Sleeping With The Enemy

April 11, 2005
The giants of manufacturing are teaming up with their competitors to cut costs and increase market share.

General Motors and Ford. Hitachi and Panasonic. DaimlerChrysler and GM. Northrop Grumman and BAE. GM and Toyota. Timken and SKF.

What these pairs of manufacturers have in common is that they compete with each other head-to-head. At the same time, they also are partners, working side by side to jointly create new products, share ideas and technologies, and expand their markets, while splitting the costs.

"We've got to find ways to share risk, cost and even technological capabilities," explains Shawn Burns, program manager for GM's joint development effort with Ford Motor Co. to build a six-speed automatic transmission for front-wheel drive cars. "There are a lot of economies of scale to working with a partner."

In other words, manufacturers are finding the benefits of sleeping with the enemy outweigh the disadvantages. "There is a shift to an innovation-based economy that is causing manufacturers to do unnatural acts," observes Tom Koulopoulos, president of Delphi Group, a Boston-based unit of Perot Systems that specializes in IT consulting. "Organizations are being put in a position where they have to innovate at a rate faster than they are used to. Globalization also is putting enormous pressure on companies, forcing them to partner in ways that would have been inconceivable a decade ago."

Unnatural? Yes. Inconceivable? Not any more. Forced to consort with the competition? You bet.

"Competitors can share costs on projects that they individually could not afford, and they can do this without hurting their competitive advantage," says Mike Arnold, president of Timken Corp.'s Industrial Group, which works with competitors such as bearing manufacturer SKF to share logistics and e-business activities. "Many manufacturers have had a difficult time in the recession, and by collaborating we are able to still increase our capacity, while sharing the cost and the risk in the case of a downturn in the market."

Make no mistake, on a daily basis, these manufacturers fight like hungry barracuda angling for the same school of tuna. They'd like nothing better than to eat one another's lunch. They're not successful if they're not wresting customers from each other, tapping a new market ahead of the other guy, or one-upping him with a better technology or a cooler design.

At the same time, when the opportunity arises, they will jump at the chance to put two sets of shoulders together to move a big boulder, or two heads together to navigate a particularly nettlesome technological thicket. In today's cutthroat manufacturing environment, savvy manufacturers are learning that always going it alone may not be the best approach.

There are plenty of reasons to share CAD drawings and machine oil with the competition. Far and away the biggest business reason is sharing costs. Certainly for the automotive industry, cost-sharing is spurring much of this latest round of collaboration.

"New hybrid systems are especially costly to bring to market and require high development costs," says Eric Ridenour, executive vice president for product development at Chrysler Group, DaimlerChrysler. Ridenour says the company's goal is to find efficiencies in such areas as engineering, working with suppliers to develop and purchase components, and in purchasing manufacturing equipment.

"With the tremendous cost pressures they face, companies simply can't afford to design and build all the components of an automobile on their own," remarks James Champy, business transformation expert, best-selling author and chairman of the consulting practice at Perot Systems, an IT and business consulting firm in Plano, Texas. "When you are designing a new engine, the only way to get efficiencies is to collaborate with your competitor."

Sometimes the end product is so complex, it often requires the participation of more than one manufacturer, as is often the case in the aerospace and defense industry. "There are a lot of different aerospace companies that we team with and that we also compete with," says Katie Lam, a Northrop Grumman spokesperson. The defense contractor is working with BAE North America to develop an integrated microwave assembly for the joint strike fighter.

Usually, but not always, competitors look to get the same business benefits from an alliance. For instance, both GM and DaimlerChrysler separately were eyeing the fledgling but fast-growing market for hybrid gas-electric automobiles. Both automotive giants, facing stiff competition from the early-to-market leaders, Toyota and Honda, needed a way to accelerate their product development efforts to bring a competitive hybrid technology to market in the shortest time.

"The competition between the two companies was less important than the challenge of getting a new product to market quickly," says Peter Savagian, director of engineering for hybrid systems at GM's engineering office in Troy, Mich. By sharing development costs and pooling their brainpower, the two automotive giants stood to gain from a shorter time-to-market than if they had chosen to go down the same path alone.

DaimlerChrysler and GM also stand to benefit from each other's technological and design resources. "This joint effort will allow us to leverage the engineering talents and technological resources of our two sizable and global companies," adds Chrysler Group's Ridenour. Says Savagian of GM, "We're bringing our engineering teams together to execute the development project."

Similarly, joint component or assembly development projects often afford both competitors economies of scale when ordering parts from suppliers. That's the case with GM's collaboration with Ford Motor to jointly build a six-speed automatic transmission for front-wheel drive vehicles. The transmission is now in the verification stages and already has been used in one early application, GM's new Saturn Aura concept car shown at this year's North American International Auto Show in Detroit. "We get a significant economy of scale gain because most of the parts are common, so we can share suppliers," says Burns of GM.

Having common goals isn't essential, but it can go a long way toward ensuring the success of a collaboration. "Both parties have to have their goals on the table, and if they are not the same goal, they better be at least complementary goals," Champy asserts. "When two manufacturers come to the table and their goals are not the same, it's riskier. There's more likely to be a conflict at some time in the relationship."

One of the longest running collaborations of all was between two arch-competitors whose business goals were totally different. Established two decades ago, New United Motor Manufacturing Inc. (NUMMI), the joint venture between Toyota and GM in Fremont, Calif., remains to this day a successful example of competitive collaboration.

California's only automotive assembly plant (the Golden State once had five automotive plants), NUMMI was set up in 1984 in a shuttered GM plant to build both Toyotas and GM cars using the same unionized work force, production line and Toyota Production System (TPS).

Summed up in a lugnut, Toyota wanted to gain a manufacturing beachhead to build cars in the U.S., while GM wanted to learn the secrets of Toyota's lean manufacturing methods. "Both sides were getting something positive out of the venture," says Dennis Cuneo, senior vice president at Toyota Motor North America in New York.

"In 1982, Toyota was importing all of the vehicles it sold in the U.S. from Japan," Cuneo recalls. "For Toyota, it was a way to reduce the risk and investment in setting up a new plant in the U.S. using American workers and suppliers." In the 20 years since the NUMMI plant opened, Toyota has expanded operations on these shores and now operates 13 plants in North America with an annual production of 1.5 million vehicles.

For its part, GM wanted to use the jointly operated plant to learn Toyota's lean manufacturing methods. "The NUMMI plant offered a way to better help us understand lean production concepts and to move to lean ways of manufacturing, which were relatively new in the 1980s," says a GM spokesman. GM took both executives and workers to the NUMMI plant to learn lean production concepts.

At the time the collaboration was forged, though, the whole idea of these two competitors pooling their interests to build cars together under the same roof was anathema to many in the automotive business. Some cried foul. According to the NUMMI Web site, "Ford and Chrysler rigorously opposed the venture and filed a lawsuit to block it." After a 15-month investigation, the Federal Trade Commission approved the formation of the company, stating that the joint venture would offer greater choices for consumers, as well as a role model for U.S. companies in the establishment of cooperative labor-management relations.

The joint venture wasn't easy to pull off. "Lee Iacocca (then head of Chrysler Corp.) had filed a lawsuit against it, and there were plenty of skeptics who wondered publicly if it could work at all, or if it did, how long it would last," Cuneo adds.

What's more, a leading business magazine ran a major feature article that was highly critical of the Fremont plant's workforce. Says Cuneo, "The article claimed the plant was employing blacks from the ghetto, rednecks, leftists militants from the Berkeley street scene, and Chicanos from the local bars."

In fact, the former GM plant on the site had been shut down by the company partly because of labor troubles. Cuneo adds that the United Auto Workers headquarters earlier had revoked the charter of the local union because workers in the former GM plant had refused to toe the line. "It's pretty bad when GM has to shut a plant down," he says.

Determined to overcome not only the outside opposition but also the business hurdles they had to confront, GM and Toyota invested heavily in the new venture to take the grand concept from the drawing board to producing automobiles using TPS and American workers. Some 450 group leaders and team leaders traveled to Toyota's Takaoka, Japan, plant for three weeks of on-the-job and classroom training, the same training that now takes place at NUMMI.

If there was a key to NUMMI's early success, it was the commitment from senior executives at both companies. "A.G. Toyota and Roger Smith (former GM chairman) were determined to move the venture forward," Cuneo says. Since the plant would be building vehicles based on the TPS, Toyota was given full day-to-day control over the operation of the plant.

The first Chevrolet Novas rolled off the Fremont assembly line in December, 1984. At the same time, the plant began producing the Toyota Corolla FX. Today, nearly 6,000 workers build GM's Pontiac Vibe cars as well as Toyota cars and pickup trucks at the sprawling Fremont facility that sits alongside Interstate 880 on the eastern shore of San Francisco Bay. Last year the plant produced 311,000 Toyota vehicles and 69,000 GM vehicles.

Ironically, both Ford and Chrysler today have engaged in collaborative arrangements with competitors, most notably each in separate product development efforts with GM. Ford has the six-speed transmission project with GM, and DaimlerChrysler is working with GM on the new hybrid engine.

And the trend seems certain to grow. Most manufacturers that are collaborating with a competitor say it's likely they will do more teaming with the competition in the future. "Collaboration with competitors, not only at Matsushita but in the electronics industry overall, is expected to increase as a way to minimize risk as it relates to development costs and efficiencies," says a spokesman at Matsushita Electric Industrial Co. Ltd.

Best known for its Panasonic brand, the Osaka, Japan-based electronics giant in February announced a plan to join forces with competitor Hitachi Ltd., based in Tokyo, to develop and expand the worldwide market for plasma TVs. The joint agreement covers a broad spectrum of activities surrounding the technology for color plasma display panels (PDPs), including development, production, marketing and intellectual property. Working with the competition isn't new for Matsushita -- the company has teamed with Hewlett-Packard, NEC, Toshiba and Hitachi in the past.

There may be downsides to working with a competitor, both in terms of the perceived innovativeness of one's brand as well as a possible erosion of expertise. "What gets lost is expertise, particularly when the collaboration leads to some reduction of staff," Champy notes. "With fewer engineers needed to design new engines, when there is an opportunity down the road to invest in a whole new engine, these players could lose some of their expertise."

Some suggest manufacturers that partner with competitors take care to guard the creativity of their organization. "One way you differentiate yourself in the market is the ability to innovate," says Delphi Group's Koulopoulos. "Companies ultimately want to be known as innovators, such as the preferred brand for innovation or quality."

When competitors collaborate, Koulopoulos concludes, "The branding issue is the real demon in the woodworks."

In other words, it's OK for manufacturers to sidle up to one another now and then when they have shared interests. But they'd be wise to draw the line when it comes to exchanging corporate DNA.

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