrid cars were sold in the US market in 2004 and sales trebled to 256,000 two years later. The majority of these were Toyota Prius. On June 7, 2007, Toyota announced that they had sold 1 million hybrid vehicles globally since the initial market introduction and 757,600 of those were Prius (Toyota, 2007). With an aluminium body, a futuristic aerodynamic design and extensive use of lightweight materials, the 2-seated hatchback Insight offered extremely good fuel economy, but with less convenience and distinctiveness than Toyota Prius, it largely failed in the US market. Due to poor sales, Insight production was terminated in 2006 and Honda’s hybrid offerings were restricted to hybrid versions of their Civic and Accord models. In terms of HEV sales, a significant milestone was passed in 2007 when Toyota Prius sales surpassed the sales of Ford Explorer, America’s top-selling SUV for more than a decade (Financial Times, 2008). The new fuel-economy standards signed by the Administration in 2007 and requiring a 40 percent improvement in overall gas mileage by 2020 have increased the pressure on the American firms considerably, but rapidly increasing fuel prices have been even more important. This has unleashed a race to develop and market smaller cars and engines replacing the standard American V8 engines with more efficient 6- or 4-cylinder power trains (NYT, 2008). Downsizing is only a temporary relief however, but competitive products from American firms incorporating advanced hybrid systems are still several years from market introduction. The American firms are under severe pressure from the general downturn in their major market, and the virtual collapse of their most profitable segments. After a difficult time in 2007, sales of trucks, pickups and SUVs, declined almost 30 % in the first six months of 2008 in spite of various discounts and other incentives. The difficulties of this situation are demonstrated by the enormous financial and operational losses disclosed by their recent annual and quarterly reports. All this puts them into a largely defensive position with huge difficulties to move from patents to products and production and to commit the resources needed to develop auto show vehicles into cost competitive mass-market offerings The development of HEV sales on the American market is presented in figure 1.
15
Hybrid car sales in USA 300000 250000 200000 150000 100000 50000 0 2000
2001
2002
Toyota
2003
2004
Honda
Ford
2005
2006
GM
2007
Nissan
Source: JDPower-LMC Market (Reuter), Hybridcar: for the sales in 2007
Figure 1 By contrast to the developments on the American market, European hybrid sales are still languishing. With less than 50,000 vehicles sold in 2006 HEVs did not even reach 0,2 % of the complete market. Toyota and Honda dominate hybrid sales in Europe. But having only 36470 (Toyota) and 3410 (Honda) hybrid cars sold in 2006, neither of their hybrid cars has been successful in Europe, with its strong diesel presence. The contrast to the success of hybrids in the US is striking (figure 2). Hybrid sales in Europe and USA 300000 253049
250000 207734
200000 150000 100000
86275
39880
50000 9000
18000
0 2004
2005 EUROPE
2006 USA
Source: JD Power-LMC (Reuter), Hybridcar: for the hybrid sales in 2006 in Europe
Figure 2
16
The European makers in France, Italy and Germany are in a much stronger financial position then their American contenders and have been stepping up their efforts in the hybrid field in 2007- 2008. Daimler-Benz plans to launch a gasoline hybrid of its S-class using lithium-ion batteries in 2009 followed by a diesel version in 2010 (Automotive News, 2008a); VW is investing in the development of a plug-in hybrid concept version of Golf, FIAT is planning to test hybrid diesels for its small commercial vehicles, etc. Leading European suppliers are also entering the field, such as Bosch, Continental and Siemens VDO to develop the integrated solutions needed to build full-blown hybrids. One reported example of such a solution by a component maker is the gearbox integrated with an electric engine developed by ZF Friedrichshafen in 2007 (Chanarron and Teske 2007). The HEV pioneers Toyota and Honda are not standing still, however, but plan to offer several new models and prepare for rapid expansion in production. Toyota is developing its hybrid system to a new generic technology in the company and plans for annual sales of 1 million vehicles in 2010. Honda only sold 55,000 hybrids globally in 2007, but has set a target to sell 400,000 hybrids annually in 2012. This goals means that hybrids would account for 10% of Honda’s total sales in 5 years, an ambitious increase compared to the meagre 1.5 percent in 2007. To reach the goal, Honda will introduce several hybrid offerings, including a hybridonly model, similar to the marketing strategy of Prius (Automotive News, 2008b).
Crucial hybrid challenges In summary, compared to incremental refinement of traditional vehicle concepts, the rise of the hybrid power train as an alternative exposes car manufacturers to several crucial challenges. In particular, they have to address the following four challenges: (1) Choice of configuration: which of several possible hybrid combinations, each with its particular advantages and disadvantages dependent on driving conditions, etc is most appropriate for a company’s competencies and competitive position? (2) Selection of which technological competencies to develop in-house and how to combine and integrate them with existing core technologies (3) Development of sourcing strategies appropriate for the configuration and architecture selected. If a firm believes that hybrid power trains will remain a strongly integrated technology for the foreseeable future, this will favor a build-up of internal resources. But if
17
the assumption is that these power trains might develop in a more modular fashion; or are perceived as remaining niche products for small markets, it might be more appropriate to build the system in partnership with strong component specialists. (4) All these considerations are related to the fourth and most critical challenge: How to bring down costs of hybrid systems to make them competitive on mass markets? Decisions on competence development, configuration, sourcing, etc are not only related to technical issues and the challenges of performance and functionality. They are also intimately related to cost considerations.
Technology strategy and capability profile of Toyota - the HEV-leader The many patents in subfields such as batteries, battery control systems, transmission systems, etc signify the importance of component innovation. According to Toyota, however, the understanding of the hybrid power train is even more important. This draws the attention to the critical role played by a company’s integration competence in making the hybrid operate smoothly. This was highlighted in an interview with Toyota Europe’s Executive Vice President of R&D, emphasizing the virtue of having key competencies in-house: We don’t believe in black box design, where suppliers have all design responsibility and design insight. We want to know all the details of new important technologies. With black box design the OEM cannot do anything if there is a problem. To develop hybrid systems is about integration. Then you need to have detailed knowledge of key components. After we have acquired this detailed knowledge it is possible to subcontract production, etc.” Vice President, Toyota R&D Europe November 2006. Decisions on competence development, sourcing, etc are not only related to technical issues and the challenges of performance and functionality. They are also intimately related to cost considerations. Compared with a conventional automotive power train, the hybrid system contains several additional components and subsystems, such as a much more sophisticated and expensive battery, one or several electric motors/generators, electric power converters, regenerative breaking, power management systems, etc. All these additional components add cost to the vehicle. Since these components such as electric motors originally have been developed for industrial applications, they have not before been exposed to the major cost
18
cutting efforts which are required to reach competitive price levels in the automotive industry. Average car buyers don’t do any life cycle cost analysis and a purchasing price penalty must be recovered by lower fuel costs in a short time-span, from 3 to maximum 5 years (Chanaron and Teske, 2007). This gives a very limited room for more expensive power trains. Thus cost cutting is a major issue for automotive manufacturers in the development of HEVs. In order to succeed in these efforts, manufacturers need to acquire deep knowledge on a component level – or devise entirely different ways to configure and integrate the power trains cost effectively. Referring to an on-going, internal Volkswagen discussion on whether to invest in building battery technology capabilities in-house or not, the Director of Group Research at Volkswagen explained the challenge of accessing knowledge of detailed cost figures, when a company is dependent on sourcing these from external suppliers: In order to really make right decisions we need to acquire very deep knowledge. We have worked two years with suppliers and we see that beyond a certain level these suppliers won’t give us detailed information on things like the value chain for the raw materials for battery, what are the cost prognoses, what chances do you have to reduce production cost, etc. These are key questions that companies won’t tell us, because this is proprietary knowledge, competitive knowledge. But we need to know this to make the right decision internally. So it seems to be the only way to get answers to these questions is to build up your own competence. (…) With any new technology, you need a supplier base, you need production capacity and if you start production on a low scale, the costs are higher also and this is definitely an advantage that Toyota has. They are on the third generation of their hybrid power train. They have really worked on cutting down cost so they have advantages compared to anyone entering the market. Executive director Group research VW July 2008 This emphasis on detailed component knowledge as a basis for successful hybrid development is in line with Toyota’s sourcing strategy. A key element here is to build strong internal capabilities, both in new R&D fields such as power electronics and in critical component manufacturing, for example of electrical motors, where Toyota has rapidly become a significant mass producer (interview with industry expert 080211). For another critical component, batteries and battery systems, Toyota has acquired a controlling interest in
19
its joint venture with Panasonic. According to critics among competitors, Prius was a lossmaking product several years after launch. But by exposing it to a real market test, selling the vehicle to regular private customers, the company was able to build invaluable knowledge of the car’s performance, problems and potential, which it could never have developed inside R&D. By developing this comprehensive R&D and industrial base, Toyota is both building capabilities for technical integration, and industrial capabilities for mass production and costreduction.
Is the Toyota way the only way? Toyota argues that the development of integration capabilities necessitates a deep and detailed knowledge of all essential components in the hybrid power train. Furthermore, technical insights developed in R&D are not enough. To optimize performance and cost it is also necessary to have first-hand knowledge of production capabilities and process development. The basic reason – and big difference to personal computers for example – is that a fuel efficient cost-competitive hybrid car must optimize on all its components and cannot carry any excess capacity in power, energy storage, control systems, etc. This tends to give integrators the upper hand (cf a similar argument in Bengtsson & Berggren 2008 concerning recent trends in the telecom equipment industry). Optimization on a systems level assumes that a systems integrator takes an active role during the development process and, as noted by Brusoni & Prencipe (2001), adopting such a role requires that the systems integrator possess technological capabilities that go beyond what they actually manufacture in-house. Extending this argument, Toyota’s strategy in HEV development indicates that when the required knowledge base changes, it may not be sufficient to develop technological capabilities on the R&D level. On the contrary, it may be necessary to in-source component manufacturing in order to gain access to the required knowledge in terms of manufacturing and cost structure. But the question remains: Is Toyota’s strategy the only viable strategy for success in the “hybrid race”? In terms of production experience and deep integration competence, Toyota’s position is certainly unrivalled by any competitors. Against Toyota’s accumulated production experience in excess of one million units, well developed internal production and supplier base, and third hybrid generation soon ready for the market, the prospect for companies planning to enter the field is indeed grim. At least this is the case if the broad and deep integration capabilities
20
developed by Toyota also are necessary for later arrivals. This would imply that they will have to build extensive internal technological, integrative and industrial capabilities and ride the slow learning curves of gradually expanding production, while simultaneously competing on both performance and cost. By these criteria only Honda might be positioned to serious challenge Toyota. Honda has demonstrated technological inventiveness (see the section on patents), accumulated experience in the hybrid field, and enjoys a production structure more flexible than Toyota’s, which made Honda the only company to expand on the US market during its latest severe downturn (Automotive News, 2008c). Honda have selected a significantly less aggressive sourcing strategy than Toyota, as they essentially decided on “going solo” in their hybrid development (Davis et al, 2008). To some extent, the differing sourcing strategies may be explained by referring to the different kinds of hybrid power train configurations preferred. Whereas Toyota initially selected a complex configuration, comprising a separate generator and planetary gear, Honda chose a less complicated parallel hybrid configuration with a smaller electric motor, implying a simpler task of integration – but resulting in a less distinctive product. However, there might be chances to catch up in the hybrid race also for European and American manufacturers. The patenting records of GM and Ford indicate that they possess some basic technological capabilities required for HEV development, but currently American manufacturers are severely strained by the financial turmoil. To what extent they are capable of making long-term investments in and gradual manufacturing ramp- up and cost reduction remains to be seen. Data on patenting and product releases seem to indicate that major European manufacturers such as VW, BMW and PSA (Peugeot/Citroen), so far have invested much less in “hybrid R&D”, and the importance of building specific integration and industrialization capabilities seem to be downplayed. Hence, there seem to be a few prerequisites that determine to what extent other manufacturers may catch up with their Japanese contenders: -
if the development of the various constituent hybrid technologies have reached a maturity level where outsourcing of manufacturing is again possible,
-
if the component specialist sector in Europe, e. g. has advanced sufficiently on this field to make outsourcing and strategic partnership structures more technically and economically feasible than they were in Japan in the 1990s
21
-
and if such a strategy of sourcing technology from outside specialists may contribute to significant component innovation, in batteries or transmission systems (a weak point in the complex Prius power-split configuration), which could enable these companies to get a competitive edge compared to their Japanese rivals in specific areas.
Alternatively, some leading component specialists might expand their scope and develop their own integration capabilities, in order to supply core sections of the entire power train system, e. g. combinations of electric motors/generators, transmissions, regenerative braking, batteries and power management systems. Already German component supplier Bosch AG has announced hybrid power train technologies as a new core competence. Such a development would imply that integration competence remains critical, but that its locus will be relocated from its traditional place at the auto companies.
Conclusion: On the importance of integrative capabilities The position of incumbent car manufacturers as systems integrators, building upon deep knowledge in mechanical engineering and combustion engine technology, has remained unchallenged during several decades. However, the development and manufacturing of hybrid-electric vehicles builds upon a different set of technological capabilities. Knowledge in electrical engineering, energy storage technologies, power electronics and electronic control systems is just as critical. Thus capabilities of integrating knowledge from diverse and highly different technological fields seem to play a key role in this evolving competition. Our study show that the renewed focus on product performance in terms of fuel efficiency may reverse the trend of modularization and standardization of technical interfaces in the automotive industry, as forecasted by Christensen, et al (2002). In particular, this is evident in Toyota’s innovation efforts in hybrid electric vehicles. The consistent efforts of Toyota to build inhouse design and manufacturing capabilities in several key components indicates that access to detailed component level knowledge is critical for the development of the required integrative capabilities. As we have seen, the importance of such capabilities is even more critical due to the severe cost pressures, which today’s car manufacturers are exposed to. In the introduction section of this paper, we briefly described a recent case of technological discontinuities in another mature industry – the advanced gas turbine industry. An analysis of the competition evolving from the introduction of new technology in this industry showed that
22
only the firms who had sufficient technological capabilities were able to respond to technical problems that were discovered in the field. In the end, the ability to correct these after delivery was a prerequisite for survival in the advanced gas turbine industry. (Bergek et al, 2008). Toyota was indeed very carful in their introduction of Prius, only selling the car on the Japanese market the first two years, keeping initial production volumes low and securing massive support resources in case of failure. But a mass-producing car manufacturer has a greater possibility of verifying product functionality through full-scale prototype tests before product release. This is illustrated by Toyota’s extensive test scheme in their initial development project, in which they reported to have made use of several hundred test engines for bench-tests and more that 60 full-scale test vehicles (Magnusson & Berggren, 2001).Since the ability to verify through full-scale prototype tests is indeed limited in the development of Complex Product Systems (cf. Hobday, 1998; Magnusson & Johansson, 2008), this distinguishes HEV development from advanced gas turbine development. The main challenge for automotive manufacturers in the development of hybrid power trains is instead another one: to reach a competitive cost level. By contrast to the case of advanced gas turbines, being purchased by professional buyers whose primary focus is on life-cycle cost, the price tag remains a critical factor for purchase of a car. The introduction of the hybrid electric vehicle does not change this.
References Abernathy, W J (1978): The productivity dilemma, John Hopkins University Press Abernathy, W J & Clark, K B (1985): Innovation: Mapping the winds of creative destruction. Research Policy, Number 14, 3–22 Anderson, P. & Tushman, M. L. (1990): Technological discontinuities and dominant designs: a cyclical model of technological change. Administrative Science Quarterly, 35, 604-633 Automotive News (2008a): February 29 Automotive News (2008b): “Honda sets lofty hybrid goal with Civic´s help”, March 3 Automotive News (2008c): “Honda to launch new hybrid car in April ’09”, August 13 Bengtsson, L. and Berggren, C. (2008): The integrator’s new advantage - reassessing outsourcing and production competence in a global telecom firm. European Management Journal, Forthcoming
23
Bergek, A., Berggren, C., Tell, F., and Watson, J. (2008): Technological capabilities and late shakeouts: Industrial dynamics in the advanced gas turbine industry 1986-2002, Industrial and Corporate Change, Vol. 17, No. 2, 335-392 Brusoni, S. & Prencipe, A. (2001) Unpacking the black box of modularity: technologies, products and organisations. Industrial and Corporate Change, 10(1), 179-205 Chanaron J-J., and Teske, J. (2007): Hybrid vehicles: a temporary step, Int. J. Automotive Technology and Management, Vol. 7, No. 4, 268- 288 Chau, K.T. and Wong, Y.S. (2002): Overview of power management in hybrid electric vehicles, Energy Conversion and Management, 43, 1953-1968. Christensen, C; Verlinden, M and Westerman G (2002): Disruption, disintegration and dissipation of differentiability, Industrial and Corporate Change, 11 (5), 955-993 Collins, P.D, Hull, F.M. and Hage, J. (1996): Profiles of Leaders, Followers, and Laggards in Programmable Automation Adoption, IEEE Transactions on Engineering Management, 43, pp. 285-296. Cooper, AC & Schendel, D (1986): Strategic responses to technological threats, in: Tushman, M L & Moore, WL (ed.): Readings in the management of innovation, 2nd edition, Harper Business, p. 249-258 Davis D, Davis, T, Moodie, S, Schilling, M A (2008): Honda motor company and hybrid electric vehicles, in Hill, C W L and Jones, G R (ed.): Strategic Management – an integrated approach, 8th ed., Houghton Mifflin Ehsani, M., Gao, Y., Gay, S.E., and Emadi, A. (2005): Modern Electric, Hybrid Electric, and Fuel Cell Vehicles: Fundamentals, Theory and Design, CRC Press Financial Times (2008): “Toyota Prius sales pass Ford Explorer in US”, Jan. 10 Foster, R N (1986): Timing technological transitions, in: Tushman, M L & Moore, WL (ed.): Readings in the management of innovation, 2nd edition, Harper Business, p. 215-228 Hekkert, M & van den Hoed, R (2006): Competing technologies and the struggle towards a new dominant design: The emergence of the hybrid vehicle at the expense of the fuel cell vehicle? Greener Management International, 47, 29-43
24
Henderson, R & Clark, K B (1990): Architectural innovation: the reconfiguration of existing product technologies and the failure of established firms. Administrative Science Quarterly, Volume 35, March, 9–30 Hobday, M (1998): Product complexity, innovation and industrial organisation. Research Policy, Volume 26, 689–710 Holmén, M. and Jacobsson S. (2000): A method for identifying actors in a knowledge based cluster, Economics of Innovation and New Technology, Vol. 9, pp. 331-351. Håkansson, E (2008): Hybridbilen: framtiden är redan här, Gröna bilister Magnusson, T & Berggren, C (2001) Environmental innovation in auto development: managing technological uncertainty within strict time limits, International Journal of Vehicle Design, 26 (2/3), pp.101-115 Magnusson, T & Johansson, G (2008): Managing internal technology transfer in complex product development, European Journal of Innovation Management, 11(3), pp. 349-365 Mintzberg, H and McGugh, A (1985): Strategy formation in an adhocracy, Administrative Science Quarterly, 30(2), pp.160-197 Miyazaki, K. (1994): Interlinkages between Systems, Key Components and Component Generic Technologies in Building Competencies, Technology Analysis & Strategic Management, Vol. 6, No. 1, pp. 107-120. NYT (2008) “Interest Fades in the Once-Mighty V-8” Jan 16th Prencipe, A (2000): Breadth and depth of technological capabilities in CoPS: the case of the aircraft engine control system, Research Policy, Volume 29, Issues 7-8, 895-911 Schäfer, A; Heywood, JB; Weiss, MA (2006): Future fuel cell and internal combustion engine automobile technologies: A 25-year life cycle and fleet impact assessment, Energy, Vol. 31, p. 2064-2087 Takeishi, A and Fujimoto, T (2003): Modularization in the car industry: Interlinked multiple hierarchies of product, production and supplier systems, in Prencipe, A; Davies, A and Hobday, M (ed.) The business of systems integration, Oxford university press, p. 254-278 Toyota (2007): http://www.toyota.co.jp/en/news/07/0607.html, accessed 2008-08-09 Tushmann, M L & Anderson, P (1986): Technological discontinuities and organizational environments. Administrative Science Quarterly, 31, 439–465
25
Tushman, ML & Rosenkopf, L (1992): Organizational determinants of technological change: Towards a sociology of technological evolution. Research in Organizational Behaviour, 14, 311-347 UBS (2007): Is diesel set to boom in the US?, UBS Investment Research Utterback JM (1996): Mastering the dynamics of innovation, Harvard Business School Press
26