Project Ironman: The Technological Engine of Change

Customization and collaboration are the latest watchwords in the automotive industry, as new technology enables manufacturers to work together to build personalized vehicles.

On a patch of dirty sand beside the Pacific stands a car that claims to represent the future of the motor industry. This seems strange, since only 500 will be made in the first year, at a cost of #61,500 each. What’s more, it appears to be made out of Meccano.

The outrageously macho off-roader, called Project Ironman by its creator Californian startup Model E, is the first solid realization of a vision mesmerizing the car industry. It is an Internet-specified, computer designed vehicle intended to accept mechanical and cosmetic parts from different manufacturers. It is aimed at discerning customers who want something a little bit different. Or rather, something wildly different.

For a start, it has a stainless steel exoskeleton; doors and windows are extras. And the driver’s seat is in the middle. Project Ironman – it has no real name, as yet – was never a lump of clay. It went from a sketch on a table napkin to computer aided design to computer aided manufacture to concept-car status in 90 days, compared with the usual 18 months. But it is, theoretically, on sale, so long as 500 people put down their #7,000 deposits.

The people behind Model E are not hobbyists. They are experienced motor industry figures, led by former Ford executive William Santana Li, who present the Ironman as the logical outcome of their business plan. This involves pampering the car-loving software magnates of their home state as they have never been pampered before.

The idea is that your alpha geek can go to Model E’s Web site, pick a Porsche, a Mercedes, a Lexus or a BMW and add new wheels, a better stereo, even a performance suspension package, according to their taste. Model E will get the work done and the eConcierge will deliver it.

Model E sees Project Ironman as the logical extension of its customizing idea. It has on its site an elaborate ‘virtual design center’ where invited guests (it helps to have a Silicon Valley postcode) are invited to contribute. The finished car could appear in Autumn 2002, if those deposits are forthcoming. As Kim says, “We are not going to dump all our investors’ money into building vehicles that people don’t want.”

Model E’s liquidity will be enhanced by the fact that it won’t be doing any of this work itself. Purchase and management of vehicles is actually handled by PHH, a subsidiary of Avis. The customizing work will be done in the ‘micro-factories’ of Model E’s partners. These are not garden sheds. Some car industry suppliers have the facilities to build whole cars: Steyr-Daimler-Puch of Austria, for instance, builds 4WD vehicles for Mercedes-Benz. “We are looking at the capitalized model,” says Kim, “very much as Cisco is doing today.”

Freedom at a price

“Right now we are focusing on liberating everybody’s automotive experience,” says George Kim, a Harvard MBA and former investment banker who is Model E’s business development officer. “A one-stop, all-inclusive servicing package and a customized vehicle, so you don’t need to go anywhere else.” It is a scheme that has brought in #11 million so far from the Japanese incubator Softbank, with a further #14 million promised. Model E’s chairman, Scott Russell, is also principal managing director with Softbank.

The scheme has two aspects. Firstly, it promises to rid the wealthy-but-busy executive of the chores associated with running a car, from buying insurance to refilling the screenwash bottle, by appointing an ‘eConcierge’ to manage it. Customers pay a monthly subscription, which includes a lease element. It is the vision of Jeremy Rifkin’s Hypercapitalism, which predicts the replacement of ownership by payment for access.

“We’re moving toward this idea of flexible mobility,” says Kim, “where you always have a perfectly tuned customized vehicle in your driveway at all times and you never have any personal downtime. Because the vehicle is often a mission-critical component of your lifestyle. We were speaking to an investment banker recently and he had to take his car in, and he took a whole day off work to deal with it. If his time is theoretically worth thousands of dollars an hour it’s kind of depressing for him to be sitting there.”

The second part of the plan is to offer those people something different. Elaborate vehicle options are a useful corporate incentive. “Out here, especially in Silicon Valley, attracting good computer programmers is almost impossible. You can compete with salary, but if you can provide other lifestyle perks, they find that to be very compelling.”

American domestic models are not offered, because these customers don’t want them. One day, though, Model E plans to drop downmarket to cater for ‘homemakers and teachers’ who would also love to escape the car ownership experience.

For now, anyone using the Model E scheme will be paying top dollar. An Audi TT Quattro coupe will cost you a #2,500 downpayment, plus about #550 a month: about #150 a month more than acquiring the same car on an unadorned three-year lease through conventional channels. “Our business is designed to be powerful for the client,” says Kim, “but it is also designed to be sustainable and profitable for us. We’re not trying to be one of these stereotypical money-losing dot-com businesses acquiring market share at any cost. We are deliberately trying to target a market segment that we know is very time constrained and willing to pay for convenience.”

The build-to-order revolution

If all this sounds futuristic, it is. The idea of ‘build-to-order’ using multiple suppliers and manufacturers is at least 15 years away. Closer, though, is limited build-to-order within a single manufacturer. Professor John MacDuffie of the University of Pennsylvania is co-author of a paper on the effects of the Net on the car industry (see boxout). “I have come to believe,” he says, “that most manufacturers are taking build-to-order quite seriously. Even those who are in every way, philosophically and historically, very sceptical of it.” Examples of the latter, he says, are BMW and Toyota. “And even they are taking it seriously enough to monitor it.”

The so-called Tier One suppliers – the big guns – would also like to move in that direction. They already design and supply complete assemblies or modules to car-makers. “build-to-order is the key,” said JT Battenburg, chief executive of Delphi Automotive. “That’s the game-changer in the industry.” The new Ford Mondeo, for instance, has, for the first time, an instrument panel designed and built by an outside organization, Textron.

Of course, people already think they can order precisely the car they want, but it’s a sham. Cars are built pre-configured in batches. If you want something different, the dealer will half-heartedly try and find it from other outlets. Usually you get what’s on the forecourt.

Some see advantages in that. Professor Garel Rhys, director of Cardiff University’s center for automotive research, says people should be wary of creating a personalized vehicle. “It’s one of the few products that, when you are buying it, you are already thinking of getting rid of it. If you make it very particular to your needs, you make it less attractive to other people.” By restricting choice, car makers are protecting the resale value of their products – and protecting us from ourselves.

But build-to-order, which in practical terms means 10 days rather than 45-60 days from order to delivery, would have benefits for both consumers and manufacturers, ending the nightmare of fields full of unwanted models. Imagine: every car a wanted car.

Inventory is a constant problem for manufacturers and suppliers. A typical car may have anything up to 5,000 parts, sourced from up to 500 suppliers. An Internet-linked system of build-to-order would not only end the glut of finished cars sitting in the rain, it would also bring into the system large amounts of information about customer preferences, enabling manufacturers to reduce the supply of lime green hatchbacks if people want midnight blue saloons. Detroit, particularly, is keen to ensure it is never again caught out as it was when the US public suddenly went crazy for imported four-wheel-drive ‘Sports Utility Vehicles’.

Such a model has already proved very successful in the personal computer market. PCs consist of discrete modules, built cheaply in bulk and then assembled by competing PC manufacturers. The pioneer of this way of operating was Dell computers, started by Michael Dell when he was still a student.

“The Dell model is very attractive,” explains automotive analyst Stefan Burgstaller of Schroder Salomon Smith Barney. “It means you have zero inventory and positive working capital. You charge your customer before you pay your suppliers.” Some car-makers have certainly pushed modularization as a way of moving production out of their own expensive unionised plants.

But it’s not a simple proposition. The personal computer is nothing like as complex to produce as a car. Car parts and assemblies are interdependent, especially when ride, noise and economy are important. Some designers think modularity is simply incompatible with engineering excellence. Some economists doubt the cost savings: both manufacturer and supplier will need to maintain engineers to check each others’ work.

Long term savings

In the short term, build-to-order will cost, not save money. If consumers want it, including the new 42-volt electronics (including anti-collision radar) under development by Tier One suppliers, they’ll have to pay for it. Once established, however, there will be considerable savings.

Savings will come when information passes rapidly down the supply chain, from manufacturer to Tier One supplier to minor suppliers. The Internet, through the XML data-description language, is now the favored medium, replacing or sitting on top of the old Electronic Data Exchange system which came in during the 1980s, but which only permitted one-to-one communication. More recently, the Automotive Network eXchange in the States, and ENX in Europe, has created a kind of secure private Internet on dedicated hardware. Now the industry is starting to use the Internet proper, lowering the price and complexity of entry. These things have improved communication, but they never set out to foster it as a business model. For that, the world had to wait for Covisint, the vast B2B exchange established in 2000 by Ford, DaimlerChrysler, General Motors, Nissan/Renault and most of their Tier One suppliers.

Each of the traditional US big three – Ford, GM and Daimler-Chrysler – had plans for its own supplier marketplace. Then they decided to merge them, reasoning that by driving their joint $250 billion annual spending through a single channel (but not buying together, which would be illegal) they could hammer down costs. Furthermore, they could take a cut – one percent has been mentioned – of all the transactions conducted between the suppliers themselves, worth another $250 billion or so.

Covisint’s Web site illustrates this with Shockwave animations. Buying and selling dominates. Manufacturers ask for a commodity, say pencils, and suppliers compete to say how little they will charge for them. Or suppliers offer something and see how much they can get. But you can imagine that suppliers might be reluctant to join a party that ends with them cutting one another’s throats. “The misconception is that they are there to aggregate the muscles of the big boys and screw the small ones,” says Burgstaller. He says the American authorities would not have permitted such a scheme. Sharing information will produce great improvements in productivity, not least in preventing over-production through ignorance. Production schedules can be shared, as can design work and drawings. This is the promise offered to the Tier One group. It will also be essential if build-to-order is ever to be more than a slogan.

“There is reason to believe,” says Professor MacDuffie, “that heavy use of that mode does influence the climate of supplier relations in somewhat negative ways in terms of trust.” Professor Rhys agrees: “If you are going to use e-commerce to drive prices down through auctions, where’s your long term relationship?”

And if suppliers are doubtful, those car makers who have not joined the group are tending towards the hostile. BMW executive Wilhelm Becker told an industry conference in June that “Covisint is too controlled by our friends in America. We don’t want our secrets in the hands of competitors. Covisint is not neutral enough.”

He also criticized launch predictions that Covisint could lead to a reduction of #2,000 in the manufacturing costs of a #14,000 car. That had unnerved suppliers. MacDuffie and Helper’s paper puts the likely price reduction at less than #350.

But it may be that Covisint had no alternative to starting as a glorified auction site. The three US car firms each brought their own “technology partners” to the table – Commerce One with GM, Oracle with Ford and SAP with DaimlerChrysler. Indeed, Covisint has three interim CEOs, one from each of the big car-makers. Getting their management and technological systems to mesh may be rather more difficult than, say, putting a Honda engine in a Ford Focus.

And whereas an auction system is a fairly straightforward proposition, establishing a system for collaborative working on high-definition engineering drawings and CADCAM models is not for the faint-hearted. “And the issues of how competitors develop those sort of tools become more difficult for that part of the site,” says MacDuffie.

Since being announced in February, Covisint has made progress. It has already done its first deals – an auction in which exhaust manufacturer Arvin Meritor sought a maker for a plastic moulding – and launched a modest advertising campaign. But it quietly shelved its initial idea of having an IPO by the end of 2000, which might have given it a market value of #28 billion, making it as big on paper as any of its partner companies. And it is certainly nowhere near the #210 billion first-year turnover that some enthusiasts predicted.

If Covisint comes to dominate as it surely should – its car-making members currently control two thirds of global auto industry purchasing – the effects could be widespread. We might see the arrival of cars brought to market in 12 months instead of three or more years. And when the industry finally surrenders the internal combustion engine and turns to fuel cells or hydrogen power, the system will accelerate the transition.

But supplier relationships will never be the same again. Those at the bottom of the food chain will be mere commodity suppliers, competing on price alone. Those higher up will get access to more information than ever before, and more of the design work. Manufacturers may become mere brands – but they should be aware of the Intel effect, where the supplier’s processor becomes more important than the box around it.

The UK industry

And what of the British car industry? The Society of Motor Manufacturers and Traders is pushing ENX, its network product, with eight companies currently conducting a trial. Covisint can run on the network, but it also promises to run securely on the public Internet for a fraction of the cost. And Covisint is not just a technology but a business opportunity. Purchasing is a global business, and almost all of Britain’s car-makers are part of Covisint already. So too are our suppliers.

But Professor Rhys points out that when BMW owned Rover it was forced to switch much its purchasing away from Britain because of the poor quality of Britain’s secondary suppliers: “Our second and third tier suppliers are not up to it. And if you can’t compete in the home market, it’s unlikely you can compete in the world market.”

There are those who see the car-makers’ enthusiasm for B2B and Internet-based build-to-order as little more than a fad. After all, weren’t robots and Japanese working practices supposed to revolutionize the car industry? As George Kim says, “There has been a lot of discussion, particularly in the US, about build-to-order. We have a company full of former Detroit and Japanese car company executives who can tell you that almost all of that, at least in the big car companies, is hype.” But beyond the spin, manufacturers are trying to do exactly what they always have – make money.

Posted by on February 2, 2001