Business Model Created for Chrysler

The U-car, An Open Sourced Brand

By: Eric Li, Manish Mishra, Cameron Keener

UNC Kenan-Flagler Business School

Step 1: Landscape and Assessment Chrysler LLC, and Problem it’s facing Chrysler LLC today offers several brands of vehicles: Chrysler, Dodge and Jeep.

In 2008 Consumer Reports Car Reliability survey, Chrysler’s car was the worst

among all car makers. Roughly two-thirds of its products rated below average on

reliability.1 Additionally, among the six top selling brands in the US, Chrysler’s

2007 lineup was the worst in fuel economy. As a result, Chrysler was especially

vulnerable as oil prices skyrocketed to $140 per barrel during 2008, which fueled

the ensuing economic recession, thus Chrysler sales were hit especially hard

(See exhibit 1 for Chrysler yearly sales). As 2008 sales dropped by 30%2

compared to the previous year, Chrysler was forced to shut down all of its North

American production by the end of 2008.3 “Detroit’s Big Three,” GM, Ford and

Chrysler, went to US government and asked for $34B bailout to prevent

bankruptcy in December of 2008. Although Chrysler obtained $4B4 in

governmental loans, it is still the in the worst financial shape among the “Detroit

Big Three.”

Industry-wide Problem across value chain For Chrysler and other US automakers, high quality R&D and labor are low value

resources, not capabilities. The big three’s labor force is highly unionized which

has reduced the auto manufacturer’s competencies. Employers such as GM and

Chrysler, which dominated by United Auto Workers, have to pay their workers at

average rate $74/hr, compared to $44/hr for Toyota.5 Chrysler’s R&D is in-

house and 100% based in the US, and thus is just not competitive enough to

compete globally with European and Japanese automakers. Chrysler is not

alone in the industry-wide problem; the entire US automotive industry lacks

efficiency along its value chain, and the supply chains are in trouble as well.

Following Delphi and Plastech, many car part suppliers such as Visteon may

face bankruptcy.6 Their distribution and sales through dealers are too costly, and

don’t provide customers with a haggle-free buying experience. Typically, dealers

2

make 30% of the gross profit/incentives of MSRP, and protected by state laws,

which state that all new cars7 have to be sold through dealers in all 50 states.

Step 2: Configure Value and Make Identify Choices

Build-to-Order using the Internet Most car manufacturers, including Chrysler, use web sites as marketing and

advertising tools; however, they don’t fully utilize the internet’s capability to

capture value or create value for customers. Most web sites show the latest

model, specs, and features for their product lineup, which is not much different

from TV ads. Although most web sites allow customers to choose packages and

order cars from the web site, the choices offered and configurability are very

limited, and customers are forced to purchase through local dealers. Thus, local

dealers actually complete the sales transaction in this model. Scion, a sub-brand

of Toyota targeting Y-generation customers, has a web site that allows

customers to “build your own Scion” (See exhibit 2). While the web site is

perhaps the most advanced in configurability, it’s still far behind Dell’s BTO

model in electronics industry. Scion ships “bare bone cars” from Japan, but most

of the options are configured by the dealers.8 Without re-configuring the whole

value chain to operate within a new business model, BTO for car industry is just

not possible.

Open Source Design – A trend in many industries Many industries have already adopted an open sourced business model for their

R&D and supply chains, but the car industry is yet to embrace it. Several non-

profit organizations are pushing for it including Open Source Green Vehicle

(OSGV)9 in the US and OSCar10 in Germany, but none of them has been able to

build a business models to capture value. BMW recently tried to develop an

open source platform11 but limited the scope to electronics.

3

Plug-in Hybrids – Totally Different Combinations of Technology BYD, A Chinese based car manufacture is going to launch its plug-in hybrid

vehicle in the US in 2009.12 The electric powered car is based on a different

technology that has the potential to totally disrupt the traditional car industry. The

core technology of electric car is the battery, which doesn’t require a

transmission and other complex mechanical equipment, thus an electric car

would be much less complicated to design with fewer parts to manufacture.

BYD analogizes the simplicity of electric cars vs. complexities of traditional gas-

powered cars to digital watches vs. Swiss mechanical watches. While US

consumers currently regard Chinese imports as inferior in both quality and safety,

US car makers should pay attention to this trend and potential value shift, which

could further exacerbate the already unstable auto business.

Identity Shifts – External and Internal Chrysler’s subsidiary GEM (Global Electric Motorcars) already owns an electric

car technology, and Chrysler is in the process of launching ENVI, its hybrid and

plug-in electric product line.13 The challenge for Chrysler is getting its customer-

base’s identity to shift from “gas guzzlers” to “eco-friendly” models. Not only

does this shift require major restructuring of Chrysler’s value chains, supply chain,

and dealer’s distribution channel, it also requires internal identity shifts, which

may be an even greater challenge. We list out innovation cube check list on

Exhibit 3.

4

Step 3A: Define Business Model and Required Resources

Modular Platform Leveraging its subsidiary GEM, Chrysler should refocus some of its resources

toward establishing an electric car platform based upon standardized modules

that can be open-sourced from any supplier. As electric cars tend to have less

complexity in their design, suppliers could specialize in creating building block

modules that could potentially be interchanged between different vehicles as well

as across other automobile brands. Exhibit 4 and Exhibit 5 shows and example

of major building blocks for an Open Source vehicle “Kernel”. The precedent for

successful open sourced design has been established in both the IBM PC and

currently with Apple’s IPhone. Suppliers and programmers tend to gravitate to

an open-sourced design as they are able to easily integrate their products into its

modular platform. The key factor for success will be for Chrysler to retain

ownership of the most critical IP (perhaps the battery or software that allows for

the integration of the modules), as Apple has done with its IPhone, and open

everything else, which should increase scale and drive down costs.

Supply Chain Management In addition to creating an open-sourced platform, Chrysler will also need to open-

source its supply chain. While Chrysler should form strategic partnerships with

its key suppliers, perhaps BYD, it also needs to be flexible enough to integrate

the most innovative designs into its platform. Because electric cars are less

complex and require less maintenance than gasoline powered vehicles, there

should be less inventory to manage (supplier to dealer), and the integration of

modular components should be less complicated, thus the huge fixed costs

currently required for automobile manufacturing may be dramatically reduced.

Dealers’ roles of managing FGI, Sales, and Service may also shift to a role of

customization and light integration. Customers could customize their electric car

via Chrysler’s web site or through kiosks at the local dealer. Thus, the dealer

5

would continue to play a role in the sale of the vehicle but be entitled to a smaller

incentive due to providing less added value. The reduced manufacturing

overhead, parts inventory, FGI, and dealer incentives should decrease the cost

of the car to consumers and thus increase demand. Furthermore, it would be

difficult for competitors (even Toyota) to respond by restructuring their business

models, as the have heavily invested in their own supply chains.

Innovation through Open Design Because electric cars present a significant identity shift for Chrysler, it should

attempt to connect with consumers by allowing for their input into the design

process, which would not only help to foster innovation, but also attract new

customers as well as excite existing customers. Instead of developing new

concepts in secrecy through its own R&D, Chrysler could open up its prototypes

to consumers and incorporate their feedback into the design process in much the

same way as Google releases “Beta” version software. To make this possible,

Chrysler would have to expand upon its current web site functionality and provide

users with collaboration tools, chat rooms, perhaps even design software that

would allow users to provide their input. Designers could then take the best ideas

and adapt them into the prototype. The approach could change the relationship

of customers to the brand and that would change the brand itself into a

collaborative community car – “the U-Car.” “[Consumers] will start Facebook

groups, blogs, and Meetup clubs extolling the wonders of the cars they choose.

Outside product designers and manufacturers will accessorize and improve the

open-source car—just like outside developers have created thousands of

software applications for the iPhone—which will support new businesses and

help sell more cars. There is the advantage to being a platform as Google is a

platform.”14

6

Step 3B: Target Resource Base for Capabilities

Human Capital Blue Print:

1. Coordinate with several universities around the world to nurture and capture talent early on.

2. These departments of engineering will be the test lab to fine tune many aspects of the open car.

3. A culture of rewarding and attracting innovators will turn the virtuous cycle in Chrysler’s favor.

4. Engineers who could not be part of Chrysler can innovate on their own, much like the programmers world wide who contribute towards the application of Ipod or apps at Google.

5. Virtually anyone around the globe can be part of this production without physically being a part of the company.

Sourcing Blueprint: 1. Just like Ipod, the features of the car are

endless. 2. It need not be developed by Chrysler alone,

the open source model encourages anyone and everyone to add their own version of functionality.

3. The vital parts of the car will be self sourced ( the core engine, piston etc.)

4. Just like dealers, there will be vendors who will co source the functionalities of the car.

5. Since the car is open source, practically any manufacturer can take advantage, thus Chrysler will be able to set the reference point and derive a set of standards, just like IBM computers.

Branded Experience Blue Print: 1. Well known brand, new car rectifies the image

of gas guzzler cars. 2. Customizable car provides infinite probabilities,

generates excitement among the youth and early adapters.

3. With sleek website, the car knowledge and capabilities will be taken to people –“it is your car, make it the way you want it to be...”

4. Empowered customers – people’s car. 5. Serves global population, can source “your

component” from anywhere around the world. 6. Create marketing campaigns to alter the

Chrysler brand perception and project it as a company that is eager to turn the tables and start fresh with fresh ideas.

Technology Blueprint: 1. The car will be open source that means the

structure of the car will be extremely modular.

2. These modular components of the car can be developed by anyone , need not be part of Chrysler at all.

3. However there will be strict quality standards that all sourcing partners will have to pass through.

4. The modular components will be based on a open source architecture which will prompt other manufacturers to leverage the architecture. A collaborative atmosphere of manufacturing will provide breeding ground for new innovation routinely.

5. Chrysler being the first mover in the space will be able to establish the standards in its own favor.

Financial Blue Print:

1. The open source car can reduce inventory because it is based on real time demand.

Physical Blueprint:

1. The components being modular can be manufactured anywhere depending on the

7

2. Less inventory means better asset turnaround ration and hence better ROE ( Dupont model )

3. A portion of assembling accessories is left for independent vendors; this reduces fixed cost and helps in attaining lean manufacturing much like Toyota.

4. Own less physical asset and yet promise customer whatever they want ( you can get it yourself ) , minimizes risk through make or order

5. Can focus on optimizing operational process to reduce cost like never before.

economics of the production, transportation and availability of resources.

2. The open source model will give Chrysler the advantage to co-source the components with anyone in the world without investing in setting up of the infrastructure.

3. The standardized chassis and its core components will help anyone to produce its own version of car.

4. Chrysler will thus be the provider of the medium and not necessarily every integral part of the car. This distributed architecture much like the distributed computing will empower customers and reduce fixed cost.

GAP ANALYSIS

1. The most important GAP with the business model is that of availability of a large pool of professional who will create their own version of components for the car. In case of Apple or Google there is a vast pool of programmers who can build their own applications based on the architecture of the base product. In the short run, there will not be any such pool because there is no precedence of anything as an open source car!

2. The above GAP can be balanced by investment in Human Capital by collaborating with Universities around the world. Chrysler can open departments of excellence within the Engineering departments around the globe to jumpstart the concept. These engineers will start with their own setup with the help of Chrysler and in the long run the model will propagate on its own, provided the demand is sustained.

3. There will be substantial upfront cost to come up with the new technology and create an open source car. This huge upfront cost however can be balanced by substantial cost savings Chrysler will have due to distributed architecture. Financial blue print shows that fixed costs will reduce dramatically and this will mean positive NPV for the upfront investment.

4. One of the biggest gaps is the Chrysler brand perception. They are not known for smart cars or being innovative. Their recent economic woes have made them the laughing stock of the world. Any move towards dramatically altering the playing field will meet with wide skepticism. One can only hope that accurate marketing campaigns will provide thaw against the skepticism.

5. In a country of SUV lovers and big car enthusiasts the market for smart cars is yet to be established. However there is strong trend towards hybrid cars and success of Toyota’s Prius is testimonial to this effect. This smart car captures the imagination of many people and hence there is good chance that it will capture wallets as well.

8

Exhibit 1 Total American Sales for Chrysler LLC Calendar Year Sales 1999[43] 2,638,561 2000 2,522,695 2001[44] 2,273,208 2002[45] 2,205,446 2003 2,127,451 2004[46] 2,206,024 2005[47] 2,304,833 2006[48] 2,142,505 2007[49] 2,076,650 2008[50] 1,453,122 Chart from: Wikipedia

Exhibit 2 Build your own Scion web site

9

Exhibit 3 Innovation cube checklists for Chrysler today: (original)

Human Capital Blue Print: 1. Owns almost all the engineering. 2. Plan to merge with GM in 2009 3. Unionized labors under UAW 4. Dealer’s network – enforced by law to

distribute car through dealers.

Sourcing Blueprint: 1. Engineering and Design 2. Sourcing and Supply chain 3. Car sold through local dealers

Branded Experience Blue Print: 1. Chrysler, Dodge, Jeep. Performance brands, but

Gas guzzlers. Worst fuel economy among top 6.15 Tech1

2. Web site experience Physical 3 3. Customer buying experience through dealers

Technology Blueprint: 1. Powerful muscle cars and trucks 2. GEM, electric golf car and ENVI hybrid car 3. Web interface –Build your own car

Financial Blue Print: 1. 2007 private equity buyout. 2. 2009 Chrysler get $4B US government loan

Physical Blueprint: 1. North American assembly plants 16 2. All cars sold through dealers 3. Can “build your own” form web

Exhibit 4

10

Exhibit 5

Referneces: 1 Reliability –Consumer Reports http://www.consumerreports.org/cro/cars/used-cars/reliability/best-worst-in-car-reliability-1005/reliability-findings/reliability-findings.htm2 Chrysler 2008 sales http://news.prnewswire.com/DisplayReleaseContent.aspx?ACCT=104&STORY=/www/story/01-05-2009/0004949198&EDATE3 Big Threes ask for bail out http://money.cnn.com/2008/12/17/autos/chrysler_shutdown/index.htm4 Chrysler get $4B http://www.reuters.com/article/ousiv/idUSTRE50200820090103

5 http://www.nytimes.com/2008/11/18/business/economy/18sorkin.html?_r=4&sq=andrew%20ross%20sorkin%20auto%20workers%20$70&st=cse&scp=1&pagewanted=print6 Supplier Bankruptcy http://online.wsj.com/article/SB123293545935214449.html?mod=googlenews_wsj 7 Car dealers lobbying for law protection http://query.nytimes.com/gst/fullpage.html?res=9507E7DC163CF936A15752C0A9669C8B63&sec=&spon=&pagewa

nted=18 Scion’s BTO model: http://www.autonews.com/article/20080204/ANA04/802040312 9 Open Source Green Vehicle Project(OSGV) http://www.osgv.org/

11

10 http://www.theoscarproject.org/ 11 http://www.autonews.com/article/20081023/COPY/310239911/-1/SUPPLIERS 12 BYD http://online.wsj.com/article/SB123172034731572313.html13 Chrysler ENVI: https://www.chryslerllc.com/en/innovation/envi/overview/14 From the book by Jeff Jarvis What Would Google Do?15 http://www.hybridcars.com/news2/chrysler-hybrid-envi.html16 http://en.wikipedia.org/wiki/List_of_Chrysler_factories

12