The potential change in supplier power due to new technological transitions in the automotive industry

The potential change in supplier power due to new

technological transitions in the automotive

industry

Master’s Thesis

MSc International Business and Management

Emanuele Fiatti

S3329577

Content

Abstract ... 3

Introduction ... 4

Literature Review ... 7

Types of power in buyer-supplier relations... 8

Sources of power in buyer-supplier relations in the automotive industry ... 12

New environmental and technological trends ... 16

Methodology ... 20

Case findings ... 21

Discussion ... 29

Limitations and conclusion ... 31

Managerial implications ... 32

References ... 34

Abstract

The automotive industry, throughout its long history, has always been characterized by the dominance of carmakers in their relations with weaker suppliers. Huge financial resources and firm size, the control of core competences, as well as an efficient distributive network and the proximity to the end customer are the main determinants of this powerful position. The available literature mainly investigates traditional buyer-supplier relations in the industry, overlooking how power dynamics might have changed in light of new environmental and technological requirements in the automotive industry. As a matter of fact, pollution and climate change concerns, that pushed governments towards the promulgation of laws and regulations in favour of electric vehicles, seemed to have the potential to narrow the existing power gap. In order to understand to what extent these dynamics have changed, I have developed a single case study on the automotive industry. As in many other similar studies, interviews with representatives of four major carmakers have been the primary method of data collections. To give more validity to my findings, primary data were backed up with secondary data sources taken from available industry reports. My analysis indicates that, in spite of the disruptive potential of new technologies related to the production of electric vehicles, carmakers might have been able to maintain their dominant position over suppliers. The ability of some automotive companies to produce the required components in house, huge resources at their disposal, and an efficient distributive network are likely to be the main explanatory factors.

Introduction

The automotive industry is one of the largest economic forces globally, employing 10 million people and generating a value chain of roughly $3 trillion per year (Pollet et al., 2012). Being one of the largest manufacturing industries in the world, it has significant economic importance for many countries (Martinez Sanchez and Perez Perez, 2005).

More than in other sectors, suppliers have great importance. According to Statista (n.d), automotive suppliers’ proportion of value added to the final product is growing over the years. If in 1985 it amounted to roughly 56%, in 2015 it reached 82%. The same reasoning applies if we consider top 100 suppliers in the automotive industry. If in 2000 their sales amounted to roughly $350 million, five years after they reached the $500 million threshold (Sturgeon et al., 2008). Nevertheless, big automotive companies have always tended to have a dominant position over suppliers, trying to make as much profit as possible at their expense (Jacobides et al., 2015).

Being a determinant variable in buyer-supplier relationships, the concept of power needs further clarifications. More generically, power usually refers to the ability of one influential firm or group of firms to control the behaviour of another (Zamalek and Pride, 1996). Even though it might be considered a rare circumstance, a situation of power should involve being in a position where a given actor in the supply chain can appropriate most of the value for itself (Cox, 1999).

eventually lead to competitive advantage. Nevertheless, in spite of such collaborative relationships, Toyota has always been able to maintain a considerable degree of power towards its suppliers. As a way of controlling its suppliers, Toyota would always have a minority ownership in each of those companies that were forming their knowledge-sharing network (Enright, 2003). In addition to this, Stevens et al. (2015), found that trust in buyer-supplier relationships established superior beneficial information sharing routines and reduced overall transaction costs. In fact, the Japanese company’s knowledge sharing processes explain the productivity advantages it has achieved over time (Dyer and Nobeoka, 2000). If suppliers want to be part of Toyota’s information-sharing network, they cannot keep their proprietary knowledge. In this way, they allow the important transfer of know-how, likely to result in sustainable competitive advantage for the parent company (Dyer and Nobeoka, 2000).

Nevertheless, different kinds of pressures and complex technological requirements are creating new trends in the industry, with the potential of an important change in the power dynamics that are underlying buyer-supplier relations in automotive. The increasing demand for fuel-efficient and more environmentally friendly vehicles is undoubtedly a challenge for the automotive industry (Miller et al., 2000). Now more than ever, due to radical technology changes that are needed to produce more efficient vehicles, greater supplier capabilities and a highly collaborative relationship with them are becoming absolute requirements (Oh and Rhee, 2008). Due to environmental issues, pressure has increased on the automotive industry to reduce emissions and produce more efficient engines (Brandes et al., 2013). Most of the times, the main source of such pressures are national governments. Hybrid and electric vehicles offer a possibility to combine environmental and economic objectives, with good visibility in the media. In this way, the political interests and the rational argumentation of policy goals are combined (Temmes et al., 2013). Europe, but also the US and Japan have in fact enacted laws for this scope. Moreover, the Chinese government is favouring a strategy to push low-emission vehicles (LEVs), with the creation of local niches in which public and private actors can experiment on them without market pressures (Bohnsack, 2018). Another notable example of government intervention is represented by Finland where the government’s report on climate and energies favoured electric vehicles development. Policy targets for Co2 reductions were translated

into promises to protect the specific niche of electric vehicles (Temmes et al., 2013). The necessity of “greener” and more efficient cars, besides increasing costs in the short run, is likely to make petrol engines obsolete in the end (Mohr et al., 2013).

those companies that are competing very effectively in this new market. In fact, their sales of electric cars are showing important levels of growth if compared to the past decade, and they are now ranging from 40000 to 60000 units worldwide. Given the magnitude of this change and new technological requirements for the production of new kinds of engines, automotive companies will require huge investments and new competences that they did not possess before (Brandes et al., 2013).

Consequently, the nature of future buyer-supplier relationship and the related power gap might change as well. While automotive companies were used to deal with weaker suppliers who had an important dependence on them, they will now have to deal with a stronger counterpart (Brandes et al., 2013). As proposed by Crook and Combs (2007), firms are in a position of power to the degree that others depend on them for resources. Core competences are, at least initially, in the hands of big companies in the electronic and computer industries that are diversifying in the automotive sector. As a consequence, taking into consideration the huge importance of suppliers’ technologies, being profitable and getting favourable contracts might get more and more difficult for automotive companies. Long term partnerships with suppliers, with the outsourcing of technical development to the latter, are likely to be future success factors. With a clear picture of the situation in mind, I will try to answer the following research question:

“What are the sources of power of automotive companies vis-à-vis their suppliers? Are new

Literature Review

The dominance of automotive companies over suppliers

Before proceeding with further considerations on recent trends, it is worth analysing more in depth the dominant position that automotive companies have been able to exert on their suppliers up to now. Maloni and Benton (2000), argue that the automotive industry retains an imbalance of power, with five manufacturers holding roughly 90% of the market share. This kind of environment has allowed manufacturers to transfer responsibilities for cost reduction and product development to their suppliers, forcing them to meet demanding performance requirements or face replacement (Jacobides et al., 2015). For example, General Motors expects its suppliers to invest one percent of their revenue in R&D if they do not want the relationship to be terminated. Similarly, Ford’s suppliers are evaluated on quality, and underperformers are eliminated (Karmokolias, 1990). As a means of maintaining control, automotive companies can in fact choose to exercise their high-volume purchasing power by frequently switching suppliers or threatening to do so (Jacobides et al., 2015). It is in fact important to highlight the fact that modularity makes components standardization possible. By using standard components, which are produced at higher volumes, automotive companies can exploit economies of scale and learning. Moreover, reducing product complexity could be identified as a way to shorten product development time, with obvious and important implications for cost saving, a crucial aspect for automotive companies (Fixson, 2005). As an example, Volkwswagen, thanks to an effective product architecture, saves roughly $1.7 billion annually on development and production costs (Dahmus et al., 2001).

Such size effect assumes even more impact with smaller supply base companies. As a matter of fact, with the exception of Germany, the average size of automotive suppliers tends to be small, therefore making them more vulnerable. In these cases, they might struggle to find resources to innovate and to meet the high-volume requirements of standardisation (MacNeill and Chanaron, 2005).

In addition to these considerations, given the importance automakers can have on suppliers’ businesses, if the former establishes operations overseas the latter is expected to follow, either by setting up subsidiaries or by entering into agreements with local firms. When Volkswagen started operating in China it was followed by roughly sixty of its suppliers. Similarly, once Toyota and other Japanese companies started producing their vehicles in the United States they were followed by hundreds of their suppliers (Karmokolias, 1990). Moreover, automotive companies are responsible for regulatory compliance and have legal liability for products defects. Thanks to near-complete control over distribution, they have the ability to monopolize customer interactions (Jacobides et al., 2015). Furthermore, the nature of the automotive supply chain, with standardised and frequent flow of demand volumes for production parts is another reason of the hierarchy of structural dominance on weaker participants (Cox, 1999).

Types of power in buyer-supplier relations

In order to better understand automotive companies’ position in their relationships with suppliers, it is necessary to analyse different types of power. The first of those is represented by

bargaining power, a concept that is showing an important variety of definitions in the vast literature

available. Since buyers normally do not know the real cost of suppliers’ parts, they increasingly opt for procurement auctions. In this way, OEMs have more scope to press for cost reduction (Jacobides et al., 2015). In such contexts, suppliers heavily compete on prices, even coming down to fractions of cents. Even though this might seem a meaningless difference, it can allow the buying company to save millions of dollars. In these situations, bargaining power deals with buyers’ ability to design auctions and determine the rules of the game. Having full bargaining power, optimal auction mechanisms in which suppliers compete for the buyer’s business can be utilized (Wan and Bell, 2008).

tactics and risk aversion are normally seen as critical factors in determining firms’ bargaining power. As a result of aforementioned factors, the latter is expected to affect both price and non-price items (Choi and Triantis, 2012).

We could also argue that firms are in a position of power as long as they can get another firm to do something they are not willing to do. Following the same line of reasoning, a further demonstration of power is the amount of resistance of the counterpart that can be overcome (Lacoste and Blois, 2015). Furthermore, specific players’ past actions are an additional factor which is likely to be an important determinant of firms’ dominant positions. It could be argued that past actions and strategies are likely to determine other firms’ perception of the counterpart’s power, with consequent effects on the latter’s bargaining power (Lacoste and Blois, 2015). In order to better clarify this statement, we could think about General Motors. As it will be explained more in detail, they are usually preceded by a reputation of a negative usage of power and scarce cooperation with suppliers. For this reason, those supplying firms that will deal with them in the future can reasonably expect them to exert power in a similar way. In situations of joint profits, a specific firm’s bargaining power is determined by its capacity of appropriating a bigger share than the other firm involved (Inderst and Mazzarotto, 2008). A firm’s bargaining power is determined by a multiplication of intrinsic bargaining power and the propensity to exert it. Such power is likely to increase with the presence of multitudes of suppliers from which the buying firms can choose, as well as in situations in which the buyer firm is the main determinant of suppliers’ profits (Cho and Chu, 1994). According to recent data, roughly 430 firms are part of the Original Equipment Suppliers Association, a community of automotive companies’ suppliers, meaning that there are important levels of supplier competition in the automotive industry (OESA, 2018). On the other hand, the propensity to exert power is likely to be dependent on a given firm’s business philosophy, which might lead to aggressive strategies to maximise profits or to more cooperative relationships (Cho and Chu, 1994).

In order to further analyse the concept of power, we could also reason on its different sources. More specifically, so called mediated power sources, which include reward, coercive and legal legitimate, represent the negative use of power. Usually considered less relational in orientation, mediated power sources deal with strategies that the buyer specifically directs to the supplier (Benton and Maloni, 2004). Reward Power is based on a given firm’s expectations that a more powerful firm will reward it in case of cooperation of the former. It also deals with the ability to provide another firm with desired things and to remove things that are not desired. Contrarily, coercive power deals with weaker firms’ expectations to be punished by a stronger counterpart in case of failure to conform to an influence attempt. As a matter of fact, it deals with the ability to assign to other firms things that are not desired through the use of threat or confrontation. On the other hand, legitimate power originates from weaker firms’ values that reinforce the acceptance of a more powerful and influential firm’s authority. In fact, it refers to the ability to induce feelings of responsibility, most of the times through the use of influence tactics (Zemanek and Pride, 1996 and Mossholder et al., 1998). According to Park et al., (2017), legitimate power is dependent on the weaker party’s consent and tacit understanding. Through the use of mediated power, firms can control behaviours and actions of other members of the value chain, such as suppliers. Powerful firms have the ability to impact other firms’ financial welfare, as well as their decisions (Handley and Benton Jr., 2011). Bandara et al. (2016), propose a similar concept of coercive power which, according to them, deals with the expectation of the weaker party that the powerful partner will punish if it does not comply with its demands. In a similar way, coercive power can deal with the ability to influence the weaker counterpart by only threatening to punish it (Bandara et al., 2016).

On the other hand, non-mediated power sources, result of more collaborative buyer-supplier transactions, include expert, referent and traditional legitimate power, and represent the positive use of power (Benton and Maloni, 2004). As far as expert power is concerned, we can argue that it deals with a given firm’s expectations and beliefs that its counterpart has some special knowledge or expertise (Zemanek and Pride, 1996). It can also be defined as the capacity to administer knowledge and expertise, and it is also related to the use of rationality as a way of influencing others (Mossholder et al., 1998). On the other hand, referent power exists in situations where one firm identifies with another to the extent that there is a feeling of oneness (Zemanek and Pride, 1996). More precisely, it is a given firm’s ability to persuade others, creating in them feelings of acceptance or approval (Mossholder et al., 1998). For this reason, it can be said that it is highly related to a given power holder’s attractiveness or charisma (Park et al., 2017).

should be used in a judicious way. As a matter of fact, given that markets are becoming more and more competitive over the years, firms have started to abandon heavy-handed use of power in favour of more cooperative relationships with their partners (Brown et al., 1995). While non-coercive techniques can enhance the power advantage, the opposite might hold as far as the use of coercion is concerned (Benton and Maloni, 2004). Successful supply chain strategies in relation to power are, in most cases, based on non-mediated power sources (Siemieniako and Mitrega, 2017). To be more precise, in order to achieve a satisfactory supply chain management performance, firms should aim at building an environment based on mutual reciprocity without the use of any kind of mediated power (Park et al., 2017). The use of mediated power is in fact associated with a lower degree of commitment and satisfaction by suppliers, with negative implications as far as inter-firm agreements are concerned (Handley and Benton Jr., 2011). Contrarily, non-mediated power is likely to have a significant influence on partnership quality and consequently on supply chain management performance (Park et al., 2017). The negative effects of the usage of mediated power are evident in the General Motors case. The American company, in line with its reputation of scarce cooperation and understanding of its suppliers, chose to impose non-negotiable cost reductions on them. While this approach generated significant savings for them, such benefits were overshadowed by supplier resentment that led to a lack of synergistic improvement (Maloni and Benton, 2000). Due to such a conflictual relationship, suppliers became very reluctant to reserve their best ideas for General Motors, preferring companies that managed supplier relationships better than them (Enright, 2003). Another famous example of use of mediated power on supplier is represented by Ford, a giant in the American automotive industry. In order to allow competitors to make their products, they forced suppliers to turn over technology (Handley and Benton Jr., 2011). Such disregard of the importance of supplier relations is one of the main factors explaining the lack of competitiveness of the U.S automotive industry today. As a matter of fact, thanks to a tight control over the supply chain and more collaborative relations with suppliers, Japanese firms managed to be more competitive as far as product development, vehicle quality and costs are concerned (Maloni and Benton, 2000).

receive, there is a great feeling of belonging to the same group. This situation mainly relates to the concept of referent power. In fact, as previously explained, weaker firms tend to identify with the power holder, with a desire of oneness. In spite of such “more positive” use of power, automotive companies’ dominant position is still quite evident. As a matter of fact, with the exception of some large players, such as Bridgestone, Japanese suppliers (similarly to Europeans) tend to be relatively small and strongly dominated by automakers. Even Denso, one of Japan’s largest suppliers, used to generate half of its revenues from Toyota and none from Nissan (Sturgeon and Florida, 2000).

This section’s aim was to provide the reader with a detailed description of the various types of power identified in the literature. Many different types of power derive from different sources, with important implications for buyer-supplier relations (see table 1 below). While those associated with mediated power sources are usually labelled as negative use of power, the opposite can be said as far as non-mediated types of power are concerned (Benton and Maloni, 2004). Not by chance, the latter are considered as a valid explanatory factor for the increasing competitiveness of Japanese automotive companies over American rivals, which are normally linked to the usage of mediated types of power. Nevertheless, in spite of this important distinction, the dominant position of automotive companies, both Japanese and American, over their suppliers has not been in doubt so far. In the following section, in order to give an even more exhaustive description of the position of power of automotive companies, I will deal with additional sources of power that are considered more peculiar to the automotive industry.

Table 1: Different types of power

Sources of power in buyer-supplier relations in the automotive industry

In order to better analyse the context of OEM’s dominance in the automotive industry, it is important to focus on specific sources of power that can provide us with a clearer overview on

buyer-Bargaining

power Reward power Coercive power Legal legitimate power

Expert

power Referent power

supplier relations. Product architecture is undoubtedly a concept that has huge importance in the automotive sector, and it can thus provide us an explanation on why automotive companies have been able to exert such dominance on their suppliers. According to Ulrich (1995), “product architecture is the scheme by which the function of a product is allocated to physical components”. More precisely, it could be seen as a detailed description of a bundle of product features, representing the fundamental structure of a product. When properly defined and articulated, it can be an efficient coordination mechanism (Fixson, 2005).

A further distinction between modular and integral product architecture has important implications for firms’ performance, since it influences their capacity to implement product changes (Ulrich, 1995). As far as the latter is concerned, it is a rather complex process, dealing with non-one-to-one mapping from functional elements to physical components (Ulrich, 1995). Of particular relevance for this study is the concept of modularity. The latter could be described as a process involving ongoing learning about interdependencies among elements in the system (MacDuffie, 2013). Despite the variety of approaches, scholars seem to agree on three key characteristics of modules. They are separable from the rest of the product, isolable as semi-autonomous chunks and re-combinable with other components (Cabigiousu et al., 2013). As previously mentioned, modularity makes components standardization possible, allowing car manufacturers to exploit economies of scale and learning (Fixson, 2005). The outcome of higher component volume is a huge price pressure exerted on one another (Ulrich, 1995). Here originates the position of power of automotive companies. Given the price competition in the market, they consequently exert huge pressures on suppliers thanks to their high-volume purchases. Furthermore, suppliers have additional pressures to learn and improve fast if they do not want to be replaced by competitors. In fact, the performance advantage derived from standard components is strongly related to learning and experience the supplier is able to accumulate (Ulrich, 1995). Moreover, crucial responsibilities for capital investment, logistics and product liability are shifted to suppliers (MacDuffie, 2013).

However, in spite of a long list of benefits automotive companies can obtain, a modular approach that includes outsourcing to suppliers does not come without risks. First of all, given that knowledge is usually obtained by doing things, by outsourcing to suppliers, automotive companies miss opportunities to gain or refine it. For this reason, maintaining substantial knowledge advantage over competitors might get more difficult (Takeishi, 2002). In addition to this, even if automakers had important levels of knowledge, the latter may be easily acquired by competing firms through shared suppliers (Takeishi, 2002). Another significant risk is related to product performance and brand identity, that could be lost in situations of excessive outsourcing (MacDuffie, 2013). By outsourcing too much new-product design tasks to suppliers, companies might lose their control on many crucial elements that shape design decisions and outcomes. In addition to this, giving suppliers too many responsibilities on product development processes might alter the technical peculiarities of automotive companies (Zirpoli and Becker, 2011b). Not by chance, worldwide known automotive companies, such as Mercedes and Toyota, have resisted too much outsourcing, given that it was seen as a potential threat (MacNeill and Chanaron, 2005). Moreover, modularization requires component-specific knowledge and important investments to remain in that knowledge domain. Even though it increases the control over component performances, modularity acts as a constrain for suppliers’ innovation (Cabigiosu et al., 2013). Furthermore, Zirpoli and Becker (2011a) also argue that modular product design is not the most appropriate approach to deal with the integration of the overall vehicle functions. In addition to all these problematics, we could also consider the complexity of division of labour and control of the business. As a matter of fact, coordinating activities is becoming more and more complicated, given the variety of actors involved in delicate tasks such as the design of a new car (Salerno, 2001).

power deals with the ability to control the decision variables in the marketing strategy of another firm. The difficulties megasuppliers had with achieving design modularity hindered them from innovating autonomously and favoured the authoritative position automotive companies were able to exert. Generally speaking, such circumstances were the main factor that prevented the initially expected shift of value from automotive companies to suppliers and the change to a completely horizontal structure (MacDuffie, 2013).

This section is particularly important for the entire research project. In fact, it deals with a detailed analysis of the main reasons behind the existing power gap in the automotive industry. Particularly specific to the sector are the notions of product architecture and the consequent increasing reliance on outsourcing that, in spite of potential risks that could have undermined carmakers’ dominant position, strengthened automotive companies’ power. Furthermore, automotive companies’ accountability for product defects and regulatory compliance should be considered as an additional explanatory factor. The fact that automotive companies need to maintain their capabilities as system integrators to be effective in these roles is an additional determinant of their position of power. Last but not least, closeness to customers, with the possibility to monopolize interaction with them gives automotive companies a huge advantage. As a matter of fact, by favouring customers’ achievement of a goal, a given company’s power over the supply chain increases. Before proceeding with a detailed analysis of recent potentially disruptive technological trends in the automotive industry, it would be useful to have a clear picture of the various determinants of automotive companies’ dominant position over suppliers. With this objective, the following summarizing table provides a detailed overview of the analysed sources of power, with particular attention to how the latter have favoured automotive companies’ dominant position over the years.

Table 2: Sources of power in the automotive industry

Firm size Mediated power sources Non-mediated power sources Product

architecture Outsourcing Accountability Closeness to customers Suppliers tend to be small and dominated by carmakers. Even bigger supplying firms, such as Denso, might end up generating half of their revenues from a single automotive company Reward, coercive and legal legitimate power. Known as the “negative use “of power. Associated with a lower degree of commitment and satisfaction by suppliers Expert, referent and traditional legitimate power. Known as the “positive use” of power, it is likely to enhance automotive companies’ power advantage. Huge pressure exerted on suppliers thanks to high-volume purchases. The advantages of standard components strictly related to learning and experience on the supplier side. Automotive can cut investment cost and give suppliers important responsibilities. Suppliers have not been able to attain the productivity gains achieved by automotive companies Carmakers have responsibilities for regulatory compliance, they are accountable for products defects and maintain their locus of differentiability by controlling aftermarkets parts The more a given company is able to mediate its customers’ achievement of a goal, the higher the company’s relative power over the supply chain

New environmental and technological trends

and more efficient vehicles are representing a serious pressure for the entire industry. Decarbonising transport is one of today’s toughest challenges for the automotive industry due to factors such as particulate emissions affecting the climate and humans (Pollet et al., 2012). As a matter of fact, the traditional motor car has always been a major contributor to the emissions of CO2 into the atmosphere

(Bailey et al., 2010). For roughly one hundred years, our society has been highly dependent upon oil, and major breakthroughs on low carbon technologies and vehicles are required (Pollet et al., 2012). The market of hybrid-electric vehicles is expected to grow over the next decade both in the United States and in Europe and automotive companies will have to acquire new key capabilities that were not required and possessed in the past (Kim and Sim, 2015). Even though hybrid and electric vehicles will have to compete on various dimensions with internal combustion engines, detailed analysis indicate that the industry is facing an important, long term transition to these kinds of new, more environmentally friendly kinds of vehicles. While the average increase in hybrid-electric vehicles’ market volume was only 0.8% in the United States, the average increase was 31% in Europe, while in the Asia-Pacific region it amounted to 12%, with an increase of 21% from 2015 to 2016. Moreover, market volume forecasts for hybrid-electric vehicles for the aforementioned markets in the next three years predict a further increase of 3.7, 14.1 and 11.2% respectively (Marketline, 2017a, b, c). In addition to this, while the number of articles on electric vehicles in AutoWeek has been relatively low, it increased sharply in the last few years (Bakker et al., 2012).

(Karden et al., 2007). Such potential issues for automotive companies are also well documented in Burke (2007). Electrical energy storage units must store sufficient energy and provide adequate power for the vehicle to have a sufficient acceleration performance (ibid.). Furthermore, it is way less straightforward to determine storage unit requirements for the weight, volume and cost of the energy storage units. The existing upper limits on these characteristics would hinder the successful design and sale of the vehicles (ibid.). Automotive companies themselves are perceiving all these innovations as a potential threat to their business. In fact, despite widespread government support aimed at stimulating the adoption of low emission vehicles, a major transition has not taken place yet. Automotive companies, in order to keep their dominant positions and market shares were, at least until it was possible, forming a significant barrier to change (Kemp et al., 1998). It is worth underlining the fact that new low emission vehicles are a systemic innovation. A simple product innovation would not be enough for such a transition, given that complementary technology such as fueling infrastructure are interdependent with vehicle technology (Pinkse et al., 2014).

In addition to the aforementioned difficulties, national governments can have a decisive role in the production and diffusion of low emission vehicles. Lowering emissions is a priority for most governments, and their interventions can have huge impacts on carmakers and favour a substantial market growth (MarketLine, 2017b). For example, the US government intervention had a huge impact on carmakers. The Clean Air Act mandated zero emission vehicles in an attempt to reduce smog in the Los Angeles Area. In practice, this meant imposing marketable electric vehicles (Pinkse et al., 2014). Similarly, electric vehicles are the focus of Japanese government since 2008. Cities are requested to become model districts with the help of extra governmental funds for infrastructure provided. The declared objective was to have at least 50% of all cars powered by non-petrol sources by 2020. As far as the European context is concerned, the European Union and the European Automobile Manufacturers’ Association started cooperating on Co2 emissions reductions (Pinkse et

The increasing importance of electronics and software in modern vehicles might create challenges for automotive companies. At least initially, core competences for green technology development are likely to be in the hands of well-known high-tech power companies in the electronic and computer industries. Such firms might represent a stronger counterpart if compared to traditional automotive suppliers (Brandes et al., 2012). Established IT firms, such as Microsoft or HP have in fact diversified in the automotive industry (Jacobides et al., 2015). For example, LG is currently supplying an increasing number of systems to Chevrolet for their Bolt model (Deloitte, 2016). Following LG’s strategy, Samsung is expected to launch operations to produce batteries for hybrid and electric cars. In order to establish their position as a supplier for the industry, they decided to acquire Harman, one of the largest suppliers of electronic components in the automotive industry. Such an important acquisition is likely to improve Samsung’s supplier power (MarketLine, 2017b). Similarly, Intel Corp. has recently acquired Mobileye at the huge price of $15 billions (Sedgwick, 2017). In light of this new kind of suppliers with powerful brands, as well as huge resources and lists of competences, automotive companies might find it hard to maintain their profitability and defend their dominant position in the market. While some authors, like for example Sedgwick (2017), predict disruptive changes in the dynamics of the sectors, other like Jacobides et al. (2015) believe that automotive companies can maintain their dominant position. In case suppliers possessed core competences, and had more experience and volume, they could theoretically begin to dictate design and prices to automotive companies. Following this reasoning, we could argue that electronic suppliers might get really powerful and play a much bigger role than suppliers automotive companies are used to deal with (Sedgwick, 2017). Automotive companies might have to deal with a new kind of supplier which might also reject the unfavourable contract terms common in the industry. This could be due to prices or to other broader conditions that are considered unfavourable for them (Sedgwick, 2012). Contrarily, another common thought is that autos would mirror technologies, pushing the industry’s structure from vertical toward horizontal (Jacobides et al., 2015). More precisely, Chrysler could be labelled as the Compaq of the automotive industry. In fact, their strategy allows suppliers to improve their capabilities and develop whole automotive subsystems (Jacobides et al., 2015). What seems to be clear is that a strong supplier with unique resources and in control of core competences that could help the company to win against competitors could behave opportunistically and charge higher prices (Brandes et al., 2012). Their brand names and fast development cycle could allow them to define ecosystem platforms and dominate in software and big data (Deloitte, 2016).

possibilities this market is offering, and by the importance of climate change issues for governments and consumers (MarketLine, 2017b). Google’s Self Driving Car and Android Auto projects are now reality. In addition to this, many automotive start-ups have emerged and could consequently advance electric vehicle technologies even further (Deloitte, 2016). The most notable case is undoubtedly represented by Tesla Motors. Only founded in 2003, they rapidly moved from the production of niche electric cars to having serious plans of mass production with one of their latest model of electric car (MarketLine, 2017b). Aforementioned start-ups represent a significant threat to traditional OEMs. In fact, their ability to take more risks is considered one of their main advantages in relation to established car manufacturers. In fact, the latter normally have more concerns of brand preservation and public perception. In addition to this, high-tech companies diversifying in the automotive industry are likely to have huge talents at their disposal, with a numeric advantage of people with the required technological competences (Orleans and Siegel, 2017).

Taking all these facts into consideration, it is worth analysing the new dynamics in such an economically important sector in order to understand whether automotive companies’ dominant position on suppliers has actually come to an end or not. All previously mentioned facts represent valid reasons why such dominance might not be easy to maintain in the future. Moreover, we could also consider other factors, such as Volkswagen’s diesel gate and the demonstrated negative effects of diesel technologies on human health, both likely to favour a further push towards electric vehicles as the dominant technology in the future. Mainly due to previously mentioned environmental concerns and socioeconomic aspects, alternatives for Diesel engines are becoming increasingly important over the years (Dorado et al., 2003). Such importance further increases if we consider that, due to their non-renewable nature, petroleum supplies are becoming limited over the years (Nabi et al., 2006). Furthermore, air pollution undoubtedly has a negative effect on human health. This is mostly determined by the exposure to fine particulate matter and ozone, that caused roughly 165000 premature deaths in the United States back in 2010.

Methodology

and the consequent scarcity of publicly available data of interest, was not likely to allow me to present significative findings. As a matter of fact, some authors, such as Barratt et al. (2011) and Ketokivi and Choi (2014), explain the appropriateness of qualitative approaches for providing detailed explanations about firm’ strategic choices. Furthermore, case studies are particularly effective for studying concepts, such as power, that are not directly observable. In line with many other studies of this kind, studying the context and directly interacting with the actors involved assume great importance (Wilhelm and Dolfsma, 2018). For this reason, interviews with people involved in the sector have been the primary method of investigation and data collection. More precisely, considering the strategic importance of aforementioned dynamics, and with the aim of collecting highly reliable data, I have interviewed four industry representatives working for worldwide known automotive companies. Given the strategic importance of the proposed topic, the interviewees agreed to be interviewed only if their companies and their personal names would not be explicitly mentioned in the thesis. For this reason, in the following sections they will be called CAR1, CAR2, CAR3 and CAR4. Interviewees have been selected according to the relevance of their position at those companies. While two of them were employed at their company’s marketing and sales department, the other interviewees were responsible for electric mobility and product development respectively. For the sake of consistency, the same questions were asked to all respondents, who also had the chance to provide additional comments related to the project at the end of the interview. Questions and the subsequent data analysis were based on three main pillars, namely product architecture and the reliance on outsourcing, core competences and market power. Moreover, some questions were based on new regulations, that were considered as a factor with the potential of favouring a faster diffusion of electric vehicles. These themes, after a detailed literature review, have been considered key to understand the dynamics of buyer-supplier relations in the automotive industry. In addition to this, with the aim of a detailed and reliable data analysis, all the interviews that I have conducted were recorded and transcribed shortly afterwards. With the aim of providing the reader with a more detailed analysis, the aforementioned primary data were consolidated with secondary data taken from available and reliable market reports.

Case findings

The phone interviews I have conducted with automotive companies’ representatives provided me with findings that are partially confirming and rejecting insights from the available literature.

(Lloyds Banking Group, 2017). As a matter of fact, battery electric mobility is currently ranked by a variety of automotive companies’ executives as the most significant trend in the industry (KPMG, 2017). The aforementioned findings were confirmed by all respondents, who explained how their companies are already preparing for such an important transition. First of all, one of the interviewees explained how the CAR1 he is working for is ready to launch a new three-years strategic industrial plan in which electric vehicles will have a crucial role, particularly as far as commercial vehicles and SUVs are concerned. Secondly, a representative of CAR2 explained how they consider themselves as one of the pioneers in the electric vehicles market. In fact, back in 2010, while all their competitors were still mainly dealing with projects and prototypes, they were already able to launch four totally electric models of cars. In addition to this, they have recently acquired a significant share of a newly founded start-up active for the intelligent and sustainable recharging of electric vehicles. Similarly, Daimler Financial Services has recently set up so called “Start-up Intelligence Centre”, with the declared aim of favouring partnership and collaborations with start-ups, providing them with a central point of contact to share their innovative ideas (Daimler, 2018). Moreover, CAR2 has recently set up a new alliance with other two manufacturers. This agreement has been defined as a sort of “Coopetition”, in fact, the cooperation will be limited to projecting and producing electric engines and components. When it comes to sales all over the world they will all act alone, and the other two brands will be considered competitors. This kind of approach is likely to be successful in these times of huge technological development. As a matter of fact, having groups of companies producing the same components might turn out to be costly. By consolidating, automotive companies could obtain some important benefits, such as improvements in capital efficiency and capital returns (PWC, 2017). Third, a representative of CAR3 pointed out that, as well as CAR2, they consider themselves as pioneers as far as electric mobility is concerned. He explained that their peculiarity is the production of totally electric vehicles since 2009. Such vehicles were brand new projects, and not the evolution of other models. The interviewee pointed out that such an aggressive strategy represented a huge financial risk for the company. In fact, their investments in electric vehicles currently amount to €5 billion, and back in 2009, other carmakers’ CEOs were convinced that the Japanese company was destined to failure and bankruptcy. Lastly, also the representative of CAR4 confirmed that electric vehicles are a key part of their current and future plans, as far as light, intermediate and heavy vehicles are concerned. Even though they are currently experimenting on alternative technologies, such as hydrogen, they believe that electric vehicles are much more likely to be the right choice for carmakers.

requirements and lower emission thresholds are certainly having their importance. In the entire automotive industry’s history, we have not assisted to radical changes yet, both as far as dominant design and business models are concerned, meaning that the transition towards electric vehicles might have been slower or absent without government interventions. As a matter of fact, from the years in which the first cars were commercialized until now, in spite of some refinements and improvements, the basic operating principles of Internal Combustion Engines are still in place (Ratjiu, 2003). This has been further confirmed by the interviewees. One of the clearest examples of new regulations is undoubtedly represented by the CAFE (Corporate Average Fuel Economy) norm. The latter requires every carmaker gradually reduce their levels of Co2 emissions. To be more precise, by 2021 they are required to have no more than 95 grams of Co2 emissions per vehicle. After five years the threshold will further diminish to 80 grams per vehicle, with a long-term objective to reduce pollutants by 95% before 2050, with an almost complete reliance on electric vehicles. A sanction of €95 for every gram of Co2 more than allowed can be expected by carmakers. Such a norm undoubtedly represents an important push towards the complete electrification of cars. As a matter of fact, besides negative economic consequences, carmakers could also suffer important reputational damages in case they were not able to respect these pollution thresholds.

Nevertheless, it seems that automotive companies are not concerned about the transition towards electric vehicles, despite the fact that two of the companies involved in this project confirmed that they still produce electric vehicles thanks to a massive reliance on external suppliers. Without excluding future developments of their technologies and changes in their strategies, they are convinced that they do not need to drastically reduce their dependence on suppliers at the moment. In fact, confirming the collaborative nature of modern buyer-supplier relations, they all think that they have satisfactory and cooperative relations with their suppliers, who provide them with the technologies they need. This might be due to the fact that the aforementioned companies, unlike some of their competitors, are still at more initial stages of development of new technologies that are needed to produce efficient electric vehicles. As a matter of fact, as the representative of CAR3 pointed out,

“It took us many years and substantial investments to reach our current level of

development. The development of new competences and technologies requires time, and it is not something that can be done in a month or two” (CAR3).

transition towards electric vehicles takes place (BCG, 2010). In addition to this, their reliance on suppliers could be a cost-related choice, meaning that these carmakers find outsourcing strategies cheaper and more convenient for their business. Furthermore, to provide an example, CAR1 usually organises so called “Technology Days” at its headquarter. On this important occasion, suppliers have the chance to provide the carmaker with detailed presentation of their technologies and are ready to answer specific questions. This presentation of the technologies they are offering, besides meaning that they will not be able to keep their proprietary knowledge, is the main criteria on which they will be evaluated. As it was mentioned in Jacobides et al., (2015), it seems that car manufacturers are still able to transfer responsibilities for product development to suppliers, who have to meet strict performance requirements. As a matter of fact, as explained by CAR1’s representative, automotive companies can still easily switch suppliers and

“better contractual conditions for them are strictly related to their ability to develop their

technologies” (CAR1).

In this situation there seems to be a demonstration of reward power by CAR1. As Zemanek and Pride (1996) argued, suppliers can expect to be rewarded and receive a benefit (in this case better contractual conditions) if they are able to show substantial levels of development of their

technologies.

Both CAR3 and CAR4 showed a different approach. The former explained how batteries are the most important component of electric vehicles. In order to reduce their dependency on external suppliers, they were the first and only manufacturer who developed and produced batteries in house. With the aim of reducing costs and operating within a wider market, they sold this

market report, 85% of automotive companies’ executives agree that the digital ecosystem will generate higher revenues than the car’s hardware in a near future. Furthermore, CEOs are

convinced that the digital ecosystem will be the main revenue source for the automotive industry. Measuring market share with mere sales units will become outdated (KPMG, 2017).

in line with modern and collaborative buyer-supplier relations, the automotive companies involved in this project showed a strong preference for long-lasting relationships with given suppliers. Given the fast-paced environment which requires substantial development of currently available technologies, conflictual relationships with suppliers would not be beneficial. In line with Benton and Maloni (2004), who suggested a judicious power use in order to avoid underperformance and enhance the power advantage, it seems that automotive companies, with the exception of the previously described usage of reward power by CAR1, are strictly preferring non-mediated sources of power. In fact, as Enright (2003) argued, suppliers are likely to be reluctant to share their ideas with buying firms characterized by aggressive approaches.

The importance of new entrants from the high-tech sector, such as Samsung or LG is recognized by some carmakers. Some of them already have active partnership with these companies, even though still related to commercial and marketing aspects of their business. Nevertheless, these companies could have a more important role in the future. CAR1 already has an active partnership with Google, which is providing them with its technologies for the development of self-driving and electric vehicles. This could be interpreted as a signal of a significant change in their strategy. Given their partial lack of the required new core competences, they might have chosen to cooperate with a giant in the high-tech sector to speed up the process, with the aim of reducing their current reliance on suppliers. The current partnership does not exclude that Google could develop its own car in the future and become a competitor. Nevertheless, even though this occurrence has been defined as plausible, such companies could face additional difficulties.

As the representative of CAR3 pointed out, compared to Internal Combustion Engines, it is relatively easy to produce electric engines. Thanks to the simplicity of electric motors, a model of electric vehicle has roughly twenty-five moving parts, compared to more than one hundred in a traditional vehicle. Furthermore, Internal Combustion Engines have spark plugs and oil that need changing, while electric motors do not require anything like that, with a much easier maintenance (Clark, 2018). That is the reason why a company like Tesla was able to enter the market, and Google could do the same. It is currently highly debated whether high-tech companies will compete or cooperate with traditional automotive companies. On average, roughly 55% of executives of both automotive and ICT companies expect that competition is the most likely outcome (KPMG, 2017). Nevertheless, in his opinion, this scenario would not be ideal for new entrants from the high- tech sector. The vehicle’s commercialization and the development of an efficient distributive network would be the main issues. For this reason, according to him,

“companies like Google or Apple can enter the market only if associated to another famous

To be more precise, automotive companies that are still at the initial stages of development of electric vehicles technologies could exploit high-tech companies’ technologies, while the latter could be interested in automotive companies’ distributive power. This kind of cooperative partnership deals with a supplier who is willing to contribute to the buyer’s competitive advantage and is only feasible with technologically advanced suppliers (Caniels and Gelderman, 2005). As previously explained, this could be the case of CAR1 as well as of other automotive companies in a similar situation. Automotive companies that have been able to reach more advanced stages of development, having already acquired the required competences, are not likely to be interested in a partnership of this kind. CAR4 has a similar view. In addition to these considerations, as their representative pointed out,

“a car that has not been built by a traditional carmaker undoubtedly has its important

drawbacks” (CAR4).

First of all, considering their lack of experience in manufacturing vehicles’ standard components, the material’s quality is inferior. In addition to this, the ease of utilization of driver-car systems of integration are scarce. In fact, in the case of Tesla, they demonstrated their drawbacks, that eventually led to infamous accidents. In fact, they are not considered “user-friendly”, and given that there is a lack of a system comparable to Apple’s Siri, the driver has to point his fingers on icons, with a huge risk of distractions while driving. Given that Tesla has failed on all these aspects, it will have to work on a completely new project, with important and negative implications for their finances. As a matter of fact, at the moment, their balance sheets are far from being satisfactory. For these reasons, high-tech firms entering the market are not really considered a threat.

The interviewed carmakers also had views on the timing of a total transition towards electric vehicles. According to CAR1, especially in Europe,

“electric vehicles still do not represent anything more than a niche” (CAR1).

of development could explain their current reliance on external suppliers. More precisely, as argued by Jacobides et al. (2015), incremental changes in technologies are likely to give carmakers time to think about possible actions. These automotive companies might therefore be convinced that this long transition is favouring them, meaning that they have the opportunity to refine their technologies in such a long time. Once again, CAR3 and CAR4 had slightly different views. According to the former,

“The CAFE norm and other requirements imposed on automotive companies are

undoubtedly accelerating the transition towards the complete electrification of cars, that might occur sooner than expected” (CAR3).

As a consequence, carmakers are increasing their investments in R&D, currently averaging to 24% of their annual turnover, with a particular focus on the development of electric vehicles and the related technologies (Lloyds Banking Group, 2017). More precisely, carmakers who invest their R&D budget in software solutions rather than product range are currently showing stronger growth than competitors (PWC, 2018). Furthermore, CAR3 is, together with other famous manufacturers, part of so called “Eva+” project. Being part of this coalition meant a significant investment by the companies involved, with the aim of developing a charging infrastructure and favouring a faster transition towards electric vehicles. Investments of this kind are starting to pay their dividends. In fact, private and publicly accessible charging infrastructure is showing important levels of growth. To be more precise, in the last year the level of growth amounted to 72% (IEA, 2017).

Nevertheless, as suggested by CAR4, we need to consider different zones to have a clear picture of the current diffusion of electric vehicles. For example, Northern, Central and Southern European countries are currently showing huge differences on the promulgation of laws and incentives on the usage and purchase of electric vehicles. While Northern and Central European countries, the Netherlands, and the United Kingdom are strongly incentivizing and favouring the aforementioned transition through investments on infrastructures and benefits on the purchase of electric vehicles, in Southern European countries governments have been almost completely absent. For this reason, according to the CAR4,

“to different zones and different levels of development of infrastructure will correspond

more or less time needed for a complete transition” (CAR4)

Group, 2017). These reasonings are made considering batteries and technologies currently available. New cutting-edge technologies with the potential of speeding up the process might completely change the situation in a near future.

These differences in carmakers’ approaches on a complete transition towards electric vehicles might be strictly related to the different stages of development they have been able to reach as well as to the core competences they have been able to acquire. Automotive companies that are still massively outsourcing from suppliers are likely to be those that are convinced that the market still needs to develop and that it will take more than expected for a complete transition to occur. Massive investments for the development of the required charging infrastructure might not make sense for them. In fact, the faster the transition towards electric vehicles, the more they will be outperformed by competitors that have developed core competences faster than them. Contrarily, companies like CAR3, given their huge competences concerning electric vehicles, as demonstrated by the “Eva +” project with all the related investments, have all the interests to favour a faster transition towards electric vehicles.

Discussion

New technological requirements, usually associated to a complete transition towards electric vehicles in a near future, representing the first radical change in vehicles’ dominant design in the history, had the potential to completely disrupt the automotive industry. In particular, it was hypothesized that suppliers, after a history of strong dominance by automotive companies, could reduce the power gap and increase their bargaining power, consequently increasing their chances of obtaining much better contractual conditions. In fact, at least initially, automotive companies would lack the technological competences required to project and produce electric cars. Furthermore, laws and regulations promulgated by governments worldwide, favouring a faster diffusion of electric vehicles seemed to further favour suppliers’ position, who could have had exploited such momentary lack of carmakers’ competences.

literature might have focused more on carmakers’ concerns and resistance to such a radical change in technologies and dominant design, overlooking the potential opportunities that it could have offered to automotive companies. The importance given to this transition, as well as carmakers’ efforts and investments might now give their results. While CAR3 is now able to produce and commercialize its new-generation batteries, CAR4 has recently developed a system of artificial intelligence that could be compared to Apple’s Siri. Even the carmakers that are not at such advanced stages of development yet, still seem to be in a rather powerful position. In fact, as explained by their interviewees, the possibility to potentially source from various different suppliers, many of which were collaborating with them as far as traditional vehicles are concerned, substantially reduces carmakers’ supply risk. Moreover, as a further and concrete demonstration of power, they are still able to impose annual cost reduction targets to their high-tech and electronic suppliers. In addition to these considerations, the latter are under the constant pressure to develop and refine their technologies. Better contractual conditions for them are strictly dependent on this capability. For these reasons, it seems that suppliers are not able to increase their bargaining power. These considerations have led me to the development of the following proposition (P1):

Some automotive companies have been able to develop the required core competences for the production of electric vehicles and are consequently able to produce the related components in

house. This might give them additional power in their relations with suppliers.

Another potential factor of concern for automotive companies was the predicted entrance in the market by high-tech companies, like Google and Apple, that were expected to launch their own car in a rather near future. Even though such an event is plausible, these companies, without any experience in the sector, would face additional difficulties and they would hardly be considered competitors by automotive companies. As explained by the representative of CAR3, they could theoretically build their cars, but they would almost completely lack a good distributive network, finding it really hard to commercialize their cars on a large scale. They would risk a similar situation to Tesla’s, a brand that is able to produce revolutionary cars every year, but whose financial statements are unsatisfactory. For this reason, he suggested that they could only enter the market in association with another automotive brand that is still at earlier stages of development of electric vehicles, and that might therefore be interested in a cooperation of this kind. Following these reasonings I have developed a second proposition (P2):

The prospected entrance in the market by high-tech companies like Google might not be seen as a threat by automotive companies, that can still rely on greater experience in the sector and superior

In addition to these considerations, automotive companies’ huge financial resources, like in the past, are still undoubtedly favouring their dominant position on suppliers. The CAR3 involved in this project provided me with a good example. Back in 2009, when they decided to develop and launch new electric cars they made an initial investment of €5 billions. In addition to this, being part of the “Eva+” project, together with other famous car manufacturers, they are making additional and substantial investments aimed at a faster development of the required infrastructure. These are investments that the vast majority of carmakers’ suppliers could not afford, being therefore an additional indication of the powerful position of automotive companies. Thanks to their huge financial resources many carmakers, after substantial and long-term efforts on Research and Development, were able to develop the required capabilities in house. Furthermore, automotive companies, if cooperating together, could potentially favour a faster development of all the charging infrastructures they need. Taking all this into consideration, I have developed a third proposition (P3):

Carmakers made substantial investments aimed at the development of electric vehicles’ technologies and charging infrastructure. Their huge financial resources might give them the

power to take risks and shape the industry in their favour.

Limitations and conclusion

this scenario may be subject to change in the future, new entrants from the high-tech sector do not seem to be considered as a real threat by automotive companies. The latter can in fact rely on more efficient distributive networks and are therefore convinced that high-tech companies would need a partnership with carmakers to successfully commercialize their cars. In addition to these considerations, automotive companies’ huge financial resources still have their importance. As demonstrated by new projects, such the “Eva+ project”, aimed at the development of the required charging infrastructure, and by carmakers’ substantial investments in R&D, it might be inferred that automotive companies have the power to take risks and favour a faster diffusion of electric vehicles. For all these reasons, it seems that automotive companies are still in a position of huge power, and that their suppliers have not been able to exploit such a radical change in the dominant design in their favour so far. On the contrary, given that automotive companies are increasingly showing trends of reduced dependence on outsourcing from external suppliers, the latter might also have an even more marginal position than before.

Managerial implications

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