New innovation champions in automotiveCoping with material & system convergence

Chemical Quarterly2014.Q3

Automotive industry at a turning (burning) point Automotive is arguably one of the fiercest industries in competition and innovation globally. Driven by increasing end customer demand in terms of product, service, and price, the entire value chain with its suppliers and service providers is changing from a linear to a networked model. The linear model considers the industry segmentation by price/ quality tier, while the networked model focuses on incremental value created by each node across the entire value chain.

This networked model creates an opportunity for suppliers to move toward integrated and interlinked collaboration with their customers – the car manufacturers (OEMs). However, this also means that suppliers must manage higher investments with greater complexity at shorter amortization cycles. An increasingly common scenario, where OEMs are not paying

price premiums, leads to significant financial and operational challenge beyond typical cost pressures. Within this network, all participants are facing a similar life threatening dilemma. The widening gap between expected and real future enterprise value can question companies not prepared for this environment. Any investor of automotive companies, whether supplier or OEM, assumes that the rate of innovation will follow, at minimum, the historical trend and translate into further sales and/or higher profitability – a price premium requiring a certain share of efficiency gains.

Regarding innovation in the automotive industry, much of the credit goes to suppliers as OEMs continue to outsource much of the required technological expertise to system and module suppliers. These suppliers manage the entire product complexity and associated technology risks, and the financial stake and associated investments risks – including the increasing complex risks of the upstream supply chain. Notwithstanding many successful process improvements (e.g., lean manufacturing, six sigma, kaizen, etc.), the automotive industry is mostly product-driven in terms of innovation, including forced changes by external factors such as regulation for the new CAFE standards (see Exhibit 1). The major question is how automotive OEMs and suppliers can manage this constant threat of balancing investment and return in this shifting market?

No longer are consumers and regulators willing to only choose on power vs. cost. Regulators, and savvy consumers, instead want to consider the tradeoffs of efficiency vs. cost.

Combining product/material, process and strategy innovation will take R&D, manufacturing, and customer service to the next level

Exhibit 1. Product frontier in the automotive industry

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New innovation champions in automotive

Innovation 2.0 and advanced material systems (AMS) as differentiatorsIn order to cope with the competitive pressure and the requirement of an increasing rate of innovation, many companies are shifting from linear to exponential thinking, moving from a high degree of incremental in-house improvements of existing technologies and the current product portfolio with the existing suppliers, toward a disruptive way of innovating with new partners, technologies, and innovation methods.

Monitor Deloitte has written extensively about growth, considering different sources of growth in three different business dimension (core, adjacent and transformation). "Classic innovative" companies generate most of their revenues in core segments (70 / 20 / 10 sales mix) and concentrate most of their investments in these same core segments, consistently failing to invest and innovate for the business of tomorrow. Conversely, leading companies are investing much larger portions of their innovation budgets in adjacent and transformation spaces. Corporations can leverage innovation in two complementary ways (sustaining and disruptive) depending on the maturity level of the client/ product business portfolio and dynamics in the market or ecosystem – see side bar. Sustaining innovation is the battle, typically amongst incumbents, to find a competitive advantage by expanding incrementally the product frontier of the existing market (e.g. Chevrolet Cruze) and leverage existing capabilities to add product functionality targeted at existing customers. Disruptive innovation occurs typically either at the low-end of a market or through creation of an entirely new market (e.g. Chevrolet Volt).

Classical innovation approaches can reach their limits by being overly focused on internal and existing products and customer. They typically take a narrow look at materials and neglect the fast changing external factors such as unmet needs, emerging technologies and new business models. Building on Larry Keeley's perspective in 10 Types of Innovation: The Discipline of Building Breakthroughs to achieve transformational innovation, Deloitte Advanced Materials Systems (AMS) framework provides a new approach for companies to target opportunities for innovation and invigorate value

creation by igniting growth based on material-enabled solutions (see Exhibit 2).

The AMS framework presents a growth and innovation pathway in a combination of solutions, ecosystems and approaches including: new functional and economic solutions, designed and delivered to address specific market needs; an ecosystem tailored for the opportunity to bring the solution to market; approaches to innovation deliberately focused on the identification and efficient maximization of value across the ecosystem – based on customer's economics. Beyond material management capabilities, the AMS approach requires core capabilities in system-level design and engineering, new business model and ecosystem identification, together with new partnership and collaboration model definition well beyond the current concepts of “open innovation”. For example, a network of partners came together to create new lightweight vehicle with greater fuel efficiency. Ford, Dow Chemical, and US Department of Energy's (DOE) Oak Ridge National Laboratory formed public-private partnership (PPP) to produce lighter body panels from high-performance carbon-fiber reinforced composites.

Sustaining vs. disruptive innovationIn order to achieve the cost and performance trade-off required by future fuel efficiency regulations, different innovation frontiers were anchored by General Motors as early as from 2007.

Sustaining approach: The low-cost Chevrolet Cruze achieves fuel efficiency of 22 miles per gallon (MPGe) at a cost of $22,000 with a standard gasoline internal combustion power train.

Disruptive approach: The Chevrolet Volt achieves fuel efficiency of 100 MPGe at a cost of $40,000 with a gasoline-electric hybrid power train.

The Volt (and related vehicles) are disruptive to the combustion engine market because it achieves a 4X efficiency gain for only 2x the price. More importantly, the combustion engine cannot achieve this efficiency at any price. This is a new market disruption.

A challenge the automotive industry faces is that regulation standards are increasing quickly over time. The same class and size of vehicles as the Cruze and Volt will need to have a fleet averaged fuel efficiency of 56 MPGe in just 10 years. Automakers are struggling to meet these aggressive standards and are forming unique partnerships to innovate.

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New innovation champions in automotive

Exponential process technologies to consider as enablersBefore applying the AMS framework, companies should also consider a changing environment from science and process technology perspectives that would impact the way to define directions towards growth and innovation. Exponential technologies will transform the manufacturing industry around solution identification, material management (selection, synthesis, and integration), product / system design, production and distribution. Solutions are already emerging from artificial intelligence (AI), crowdsourcingi and gamificationii. Convergence across various industry sectors is happening such as molecular biology with chemical engineering and materials science.

Additive manufacturing, also known as 3D printing, is already changing dramatically the way companies make and distribute products in given sectors. Additive manufacturing refers to a group of technologies that fabricate solid objects directly from digital models through the addition of materials (typically layer by layer of polymers, ceramics, or metals) rather than by traditional manufacturing. Additive manufacturing enables unprecedented design flexibility, allowing rapid speed to market and cost and waste reduction. Its potential future applications in the automotive industry include sophisticated auto component and auto components designed through crowdsourcing. General Electric has a great example which other industries may learn from. GE ran a global 3D printing challenge campaign

to achieve the redesign of a Titanium based jet engine bracket with 84 percent weight reduction and leveraged a global pool of talents with only US$20,000 entire winnings giveaway.

Another example of exponential process technology is Nanotechnologyiii. Nanotechnology permits engineering of numerous classes of materials with otherwise unavailable structural and functional precision at ultrafine scales. Nano-manufacturing processes allow innovators to design and integrate new materials at the nano-scale to create high-value, high-performance products such as cubic boron nitride coatings for carbide tools and wear parts used in machining and manufacturing, and advanced lubricants designed with nano-engineered multi-functional particles that help to save energy and enhance durability of equipment.

Nano-manufacturing processes also facilitate the application of new advanced materials in the alternative fuel systems. For example, BASF has developed nanostructured materials, known as Metal-Organic Frameworks (MOFs). These nanomaterials allow for the increased storage of natural gas, offering the potential to significantly increase vehicle range to operate fuel storage tanks and natural gas compression systems at lower pressures. BASF is partnering with several technology, development and original equipment manufacturers (OEMs) to pilot the use of MOF materials for enhanced natural gas storage in vehicles in Europe, Asia and North America.

Exhibit 2. Advanced material systems (AMS) framework and potential benefits to automotive suppliers

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New innovation champions in automotive

i Crowdsourcing is the process of obtaining needed services, ideas, or content by solic-iting contributions from a large group of people, and especially from an online community, rather than from traditional employees or suppliers.

ii Gamification is the use of game thinking and game mechanics in non-game contexts to engage users in solving problems.

iii Nanotechnology is the manipulation of matter on an atomic, molecular, and supramolecular scale.

AMS for sustainable growth & innovation across the value chain Past experience shows that companies who are adopting a customer view and applying a broader perspective when implementing AMS are more successful. A recent comparison between material producers and system integrators indicates that companies delivering systems continue to outperform in value creation (see Exhibit 3).

Correctly and fully applied, the AMS approach will help disrupt traditional supply chains and bring significant benefits to the customers. Combining product/ material, process and strategy innovation will take R&D, manufacturing and customer service to the next level. Substantial value can be created for the companies that master AMS through reduced costs and increased revenues in

selling more/ new products driven by a shorter time-to-market, better customer service and higher customer satisfaction.

To be effective, the AMS approach calls on manufacturers, integrators and OEM customers of materials to boldly rethink value capitalization/ capture. All players need to evaluate their individual role in the value chain and identify how to forge new frontiers of opportunities by both building upon and expanding beyond traditional mind-sets (in materials and process technologies, product development, collaboration and business models). Any players ready to embark on that journey should consider how it will affect its customers, its suppliers and its own organization (people, process and system) as part of change management program.

Source: DTTL Global Manufacturing Industry group 2013 study "Driving growth - Advanced Materials Systems"; Note: same trend foreseen in 2011-2014 based on extrapolation.

Exhibit 3. Performance divergence between materials producers and systems integrators

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New innovation champions in automotive

About the authorsDr. Marco H. Hecker is a Partner of Monitor Deloitte based at the Shanghai office. He is leading the China Automotive Practice of Deloitte Consulting. You may contact him at mhecker@deloitte.com.cn.

Yann Cohen is a Partner of Monitor Deloitte based at the Shanghai office. He is leading the Asia and China Chemical & Material Practice of Deloitte Consulting. You may contact him at yanncohen@deloitte.com.cn.

Dr. Jeffrey Carbeck is a Specialist Leader, Advanced Materials and Manufacturing of Deloitte Consulting LLP based at the New York office. You may contact him at jcarbeck@deloitte.com.

Jiaming Li is a Director of Monitor Deloitte based at the Shanghai office. You may contact him at jiamli@deloitte.com.cn.

AcknowledgementsThe authors would like to thank David Martin, Managing Director of Monitor Deloitte China and Duane Dickson, Global Chemical Sector Leader for their endorsement of the report. Sincere thanks to Shirley Xia, Lydia Chen, and Nickie Wang for their contributions in editing, review and design of this Deloitte Chemical Quarterly report.

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New innovation champions in automotive

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