Automotive industry and vehicles manufacturers

Automotive industry and vehicles manufacturers

While automotive industry and vehicles manufacturers create added value, develop and market vehicles drive train solutions that are more eco-efficient than the conventional fossil fuel based combustion engine, environmental impact need to decrease greatly curbed carbon emissions in line with global climate stabilization objectives (Zachariadis, 2015; Russo and Pogutz, 2009; Adamou at. el., 2012; Janssen, 2005; [8]). Plug-in electric vehicles put greater demands on, required new approaches from vehicle dealers to market and sell them (Cahill at. el., 2014).

Car-makers Toyota (Japan) and BMW (Germany) are next, with brand values of $46.3 billion and $37.1 billion, respectively.

The average CO2 emissions of the total car fleet dropped to 90 g/km by 2030. The fleet is characterised by a wide range of technologies. Significant technological breakthroughs have been achieved in battery technology since 2010, which have resulted in a considerable scaling down of the storage cells per unit of energy, reduced weight and thereby larger driving ranges, faster charging processes and greatly reduced prices because batteries are produced in large quantities. As a result, in 2050, the electric car outperforms other passenger vehicle technologies in terms of its total costs (purchasing plus operating costs).

Different vehicle concepts are implemented with purely electric cars. These are integrated into society’s mobility services in many different ways. For instance, public electric cars are available in specially designated parking spaces at every major public transport hub. Modern car-sharing technology allows simple access without pre-booking and cars can simply be returned to any other free parking space. 

The Automotive Industry continuously changes to new directions. Today there is a vast change of the Automotive Industry's prerequisites for profitability. Profit shrinking for the European automakers and are now at levels of 1-3%. This is a result of a decrease in demand for new cars and production overcapacities. The type of demand has also changed to be opting for environmentally friendly and cost-conscious small cars, which have lower prices and slimmer margins for the automakers. This trend leads to consumers, in the segment of consumer passenger cars, purchasing smaller and more environmentally friendly cars, which results in smaller margins and less profits for contestants in the Automotive Industry. Politics plays a great role with the introduction of new legislations, pressuring manufacturers to spend more money on R&D and operational improvements. (Bissinger & Castellano, 2007)

Problem for the automotive industry - growing gap between the production system and the market

The core problem for the automotive industry is that it is insufficiently profitable, particularly given the capital intensity of the industry (Nieuwenhuis & Wells, 2003). The problem really relates to the growing gap between the production system and the market it is intended to serve. This gap takes a number of forms:

 • High capital intensity and fixed costs of production together with a business model based on market share leads to over-supply in some product areas and under-supply in others.
• Over-supply of overly standardised models may result in discounting, rapid depreciation, and premature scrapping of vehicles.
• Manufacturing inflexibility can include an inability to adjust output with demand and difficulties in switching from one model to another, again resulting in price reductions to ‘shift the metal’.
• Reliance upon continued new car sales as the main source of revenue leads to a business model where the primary income source is car finance followed by parts sales, but this too demands that greater numbers of cars be sold at cost.
• Shorter model lifetimes lead to lower model lifetime volumes and hence difficulty in recovering investments.
• High capacity utilisation break-even points may enhance the pressure to over-supply and the need to maintain extensive logistics lines to a large number of sales outlets.
• Production concentration and extensive distribution systems lead to long delivery times for customer-ordered cars and high levels of stock in the system.
• High capital costs with very ‘lumpy’ investment in plant and models lead to high risk, resulting in conservative new model introductions of ‘general purpose’ vehicles.
• Asset longevity combined with high fixed costs may give rise to an unwillingness to embrace the radical product and process strategies that would render such investments redundant.

Automobile Externalities

In summary, while there is uncertainty surrounding marginal pollution damages, they are not insignificant in magnitude: Small and Kazimi’s best estimate of 2.3 cents/mile is approximately 20% of average per-mile fuel costs.4 And the upper range of their sensitivity analysis yields figures significantly higher. Nonetheless, as tighter emissions standards are phased in over coming years (see Section 3.3 below) and as the on-road vehicle fleet is gradually replaced, we expect local pollution costs to decline.

R&D, “green” innovations

European Commission, 2009b

The process of developing a new vehicle starts at formulating a concept of the product. Having these concepts as a starting-point, more detailed goals of a vehicle's design can be set. These goals are to be translated into engineering blueprints and prototypes. The blueprints also lay the foundation of the description for the production process.

Development costs are high in the segments of the automotive industry. Developing a new car model is a multi billion SEK project. For the contestants in the Swedish automotive industry, who haven't got the same economies of scale’s advantage as a large volume manufacturer, these costs are relatively high compared to these manufacturers worldwide. Almost 60% of these costs are put on the development of the car platform. There is a tendency to standardize and decrease the number of platforms in order to reduce development costs. (Elsässer, 1995)

There are certain strategies in being able to affect development costs. One way of reducing them is by keeping a low number of models in the product program. Another is by extending the life cycle of a produced model or to keep producing old components and use them in new models.

 

Proposal of a Sustainability Index for the Automotive Industry

Companies have faced different challenges in seeking to combine the best economic performance with increased social and environmental responsibility. Monitoring sustainability is essential for decision-making and management of activities that comprise an organization’s system processes. Evaluation can be performed using indices or a set of indicators. In addition to increasing organizational effectiveness and improving competitiveness, customer service and profitability, it is also a crucial influence on the development of business sustainability.The importance of the indicators is assessed by using the Analytic Hierarchy Process (AHP) methodology applied to a case study of a supply chain in the automotive industry.

Companies are changing from a pure economic business perspective to one including more sustainable development, adding more economic, social and environmental concerns to their business operations. Companies must not only implement practices that promote the company and the efficiency of the global supply chain, but also those that focus on social, economic and environmental issues [1].

Proxy Voting and Shareholder Resolutions

In the environmental and social arenas, concerned shareholders have focused particularly on improving disclosure and oversight of corporate political spending, environmental policy—especially with regard to climate change—and overall sustainability. The percentage of votes supporting shareholder resolutions raising concerns on environmental and social issues has grown in recent years. While vote support over 50 percent is still rare for social and environmental proposals, it is no longer uncommon for such proposals to receive the support of 30 to 40 percent of the shares voted. (Unfortunately, many investment managers and traditional mutual funds still vote frequently or even automatically in line with corporate managements’ recommended positions on sustainability and other issues.) However, shareholder resolutions do not need majority support to be effective. In some cases, directors heed the concerns raised in advisory proposals and find ways to make improvements in their policies, or disclose more information to respond to investors, even when votes in favor are below 50 percent. Many companies are open to negotiating with shareholder proponents to find common ground on an issue and to be able to agree on removing potentially controversial items from the proxy statement.

 

The innovation process

A distinction is made between radical innovation or breakthrough and incremental innovation, which modifies the products, processes or services through successive improvements. Lundvall (1988) and OECD (1992b) consider it important that: by using terms such as "the process of innovation" or "innovation activities" to indicate that traditional separations between discovery, invention, innovation and diffusion may be of limited importance in this perspective.

 

Linear Model of Innovation

In understanding the process of technological change, modern theory begins from Schumpeter's view that competition is primarily a technological phenomenon. The basis of competition is the quality, design characteristics and performance attributes of products. Firms seek competitive advantage on the one hand by continuous development of technologically differentiated products, and on the other by changing processes so as to generate these products with competitive cost structures.

The primary problem for the firm is to build a set of technological competences and capabilities which will enable it to create distinctive areas of competitive advantage. Through marketing exploration, and general relationships with customers or product users, firms attempt to identify opportunities for innovation; but this is usually done within the context of an existing set of technical skills, and an existing knowledge base. Search for new and novel technological solutions is usually performed only when firms face problems which they cannot solve within their existing knowledge bases.

Firms not only produce differentiated products, they generate innovations in different ways. This has two important implications (Smith, 1994):
• Firstly, the process of differentiation generates a high level of variety and diversity among firms. There is no single model of the innovation process: firms can differ very significantly in their approaches to innovation.
• Secondly, the fact that firms attempt to specialize around existing areas of competence means that there are limits to their technological capabilities and awareness.

3.3. Models of innovation

The Roozenburg & Eekels model
Roozenburg and Eekels (1995) defines innovation as a process including the generation of a policy and ideas to the utilization of the final product, as illustrated in Figure 3.2. Innovation starts with an idea. Someone within a company have come up with an idea to redesign a product or develop a completely new design. A company that wants to innovate has to know very well what it wants to achieve.The Roozenburg model combines a model of product development with innovation, indicating that product development is a part of innovation. The model thus focuses on the technical aspects of innovation. The Roozenburg model includes all phases involved in the product lifespan until the use phase. In a product lifespan context, a lot of valuable information is missed concerning collection, disassembly, reuse and recycling, when the remaining life phases are left out.

3.3.2. Chain-linked model
The Chain-Linked model has its community of supporters within the economic literature (Kline and Rosenberg , 1986, OECD, 1992b) Kline and Rosenberg (1986) argue that the Chain-Linked model is consistent with a detailed evaluation of the nature of technology, the concept of innovation, and the failures of a simple linear model which are often assumed, and the necessity that the linear model be replaced with a more complex model in order to understand the nature of innovation. The Chain-Linked method emphasizes the socio-technical nature of industry and technology and the necessity to look at it as a complex system. The chainlink model shows a situation where research, development and knowledge are inter-twinned with all phases of product, process and service life cycles (Kline and Rosenberg, 1986).

A perceived market need will be filled only if the technical problems can be solved, and a perceived performance gain will be put into sense only if there is a realizable market use. Furthermore, Kline and Rosenberg argue that the importance of “market push” versus “technology pull” becomes in this sense artificial since each market need entering the innovation cycle leads in time to a new design, and every successful new design, in time, leads to new market conditions (Kline and Rosenberg , 1986).

At the level of the firm, the innovation chain is visualized as a path starting with the perception of a new market opportunity and/or a new science and technology-based invention; this is necessarily followed by the 'analytic design' for a new product or process, and subsequently leads to development, production and marketing.

Firms below a certain size cannot bear the cost of an R&D team (Kline and Rosenberg , 1986).

3.5 Degrees of freedom

3.5.1 The Theory of Dispositions
One of the most fundamental recognitions in design theory is that basic decisions about properties must be taken in the early stages of the product development process (Olesen and Keldmann, 1994).

Studies showed that the stage of design causes a large share of 70% of the future production costs whereas the cost for the design itself only has a share of 10% of the final costs for the product. Regarding environmental aspects this ratio becomes even more drastic since the amount of ecological damages resulting from the design of the product are by far higher than the ecological damages caused by the process of design itself (Anderl and Katzenmaier, 1995).

If the product development team needs a complete picture of all systems the product affects or is affected by, the team needs to view all systems of the product lifespan, the relations between them, and the development of these systems (Olesen, 1992).

3.7 Drivers for innovation

Schumpeter argued that competition in capitalist economies is not simply about prices, it is also a technological matter: firms compete not by producing the same products cheaper, but by producing new products with new performance characteristics and new technical capabilities. The search for new technologies is thus an integral part of competitive economies, and the development of new technologies is a continuous process (Smith, 1994).

 

3.7.1 Sustainable development as a driver

Thus, sustainability is not about stability but rather about constant change which is linked to innovation. 

Technological lock-in as a barrier to sustainable development

Escaping technological lock-in
The growing awareness of the environmental effects of some products has created mass markets for environmentally adapted products. The growth of emerging technologies is facilitated if there exists a relatively large number of consumers willing to invest in the new technology before low cost production, (internal production economies), and well developed after-sales services, (external consumption externalities) emerge. Early adopters provide the learning and scale economies needed to generate these externalities.

 
Innovation in technology, organization and institutions is the key dynamic in improving ecoefficiency. The innovation process includes not only the development of new technologies, but their successful deployment and diffusion.

 

Four level of eco-innovation
Brezet (1997) discerns four types of product-related environmental innovation, based on extensive experience in ecodesign practice. The types are related to two axes: ecoefficiency and time-scale.

The first type of improvement involves the improvement of products from the perspective of pollution prevention and environmental care. With the second type of improvement, product redesign, the product concept stays the same, but parts of the product are developed further or replaced by others. Examples are the use of other materials, design for recycling and minimizing of energy use during its life span through product and component modifications.

The third type, alternative function, is based on the function of the current product. In the Ecodesign strategy wheel (See Figure 3.16), this is equivalent to strategy 8, alternative function fulfillment. An example is the transition from letters to e-mail, where the function is ‘information transfer’. The environmental profit is mainly through dematerialization. The fourth type deals with system innovation. Changes in related infrastructure and organization are required in order to develop new products and services on a system level.

Cross-cutting technologies

Four cross-cutting technologies or technology areas have been playing an increasing role for the changes in mobility and the transport systems since 2010: • Nanotechnology • Image communication in 3D quality (holography) • Biorefinery and biomass use • Recycling. 

Pre manufacturing

Lean production is about maximizing value and minimizing waste through the optimization of throughput time and also with focus on the customer. This develops an operation that is faster, more dependable and produces higher quality products and services to a lower cost. But these are not the only important factors in today's manufacturing process. Due to competitive pressures it has become vital for manufacturers to provide product diversity, which now is the norm, and to head towards being more batch oriented. Thus achieving more flexibility in production introduction and scheduling. This has been a must because of the customers demand for a wider choice when buying vehicles which results in manufacturers being able to offer a range of vehicles with a variety of models for each segment in the range. Manufacturing equipment needs to be easily adaptable for later upgrades of vehicle models that seem to be necessary more intensely. Even the product life cycle has been shortened to satisfy today's market trends. (Packendorff, 2006)

 

Asymmetric information

Throughout the paper, we have assumed that clean technology increases only the marginal cost of foreign exports to the home country. Under asymmetric information, our results do no change, so long as these other costs are not strongly inversely correlated with marginal cost of foreign exports to the home country. As long as the marginal cost under the clean technology is lower on average for firms that adopt than for those that do not and the optimal tariff declines with expected marginal cost, the underadoption result goes through.

Modelling of diffusion across several countries

Modelling the diffusion of the same innovation in several countries offers a number of benefits. A practical forecasting advantage is that it helps overcome a perennial difficulty of using diffusion models for forecasting, their hunger for data. If an innovation is released in different countries at different times, it is desirable to be able to use the data from earlier adopting countries to predict the diffusion in later adopting countries. Modelling the effect of different national cultures on the diffusion process gives insight into the effect of national differences on the rate of adoption of the innovation.

 

Addressing this last question, Takada and Jain (1991) used the Bass model for a cross-sectional analysis of the diffusion of durable goods in four Pacific Rim countries. They used the estimated coefficients to test hypotheses on country-specific effects and on lead-lag time effects on the diffusion rates. They established significant differences in the coefficients of imitation between countries with different cultures, such as US and Korea. They also found evidence that a lagged product introduction led to accelerated diffusion. The effect of lead-lag on international diffusion of innovations has been addressed more recently by Ganesh and Kumar (1996), Ganesh, Kumar and Subramanian (1997), Kumar, Ganesh and Echambadi (1998) and Kumar and Krishnan (2002). The premise is that the time lag grants additional time to potential adopters in the lagging markets to help them to understand the relative advantage of the product, better assess the technology need, and observe experience of the lead country adopters’ usage of the product. Kalish, Mahajan and Muller (1995) argue that the potential adopters in the lagging countries observe the introduction and diffusion of technology in the lead country. If the product is successful in the leading countries, then the risk associated with the innovation is reduced, thus contributing to an accelerated diffusion in the lagging countries.

Talukdar, Sudhir and Ainslie (2002) investigated the impact of a wide range of macro-environmental variables on the parameters of the Bass model while modelling diffusion of six products across thirty-one developed and developing countries. They found that, on average, the market potential in developing countries was a third of that in developed countries; and that despite lagged introduction, the rate of adoption was slower in developing countries. They found that market potential was best explained by previous experience in the same country; in contrast, the probability of adoption was better explained by product experience in earlier adopting countries. Similar findings are reported by Desiraju, Nair and Chintagunta (2004) who modelled the diffusion of pharmaceutical drugs with the logistic model using data from 15 countries. In addition, they found that per capita expenditure on healthcare was positively related to the rate of adoption, while higher prices decreased adoption rates.

Gaining and maintaining a competitive advantage

A firm that manages the aforementioned risks more effectively than others in its industry may gain and maintain a competitive advantage. For example, if a manufacturing firm carries out a comprehensive effort to mitigate climate change effects, it may be able to reduce energy costs, discover ways to streamline its processes, exceed shareholders’ expectations and establish a positive environmental image. Developing its ability to out-compete sectoral peers on efficiency, reducing the cost of energy and improving margins and profitability will allow a firm to increase its competitive advantage (Greenall, 2006). According to Tubman (in Hoffman, 2006), energy efficiency is becoming a source of competitive advantage as it builds brand loyalty: ‘Once someone buys a high efficiency device, they never go back to buying a traditional machine’ (p.123). This conclusion has been supported by Whirlpool’s market research. Whirlpool surveys have demonstrated that ‘there is a strong correlation between a firm’s performance in appliance markets and their social response to issues such as energy efficiency and pollution’ (in Hoffman, 2006, p.124). Environmentally friendly products are now aggressively developed by many firms as part of strategies to gain a competitive advantage. Several examples show firms’ efforts to deal with reducing GHG emissions, such as how automobile firms increase their sales in hybrid automobiles in order to cope with the volatility of gasoline prices.