This classification covers establishments primarily engaged in manufacturing electrical equipment for internal combustion engines. Important products of this industry include armatures, starting motors, alternators, and generators for automobiles and aircraft, and ignition apparatus for internal combustion engines, including spark plugs, magnetos, coils, and distributors.
336322 (Other Motor Vehicle Electrical and Electronic Equipment Manufacturing)
The electrical equipment market for internal combustion engines is divided into two categories: original equipment manufacturers (OEMs) and aftermarket. The OEM market consists of companies that produce engines or engine parts for placement in new vehicles. The after-market segment targets consumers, often do-it-yourselfers, who buy replacement parts for an existing engine. In 2001 the vehicle electrical and electronic equipment industry generated $20.5 billion in sales, representing the second year of sliding sales figures, which peaked at a record $23.0 billion in 1999.
Electronic parts and components met increasing consumer demand for safety, environmental, and convenience features. As electronic engine controls increased in sophistication, the dollar-value content of these systems in new vehicles continued to rise. In the midst of widespread industry consolidation by the auto parts manufacturers—incited by increased outsourcing from automobile manufacturers—the electrical parts sector shifted gradually into the market domain of the electronic industry.
A general restructuring of the auto sector occurred in the 1990s when the Big Three automakers—Ford, Chrysler, and General Motors—cut the number of suppliers they dealt with and concentrated their business on a select group of component manufacturers. Consolidation among the parts industry ensued. The Big Three also shed their noncore parts operations and purchased more parts assemblies from outside vendors, thereby avoiding the overhead costs for plant operations and materials necessary for in-house manufacture and assembly. There was also a movement toward standardization of parts across disparate car model lines, which presented the opportunity for parts manufacturers to diversify into design work in order to develop universal parts.
The aftermarket segment of the electrical auto parts business, devoted to replacement parts for used automobiles, presented a mixed picture as car owners kept their vehicles longer. The average age of cars on the road escalated to 8.9 years by the end of the 1990s, compared with 7.4 years in 1986, a circumstance that boosted sales of replacement parts. Some of the increase was offset, however, by the development of longer-lasting and better-made parts, which in turn decreased the need for replacements. Other offsets occurred due to the significant percentage of imported vehicles, since the share of the business for foreign vehicles remained relatively small. Additionally, the do-it-yourself (DIY) segment was tempered by consumer wariness of doing any work on the increasingly sophisticated electrical systems in new vehicles. In the face of these negatives, sales of items like spark plugs held up remarkably well throughout the 1990s. A push for increasingly tougher auto emission regulations and the resultant equipment necessary for compliance also augured well for the future.
The automotive electronics industry can essentially be divided into two parts: original equipment manufacturing (OEM) and the automotive aftermarket. OEM manufacturing is for new autos; the aftermarket is for used ones. In both segments, the manufacturers comprise the components groups or affiliates of the large automakers, and independent parts makers, which themselves may be divisions of much larger industrial entities. As Japanese companies took an increasing share of the U.S. market, Japanese-affiliated suppliers began to open local branches; by 1993, almost 300 such companies were located in the United States.
The application of electronic systems into automobiles evolved to increasing levels of sophistication since commercial production of the automobile began in the early 20th century. The first electric starter appeared on a 1912 model and, by the 1930s, six-volt electrical systems were standard. Electrical requirements grew as engines became larger and additional features—for example, radios and multi-speed windshield wipers—were added. By the late 1950s, 12-volt systems had replaced six-volt systems as a requirement. In the 1970s, electrical, or transistorized, ignition systems, which required less maintenance and were more reliable than mechanical breaker-point systems, were introduced.
The OEM parts industry entered a depression cycle in 1989, but revived in 1992 and continued strong into the mid-1990s. Tremendous financial pressure assailed the Big Three automakers during the early 1990s, and caused them to rethink their business practices. They gave their top suppliers greater responsibility for design and engineering in the process. In return for taking on these greater burdens, suppliers received long-range contracts—often for the life of a car model rather than for one to three years, as was formerly the common practice. According to one estimate, the number of auto parts makers in the United States fell from 3,000 to 2,000 during the years from 1983 to 1992. Yet the Big Three sought additional reduction in the proportion of auto parts that they manufactured themselves. In order to reduce further the number of suppliers they dealt with, automakers began awarding contracts for entire components or subassemblies to so-called Tier 1 suppliers. In 1994, General Motors spun off Delco Remy, its automotive engine parts subsidiary, to a group of investors headed by a former auto executive. Also in 1994, Chrysler sold a large portion of its Acustar parts-making subsidiary to Yamazaki of Japan, including eight plants in Mexico that made electrical wiring systems for cars and trucks.
Growth in demand for engine and drive-train electronics increased further in response to the mandates of the Clean Air Act. Other factors being equal, older cars—especially those with more than 100,000 miles—pollute more than new vehicles because exhaust gases become dirtier as spark timing and other factors begin to vary. Environmental regulations requiring ignition designers to build more efficient combustion systems led engineers to scrap the traditional rotor-based distributor and develop a distributorless, all-electronic ignition system (DIS). General Motors introduced the first DIS in 1984, and the systems gained popularity in the 1990s. Rather than distributors, DIS utilized small ignition coils for each spark plug; an ignition computer triggered each coil individually, using engine sensors to time the pulses correctly. DIS systems eliminated the small variations in spark timing that resulted from mechanical wear of the distributor. The DIS compensated for plug misfires by signaling corrections in the fuel-air mixture and in the microprocessor-controlled timing mechanism. While DIS eliminated the distributor, it added one coil for each pair of cylinders; the improved gas mileage and reduced exhaust emissions offset the expense of additional coils and semiconductors. Throughout the decade of the 1990s increasing numbers of new cars operated without distributors; analysts expected that number to rise steadily to 100 percent.
Aftermarket. In the aftermarket segment of the industry, business trends remained subject to a variety of influences. On the positive side, the number of cars on the road increased steadily; according to one estimate, in 1996 there were 101 million vehicles on American roads that were three to seven years old. Those were the cars on which most repairs were performed, and because fuel prices generally remained low, the number of miles driven increased dramatically. Additionally, by 1996, all new vehicles had to meet On-Board Diagnostics Series II emission rules (OBD II), and compliance often required additional equipment or repairs. Finally, sales in the key spark plugs segment rose to $806.0 million in 1995, which was $66.0 million higher than in 1994 and a $105.0 million than in 1993.
Counterfeiting of parts posed a challenge for the aftermarket industry in the 1980s. General Motors contended that it and its suppliers were losing $1.2 billion annually to counterfeits; among the parts most copied were electronic ignition modules. Although Congress attempted to deal with the problem in 1984 by passing the Trademark Counterfeiting Act, the counterfeiting business continued to thrive. In 1993, the Federal Trade Commission estimated that auto parts counterfeiting was a $3-billion-a-year business in the United States.
Estimates of the dollar volume of electronic engine systems are difficult to evaluate, since they can be calculated in several different ways. As Derrick Kuzak, Ford Motor's director of electric/electronics systems engineering, told Purchasing, "Rather than having a number of stand-alone modules—like processors—that are controlling individual features of a car, there is a trend toward functional integration with more control in fewer, larger modules." At the threshold of the twenty-first century, the automotive electronic parts industry totaled $54.4 billion in North America, Japan, and Europe combined, with increasing emphasis on electronic systems. According to interpolations of a survey performed by Ward's Auto World, the per vehicle total of engine electronics by the year 2000 was forecast at $720-900—based on 6 percent per year growth rate in electronics content per vehicle between 1994 and 2000, with 40-50 percent of electronics devoted to engine and drive-train applications.
Consolidation. An ongoing outsourcing of component manufacturing functions bridged from the 1990s and into the twenty-first century. According to a report in Economist, by mid-1998 only 4,060 auto part suppliers survived worldwide, a dramatic decrease from 30,000 suppliers 10 years earlier. Economist quoted International Business development consultant Donna Parolini saying that as few as 26 global firms might survive the first decade of the twenty-first century. Indeed, U.S. carmakers decreased their relationships with suppliers by an estimated 80 percent in the late 1990s. Ford Motor Company, in its North American operations alone, reduced its supplier count from 2,400 in 1980 to 1,400 in 1993, with projections for a continued decrease to 1,000 suppliers by the year 2000. Tier 1 companies gained the added responsibility of dealing with smaller sub-contractors that had previously provided goods and services directly to the automakers. As smaller suppliers closed shop, larger suppliers grew and expanded into new functional arenas. Some parts makers huddled in negotiations to purchase design firms, in order to increase their functionality potential in the outsourcing industry. At least one parts maker, Valmet of Finland, produced completely assembled vehicles by 1998.
The consolidation movement led automakers to embrace greater standardization of parts and components across model lines. Rather than customizing each component for a specific car or truck, auto manufacturers accepted common designs for a variety of models. Hidden "under the hood," electronics assemblies did not serve to distinguish one car model from another in the perception of the consumer, making electrical components readily adaptable to standardization. Suppliers might amortize research and development costs and expenses connected to tooling over larger volumes, and might also reduce inventory levels of the wide variety of low-volume parts. Japanese automakers, Toyota and Nissan in particular, initiated this consolidation trend. By 1998 each had outsourced a reported 75 percent of engineering functions.
Emissions Control. The legislative environment of the 1990s proved a boon to replacement part companies, since tougher emission standards related to the Clean Air Act of 1990 and other environmental legislation increased consumer demand for aftermarket parts. Efforts by several states to enhance their emission inspection programs were expected to contribute to improved vehicle-maintenance practices. The Environmental Protection Agency estimated that the 20 percent of all vehicles that fail emission tests are responsible for some 60 percent of all toxic emissions. The cost of bringing those vehicles up to prescribed standards was estimated to run into billions of dollars, much of which flowed to parts companies.
Some technological advances, in contrast, affected the aftermarket sector adversely because parts and components were built with extended life-expectancies—electronically driven systems in particular proved to be very reliable and consequently needed less maintenance. Just as the introduction of electronic ignition systems erased demand for points and condensers, the advent of the distributorless ignition system (DIS) resulted in a shrinking market for distributor caps and rotors. The introduction of the emission-reducing catalytic converter also tended to prolong the life of spark plugs because of its requirement of unleaded fuel. By 1997, spark plugs that could last 100,000 miles were commonplace.
In addition, small, four-cylinder engines, which require fewer plugs than their six- and eight-cylinder counterparts, became more prevalent. Likewise the compact engine departments of many newer vehicles tended to discourage plug changing, which some contend now require the abilities of a contortionist. New technologies superannuated much traditional auto maintenance: few cars needed such items as breaker points, and the annual tune-up became a relic of the past. The number of service stations declined, and there were fewer outlets performing preventive maintenance. For some engine parts, quality had so improved that, barring an automobile accident, they would never be replaced during the auto's lifetime.
The incursion of foreign cars into the U.S. auto market also had a negative impact on U.S. parts makers in the aftermarket. Some professional installers and do-it-yourselfers working on import vehicles continued to feel that, at least in certain applications, it was better to use original equipment version (OEV) products than the aftermarket offerings of U.S. parts manufacturers. In addition, some potential DIYers were reluctant to work on their imported vehicles and opted instead to bring their cars to dealer service departments that used OEV parts. Some observers also commented that, as in other consumer products, brand loyalty was declining among many auto owners who were more concerned with buying quality parts at a competitive price. Despite these limitations, however, since the early 1980s—when sales for imported vehicles accounted for only 1 percent of revenue—domestic parts-makers have made important strides in supplying the import aftermarket.
In the aftermath of the terrorist attacks of September 11, 2001, the auto industry's Big Three (Ford, General Motors, and DaimlerChrysler) helped jump-start auto sales by promoting zero-percent financing options. As a result, despite a stagnant overall economy, U.S. auto sales totaled 16.8 million units during 2002. Although this reflects a 2-percent decrease from 2001 (17.2 million units) and a 4-percent decrease from 2000 (a record 17.4 million units), in the face of serious questions regarding the health of the U.S. economy, auto sales were touted as a bright spot on the otherwise dismal fiscal landscape.
Profit margins are running razor thin in the automotive industry, and automakers are working hard to turn a profit on sheer volume alone. As such, automakers are pressuring OEM suppliers to keep prices down. Yet, while under tremendous price pressure, OEM suppliers have faced increased materials costs and are running on margins that are equally thin, if not transparent. Whereas big-name players such as Delphi can run the numbers game, smaller dealers will be quickly victimized by any downturn in auto sales, which is expected to occur by the end of 2003 due to saturated demand and a continuing weak economy. OEM suppliers are looking to efficiency and cost-cutting to generate income.
The aftermarket sector market continues to struggle with the increasing complexity of automobile engines, which scares do-it-yourselfers away from self-maintenance. Although motor repair and maintenance has advanced beyond the skills of most drivers, the do-it-for-me (DIFM) market is increasing in popularity. James E. Guyette noted in Aftermarket Business, "Because of the increased complexity of repair, the more difficult—and more expensive—repairs are becoming more of the exclusive domain of the DIFM segment, a trend expected to continue."
In a highly anticipated move in February of 1999 General Motors Corporation spun off its Delphi Automotive Systems parts manufacturing business, with an initial public offering (IPO) of 100 million shares. Delphi Corporation, a subsidiary of General Motors for 90 years prior to the IPO, ranked immediately as the largest independent maker of auto parts worldwide, with sales of $27.4 billion in 2002. Also prominent were Dana, with $9.6 billion in sales in 2002, and TRW Automotive Incorporated, which reported $10.1 billion in 2002 revenues. TRW's revenues were boosted by the purchase of Lucas Varity PLC (of Britain) for $7.0 billion in 1999. The Delphi IPO in fact sparked merger and acquisition negotiations throughout the industry as parts manufacturers rushed to compete.
At the beginning of the 2000s, pay levels in auto parts manufacturing varied widely for basically the same type of work. Wage disparities were attributed primarily to the union contract factor. In unionized plants employees earned approximately $50,000 per year—approximately double the earnings of non-union workers.
In 1999 the United Auto Workers (UAW) Union estimated that the unionization rate at parts manufacturing plants had declined from 20 percent to 10 percent over a three-year period beginning in 1996, and that the overall auto parts industry employed 400,000 nonunionized workers. The growth of spin-off parts companies, many of which were previously owned by one of the Big Three automakers, contributed significantly to the size of the non-unionized population among auto workers. Union leaders, apprehensive of wage erosion among the union ranks, increased recruiting efforts at non-union establishments and further initiated negotiations for nonunionized parts workers to receive wages equivalent to unionized employees of the Big Three car makers. In the spring of 1999 the UAW openly approached the Big Three for cooperation in pressuring suppliers to cease opposition to union activity at parts assembly and manufacturing plants. The UAW' appeal to the big carmakers met with limited success, as many complex issues remained to be resolved into the year 2000.
In 2001, the industry employed 94,812 people. Of this total, nearly 69,737 were production workers who earned an average hourly wage of $18.18.
The OEM segment benefited from a steady shift of production from Japan to the United States during the 1990s. For many years, U.S. parts makers struggled unsuccessfully to sell their products to Japanese-based automakers producing in the United States. Because of trade friction, many Japanese companies promised to increase their buys of U.S. parts substantially. The U.S. trade deficit with Japan in the overall auto sector was more than $60.0 billion in 1995, and auto parts accounted for perhaps $10.0 billion or more of the total. Nevertheless, there were signs that American manufacturers could expect increasing sales to North American assembly sites (although a more powerful dollar in 1997 made domestic sourcing less attractive). Increasing export sales to plants in Japan, however, was still expected to be a step-by-step battle.
Globalization of the auto parts industry accelerated into the twenty-first century. Trade relationships expanded between Mexico, Canada, and the United States as a result of the North American Free Trade Agreement (NAFTA), while new auto-producing nations emerged in Asia. That combination of circumstances, in the wake of ongoing consolidation, led to the increasing presence of Tier 1 suppliers at the international level, a growing presence that spurred competition among suppliers worldwide. The rapid consolidation of the parts industry overall, combined with the increased involvement of electronics firms—including an overwhelming majority of Japanese-based firms—afforded a critical edge to Japanese contenders in the parts arena. In that regard, the Japanese industrial model held relevance for all. Tim Moran, in an Automotive News commentary, extolled the need for all suppliers to streamline operations in order to compete. He cited the success of the Japanese model and noted Japan's "high art of lean production—namely Toyota Motor Corporation." According to Moran, "That automaker's Toyota Production System has become the largely unacknowledged inspiration for lean-manufacturing practices at … countless other producers."
Government regulations requiring reductions in auto emissions helped to drive trends in research and technology for the industry. The three government-regulated auto pollutants are hydrocarbon, carbon monoxide, and oxides of nitrogen exhaust emissions. The catalysts that break them down in the exhaust stream must have a carefully balanced chemistry to work properly. Essential to this process are electronically controlled fuel injection and ignition systems with feedback from various sensors. Research efforts in diesel engine electronics were undertaken in anticipation of updated federal and state emissions regulations scheduled for implementation in 2004. The innovative systems incorporated "brain box" technology, featuring electronic control modules (ECMs). ECMs afford centralized control of both fuel emissions and fuel consumption, and provide control of engine pressures and fluid levels as well. ECM technology affords greater fuel efficiency and lower maintenance, as well as reduced emission hazard. In the fall of 1999, Siemens Diesel Systems Technology L.L.C. embarked on a joint venture with Navistar International Transportation Corporation to manufacture components of the electronically controlled systems, with implementation scheduled for the year 2002.
Other developments in emissions controls included Motorola's MPC555 microcontroller chip. In 1999, researchers at Motorola earned for the company the Premier Automotive Suppliers' Contributions to Excellence (PACE) award for the chip, which contained 6.7 million transistorized switches and promised to provide optimized control of electronic emissions and powertrain systems. Later that same year, Hewlett-Packard introduced the TS-4500 Series II test platform for rapid diagnosis of ECM systems.
Siemens's Automotive developed the "Keyless Go" integrated circuit, featuring built-in Identification Friend or Foe (IFF) security encryption. IFF was designed to impede vehicle theft by disabling the engine ignition function in the absence of the chip carried on a key chain or elsewhere on the driver's person. Initial implementations of similar systems resulted in 82 percent theft reduction. The commercial release of programmable fingerprint-recognition technology for ignition security was the predicted follow-up to smart-key technology.
Also new for the twenty-first century was a programmable electronic sensor, developed by Ab Elektronik GmbH of Germany, which when located on a car's accelerator pedal simulated the function of a mechanical accelerator to control engine speed.
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