ARE THE wheels coming off the luxury German charabanc? For a long time as closely identified with quality as sauerkraut was with wurst, the exclusive image of German cars is taking a battering in the area it can least afford.
* DaimlerChrysler recently admitted that quality problems at Mercedes had kicked a hole in group profits this year and would do so again in 2005. The three-pointed star has tumbled from top of the influential JD Power US reliability rankings to 28th in a decade.
* Volkswagen, once a byword for reliability, has sunk to 33rd in JD Power. The VW division, with fleets of unsold cars, is in ‘a clear loss situation’ and faces labour unrest at home as it seeks to slash costs by a third.
* Uber-aspirational BMW, too, is not immune to quality woes. ‘If only everything in life was as reliable as… a Japanese car,’ quipped the Which? headline on its annual reliability report in August, noting that the Munich firm and Audi had joined VW among the least reliable makes.
* Even Porsche, the best-placed German marque, was only average in the Which? ratings, while in another hefty dent to German bodywork, the VW Polo, the old-model Mercedes E-class and super-trendy Audi TT had the worst record of all new cars for breakdowns in the first two years.
The common quality dip in German cars is no coincidence – and it may be serious. ‘It’s attacking the German manufacturers at the core of their brand and business model,’ says Mike Sweeney, professor of operations management at Cranfield Management School. ‘It’s a real challenge.’
The Germans face not one but two testing issues. The first is how to manufacture increasingly complex and sophisticated products. Traditional vertically integrated operations – doing everything in-house – have served German firms well in the past but are increasingly difficult to do cost-effectively as complexity outstrips even the capabilities of a legendarily well-trained workforce. So firms are outsourcing sub-assembly to ‘prime suppliers’, which instead of delivering individual parts now send whole modules – a complete power-train, for example – to the production line.
For the final assembler, says Sweeney, modular build has the advantages of simplifying production, shifting responsibility for managing the supply chain to first-tier vendors, and dramatically reducing investment needed in its own plant and equipment.
In the long term, it should yield substantial cost and quality gains. In the short term, however, there are big transition problems as suppliers grapple with unfamiliar tasks of managing global supply chains and advanced manufacture, while final assemblers come to terms with concomitant loss of control. ‘There’s a big decision to make now,’ notes Sweeney. ‘Do they go in and sort things out or wait for the suppliers to get it together?’
But systems engineering is only part of the problem. Anxious to underline their reputation for cutting-edge technology, German manufacturers have eagerly embraced electronics in everything from engine management to navigation. But if integrating and managing mechanical systems is difficult enough, in electronics it is a nightmare.
‘Of course, technology is part of their marketing strategy,’ says Dan Jones, co-author of The Machine That Changed The World and chairman of the Lean Enterprise Academy. ‘But they went beyond the capability of the electronics they were using. There are some red faces at the likes of Bosch – the systems were just not robust enough for the auto environment.’
To get the reliability ratings back on track, German carmakers are now hastily backtracking on electronics. But having built their reputations on advanced technology, will they continue to be in a position to demand today’s high prices after the debacle?
This links to a third question. ‘There’s a big debate in Germany about diesel,’ notes Jones. ‘While they’ve been concentrating on diesel, everyone else is looking at hybrids’ – notably Toyota, whose second-generation electricity and petrol-powered car, the Prius, is well ahead of the competition. Hybrid, says Jones, promises ‘guilt-free motoring’, an especially alluring message in the US, land of gas-guzzling SUVs and pickups. Toyota’s next hybrid is a top-of-the-line SUV Porsche has adopted the technology for its Cayenne.
Until now, with a few niche exceptions, German carmakers have hogged the autobahn with high-tech, high-margin cars. But this may be changing. Thomas Bayne, chairman of ad agency Mountain View, who has worked with several motor industry clients, points out that competition is much greater at the top end of the market than it used to be. With cars in oversupply, the real issue now is differentiation, he believes, not quality as such – witness the Mini and Audi TT, both of which have become cult cars despite reliability ratings that would have taken less sexy designs straight off the road.
In this context, he speculates that the problem for firms like Mercedes and Volkswagen may be a loss of status and desire: ‘the badge may not mean what it used to’. In which case, better quality is not the answer. As for BMW, having introduced an entry-level 1-series, how far can it stretch the brand in search of volume without destroying the aspirational qualities that drove its success?
German manufacturers can thank their stars that they currently face little threat from the cash-strapped US Big Two: both Ford and GM lost money on cars last year, and some observers think Chapter 11 is a possibility for at least one of them.
But that still leaves the juggernaut bearing down on everyone: Toyota. The Japanese firm, which announced its own results last week, has money to burn, in the last half year overcoming tough conditions to record an operating profit of $8bn. Up until now, the company has been thought of as a cautious copier rather than high-tech innovator. But with its superior engine technology, its upmarket Lexus marque adding style to its formidable build quality and its adoption of electronics to add to its peerless manufacturing prowess, it is now poised to offer a serious challenge in the luxury sector. Toyota’s next-generation cars will be simpler, smaller, smarter, cutting out a new layer of cost as well – the opposite of the German approach. Roll over, Beethoven?
The Observer, 7 November 2004