On Strategy: Electronics & Automotive: Achieving a More Solid Union

Columns From: 5/1/2005 Automotive Design & Production, , Partner from Roland Berger Strategy Consultants , , Partner from Roland Berger Strategy Consultants , , Senior Consultant from Roland Berger Strategy Consultants

A presenter at the Convergence 2004 conference compared the growing confluence of the automotive and electronics industries as a marriage between an elephant and a fruit fly.

A presenter at the Convergence 2004 conference compared the growing confluence of the automotive and electronics industries as a marriage between an elephant and a fruit fly. As preposterous as the analogy sounds, the joining of these industries is happening more frequently and rapidly. But this marriage is off to a rocky start. The most obvious conflicts involve replacing mechanical systems with electronic or mechatronic solutions; and with marrying myriad electrical and electronic devices into interconnected, feature-rich, simple-to-use and brand-differentiating accessories for consumers. Less-visible conflicts may be even more significant and are based on the colossal cultural differences between the industries. The automotive mindset is based on 18- to 24-month development cycles and five- to 10-year warranties. The electronics mindset is focused on three- to six-month development cycles and 30-day to one-year warranties. The success of the marriage depends, in large part, on harmonizing these fundamental differences. From the outside, the marriage seems to be made in heaven, as consumers, regulators, environmentalists and others see the benefits of in-vehicle electronics. But looks are deceiving, and all is not idyllic with these nuptials.

A ROCKY START. Consider the rocky start of Mercedes and BMW, two companies that jumped hastily into a marriage between automobiles and electronics. They not only have experienced numerous vehicle recalls, but also alienated consumers and tarnished their brand reputations with unwanted, complicated features. Their strategy—using electronics to carve out a competitive edge—in some cases backfired. But BMW and Mercedes are not the only ones that have had problems. Even automakers that have been successful with in-vehicle electronics face problems managing the increasing complexity of embedded software and cross-domain electronics functions.

The result is that 30% to 40% of North America's $10-billion annual automotive warranty costs are attributed directly to software and electronics. We predict that this problem will grow proportionately as the percentage of in-vehicle electrical and electronics content grows from a current 25% to 40% by 2010. To this point, electronics have been used in spot locations in vehicles for such things as fuel injection, antilock brakes and electronic clocks. But now there is a shift to applications including transmission controls and drive-by-wire. Future developments such as crash avoidance systems will heighten the level of complexity.

Beyond technical and cultural challenges, the marriage between automobiles and electronics also faces money problems. Continuous cost pressures throughout the industry have compelled automakers to share or distribute costs, from R&D and manufacturing to marketing and warranty expenses. Cost pressures heighten the challenge of finding that sometimes-elusive in-vehicle consumer "hit" at the lowest possible cost. Despite all of these challenges, automakers and electronics suppliers alike see a variety of opportunities. But following the infatuation of possibilities is the reality of making the marriage work for all concerned.

A Holistic Approach. "When looking at electronics, we need to find a way towards 'intelligent simplicity' rather than stupid complexity." ~respondent to Roland Berger research

Successful automotive companies will adopt a holistic approach to integrating electronics into new vehicles to avoid the awkward complexity of marrying numerous, disparate modules within a vehicle in Rube Goldberg-like fashion. Companies that invest in a holistic approach, and get it right, will have significant competitive advantages over their competitors in everything from brand differentiation and customer satisfaction, to warranty reduction, serviceability and even the decision-making processes on regulatory issues.

To master the challenges of the marriage and to leapfrog the competition, auto-makers must implement a clear-cut, holistic electronics plan that fulfills six critical success factors:

  1. Derive the "right" technologies and functions from the overall brand strategy
  2. Construct business models for developing key, brand-differentiating electronics segments
  3. Reduce complexity by strengthening and managing overall electronics vehicle-line architecture
  4. Define, prioritize and organize existing competencies internally and externally
  5. Systematically leverage suppliers with the right level of integration
  6. Optimize processes and tools to ensure the maturity of technologies and functions, as well as an efficient organization

Most automakers realize that they must act now to achieve significant competitive advantages, but only a few are developing a clear and focused electronics strategy.

To tame the increasing complexity of the marriage, automakers are shifting their efforts to standardized, scaleable vehicle-system architectures, allowing the sharing and reuse of components across platforms and vehicle classes. Because most interfaces today between electronic subsystems are proprietary and application specific, automakers and electronics suppliers are seeking help to develop a successful electronics strategy. Several groups are attempting to set standards to act as quasi-counselors to the marriage. Industry leaders must actively participate in shaping the outcomes of these groups, which include:

  • Autosar (AUTomotive Open Systems Architecture) / Jasper: Devoted to standardization of software and hardware in order to ease the reuse of software and allow new business models in software and electronics control-unit development.
  • Flex Ray, pioneered by BMW and Mercedes: A time-triggered bus standard that acts as a 'backbone' solution to interconnect the electronics of mission-critical vehicle applications. We expect Flex Ray to be introduced in late 2007.
  • MOST or EDB1394: Two standards being developed to increase data transfer speeds between multimedia applications. It is not yet clear which of these two initiatives will be the industry standard.

Each of these initiatives can set standard electronics protocols that will result in reduced in-house, proprietary development; better leverage supplier know-how and establish more consistent specifications to better integrate new functions. When these standards are established, the end results should include quicker time-to-market, lower costs and enhanced flexibility in adding, servicing or upgrading components.

Understanding the advice of these quasi-counselors is one thing, but implementing the significant cultural changes within an organization to make holistic electronic integration a reality is the more difficult challenge. It requires significant insight, broad-minded planning that is spread throughout the organization, and dogged determination to make the marriage work.

MAKING IT WORK. Today, auto manu-facturers outsource many electronic and software-based sub-systems to suppliers. Consequently, they haven't established strong, in-house software and electronics competencies, and don't have the depth and breadth of talent to engineer a holistic approach to electronics integration. A widening competency gap is perhaps the greatest risk to the marriage, especially with the projected increase in electronics content. In order to manage the increased amount of content, automakers must triple their current electronics R&D and engineering talent pool significantly between 2010 and 2015. The automotive industry must work quickly with governmental and educational institutions to remedy this gap in education and talent.

For better or worse, the marriage between the automotive and electronics industries has been made, and consumers, regulators and others are waiting like impatient grandparents for the fruits of the union. Success or failure depends on hard work, planning, ingenuity and compromise. Some companies simply will not survive the marriage, but those that harmonize product development cycles and warranty periods, and take a holistic approach to the numerous technical aspects of integrating features and functionality may discover a marriage made in heaven—or at least something less like a marriage between an elephant and a fruit fly.