31st Annual Automotive Insights Symposium | The Supply Chain Implications of Simplifying Manufacturing

KRISTIN DZICZEK: Thank you for staying with us. I did say this is going to be worth it, and I believe it is. And I'm getting to the finish line of two days or three days of this event. Really thank everybody for great panels, great presentations, great moderation, great support from my staff and folks who all joined together. I hope you felt welcomed here at the Fed. And that you felt well fed here at the Fed, because we do take care of that. I mean, I guess fed is like what we do, right?

So welcome to the final panel. I promise this is going to be a pretty interesting conversation because like my other one that I was preparing, I get these three people together and the conversations are just like crazy and great. So I'm Kristin Dziczek. Again. I'm the automotive policy advisor here at the Federal Reserve Bank of Chicago. I must always begin with my disclaimer that these are my comments, mine alone, not those of anyone else. So that out of the way.

The idea for this discussion stems from some joint research that I'm doing with Professor Sue Helper who's an internationally recognized supply chain expert and just recently joined by our mutual friend and colleague, Professor John Paul MacDuffie The work stems from conversations Sue and I have been having for some years that we found that when we're talking with policymakers and key stakeholders who are thinking about workforce, who are thinking about economic development, who are thinking about this EV transition and what it means beyond the industry, they're often thinking about it in a very simplistic term. They're thinking about more batteries, less engines, really.

And they don't truly understand the profound changes that are happening in vehicle manufacturing and supply chains. So they need to. The need to understand how these things will transform the industry and impact its competitiveness, and possibly alter the industry supply chains and footprint. So we're calling our project and what Sue's presentation is going to be, the Supply Chain Implications of Producing Affordable Electric Vehicles. But as you'll see, these changes that can be driven by the EV transformation may have consequences that spill over and proliferate in ICE and hybrid vehicles as well.

And I'm going to take a minute here to give you a little historical background on myself. I'm really thrilled to bring this panel to AIS, and it's made of three of my longtime friends, one for majority of my life, really, and people I admire greatly. And I was a blue collar kid growing up in Flint, Michigan. I never imagined I'd be here at the Fed. I never imagined there'd be a bunch of people listening to me. And I never thought I would meet less, much less, become friends with such hotshot, globally recognized experts in this field. So I'm going to introduce them all now. And we'll give each some brief opening remarks. We'll load onto the panel and we'll get started.

So first, I'm joined by Professor Susan Helper. As noted she has deep expertise in researching automotive supply chains. She's the Frank Tracy Carlton Professor of Economics at Case Western Reserve University's Weatherhead School of Business. And you may have noticed her bio photo has the telltale mark of a government headshot, the US flag backdrop. That's because Sue has also served as a senior economist in the White House council of Economic Advisors, Senior Advisor for industrial strategy at OEM, or, I'm sorry, OMB, both under Presidents Biden and President Obama and Chief Economist I'm sorry, chief economist of the US Department of Commerce under President Obama.
 
She's also on the National Bureau of Economic Research. Those are the people who say whether we're in a recession or not. And she's earned her PhD at Harvard and her BA at Oberlin. I'm going to go right through to the introductions, and then Sue will join us up here at the podium and talk about our joint work.

Next up, after Sue, we'll hear from another of my speed dial friends, or as I like to-- John Murphy, or as I like to call him, Murph. And I might call him that today because I have two Johns, John and John Paul. John Murphy is a Managing Director of Bank of America and a Senior North American Automotive Equities Research Analyst at the bank. And if you're in the auto industry, you may be familiar with his widely recognized research reports. There's the annual "Car Wars Study," of which automakers have the freshest metal in the showrooms and the strongest product pipeline. And another that's called "Who Makes the Car," which delves deeply into the structure and costs of critical automotive parts and components. His award winning analysis have earned him numerous accolades, including a 2023 induction into the Automotive Hall of Fame, and I think that's kind of cool.

In batting cleanup is Professor John Paul MacDuffie. He and I have known each other for years as well, and he's a Professor of Management at Wharton and directs the Program on Vehicle and Mobility innovation, or PBMI at the Mack Institute for Innovation Management in management. PBMI kind of makes me giggle a little bit because it had a predecessor, the IMVP, so like Stellantis and Tesla and those four letters, there are only four letters apparently, right John Paul, there's IMVP and PVM and I. At IMVP, his work was featured in the groundbreaking work "The Machine that Changed the World," which I'm sure many of us have read. John Paul has had a long and productive research career focused on how disruptive technologies change products and organizations.

I've learned a ton from these people in my career, and I hope you will also become at least a little smarter by taking part in this discussion. Please send your questions to us through the portal. By now you might be getting good at that and know where all the buttons are to do that. We want to know what you want to know and help us make this a panel that is useful to your work. So please welcome our panelists, and Sue, let's get us started. And I'm going to go sit down.

SUSAN HELPER: And do I hit Next?
 
KRISTIN DZICZEK: Yep.
 
SUSAN HELPER: Great. OK, so Kristin, I guess the first slide is just to say the disclaimer. Again, these views are views of Kristin and me and not the Federal Reserve. I'll somewhat implicate John Paul also in decades of work together. And yeah, so we're going to talk about the changes outside the propulsion system as we move toward an EV transition.

And so this is a kind of long-term project. And I struggled to think about a small piece that could present a little bit of-- and so there's-- I'll talk about the kind of broader project and then think about, open to questions about any of these things. And so we want to, you know, I think the electric vehicle train has left the station. I think there's a lot of questions about how fast that train is going to move. But I think it's without question that there are these fundamental changes in vehicle architecture that we really haven't seen since the '60s and '70s.
 
And so we're going to look at how incumbents versus startups address these challenges and uncertainties differently, the kinds of changes in innovation trajectories that we might see, the implications for supply chains, and then some broader implications for theory and practice. So I think I'm going to leave a lot of those to John Paul and to questions.

And so if we think about the overall outline of this very short talk, thinking about differential advantages of incumbents, actually, and there's a few more issues. I didn't actually talk about that I think, you know, there's other challenges. So if you think about the whole scarring effect of the semiconductor shortage, making automakers realize kind of just how vulnerable they are to-- and how much there's an intersection now between the chip supply chain, the electronic supply chain, and their traditional supply chains. Do they want to control more of it? Do they want parts commonality? How do we think about a more centralized electrical system, all that kind of stuff.

And then and John Paul, I think, will talk more about the whole CASE transition. So obviously all kinds of things that are up for grabs, you know, tons of things that are not just the propulsion system. OK, so the kind of outline of the talk and the project is there's differential advantages of incumbents and startups, which lead to a differential responses to policy uncertainty. And that means differential implications for things like parts count reduction and parts redesign, which is going to be my focus today, just a small section of that broader agenda that I discussed, and I think we're happy to take questions on.

And then we're going to look at the implications for the supply chain. And that's not just upstream parts suppliers, but also downstream repair and insurance. Crucially, I think these implications are not confined to electric vehicles. So incumbents have an advantage. It's kind of a double-edged sword. They can draw on legacy products. They're not building everything from scratch. They also face pressure internally to use those existing assets, even if it constrains the ability to do some clean sheet redesign. And we'll see that their customer base tends to be different than the customers for startups.

Customers want all the features they had before. The customers are not just say in the Midwest US, but companies, the established automakers are designing for temperature extremes of Saudi Arabia to Alaska, which requires some parts robustness that maybe some of the newer designs are not tested for. Investors want consistent and short-term returns. And so even though these companies have a ton of collateral, they are not the darlings of Wall Street. They may actually face higher cost of capital, which affects how quickly do you jump into wanting to retool a part?

On the other hand, we have the startups, which have the ability to start with a clean sheet. They lack the legacy plant and equipment. Their customers are more open to novelty. And as I said, they may have a lower cost of capital and less risk averse investors. So it's a very different set of assets and liabilities of these two kinds of companies bring with them. And so how does that affect when we have this incredible policy uncertainty?

So one thing you could do is hedge your bets. This is an incredible chart that Kristin designed. And there's so much behind it, I won't do justice and we can come back in questions. But I think what I take to it is the kind of cost of policy uncertainty. So on the left, you can see three kinds of potential platforms that you might have. And so this is essentially of the electric only over here. And the amount of volume that we predict from starting in 2020 going through to 2031.
 
So you see a gradual increase in people willing to specialize in electric vehicles. And over here, a gradual decrease in the ICE only. But in the middle is this bet hedging of the multi propulsion where you have-- and this is platform. So we're talking here about design. You design a platform to handle a different variety of propulsion systems, ranging from full electric to plug-in hybrid to mild hybrid, et cetera. And that volume made on these multi propulsion systems is projected to peak, this black line, so about 2026, and then eventually will decline.

And this is from December 2024. So there's some thought about this, but this is adds a huge amount of complexity in your design.

You have the ability, you don't have to necessarily produce all these variants in the same assembly plant, but you might. Car makers have been-- I think, a lot of thought has gone into this. We were, I guess, concerned, you know, you think about the needs of an electric vehicle. It needs a battery, it doesn't need a motor, doesn't really need a firewall in the same way, maybe has less NVH. And so what automakers have done is they don't drive these, you don't see a car going through a plant that has both systems.

What you see in the plant, though, is a whole lot of extra inventory. You know, they're carrying the battery, they're carrying the engine. They're-- there's all-- there is, in fact, at least for some automakers, redundant software that can handle switching from both a battery and an engine, so just a lot of complexity and a lot of consideration that has to happen. So in some level it's a great option that legacy car makers have that an electric only car maker doesn't have. But it also adds a complexity. And so in finance we talk about real options. It's retaining a real option. But that option is not free. And it's kind of yet another cost of policy uncertainty.

Let's see. OK so then just looking at what can you do. So we're really grateful to Care Soft and Ashwin who's here for kind of letting us see this wealth of data and the analysis that they've done and showing-- and here's a couple of examples of Tesla kind of them working out the implications of an electric-only platform. And they're able to simplify, remove parts, use the battery as a floor, really interesting stuff and a very different approach to models where they don't actually introduce things they call new models. But the same model looks actually quite different over time.

And so here's an example, a kind of a comparison of a front fascia, where we have on the left a traditional model from a traditional legacy automaker, and then the Tesla Model Y. And you can see that there's many fewer parts in this. I'm not sure, so it's the Tesla is 27% lighter, so 4 kilograms, 75% fewer parts, 50% fewer fasteners, 50%. And so you'd think, well this is obviously better. And you know, I think what it is an example of differential responses to differential kinds of pressure. So why haven't we seen this from the legacy producer? So a bunch of reasons that we might imagine.

One is if you think it's going to be a low volume car and you've got already tooled up some or all of these parts, why do a new tool, set of tooling? Second, your customers and your dealers care a lot more about repair costs maybe than the buyers of a Tesla that aren't really thinking long-term about their repair bills, aren't really used to being upset about whatever. Whereas there's all these kind of channels for communication and complaints about repair. And so this-- with the small parts, you can just replace the small part that you need.

Yeah, I think, I think I said all that. So it's an interesting. And I guess a question would be, you know, if we had policy certainty, the ability to decide that there's going to be EV platforms, new kinds of cars that we're sure are going to go, will we see the legacy producers move more toward this? And I think John Paul will talk about some of the pendulum swing around complexity and simplification.
 
Let's see, I'm being very slow here. So another kind of big change is giga casting. And this is casting a dramatic, a large piece replacing multiple pieces of a car. I'm being vague because people, I think, mean different things by giga casting. And so that was one thought that you could cast the entire car as one single casting. That turns out, it has a bunch of benefits. It would save weight, reduce the number of parts, reduce assembly complexity, but you also have a huge amount of investment, you, and the repair costs are incredibly high.

And so I think there's some interesting questions about Tesla and why they've done giga casting, and they for a while were kind of increasing the size of their castings. They're now stopping and deciding that maybe repair costs actually do matter and moving away. But what we're seeing a kind of perfusion or diffusion of the idea of giga casting, including two legacy producers like Honda.

And so I think one of the things that will be interesting to see is how much learning are we going to see across the legacy and the and the startups? How will giga casting evolve over time? And then what does this mean for the supply base, most importantly? And so we have a lot of suppliers, second, and third-tier suppliers that make a lot of small parts. If you replace them all with a single giga casting, that's maybe not so great for that. How do we help them? You know, simultaneously, at least in the kind of Biden administration vision was there's going to be all kinds of clean energy manufacturing that was going to need this stuff, so heat pumps, grid parts, et cetera.

Does that vision continue? There are other kinds of things that we could think of where these suppliers go. But it's a big challenge.

Automakers, particularly as they move away from engines, very concerned to employ their current workforces. I think there's some careful work that's been done about the overall electric vehicle supply chain. If you include battery cell manufacturing for at least the medium to short term, the amount of employment in the total supply chain is similar, if not greater, than what it is today. However, there's a huge transition because this new employment is in electronic, electrical, chemical. It's less in stamping, machining, et cetera, trends exacerbated by movements like reducing parts count reducing moving to giga casting.

So there's a big transition issue. There's a vertical integration potential. So this seems potentially very difficult for small suppliers. I think an open question also is what happens to the tier ones. And you could imagine an increased role for tier ones that as you change these modules again, John Paul, I think we'll touch on this. You change these modules and you have kind of uncertainty around what you've done to a boundary, particularly when we're talking about structural parts, you know, you have a division of labor, you don't fully maybe redo your analysis of crash worthiness for every model.

And if you change something, maybe you just made your car vulnerable to a side impact crash. And thinking about the cockpit, John Paul will talk about cross car beam. You know this, you would think that having a partner with a lot of engineering capability might actually be helpful. So I think we should think not just about vertical integration, but also about the nature of relationships through the supply chain. How collaborative are they? How disposable are suppliers going to continue to be or not?

So I think to conclude, it's a time of we think it's a lot of uncertainty for automakers, these suppliers down the food chain are facing even more uncertainty, have even less margin for error. They kind of get one bet or two bets, and if they're wrong, they are potentially out of business. So I think we need to be thinking about all that in this time of great uncertainty. And let's see, I think maybe I should stop. Yeah, I think that's enough. Great, thank you.
 
[APPLAUSE]

JOHN MURPHY: Well, thank you very much for having me today. I just wanted to say a couple of words about Kristen. First of all, thank you for the invitation. Kristin, she is a dear friend. We talk many nights when things are blowing up in the industry, which is almost every night these days. So it's quite fantastic to have somebody like that on speed dial and spitball ideas and figure things out with. So, Kristin, thank you very much for your friendship and the invitation.

Sue, thanks for the lead in, because I think some of the things that I'll go through here echo some of the things that you're saying. And I think we'll dovetail with what John Paul is going to get into. You know, title here is EVs, Damned if You Do, Damned if You Don't. But if you look at the agenda and think about, you know, leveraging some of our core work on EVs, Car Wars, Who Makes the Car, Core to future.

As I go through the presentation, I think you're going to hear an echoing of why and how, you know, the supply chain should simplify. And then also at the end, I'm kind of wrap up with some changes on this quarter future view. But first on EVs, why are the degrees of commitment and success so different? And I think it's really, really, really important to take a step back and think about things from a regional and geographic and government perspective.

The Chinese are going after EVs, at least in my opinion, largely because they were never really able to get around too much on the ICE powertrain. We've heard this from suppliers for years and years and years. And like many governments around the world, they want to have a large, viable, competitive auto industry because it's a status symbol. But more importantly, because it's a key driver of your economy.

When we think about the auto industry on the front end of the value chain, and Kristin probably knows these numbers far better than I do, it's about 4% of GDP at the front end of the value chain in the US. That's before you get into the aftermarket and the dealerships. In Europe, it's about twice that. In China right now, it's almost three times that-- actually a little bit better than three times. So when you think about what the Chinese are doing here with EVs, it's the way that they thought and they are going global and being very competitive.
So it's really important to recognize their motivation has something to do with the environment, but it has more to do with industrial logic and driving their economy forward and getting their population moving from A to B. So that growth and that focus on EVs is more of an industrial and economic logic than necessarily an environmental logic. Europe, you know, committed a sin, I think, at least in my opinion, on Dieselgate. It wasn't necessarily VW. The regulators pushed diesel through taxation schemes. And the reality is, if you talk to any Japanese or American engineer, they were kind of always scratching their head and not clear how the Europeans were doing what they were doing, because they just kept saying it was impossible. And it turns out it was impossible.

So now you have a whole regulatory body that blamed VW, but now is having this knee jerk reaction and moving very quickly towards EVs. And EVs might be a big part of the answer. And I'm not certainly dismissing them, but their motivation is they committed a sin on their population, and now they're having a big knee jerk reaction.

And the United States, we are probably a little bit more focused on the environmental impact on EVs, but we're not pushing them as hard. We certainly have some regulation and incentives that are about to change or changing as we speak through some executive orders.
 
But there, you know, but we're doing this in a slightly more market-based approach. In all three of these major regions around the world, what you're starting to see is EV penetration is leveling out in the past couple of years. And last year, actually in Europe, it went down. The US has leveled off and China it went up a little bit. So even with this great push from the regulatory regime and incentives in China and Europe, and even in the US, we're not seeing the massive surge in a lot of folks were expecting for EVs. But remember, there is a motivation that is different than just focusing on the environment.

Second thing here is this is one of the summary slides from our Car Wars analysis. And as you can see here, we have, you know, the number of ICE hybrid and electric powertrains we expect to be launched over the next four years. This study was done in June of last year. We only do it once a year because it's a tremendous amount of work. I'd love to do it all the time, but I got to focus on my day job at picking stocks occasionally.

So, you know, what you see here, though, a pie chart that shows that hybrid and electric vehicles represent about 60% of the nameplates we expect to be launched over the next four years. That's very interesting because the year prior, it was 64% So we've been doing this analysis in addition to nameplate launches with powertrain launches over the last six or seven years, and this is the first time we've actually seen a reversal back towards ICE as a percent of the total.

And that's, you know, that's a big deal. It's a very, very big deal. Because when you think about what the industry has to lay out. And Sue got into this about the capital commitments, you're talking about $2 to $3 billion a program, $2 to $3 billion on a facility. If you're going to build a facility. So you're talking about a $4 to $5 billion commitment that you're making five to six years out that you're going to have to live with for another six to seven years beyond. So we're talking about long-term commitments, and the fact that this is changing this quickly, even before we get to changes in regulation and the incentive environment here in the US in the Trump administration.

You know, the industry is already reversing course to some degree, and it's costing a lot of money. We've already seen Ford cancel its three-row EV, which was the Explorer. And that's, was a write off of $2 billion. And luckily they killed it before they launched it because they would have had to kill it afterwards and would have cost a whole lot more money. But if we think about those product launches and what the industry was planning for EV penetration, right. So Car Wars is our forecast of all the products going to be launched over the next four years.

A little bit of massaging of our expectation for volumes along with each of those, those products.

It is largely what we think the industry is planning for, for the next four years for product. And if you were to look at the graph on the left, and it's not well labeled here, but 2024 would indicate the industry was launching product planning for an 11% EV penetration rate. We were just below 8% last year. This year they're focused.
They were, as of mid last year, planning for a 15% EV penetration rate, '26, 20%, in 2027, 25%.

Even without changes in the IRA, EPA regulations or what's going to happen with Car, these numbers were probably were never going to really, really happen. Now they're going to be far lower. So just think about this. The industry is planning for something that is not going to happen. They've spent billions and billions of dollars of capital. And now they're kind of stuck with it. So they've been overshooting. And we think that's going to cost the industry a lot of capital. But that creates massive complexity. And we're going to get into what this means for the supply chain right here.
 
This is a simple summary of who makes the car. And this is a study we've been doing for 25 years now, largely originated with ICE components. And it's a little bit more management consulting and big picture that what folks at Caresoft are doing? But it was our best guess and our best estimate of the 16 major component systems in a ICE vehicle. So it was globally originally to start in column A. We gross that up for the US product in column B. This is 2023 data because we did the study also in June of last year.

And what we've done over time is massage this to figure out what the delta is in those component system costs are versus an EV. And you're dropping stuff like exhaust fuel systems, transmission and engine out, and you're adding the electronic components, motors, converters and the battery. And this is basically set up as if the 16 systems showed up at the front of an assembly facility and were dropped off. Doesn't include advertising, some of the R&D or final assembly costs. It's just a car in a box as if the car showed up and had to be assembled?

Now, what you can see here in the middle is the average US vehicle is about $25,000 of content on that basis at that point in the production process. By our estimates, a comparable average EV, think about a Chevy Equinox right now is about $35,000. So about a $10,000 Hickey or higher cost. That's a problem, right? Because right now you're looking at a product that is demonstrably more expensive to produce, the consumer doesn't really, really want and you have to focus on taking cost out of the vehicle dramatically.

And I'm very looking forward to the study that Kristin, Sue and John Paul do on this, you know, very selfishly, so I can understand what's going on. But I would love to be involved because it's, you know, great to hear people are working on this kind of detailed stuff, but you have to focus on the components above that electric powertrain. So as you're looking at all this stuff and John Paul is going to go through some detail that, you know, I'm very much looking forward to hearing, but you have to take costs out of the rest of the vehicle because that battery costs will come down slowly over time.

But even if you cross out, the battery, made it zero, like, you know, you would get you would get the parity. So like, you know, you could create an EV without a battery and you'd be at cost parity on average. It just doesn't work, right. It just doesn't simply work. So what you're going to do as an automaker is scramble, and you're going to try to cut costs out of everything else, but then you're like, wait, heck, if I took it out of the EV, why don't I just take it out of the ICE as well? Right? and then you're just left with that, that cost delta.

And it's a very significant challenge for the industry. And you everybody running around with their hair on fire trying to solve this problem. But you do have folks that have solved it to some degree. And there are companies like Tesla and the Chinese. Now we're going to get into some of the reasons for this. But, you know, our estimate is that they have about a $17,000 cost advantage versus the incumbents that, as Sue mentioned, are working off of some jerry rigged stuff, some Frankenstein programs and some stuff that's kind of ground up, but not really that ground up, like, you know what Tesla did with the white sheeting things and the Chinese are doing as well. But that is a major issue.
 
And some of that, I think. I think the average, the three and the Y weight versus the average ICE like, a Chevy Equinox or a Ford Mach-E is about 1,500 pounds more. Right? So there's the cost and there's the weight difference, which just shows you how absolutely different the vehicle architecture is to start with. But everybody is going to be going after the suppliers or the other components of the vehicle to take these costs out and to simplify, simplify, simplify. But it's not just going to be on EVs. It's also going to happen on the ICE side. So it's a real interesting thing to watch, creates problems in the supply base from for an investor and figuring out where you're supposed to commit capital. But this is a really this is a really significant difference.

Now the other thing that you would look at here also is, you know, as you're focusing on taking the cost out, you're looking at averages. And one of the big problems when you look at averages is you don't look at distributions, right, and you talk about round averages. And you know, as I was mentioning before you're shooting to get to a cost that is well below $25,000. I'm sorry, your ICE cost is $25,000 and your EV cost is $35,000. You're trying to get to a cost that is probably sub $50, you need to charge $50,000 or more to make a margin on that, on that EV as it exists right now. So you're trying to take your cost down to where Tesla is to make money.

But the thing is, the bulk of the market is occurring at $40,000 or less, or more than half of it is occurring at $40,000 or less. So when you talk about the average, we're kind of talking about still the not the complete market. And if you want to drive these costs down to a point where you actually get significant penetration, you have to go significantly below that $40,000 average transaction price. So it makes it that much tougher.

So what we've done over the past couple of years is taking sort of this cost analysis, tried to understand how much the automakers would be willing to lose to drive scale up over time, because you're pricing at a point where you're trying to clear and sell volume to drive scale, to ultimately drive your costs down. But, you know, what we're seeing is like Ford yesterday talked about losing over $5 billion this year in EVs. And they're not going to sell a whole lot of them, but they're willing to lose a whole lot of money to try to get it done, to try to drive scale and develop the product.

If you were to look at that machination of the cost and price assumption, we basically estimated that by 2025, the industry would be looking at around 11%, and by 2027 at about 15% So remember, when I was talking about the product planning in 2027, they're looking at stuff that's in the mid 20% range. We're talking about a cost basis at 15% and a price basis where it's whereas 15% So the industry is demonstrably too high in what they're doing on the product side by at least 10 points. They're overplanning what is even possible based on the cost side and what they actually can price the vehicles for. So there is a massive mismatch in what's going on in product planning and then cost and pricing in the industry.

And then what we're seeing right now is with the change in IRA incentives, potential change in IRA incentives, what's going on with Car [INAUDIBLE] EPA regulations is we're probably looking at an EV penetration rate that's probably going to pancake closer to 8% where it was last year, or just below 8% for the next few years. So there's a very significant issue here of, you know, cost and price, and then product planning and then what's actually happening in the market. And this gets to a major challenge for the industry in the US, probably in Europe to some extent, where you have incumbent product. And that incumbent product is generally liked by the consumer, right?
 
So you have a lot of people that are driving around in their F-150s and their Silverados and their RAM 1500s and their Toyota Rav4's, and they're actually happier, more happy about those than the folks that are driving the Model Y, right? So you have people that are not saying, my product sucks. I needed a whole new product, a whole new powertrain, a whole new thing. They're actually pretty happy with their product. And the problem that you have here is in a consumer retail industry, you have to gain market share, create a better product at a better price. It's very, very simple, right?

Most people don't have the luxury of buying the cool new thing at a very high price, so that the reality is that the industry is really facing massive challenges as they're pushing EVs forward, whether it be because they think they should for the environment or for regulatory reasons or for other reasons that might be, you know, trying to be competitive on the global stage, which we'll get into in a second. But the reality is, trying to convince the consumer to make this shift is very difficult when you have a product that is higher priced, you're not making money on and they're very happy with their existing product. So it's a real significant challenge.

And what you've got now is a mess. And that mess we try to figure out and show. And this a little bit psychedelic in a management consulting kind of chart of thinking about the core to future transition for, for the industry. And what the industry is doing is trying to keep, and I think Sue actually hit on this very well is keep doing what it's doing in some ways and actually try to transition to the future, stay competitive on a global basis, figure out, you know, technology on the ADAS and AV side, and they're running around and they're blowing tons of capital, and they're not getting, from an investor standpoint, adequate margins and returns on what they're doing.

And, you know, retrenching to what your core is, right, from a financial perspective so that you can make great margins, great returns and generate the cash flow to invest in the future is traditionally how business works. And the auto industry, it's not how it often works. And what we're seeing is companies that are staying committed to markets like China. I mean, GM and Ford, GM is losing money. Ford is making a little bit of money. But as we kind of mentioned at the start of the presentation, governments favor their domestic industry and often their domestic companies. I

Mean, we did it by bailing out GM and Chrysler in '08 and '09. The Chinese are doing it by giving some of their companies or a lot of their companies free capital. And it's important to remember capital is the most important input cost, particularly when you're starting a company or starting a program. So there's really a lot of challenges here. And I think that the companies are not recognizing how much they need to skinny back to their core. And that includes exiting China. It includes exiting probably the rest of the world and GM and Ford retrenching to their North American business.

And you only have to listen to Ford's earnings call last night where they're going to have Kentucky Truck shut down for the first quarter for the expedition and navigator changeover, and their EBITDA is going to be break even. And then you wonder, where does Ford make all its money? Well, it's Kentucky Truck and you have F1 where you have the Super duties, the expedition navigator and then the F-150 plants. So, you know, as you look at this, there's this constant thought that you need to be this large global player. And over time, scale really does matter. But these companies are losing ground very quickly to their international counterparts, really, the Chinese automakers.
 
And a lot of this has to do with some of the costs, some on the cost side, but some of this lower cost has a lot to do with free capital that they're being given. And they're not recognizing where they need to go in the future.

And if they don't make these changes quickly, they're going to become defunct and not exist. And we saw that happen in the US over the last 100 years, you know, and what I think we're seeing right now is kind of the opening up of the competitive set where, you know, you'd say, there's over 100 OEMs in China right now.

And you say, OK, oh my God, China's going to look like the US did over the last 100 years and you're like, no, no, no, no. It's not just China that's going to look like the US did over the last 100 years. It's the global competitive auto maker space that's going to look like the US did over the last 100 years. And just because you're an incumbent, it doesn't give you a better right to exist than some of the startups in China. So these incumbents really need to be very careful and really think about where they go in the future.

Now just two seconds on the future. I think this industry constantly has an identity crisis. And I say this wherever I go. And this was touched on in the last panel, the core rationale for the auto industry existing, like the only reason it exists, is to get people from A to B quickly and safely and cost effectively. The speed of travel is key, right? We have not increased the speed of travel in the US for over 50 years. We have a network that has not been invested in for over 50 years. It's a dumb network. If you think about networks and you have blacktop yellow lines, you know, red and yellow and green signs that tell you when to go, stop, where you can go. I mean, that's insane. In the environment that we're in right now with all the technology we have that we don't have connected road networks and smart networks.

And the problem with that is then we have these supercomputers and these super machines that are operating on them. And they're tasked with understanding this archaic network. And it's part of the reason that we have massive challenges with ADAS and autonomy. And if you got those connected road networks set and had vehicles that were connected, you could start increasing the speed of travel. And you know what happens when you increase the speed of travel? You create massive economic growth, you create opportunity for underprivileged folks, and it's something that we really need to focus on, because there's this view that we need to remain competitive on a global basis, or the automakers in the US need to remain competitive on a global basis.

And that would be nice. That ship has sailed. I mean, that's history. The idea that GM and Ford are really going to be competitive in China anytime in the near future is over. So I think we really need to figure out where you can differentiate, get back to your core, invest, and create technology to where the industry can actually go in the future and create value.
And the great thing about what's going on in China right now is they're not they're not doing this exactly. So if the US can actually step up, and this would be a great thing for the new Transportation Secretary and everyone else who's working on all this stuff under the Trump administration, is if they could focus on these smart networks and getting autonomy up and running, so that we could increase the speed of travel in the US. I think we'd have an industry that could then go back global and be very competitive. But right now, you're certainly a lot of concerns about their global competitiveness.
 
One other thing I would just say is when you say stuff like that, people think you're crazy. And you might certainly think I am, but it's happened before. When the Model T was invented in or actually first produced in 1908, it ran to 1927. The total mileage in the United States went up 125-fold. So it's happened before as the speed of travel has gone up. Selfishly as a New Yorker, the peak population in Manhattan was. In 1910, there was 2.3 million people. The Model T came in. Public transportation went up. That population quickly went down to 1.8 million, vacillated between 1.5 and 1.7, but it's never really ever grown since.

So if you give people the ability to move further, faster, effectively, safely, they'll do it and they'll spread out and you'll create great economic growth. So I think this industry has got a bright future, but they've got to focus on, on the technology. And that creates complexity. It's going to be difficult for the suppliers, you know, to deal with. But hopefully, they can help solve the problems too.

[APPLAUSE]
 
KRISTIN DZICZEK: Now John Paul.
 
JOHN PAUL MACDUFFIE: All right. Well, thank you, everyone, for staying to the end. And my head's kind of exploding with all the great stuff that Sue and John teed up and delighted to be here at the Fed. Thank you, Kristin, for inviting me to be part of the conference and particularly part of this panel. It's been really terrific.

So let me try to deliver in too short a time, too much material, and not confuse you along the way or muddle my message. So I will be perhaps skipping around a little bit, but I want to explain on the topic of simplification, why I call the auto industry persistently integrated, and then what perspective that gives me on this issue of disruption.

And Sue and I met when I was at MIT working on the International Motor Vehicle program, that IMVP, and the machine that changed the world. And although I was studying manufacturing then, I through her eyes and on joint projects, learned about supply chains, gone on to study product development and advanced technology and competitive strategy. So to my colleagues. I'm unusual because I've stuck with this one industry for 30 years, but I'm always studying new stuff, and I think there's a lot of-- I've certainly loved every minute of taking that approach.

So simplification in a persistently integrated industry, there's way too many words on this slide. But I first I'm going to explain what I mean by persistently integral and why that gives me a perspective on what would happen with simplification. There is a trend that-- so there's a product design implication of that which just means that the automobile has been quite resistant to modularization, which would greatly help with simplification. It's part of what keeps the product complex.

There's tremendous numbers of interdependencies, technical interdependencies, all the different things we want our vehicles to provide to owners, to consumers creates that complexity. Organizationally, that means that things that bring, you know, the parties together in the design process, often is a better way to handle all those technical interdependencies. And one of the striking things in the transition to EV is that the two leaders, Tesla and BYD, are remarkably highly vertically integrated.
 
As you'll hear in a minute, people predicted electric vehicles were going to go towards modularity and might go in exactly the opposite direction. And so I'll say a little bit about that. What does that lens mean for simplification? I'll do that in both in general and with this Cross Car beam example. And then if I have time on the pendulum swing, you know, 30 years of studying the industry and certainly paying attention to manufacturing supply chains, I've seen simplification campaigns come and go.

There's often a set of things that drive simplification. And then even if you achieve a bunch of what you want, there's things that tug you back the other way. You're doing new things with product, new things with technology, there's new things consumers want. You want to differentiate from your competitors. You went too far with simplification. In some ways, it hurt quality, it hurt brand and differentiation, et cetera.

So now the automobile industry is many things. The automobile is many things. It's our access to mobility, to autonomy, to adventure. It's a way to get practically from point A to point B in the fastest way. We relate to it emotionally and practically, but in phrase originally from my friend Taka Fujimoto in Japan, we talk about the existential essence of the automobile is that it's this heavy, fast moving physical object that operates entirely in public space, and it is dangerous. It kills people. It damages property.

Think about it. There aren't many products for which that is true. Pharmaceuticals can kill people, but they don't operate in public space. Smartphones have a million implications for our life, but they also don't kill people in the ways that a car can. So the implication of that for the product architecture of a car has been for a long time, this very integral, highly interdependent product, multi-technology product that requires a capable system integrator to pull the pieces together. And that's where the OEM role has come and has been relatively sustained over time.

These subsystem interdependencies require that kind of role, and society holds the OEM responsible for keeping us safe and for achieving other goals like emissions reduction and safety and quality and the like. So that also sort of cements the OEM as a system integrator in a certain role. And working with a colleague, Michael Jacobides, who had been studying the computer industry, and also Carlos Baldwin at Harvard, we put together some comparative data between computers and automotive.

And I mean, this is to make a bigger story into a very simple one. But we all know what happened with computers. There was a massive transformation of the industry from the big, vertically integrated IBM to these strong horizontals. You have Intel, you have Microsoft. Completely the industry structure has changed. Modularity of the product is very much at the heart of that. Who gets the value in the industry changes dramatically in that time.

So we just collected the same data for the auto industry over the same period of time. And guess what? The OEM share of value stays remarkably the same. Now OEM to OEM, you know, some went up, some went down in that period. We all lived through that. We know who were the winners and relative losers. But the point is the OEM share of value stayed very stable. And my claim is not that that's necessarily brilliance on the part of OEMs. It's this role of being the system integrator with this persistently integral vehicle.
 
And so to say a little bit more, why in at least in the ICEV era, there wasn't any migration of value. It's this integral product architecture, more on that, the system integrator role, the regulatory responsibility, legal liability. I think it's also very important that in the words of some academics studying this, OEMs know more than they make. They invest massively in R&D, so they know enough to be able to pull all the pieces of the system together. They don't do it all themselves or they haven't tended to for a long time. They outsource it, but they control the way the product architecture is put together. They control the supply chain in very important ways. It still has a lot of hierarchy, as we know.

So the project that I'm working on broadly with the PVMI program is, will these case technologies, connected autonomous shared services and electric cause now value migration from OEMs to tech. You know, big tech to small tech to new entrants and one of the important questions is, will these innovations bundle? I'll just say that it does look like they will, like most autonomous vehicles will be electric vehicles. Most electric vehicles have a lot of at least advanced ADAS in them. They're all going to be connected. This bundling is creating more design interdependencies all the time.

Interdependencies up, more persistent integrality in the product design and in the way that the whole system comes together. So the bundling of case ultimately favors, in my perspective, these system integration capabilities. The tech companies are great at module initiatives, but they're not great at doing this kind of interdependence or the ones that are really good at, for example, hardware software integration, like Apple decided they didn't really want to get into such a low margin business in the end, at least so far.

So anyway, what I'm going to do for the rest of the time and I know I have a lot more is just talk about simplification from this perspective. And I do have these brief comparison of over some period of time of looking at an example at Ford and Hyundai as well as Tesla. That's the cross car beam which sits inside the cockpit and provides structural rigidity, also a place that many components are attached. It affects vibration, it affects. And it's an important part in it's been expensive and complicated to produce.

There's a lot of data. Caresoft has some. Kristin shared this Monroe teardown with me as well. And you may have seen this story in Bloomberg saying, "How Long can Toyota put off Figuring out EVs?" Caresoft is helping Toyota learn about part simplification. That's in Japan, a Caresoft kind of a learning lab for Toyota. Is Toyota not capable of making this change? I'll come back to that briefly at the end.

So electrification in general, the perspective, I and my colleagues have had is OEMs are going to be able to learn to make electric vehicles. This is no surprise. Now we see many different products coming from different OEMs. And of course, the drivetrain is more modular. But the theme of a lot of things today is let's not only look at the switch from ICE to battery electric drivetrains, we have the rest of the car to look at. And when you switch the drivetrain, you may need to design almost everything else in the car to get battery range, lightweighting, deal with the fact that there's less vibration and so on and so forth.

So, you know, I think a lot of people have expected that battery electric vehicles would be more modular than internal combustion vehicle vehicles. This is a consultant deck that I happened upon, which sort of said, well, you know, electric vehicles are going to be like the PC. It's going to be a completely modular product. It's going to be plug and play. I had to chuckle at the inappropriateness of the metaphor, but in many ways, I think a lot of us expected, well, this is a giant change and maybe it would allow more modularity and the like.
 
So I'm going to say based on the evidence to date, this is wrong. These two gentlemen from Germany did a really interesting and valuable deep dive into this by getting design engineers at three companies, a company that makes electric and traditional ICE vehicles, and then two startups that were pure BEV to fill out a design structure matrix which captures the interdependencies among all the subsystems in a vehicle.

And when you have a design structure matrix and you have scatter like this, it means that there's a lot of interdependencies across different parts. If you have a modular product architecture, it looks like what's in that little figure there? Everything clusters along the diagonal. But as you can see in the DSM that's from one of their battery electric startups, it's scattered all over the place. So there's new interdependencies that come along between HVAC and the drivetrain, because you don't want your draw upon the battery from the HVAC to be too intense. You don't want it to draw down your battery. You may want to have your cooling curves and your heating curves be different or treat the energy more efficiently.

So you might think that the clean sheet of paper startup would have been able to modularize more than the OEM that does both, but they didn't. And they have a bunch of ways in which they measure this. But you can see that the complexity level in terms of these interdependencies is actually higher for battery electric vehicles. So essentially, in support of the argument of persistent integrality, even with this gigantic technological change, I'm going to say the claim that BEVs are more modular is correct for the drivetrain. Sure, battery simple transmission electric Motors much simpler, but the whole vehicle is much more integrated.

And then when we look at how manufacturing is done, this is what I did with a couple of French colleagues. We see things that Sue already described. So you see the mixed model production. What you don't see, there has really been remarkably little contract manufacturing. Again, people who thought it was going to look like the electronics world were expecting, designed in California, built in China. And it's-- and it's that model is not what we've seen. We haven't seen contract manufacturing, which tends to be part of the modular vision. Overall, we're seeing BEVs produce with more integration, more integral design, more vertically integrated supply chains.

So anyway, so what about cross-car beams? Let me just talk through a couple of examples and do this quickly. These really almost don't deserve to be called cases. They're anecdotes, observations at different points in my history of doing research. And I'm adding the Tesla one, which was part of some of the Caresoft analysis that Sue and Kristin were looking at.
But Sue and I were at Visteon soon after the spin off, and Visteon was eager to prove to Ford how much engineering capability they had. It was a time when there was also a big push at Ford to do modularity. Visteon brought an instrument panel design, which included a new cross-car beam, and it included a whole bunch of other innovations with promises of dramatic reductions in weight, in parts, and costs in NVH. And this was for the Mustang. We talked extensively to the chief engineer at the time, and basically they tested the heck out of this Visteon proposal. They weren't completely happy with it, but they also didn't completely trust that the Visteon team was capable of taking it over the finish line. And they had time pressure and they had cost pressure and they said no.
 
In the same time frame, although it was a couple of years delayed, I was visiting Hyundai in the period when they spun off their parts manufacturers to Mobis, but instead of Mobis moving away from Hyundai in this period the way Visteon moved away from Ford, the way they structured this was there were a number of advantages to them of having parts in a separate corporate structure, but they actually pulled all the design engineers closer together than ever. And you had Mobis and Hyundai Kia engineers working together on cockpit modules, on cross beam projects, sort of patiently with the a plan to find ways to simplify and exploit that.

And I found some evidence, including in some engineering journals, of a crossbeam project in which they set out to do exactly the same things that Visteon set out to do for Ford. They accomplished, very impressive, I don't how to weigh the comparison across cases, but and then they implemented that fully across a bunch of Hyundai, Kia platforms starting in 2019. This Tesla example, much more recent, appears to be a supplier with an innovative cross-car beam that brought it to Tesla. Tesla was the only one to be interested. Again, the same kinds of gains in weight, in cost in part simplification in NVH.

And so, you know, I haven't been able to do, of course, a teardown analysis. But to me, where the Hyundai team got with their patient work between Hyundai and Mobis in terms of cross-car beam innovations and where ElringKlinger was getting and offering to Tesla kind of going in the same direction, using a different kind of shape, which has some topographical benefit in terms of rigidity. You're using different materials, but not necessarily the most expensive ones like magnesium. You're doing innovative casting in which you're getting the plastic where the fasteners go on embedded in the metal, so you have better rigidity, and for the fasteners, and you have better retention of that. The weight is down, the cost is down, et cetera.

So I guess I think this effort to simplify the vehicle has been going on is going on in a way, all the time. The best in this persistently integral world, the best way to simplify is for the entities with knowledge to work closely together. When Ford spun off Visteon and they were not interacting as much, it actually didn't help them. When Hyundai spun off Mobis, but they spun towards each other in R&D, that did help them. And I think the way from what I understand, Tesla has worked with the supplier would be similarly true.
And so, you know, how are these used across products and all that is something that we have to ask. In terms of the pendulum swing, I don't think I have time to go into this, but I more or less laid out the idea. There are things that pull you towards simplification. There are things that pull you away from it. And right now, the pressure is on cost, the high complexity generated by this multi-platform, multi propulsion moment that we're in, which we're going to segue out of is a pressure to do it. It also is going to increase the returns of simplification.

I actually expect that the things that are done for BEV simplification will spill over to hybrids and ICE in something that benefits the entire industry. Taking weight out can't just be about cost. You got to take weight out to make battery propulsion platforms effective, and that'll become more of a driver in the total, in the total mix. And can Toyota pull this off? I think, of course. I mean, I'm a little biased. I have a lot of faith in Toyota as an engineering organization. But, you know, are they at the moment where they have enough volume of BEVs to have a completely new cross car beam for BEVs? No.
 
Are they at the moment where they see enough volume coming across the full set to support some new designs from the way they're studying Tesla's innovations. And with Kirchhoff's help, digging deep on this makes me think they're getting ready to do it. And Toyota doesn't only do Kaizen. And all these critiques of Toyota basically say, oh, you know, they're stuck in the old TPS, they're going to be left in the lurch. I have seen Toyota make some impressive leaps forward, and I think when it comes to leaping with BEVs and simpler designs, they'll be there. So with that, I'll stop. Thank you.

KRISTIN DZICZEK: Thank you.

[APPLAUSE]

So these are a lot of interesting questions, at least to me. I hope they were for you. And we've got a couple of questions from the audience. And we've got a little bit of time. And I'm going to. Rick, can I borrow a little bit of your time to have a good discussion here? All he's going to do is say goodbye. OK, I'm going to start where we ended, I think, with John Paul's presentation claims that the industry is and will continue to be persistently integral. We have this swing back and forth to integration and modularization. Are there-- do you think the forces are pushing us that way? I'm going to start with you, John, and then Sue to react to that persistently integral question.
 
JOHN MURPHY: For John or me John?

KRISTIN DZICZEK: You, John. he's John. Paul. You're John.
 
JOHN MURPHY: Got it. Murph, you said Murph to start.

KRISTIN DZICZEK: OK, Murph.
 
JOHN MURPHY: You know, I think what happens at the automaker level in talking to management is that as you go through these very significant changes, is there is a fear and a land grab to pull everything in and understand what's going on. And then over time, once they have competency on technology and understanding what's going on, to push it back out for mass production to save cost.

So I think when we're seeing all these changes right now, they are hoovering stuff up and it looks kind of scary from a supply base. But it's going to get, you know, pushed back out probably relatively soon. So I mean, I think you probably have a product cycle or two of that going on. So you're probably, you know, 5 to 10 years out before, you know, before it gets pushed out. But I think that's the way it's being.
 
KRISTIN DZICZEK: So like batteries are a good example of that, I think because they form these joint ventures for the batteries. But, you know, and there's all kinds of proliferation of different chemistries and different forms and different integration into the vehicle. And like, we haven't figured this all out yet. And it may be that there's multiple versions of this in the market for forever, but we might settle on like three or four different sets of this is what the batteries are, and then they become commodity.
 
I mean, it's a question too for this investment, because if you looked at what David showed about the commitment to gigawatts and how much-- I mean, all of that is very siloed. Each automaker has got, well, my partnership with LG and I've got my partnership with LG and SK or, you know, some other tie-ups like because they're hoovering it in and trying to capture the value. Don't you see at some point, it just goes back out?

JOHN MURPHY: Absolutely, I mean, I think John Paul's point of the integrator is probably case in point, right? I mean, that's where they can be the integrator, not the producer of everything. Yeah so.

SUSAN HELPER:Well, it seems like so, at least in the short run, there's two reasons. We asserted that there were going to be these big changes outside the powertrain. And I think they're driven by two things. So one is the real return to taking out weight because it increases your range. And second, in the HVAC, particularly in winter, there's a lot of draw because you're not heating the car for free in a way that you do with the use the waste heat in your internal combustion engine. And so then there's a need to really think about more efficient HVAC system that wasn't needed before, as John Paul talked about.

And so yeah, I guess I agree that is going to get figured out and you'll have kind of new boundaries again, and you can outsource it. But 5 to 10 years is kind of a long time in some level. And, and I guess my understanding is there's still a huge amount of experimentation that, I mean, there isn't really a dominant design for a battery case even within certain automakers. And so there's just a lot to be figured out. And then when you think about the other letters, the C and the A and S and the E, and you're thinking about the roads, it seems like there's a whole lot of integrality and changes in boundaries that are going to take some time to figure out.

KRISTIN DZICZEK: You want to react, John Paul?
 
JOHN PAUL MACDUFFIE: Well, I was going to react to one thing. You said, I think, yes, it's being hoovered up, brought inside to learn. It will get pushed back out, but I don't think it necessarily makes it commodities. So yes, the supply chain has a big role in this integral product as integrated product as it always has. But because of all the interdependencies, constantly, I think not many things will commoditize for quite a while because of so many new technologies. So that means, you know, probably not a lot of stability in supplier programs, but it means, you know, new technologies, chances to learn, and also probably to have a little more reliable margin for some of that going forward.

Batteries, maybe look like they were going to commoditized, but when you start doing things like cell to chassis or, you know, you don't have a standard size, you don't have a standard form factor, you don't have a standard packaging. Each one is customized to a particular manufacturer or a particular frame style. I mean, then, you know, all bets are off in terms of the thought that you would get to a commodity, so I would just pull commodity out of it. But yes, it's going to go back into the supply base for sure.
 
KRISTIN DZICZEK: OK, great. I'm going to go to questions from the audience. So thank you guys who are sending in questions. I appreciate it. I'm going to broaden this one out a little bit. The question is, will a specific automaker, but I'm going to say, will the automakers who are trying to drive to scale an EV. And this is a legacy automaker that's got to bridge that valley of death between losing scale and the profitable vehicles and not yet profitable on the EVs. Will they be able to drive that scale in the EV market? And if not, what's the chance of bankruptcy? So that comes to John Murphy, Murphy, but I think all of you can weigh in on this. What's the question of scale as we go through that valley of death?
 
JOHN MURPHY: I think it was 2007 when I said an automaker would go bankrupt. And I don't think we're in the same state right now. And I think that one was the old GM and not the current-- certainly not the current company. So I think there's little near-term risk of any financial distress, a lot of the major manufacturers. But I think the complexity and understanding what's going on here, and I think once again, a lot of the stuff that to when John Paul talked about of re-engineering and the cross-bar beam is just, you know, is one of thousands of examples of things need to be done completely differently.

I mean, that who makes the car thing is like jerry rigging stuff is a dumb financial analyst. I'm trying to figure out ICE that, you know, to EV, but like, it's almost like you're everything up in the air and starting from scratch. And I think, like the Skunk Works at Ford may or may not work, but they're going after it the right way by starting all over with all sorts of, you know, with a whole different set of folks. So that ultimately means getting to scale is like, you know, I don't know, sort of the next question. It's got to be designed and engineered correctly.

And then-- and then you scale up. And I don't think they're even at a point where their design and engineering it correctly yet and have that figured out. And that's what Sue just kind of said is like, there's so much shifting here that they, you know, I think they really need to start from scratch. So I think we're a long way from even asking the scale question.
 
KRISTIN DZICZEK: Well, in shifting, you know, because the policy environment is shifting, the rules and regulations are shifting. The global stage is shifting. I mean, driving profitably through that storm.
 
JOHN MURPHY: Especially when you're starting with single digit margins and returns on capital that are low teens, so you don't have a lot of room. Yeah, right. I mean, it's just not a lot of room to work with.
 
KRISTIN DZICZEK: Sue, do you want to--
 
SUSAN HELPER: No, not at all.

KRISTIN DZICZEK: OK, John Paul.
 
JOHN PAUL MACDUFFIE: So if you think about the first EVs, say from Ford, you know, they put an electric drivetrain in a mostly existing vehicle, and they build it in a plant with existing ICE vehicles. And that got them into the market quickly. And then people said, well, OK, but then you're kind of trapped in an older architecture and you're trapped in an old manufacturing system. You need to have a clean sheet, you know, at least a purely E platform, and maybe you want to have a dedicated plant for that, because hopefully the scale is going to get you there.

Well, now we're not sure the scale is going to be there. So I think it pulls most of these manufacturers back towards, you know, mixed model production. And probably, you know, they're going to have a platform that's there for E, but maybe they're going to think of a lot of the other components as needing to bring costs down and scale by being able to use them across both. So again, you redesign the cross-car beam to have all these improvements. Why not put it in the whole product line? Why not make that your design goal? If you're redesigning HVAC, you know, maybe you don't need to have it have those attributes in ICE, but maybe it has some advantages to do it. And you can then scale up one design.
 
So I think they'll be out of this turbulence and the slowing down of BEV demand, what there will be is less optimized focus on just BEV, but more thinking, you know, synergistically across the propulsion types to get the cost out and get the simplification. I mean, I think it could be very innovative time for the supply sector.
 
KRISTIN DZICZEK: And there's been like really different strategies too about different, you know, those EV dedicated platforms. And some of those are in dedicated EV plants, right, that's only going to make EVs. And we're going to, you know, match our plant and equipment to optimize for only making EVs. And then there's this mixed propulsion platform. But there can also be multiple platforms in a plant.

And I think back to Ford's Wixom plant in the wayback times when they made front wheel drive, they made rear wheel drive. They made, you know, big cars. And they made-- like it was they had a lot more complexity inside a plant. That's just the one that comes off the top of my head. But and then we specialized into, well, these are going to make things on unibody front wheel drive. And then the rear wheel drive is all going to be on body on frame. And like, we kind of went to, just one platform or fewer platforms per plant. Can you react to-- can you shoehorn those BEV platforms into the plants? And what does-- I mean, we're already managing a lot of complexity on the multi-propulsion platform. So this is not that much more complexity when it's a different chassis coming down the line.
 
JOHN PAUL MACDUFFIE: I mean, it just makes me think kind pendulum swing again. And for me the classic going too far with simplification platform simplification was the GM 10 program. This dates me. But across so many brands, same platform, and you'd start to hear, you know, I can't find my car in the parking lot because the Buick looks the same as the old, looks the same.
 
KRISTIN DZICZEK: And there was a famous Forbes front page that had three of them, and they were all the same color, and you could not tell the difference.
 
JOHN PAUL MACDUFFIE: Yeah and, you know, they also had dedicated plants that were so optimized for that platform that when the volume wasn't there, they couldn't-- they were running at half capacity. So I mean, that's when you have an experience like that, you go back to saying, oh, we better figure out what to do. And Toyota was already going this way.
 
KRISTIN DZICZEK: And Honda too.
 
JOHN PAUL MACDUFFIE: Build multi platforms in the same plant, and we just got to get the supply chain and the workforce and our automation in the plant to be responsive to that. And then, of course, you can go too far that way and it's driving you crazy. But that's some of the pendulum swings. So I think there won't be as much economic logic to have dedicated BEV plants. Some were announced, but I bet they'll be pulled back. Then you just manage the complexity of multi propulsion.
 
KRISTIN DZICZEK: Well, and BEV platforms was supposed to give us also the ability for multiple top hats, right a proliferation of top hats. You could make anything you wanted to on a skateboard right.
 
JOHN PAUL MACDUFFIE: Skeptic.
 
SUSAN HELPER: But you know, you were talking about, that the Tesla weighs 1,000 pounds less. And you know what? Where does that thousand pounds come from? And is that really consistent with building? You know, if every part is different, can you really build that car or, you know, a Tesla like car, BEV and a gas car in the same plant?
JOHN MURPHY: I think the cross-car beam in the NVH, the delta in the NVH in an ICE versus in EV is one of the things. Light bulb is going off in the last like six months for me, of like, you know there actually is the characteristics of the vehicle are a fair amount different. And what you can do stuff in an EV that you can't necessarily do because of the vibration of the engine. It's, you know, it just creates, you know, creates opportunities, I think, that maybe, I don't know, the guys at Caresoft or other teardown companies might, you know, see that we-- dumb guy like me is not seen from the outside looking at financials. You know, I think there's some of that going on.

The one thing I would just say is like, you know, that Wixom example. I remember going to the Georgetown, Kentucky plant, you know, when I was a very young analyst and being like, you know, I think they were making seven products in that plant. And I'm like, you know, I didn't know that. I'm like, oh my God. GM and Ford are really in a lot of trouble if this was 25, 26 years ago when I was there. I'm like, oh my God, this is-- you know, this is game changing.

But the competition keeps going up. So, you know, the simple-- the question of the simplification and taking cost out. Like, you know, when you have China that's now exporting 5, 6 million units and there was a net neutral, you know, an importer exporter and is accepting, you know, 1% to 2% operating margins for their companies. That the capacity is going up dramatically, and it's got different financial motivations than like, you got people like me screaming at companies on a quarterly call, you're not making enough money.

You know, there's kind of this-- you're stuck in this very difficult, challenging environment. And I think, you know, we're talking about simplification. They got to they got to do it. But I think they also have to figure out ways. And I don't love the subscription models of certain things being added to the vehicle. It has to be-- because we're all walking around with these things and, you know, a lot of the subscription stuff that you do, it's got to be very car specific, but you have to figure out how to generate revenue or participate in a greater portion of the revenue.

This is what Pete Longshore was talking about yesterday from group 1 in the vehicle, because you're going to continue to be challenged on the hardware initial sale.

And you have to, you know, because the competition is going to keep going up, it's like you can take cost out. You can take cost out, but you can't take cost to zero. So at some point, you have to figure out the revenue equation as well in this. And it's, it's very difficult because that competition is not going China is not going away. I mean, it might take different shapes.
 
KRISTIN DZICZEK: And they're eating global share.
 
JOHN MURPHY: Tremendous global share.
 
KRISTIN DZICZEK: Yeah so I'm going to wrap us up with coming back to the beginning of why Sue and I started down this road. We know that not everybody here is an automaker or a supplier. We've got people from states, from municipalities, workforce development folks, all kinds of other people. And I'm sorry if I offended you by saying, you know, it's not as simple as fewer engines and more batteries. Because when we started digging into it, it is. But what do you think the lessons from what we've just presented are for key stakeholders in this industry? So, you know, bankers and economic developers and political leaders and all the folks who care that we have an auto industry in this country. What are the takeaways from what we've just said?
 
JOHN PAUL MACDUFFIE: Ooh, that's a big one. Oh, just thinking of the, the themes of uncertainty. I mean, it seems like a lot of people in the industry believe that the electrification train has left the station as, as Sue said, and that some of these other trends are going to happen. It may just be a matter of how fast. I think for the industry to back future vision, that they're pretty convinced that will come and to try to withstand the tugs and pulls to jump around in response to external volatility would be really valuable for all the stakeholders in the industry.

And that's very hard to do when some of the external volatility is, you know, has a powerful influence on everything about your well-being. But I think it could be the right path forward. And I'm not saying everybody already agrees, but I think there may be more convergence of some of the vision among key stakeholders in the industry and maybe having them come together and talk about it and have that guide then some of the long term strategic choices, technology choices, et cetera.

And maybe in some, you know, happier time, that translates into also a long term policy to do things like make smart highways. I mean, I agree with John. There's a whole bunch of things we can't even get close to because we've never been willing to invest in smart infrastructure or vehicle to vehicle communication. I mean, we're just trying to do it all with you know, tons of smart technology put on each vehicle at a high price and, you know, not quite getting us to all the safety we want. So anyway, that's a thought.
 
KRISTIN DZICZEK: OK, Murph.
 
JOHN MURPHY: That DSRC stuff, damage dynamic short range communication that got shut off because it was, quote unquote, like not great technology. Like it would have worked and saved lots of lives. But that's I mean-- we go front for that.
 
JOHN PAUL MACDUFFIE: I agree--
 
KRISTIN DZICZEK: [INAUDIBLE] conference.
 
JOHN MURPHY: Yeah, I think remembering how important this industry. And I think this industry often gets on, you know, genuflects to critics in a way that is a little bit too subservient. And I think sometimes this industry really needs to stand up, you know, and you know, and be a little take sort of account of how important it is to a society from people moving around from a job, from an economic perspective and be a little bit proud of what it does, because I think sometimes it cowers in the corner because you have regulators bashing it, you know.
 
And, you know, it's like there's a cost of 30,000 to 40,000 lives that are lost in the US each year because of car accidents. And that's horrible. And we should improve that. But the importance to the jobs and mobility and the broader economy is so wildly important that can't be lost. And you need a strong domestic industry. Now, however you get there, whether it be the chicken tax, 100% tariffs on EVs, and but you also then have to create a, a technologically competitive industry, you know, to be competitive on a global stage, so that the Chinese don't come in and take over the market and that you can compete to some degree, you know, globally and have viable financial businesses, I think is really important.

And I think, you know, there's stuff like GM and Ford were up and making ventilators, you know, very quickly when COVID hit. Yeah it's like bam, what other manufacturer in this country could do it? And then not really any others. I mean,
 
KRISTIN DZICZEK: Mother of all supply chains.
 
JOHN MURPHY: Yeah so like-- and you can't forget. I mean, there's always this old adage of, like in wartime, you need this industrial manufacturing base. Well, it's kind of scary, the world we live in right now, that that's not that crazy a statement anymore. But that COVID example was a real one. And this is, you know, an industry that should be proud of what it does. And it's very important to everybody in far greater ways than they realize. And they like to bash it, but they really shouldn't.
 
KRISTIN DZICZEK: Can I just jump? I mean, the ventilator industry was making output in the hundreds and low thousands a year because there just wasn't a huge demand. They ramped to tens of thousands within weeks and, you know, had within days had sources for most of those parts. That was an incredible thing. And it wasn't just the US industry. The Canadian industry did it too. And you know, that ability to be more self-sufficient and responsive, it's the mother. It's the mother of all supply chains. Sue, close this out.
 
SUSAN HELPER:Yeah, so I think. Yeah, so there's. I mean, I think, you know, electric vehicles are critical for climate reasons, but even if you disagree, there's reasons why you should want electric vehicles. And I think, you know, we've just given some of them that it's an industry of industries. And it really affects a lot of other employment and whether the viability of a lot of other manufacturing ability to respond to crises of--

And then I think also it's just a superior product. You know, the electric vehicles don't vibrate whatever. So there's all kinds of non-green reasons why you should care about electric vehicles if you're a policy maker. The policy uncertainty is really terrible and costly. I think there's also a message for bankers that we have to think about. And, you know, we think about China as not playing fair. But, you know, if their cost of capital, if they don't, you don't pay quite as much to the providers of capital. Maybe that's something we can learn from. And how do we think about a different and more viable financial system that doesn't have such high cost of capital and etc? So just on that small thing, I will end.
 
KRISTIN DZICZEK: Oh, just a small thing. Sure. So I hope it was worth it to stay to the end for us. And I'd like to thank John Paul, John Murphy and Sue Helper for closing us out here at the conference. So let's give them applause.

[APPLAUSE]

SUSAN HELPER: And I would like to thank Kristin for her leadership and also personally my friendship and organizing all this great panel and everything else. So thank you.
 
KRISTIN DZICZEK: So we're going to switch right over to Rick. So why don't we just stay here while he closes us out.
 
RICK: OK, so I promised I'd make this really sweet and short. So basically, I just want to thank everybody. I want to thank all the terrific panelists, all the presenters we've had for the last two days. It's really been a terrific experience. I think everybody agrees with that. I want to thank you, the audience, for attending and for your sort of passion for this topic. I also hope that you'll come back next year in February when we have the 32nd annual Automotive Insights Symposium, which I will, I'm sure will be just as good in terms of--
 
KRISTIN DZICZEK: I hope you'll come too, Rick.
 
RICK: Yeah, maybe I'll come too. So and then finally, I just want to thank everybody on the Fed staff who was so instrumental in pulling off this program, everything from Kristin, in terms of designing the agenda to all the moderators to our incredible production and event staff. Really, we couldn't be more proud of this organization and its ability to pull off this kind of event. So anyway, thank you. Drive safely and we hope to see you next year.

[APPLAUSE]