With every new model that mobile phone manufacturers release there’s a quantum leap forward in technology.
Automakers do the same, but with the development and production costs of bringing a car to market often running into the hundreds of billions of USD model life cycles tend to be much longer (Typically 7 years), but with connected and selfdriving cars looming on the horizon the industry is feverishly looking at new business models.
According to Edward Taylor of Reuters carmakers are devising new ways to keep pace with fast-moving trends and innovation in the consumer electronics that have become increasingly important to car buyers, executives at the Geneva motor show said.
The big challenge is how to introduce the latest technological wizardry as frequently as possible without interfering with the economics of selling cars: earning back the cash spent on expensive tooling, production and distribution.
The problem is neatly illustrated by the rapid release of ever more advanced mobile phones, compared with a turnaround of about seven years for new or redesigned car models.
Narrowing that gap is crucial, given how mobile phones and cars have become increasingly integrated, not to mention the advances in computer software and processing power that will be key to making self-driving cars a commercial success.
The new Mercedes-Benz E-Class, for example, can activate accident-avoidance braking systems far earlier than any other Mercedes model, thanks to a doubling of the performance of radars, the stereo camera and processing power.
Tesla Motors has set the pace, adapting the strategy of improving its products as soon as is possible, using software updates and by making changes to the hardware.
Yet executives at the Geneva show say car product cycles will not tighten much below six years. “I do not see a reduction in the product cycle for the car,” said Klaus Froehlich, BMW board member responsible for research and development.
Volvo CEO Hakan Samuelsson explained: “It’s about how effectively you use capital. Shortening the product cycle too much means you won’t earn back the money and you will not be profitable.”
For example, the cost of a high-end stamping press for making body panels costs about 40 million euros ($43.38 million). That investment needs to be recovered over many months and years, even for manufacturers of premium cars.
“We are very cautious about whether we should accelerate the life cycle of a vehicle. Seven years is an established time frame,” said Daimler board member Thomas Weber, who is responsible for group research and Mercedes-Benz cars development. “Time to market should be as short as possible, but even here many companies make mistakes. Making a product perfect takes time.”
Mercedes, BMW and others are seeking to shorten the time it takes to develop a car and introduce interchangeable parts that can be updated in a “product refresh” while sticking to the seven-year product cycle.
Can the market afford shorter life cycles?
A key reason to keep the seven-year cycle is to avoid introducing next-generation products before customers have had time to pay for existing cars.
Leasing contracts generally last 36 months, with monthly payments based on the assumed resale value of the vehicle. Introducing a new model too soon could hit resale values, potentially raising leasing rates for buyers of previous-generation vehicles.
Analysts BNP Paribas said that German carmakers’ leasing contract volumes have doubled since 2007 to about 80 billion euros at the end of last year, with BMW’s leasing contracts representing more than half of its market capitalization.
Twin-track approach a win-win solution?
To help keep their products up to date, Mercedes and BMW are now focusing on shortening the software product cycle while keeping expensive components on the market for six to seven years.
“We see different potential for optimizing hardware and software. Hardware, steel, the engine, the crank case, the transmission should have long life cycles, while software will be updated in a more dynamic, frequent manner. And processors are ordered with potential upgrades in mind during the life cycle of the vehicle,” Daimler’s Weber said.
Effectively, it’s a case of wheels within wheels.
“We are moving away from a trend to build a brand new car from scratch every seven years. Carmakers are now working with modular systems, with some components in use over two generations of vehicle,” said Wolfgang Bernhart, a partner at consultancy Roland Berger.
Philippe Klein, of Nissan’s global product planning operation, said: “The name of the game is how can you refresh your product without having to reinvest everything. The industry is capital intensive; you need to amortize the investment over time.”
Thanks to AutoNews for the basis of this article