But now automakers see the fabulous potential in driverless cars to reshape the industry. Ford just bought an AI firm for $1 billion. They seem to be vertically integrating into this technology as fast as they can by acquiring the firms that are producing these components.
In the last several months, Ford acquired Chariot, a start-up that ferries commuters around the San Francisco area, and invested in Civil Maps, which is developing 3-D mapping technology that can be used by self-driving cars. In August, Ford also acquired SAIPS, an Israeli company developing machine learning and computer-vision technology.and
Other automakers are moving in the same direction. General Motors has invested $500 million in Lyft, a ride-hailing service and main rival of Uber. G.M. also acquired Cruise Automation, a maker of sensors and other gear that can enable conventional automobiles to drive themselves on highways.
Why the reversal on vertical disintegration?
Possibly for quality assurance reasons. Driverless cars rely on computers and software that comes from an industry notorious for rushing new products out the door, sometimes before all the kinks are worked out. But getting the PC’s “blue screen of death” at 80 mph might become a bit too literal. If the software in your Ford failed, you would sue Ford, not its supplier. Knowing this, its supplier might not do all the safety checks Ford might want. A solution, make them part of Ford.
The dynamic and changes to the automotive world over time are certainly fascinating and an area of manufacturing that remains quite public as it is highly relatable since so many of us own a vehicle.
ReplyDeleteLet’s go back for a second to a big reason the vertical disintegration happened in the first place. The rise of the Tier 1 suppliers! High volume distributors, often supplying parts to many of the major OEM outfits. I have worked in both Tier 1 and 2 for a handful of years. While you point out the lack of direct control can be a con the pro is we generally have a greater depth of knowledge in whatever parts field it is. Say electronics, emissions control, etc. For this reason having suppliers who only think, dream, and create vision around a few similar products can make them have higher quality standards and importantly lower operating costs. Also I wanted to note that in the event an automaker is sued or there is any claim such as a recall the suppliers are immediately charged back for the damages. Only when the decision was a known variable would it lie only on the OEM. In fact it is another reason to use suppliers. Any manufacture that can build in suppliers that have to be responsible for their own defects saves you the cost of poor quality in favor of whatever their margin might be over your cost of production + COPQ.
Now in the event of self-driving cars and why it makes sense for Ford to purchase I would still believe quality could be a driver. In a non-established field my above mentions are not proven. A few other ses of alternatives I would consider why Ford and others are investing in direct ownership:
• Availability of resources to scale quickly
• Immediate parts integration focused on their vehicles
• Combined efforts to remove barriers of success
• Growing value of the asset. Once mature they could very well sell off and establish the Tier 1 relationship!
For the many reasons Ford won’t begin buying up all of their suppliers but it sure can make sense here.
Michael Ward present an interesting article. I believe for liability reasons Ford need to invest in getting their own products. There are profits to be made, but there is also the business stake at hand. With Ford invest in their own products, such as driverless cars and 3-D maps as suggested in the article. For quality assurance reasons this will ensure that all their product is checked for safety reasons. In the event of a law suit.
ReplyDeleteVertical integration for Ford can be a plus or a minus. Some positives are that it would keep all the chain of command and developing their product in one place. This will also provide jobs and build the market economically, keep the business within the country. “The benefits of vertical integration come from the greater capacity it gives organizations to control access to inputs (and to control the cost, quality and delivery times of those inputs)”.
On the other hand, according to the Harvard Business Review “If this strategy offers so many potential gains, why don’t more managers employ it? Operating on an integrated basis brings offsetting costs and risks, the most important of which are increased capital requirements, unbalanced throughput, reduced flexibility, and loss of specialization”.
References:
https://hbr.org/1983/01/is-vertical-integration-profitable