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Open Sourced Car Business Model

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How can Detroit big three survive? They all should read this paper

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Open Sourced Car Business Model

  1. 1. Business Model Created for Chrysler The U-car, An Open Sourced Brand By: Eric Li, Manish Mishra, Cameron Keener UNC Kenan-Flagler Business School
  2. 2. Step 1: Landscape and Assessment Chrysler LLC, and Problem it’s facing Chrysler LLC today offers several brands of vehicles: Chrysler, Dodge and Jeep. In 2008 Consumer Reports Car Reliability survey, Chrysler’s car was the worst among all car makers. Roughly two-thirds of its products rated below average on reliability.1 Additionally, among the six top selling brands in the US, Chrysler’s 2007 lineup was the worst in fuel economy. As a result, Chrysler was especially vulnerable as oil prices skyrocketed to $140 per barrel during 2008, which fueled the ensuing economic recession, thus Chrysler sales were hit especially hard (See exhibit 1 for Chrysler yearly sales). As 2008 sales dropped by 30%2 compared to the previous year, Chrysler was forced to shut down all of its North American production by the end of 2008.3 “Detroit’s Big Three,” GM, Ford and Chrysler, went to US government and asked for $34B bailout to prevent bankruptcy in December of 2008. Although Chrysler obtained $4B4 in governmental loans, it is still the in the worst financial shape among the “Detroit Big Three.” Industry-wide Problem across value chain For Chrysler and other US automakers, high quality R&D and labor are low value resources, not capabilities. The big three’s labor force is highly unionized which has reduced the auto manufacturer’s competencies. Employers such as GM and Chrysler, which dominated by United Auto Workers, have to pay their workers at average rate $74/hr, compared to $44/hr for Toyota.5 Chrysler’s R&D is in- house and 100% based in the US, and thus is just not competitive enough to compete globally with European and Japanese automakers. Chrysler is not alone in the industry-wide problem; the entire US automotive industry lacks efficiency along its value chain, and the supply chains are in trouble as well. Following Delphi and Plastech, many car part suppliers such as Visteon may face bankruptcy.6 Their distribution and sales through dealers are too costly, and don’t provide customers with a haggle-free buying experience. Typically, dealers 2
  3. 3. make 30% of the gross profit/incentives of MSRP, and protected by state laws, which state that all new cars7 have to be sold through dealers in all 50 states. Step 2: Configure Value and Make Identify Choices Build-to-Order using the Internet Most car manufacturers, including Chrysler, use web sites as marketing and advertising tools; however, they don’t fully utilize the internet’s capability to capture value or create value for customers. Most web sites show the latest model, specs, and features for their product lineup, which is not much different from TV ads. Although most web sites allow customers to choose packages and order cars from the web site, the choices offered and configurability are very limited, and customers are forced to purchase through local dealers. Thus, local dealers actually complete the sales transaction in this model. Scion, a sub-brand of Toyota targeting Y-generation customers, has a web site that allows customers to “build your own Scion” (See exhibit 2). While the web site is perhaps the most advanced in configurability, it’s still far behind Dell’s BTO model in electronics industry. Scion ships “bare bone cars” from Japan, but most of the options are configured by the dealers.8 Without re-configuring the whole value chain to operate within a new business model, BTO for car industry is just not possible. Open Source Design – A trend in many industries Many industries have already adopted an open sourced business model for their R&D and supply chains, but the car industry is yet to embrace it. Several non- profit organizations are pushing for it including Open Source Green Vehicle (OSGV)9 in the US and OSCar10 in Germany, but none of them has been able to build a business models to capture value. BMW recently tried to develop an open source platform11 but limited the scope to electronics. 3
  4. 4. Plug-in Hybrids – Totally Different Combinations of Technology BYD, A Chinese based car manufacture is going to launch its plug-in hybrid vehicle in the US in 2009.12 The electric powered car is based on a different technology that has the potential to totally disrupt the traditional car industry. The core technology of electric car is the battery, which doesn’t require a transmission and other complex mechanical equipment, thus an electric car would be much less complicated to design with fewer parts to manufacture. BYD analogizes the simplicity of electric cars vs. complexities of traditional gas- powered cars to digital watches vs. Swiss mechanical watches. While US consumers currently regard Chinese imports as inferior in both quality and safety, US car makers should pay attention to this trend and potential value shift, which could further exacerbate the already unstable auto business. Identity Shifts – External and Internal Chrysler’s subsidiary GEM (Global Electric Motorcars) already owns an electric car technology, and Chrysler is in the process of launching ENVI, its hybrid and plug-in electric product line.13 The challenge for Chrysler is getting its customer- base’s identity to shift from “gas guzzlers” to “eco-friendly” models. Not only does this shift require major restructuring of Chrysler’s value chains, supply chain, and dealer’s distribution channel, it also requires internal identity shifts, which may be an even greater challenge. We list out innovation cube check list on Exhibit 3. 4
  5. 5. Step 3A: Define Business Model and Required Resources Modular Platform Leveraging its subsidiary GEM, Chrysler should refocus some of its resources toward establishing an electric car platform based upon standardized modules that can be open-sourced from any supplier. As electric cars tend to have less complexity in their design, suppliers could specialize in creating building block modules that could potentially be interchanged between different vehicles as well as across other automobile brands. Exhibit 4 and Exhibit 5 shows and example of major building blocks for an Open Source vehicle “Kernel”. The precedent for successful open sourced design has been established in both the IBM PC and currently with Apple’s IPhone. Suppliers and programmers tend to gravitate to an open-sourced design as they are able to easily integrate their products into its modular platform. The key factor for success will be for Chrysler to retain ownership of the most critical IP (perhaps the battery or software that allows for the integration of the modules), as Apple has done with its IPhone, and open everything else, which should increase scale and drive down costs. Supply Chain Management In addition to creating an open-sourced platform, Chrysler will also need to open- source its supply chain. While Chrysler should form strategic partnerships with its key suppliers, perhaps BYD, it also needs to be flexible enough to integrate the most innovative designs into its platform. Because electric cars are less complex and require less maintenance than gasoline powered vehicles, there should be less inventory to manage (supplier to dealer), and the integration of modular components should be less complicated, thus the huge fixed costs currently required for automobile manufacturing may be dramatically reduced. Dealers’ roles of managing FGI, Sales, and Service may also shift to a role of customization and light integration. Customers could customize their electric car via Chrysler’s web site or through kiosks at the local dealer. Thus, the dealer 5
  6. 6. would continue to play a role in the sale of the vehicle but be entitled to a smaller incentive due to providing less added value. The reduced manufacturing overhead, parts inventory, FGI, and dealer incentives should decrease the cost of the car to consumers and thus increase demand. Furthermore, it would be difficult for competitors (even Toyota) to respond by restructuring their business models, as the have heavily invested in their own supply chains. Innovation through Open Design Because electric cars present a significant identity shift for Chrysler, it should attempt to connect with consumers by allowing for their input into the design process, which would not only help to foster innovation, but also attract new customers as well as excite existing customers. Instead of developing new concepts in secrecy through its own R&D, Chrysler could open up its prototypes to consumers and incorporate their feedback into the design process in much the same way as Google releases “Beta” version software. To make this possible, Chrysler would have to expand upon its current web site functionality and provide users with collaboration tools, chat rooms, perhaps even design software that would allow users to provide their input. Designers could then take the best ideas and adapt them into the prototype. The approach could change the relationship of customers to the brand and that would change the brand itself into a collaborative community car – “the U-Car.” “[Consumers] will start Facebook groups, blogs, and Meetup clubs extolling the wonders of the cars they choose. Outside product designers and manufacturers will accessorize and improve the open-source car—just like outside developers have created thousands of software applications for the iPhone—which will support new businesses and help sell more cars. There is the advantage to being a platform as Google is a platform.”14 6
  7. 7. Step 3B: Target Resource Base for Capabilities Human Capital Blue Print: Sourcing Blueprint: 1. Coordinate with several universities around the 1. Just like Ipod, the features of the car are world to nurture and capture talent early on. endless. 2. These departments of engineering will be the 2. It need not be developed by Chrysler alone, test lab to fine tune many aspects of the open the open source model encourages anyone car. and everyone to add their own version of 3. A culture of rewarding and attracting innovators functionality. will turn the virtuous cycle in Chrysler’s favor. 3. The vital parts of the car will be self sourced 4. Engineers who could not be part of Chrysler ( the core engine, piston etc.) can innovate on their own, much like the 4. Just like dealers, there will be vendors who programmers world wide who contribute will co source the functionalities of the car. towards the application of Ipod or apps at 5. Since the car is open source, practically any Google. manufacturer can take advantage, thus 5. Virtually anyone around the globe can be part Chrysler will be able to set the reference point of this production without physically being a and derive a set of standards, just like IBM part of the company. computers. Branded Experience Blue Print: Technology Blueprint: 1. Well known brand, new car rectifies the image 1. The car will be open source that means the of gas guzzler cars. structure of the car will be extremely 2. Customizable car provides infinite probabilities, modular. generates excitement among the youth and early 2. These modular components of the car can be adapters. developed by anyone , need not be part of 3. With sleek website, the car knowledge and Chrysler at all. capabilities will be taken to people –“it is your 3. However there will be strict quality standards car, make it the way you want it to be...” that all sourcing partners will have to pass 4. Empowered customers – people’s car. through. 5. Serves global population, can source “your 4. The modular components will be based on a component” from anywhere around the world. open source architecture which will prompt 6. Create marketing campaigns to alter the other manufacturers to leverage the Chrysler brand perception and project it as a architecture. A collaborative atmosphere of company that is eager to turn the tables and manufacturing will provide breeding ground start fresh with fresh ideas. for new innovation routinely. 5. Chrysler being the first mover in the space will be able to establish the standards in its own favor. Financial Blue Print: Physical Blueprint: 1. The open source car can reduce inventory 1. The components being modular can be because it is based on real time demand. manufactured anywhere depending on the 7
  8. 8. 2. Less inventory means better asset turnaround economics of the production, transportation ration and hence better ROE ( Dupont model ) and availability of resources. 3. A portion of assembling accessories is left for 2. The open source model will give Chrysler the independent vendors; this reduces fixed cost advantage to co-source the components with and helps in attaining lean manufacturing much anyone in the world without investing in like Toyota. setting up of the infrastructure. 4. Own less physical asset and yet promise 3. The standardized chassis and its core customer whatever they want ( you can get it components will help anyone to produce its yourself ) , minimizes risk through make or own version of car. order 4. Chrysler will thus be the provider of the 5. Can focus on optimizing operational process to medium and not necessarily every integral reduce cost like never before. part of the car. This distributed architecture much like the distributed computing will empower customers and reduce fixed cost. GAP ANALYSIS 1. The most important GAP with the business model is that of availability of a large pool of professional who will create their own version of components for the car. In case of Apple or Google there is a vast pool of programmers who can build their own applications based on the architecture of the base product. In the short run, there will not be any such pool because there is no precedence of anything as an open source car! 2. The above GAP can be balanced by investment in Human Capital by collaborating with Universities around the world. Chrysler can open departments of excellence within the Engineering departments around the globe to jumpstart the concept. These engineers will start with their own setup with the help of Chrysler and in the long run the model will propagate on its own, provided the demand is sustained. 3. There will be substantial upfront cost to come up with the new technology and create an open source car. This huge upfront cost however can be balanced by substantial cost savings Chrysler will have due to distributed architecture. Financial blue print shows that fixed costs will reduce dramatically and this will mean positive NPV for the upfront investment. 4. One of the biggest gaps is the Chrysler brand perception. They are not known for smart cars or being innovative. Their recent economic woes have made them the laughing stock of the world. Any move towards dramatically altering the playing field will meet with wide skepticism. One can only hope that accurate marketing campaigns will provide thaw against the skepticism. 5. In a country of SUV lovers and big car enthusiasts the market for smart cars is yet to be established. However there is strong trend towards hybrid cars and success of Toyota’s Prius is testimonial to this effect. This smart car captures the imagination of many people and hence there is good chance that it will capture wallets as well. 8
  9. 9. Exhibit 1 Total American Sales for Chrysler LLC Calendar Year Sales 1999[43] 2,638,561 2000 2,522,695 [44] 2001 2,273,208 [45] 2002 2,205,446 2003 2,127,451 [46] 2004 2,206,024 [47] 2005 2,304,833 [48] 2006 2,142,505 [49] 2007 2,076,650 [50] 2008 1,453,122 Chart from: Wikipedia Exhibit 2 Build your own Scion web site 9
  10. 10. Exhibit 3 Innovation cube checklists for Chrysler today: (original) Human Capital Blue Print: Sourcing Blueprint: 1. Owns almost all the engineering. 1. Engineering and Design 2. Plan to merge with GM in 2009 2. Sourcing and Supply chain 3. Unionized labors under UAW 3. Car sold through local dealers 4. Dealer’s network – enforced by law to distribute car through dealers. Branded Experience Blue Print: Technology Blueprint: 1. Chrysler, Dodge, Jeep. Performance brands, but 1. Powerful muscle cars and trucks Gas guzzlers. Worst fuel economy among top 2. GEM, electric golf car and ENVI hybrid car 6.15 Tech1 3. Web interface –Build your own car 2. Web site experience Physical 3 3. Customer buying experience through dealers Financial Blue Print: Physical Blueprint: 1. North American assembly plants 16 1. 2007 private equity buyout. 2. 2009 Chrysler get $4B US government loan 2. All cars sold through dealers 3. Can “build your own” form web Exhibit 4 10
  11. 11. Exhibit 5 Referneces: 1 Reliability –Consumer Reports http://www.consumerreports.org/cro/cars/used-cars/reliability/best-worst- in-car-reliability-1005/reliability-findings/reliability-findings.htm 2 Chrysler 2008 sales http://news.prnewswire.com/DisplayReleaseContent.aspx?ACCT=104&STORY=/www/story/01-05- 2009/0004949198&EDATE 3 Big Threes ask for bail out http://money.cnn.com/2008/12/17/autos/chrysler_shutdown/index.htm 4 Chrysler get $4B http://www.reuters.com/article/ousiv/idUSTRE50200820090103 5 http://www.nytimes.com/2008/11/18/business/economy/18sorkin.html?_r=4&sq=andrew%20ross%20sorki n%20auto%20workers%20$70&st=cse&scp=1&pagewanted=print 6 Supplier Bankruptcy http://online.wsj.com/article/SB123293545935214449.html?mod=googlenews_wsj 7 Car dealers lobbying for law protection 8 Scion’s BTO model: http://www.autonews.com/article/20080204/ANA04/802040312 9 Open Source Green Vehicle Project(OSGV) http://www.osgv.org/ 11
  12. 12. 10 http://www.theoscarproject.org/ 11 http://www.autonews.com/article/20081023/COPY/310239911/-1/SUPPLIERS 12 BYD http://online.wsj.com/article/SB123172034731572313.html 13 Chrysler ENVI: https://www.chryslerllc.com/en/innovation/envi/overview/ 14 From the book What Would Google Do? by Jeff Jarvis 15 http://www.hybridcars.com/news2/chrysler-hybrid-envi.html 16 http://en.wikipedia.org/wiki/List_of_Chrysler_factories 12

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