CPET 575 Management of Technology Technological Innovation Case I-1 Elio Engineering, Inc

Lecture Note & Summary by Professor Paul I-Hai Lin

Pages 13-31 of Text Book: Robert A. Burgelman, Clayton M. Christensen, and Steven C. Wheelwright, Strategic Management of Technology and Innovation, 5th edition, McGrawHill, 2009.
Case I-1 Elio Engineering Inc. 1

Outline

Origin of Elio Engineering Seat Mechanism Technologies Industry and Regulatory Environment Technological Barriers and Risks Capabilities Requirements for Players in Automotive Seats and Comparative Company Profiles Decision Time

Case I-1 Elio Engineering Inc.

Origin of Elio Engineering

Paul Elio

Hari Saknkara

Technical Capabilities JCI Benchmarking Department JCI Structural Design and Analysis Department 1996 -1998
A patent: revolutionary bike design Failed venture

Technical Capabilities: 1988 1997, JCIs Structural Design & Analysis Department MBA training 1998 Summer Intern at Booz Allen Hamilton, a management consulting firm

Feb. 1998
A new seat design No Compromise

Feb. 1999

Case I-1 Elio Engineering Inc.

Origin of Elio Engineering

1998 First venture meeting: Paul & Hari, at Venice, CA Agenda
ABTS (All-Belts-To-Seat) Announcement & comments

A cost effective new seat design - a special class of ABTS Utilizing new technology Resulting structure: Low cost, Light weight, Strong

Features

Potential: penetration of all segments of auto market

Case I-1 Elio Engineering Inc.

Origin of Elio Engineering

1998 - Follow up activities

Partnership arrangement New product design

Funding: further R&D, computer & simulation software Product Design Methodology: Build-and-Test approach Intermediate Outcomes: Prototypes, simulation results

First business adventure

Show the concept (set invention) to automotive seat industry Fair value of the new design & concept No patent protection

Second try
Bostrom Seating, a seat supplier for the heavy truck and bus industry Concluded an option agreement to prototype and test their NC seat
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Origin of Elio Engineering

Nov. 1998: New product development at Bostrom Seating

The Elio team based at Bostrom Seating Packaging & developing the seat Received a letter of intent with respect to licensing agreement (would follow successful prototype testing) Stipulated testing requirements (in the option agreement) 130 percent of FMVSS loads (Federal Motor Vehicle Safety Standard)

Early 1999
Support 3 full-time engineers an advance against future royalties Prototype assistance from Bostrom Seating

Feb 1999
Prototype tests promising OEM customers response favorable A licensing deal - based on the prototype performance
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Origin of Elio Engineering

March 1999
Bostrom Seating plan to unveil the NC seat at the March 1999 Trade Show at Louisville, KY Elio team run into a few design-engineering challenges Bostrom plan for bring new product to the market Time: Intended to ramp up production very soon

U.S. Market
Market segment: U.S. truck market Market size: 500,000 units Market share: 50 percent Elio royalties: 2 to 5 percent on sales in the truck industry

European Market (no presence), Asian Market? Paul Elio Vision

Bring the seat to the entire automotive industry Potentially saving millions of lives around the world If Bostrom Seating would be the right partner?
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Origin of Elio Engineering

Feb. 1999 - Paul Elio Vision Bring the seat to the entire automotive industry Potentially saving millions of lives around the world If Bostrom Seating would be the right partner?

Case I-1 Elio Engineering Inc.

Seat Mechanism Technologies

Existing Seat Technologies

Typical conventional front seat (~$500 to OEM) A complete seat system two front and one back row (~$2,500 to OEM) ABTS seat cost?

Conventional Car Front Seat Technology

Seat Mechanism (~60 percent of total cost) Exhibit 1 Seat Mechanism: Seat Track (Adjuster), Seat Structure (recliner) Manual or electric motor adjustment control Seat belt (shoulder belt) Exhibit 2 Seat System: Seat structure, track, suspension, trim, and foam No major breakthroughs; Incremental innovations NHTSA (National Highway Traffic Safety Administration) Safety standard - crash loads specification Major benefits: inexpensive components and materials, lightweight, matured technology, easy to manufacture and assembly Case I-1 Elio Engineering Inc.

Seat Mechanism Technologies

All-Belt-to-Seat (ABTS) Seat Mechanisms ABTS development attempts

Major industry players during 1984 -1999: Johnson Controls, Lear, and Magna Exhibit 3: ABTS Seat Frame and ABTS Seat System

ABTS advantages over conventional seats

Ease of use Higher comfort level More attractive appearance Better maneuverability Potential safer (seat belt hugs the occupant in the event of rear collision)

Current ABTS technology

Use the same recliner & track concepts 10 Case I-1 Elio Engineering Inc. Need a must stronger seat structure to meet safety standard

Seat Mechanism Technologies

Current ABTS technology

Use the same recliner & track concepts Need a much stronger seat structure to meet safety standard Weight twice as heavy as a conventional seat Cost: Average $750 to OEM About 1.5 times higher

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Seat Mechanism Technologies

Elio Engineering ABTS Technology A new state-or-art technology
Broadly patented mechanism based on cable and drum elements as opposed to gears Major technological breakthrough

A new load-leveling recliner mechanism with a high strengthto-weight ratio to ensure that the seat does not fracture or buckle at the failure level When the force diminished, the seat structure is still fully functional Stronger, Lighter, and Cheaper Does not permit catastrophic failure

Key benefits:

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Seat Mechanism Technologies

Elio Engineering ABTS Technology Other Innovative design features & improvements
Use fewer and lighter parts (single-sided recliner): as light as a conventional seat Improved comfort and ease of use Infinitely adjustable both for manual and electric seats Minimizing buzz, squeak, and rattle problems Seat-belt retractor (the component containing the belt pool) Located at the bottom of the back frame Reduce load-carrying requirements of the back frame by 20%

Ease of Manufacturing
Easy to assemble Does not require expensive high-tolerance parts
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Industry and Regulatory Environment: Customer

Ultimate user of the technology buyers of a new (or used) car Decision maker -OEM customers of seat system suppliers, need to fit
The body of a particular car model Part of the total interior design: door panel, instrument panel, console, and headliner

The OEM provides the suppliers with

Specifications type, structure size, and styling Other spec. factors: demographic parameters, needs, and/or lifestyles for matching cars interior

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Industry and Regulatory Environment: Customer

The OEM market

Highly concentrated, and buyer power is enormous Able squeeze the operating margins of major U.S. seat system suppliers (ten multibillion dollar companies) down to 2 to 5 percent Exhibit 4 U.S. 1998 Light Vehicle Market Share Total U.S. sales: ~ 15 million units Big three U.S. automakers: Ford (25%), GM (29.1%), and Daimler Chrysler (16.2%) Prefer multiple sources of seat technologies and systems Often dictate seat technology, components, or systems

OEM In-house seat system

Design & manufacturing some high-end seats

Supplier selection criteria

Safety, cost, reliability, comfort and ease of use
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Industry and Regulatory Environment: Customer

Elio Engineerings Concerns

Recognize unfavorable bargaining position for seat supplier Important consideration - not to release exact cost info to OEMs Can be easily be reversed engineered

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Industry and Regulatory Environment

Potential Market Size for Elio ABTS Seat Technology Current ABTS seats market
Limited only to high-end market segments of the passenger car market (high cost) Luxury segment brands unit sales of 2.16 million in 1997; 15% of total U.S. light vehicle market OEMs awareness of ABTSs benefits and strong latent demand for the technology; improving peoples safety Exhibit 7 European 1997 Market Share in Automotive Seats Total European Revenues: ~$7.5 billions: Johnson Controls 27.3%, Lear Corp & Keiper 24.6% Exhibit 8 U.S. Seat Systems: 1997 Market Share Total Revenue: ~$8.2 Billion: Johnson Controls 31%, Lear Corp 28%, Magna 10%
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Industry and Regulatory Environment

Potential Market Size for Elio ABTS Seat Technology Future ABTS seats market
Exhibit 6 Global 1997 Vehicle Unit Sales by Region Annual market potential of up to 17 million units in North America World-wide up to 53 million units

Other Potential Markets - Elios ABET technology

Heavy truck Aircraft Passenger train

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Exhibit 5 Benefits of Adopting NC Seat

Benefits
OEMs share cost benefits Reduced R&D expense

Rationale
Reduced ABTS weight NC seat is scalable and portable across multiple platforms

Implication
Cost Cost Cost

Reduced Fewer parts less variability and less inventory buffer stock to protect against stockout carrying costs Enhanced market position by being lower cost producer Improved business capture (including available conventional seat market in N.A. and Europe and new market in Asia, Latin America, and South Europe); better margins
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Cost/ revenue

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Exhibit 5 Benefits of Adopting NC Seat

Benefits Rationale

(cont.)

Implication
Cost

Deceased No catastrophic modes of failure; better product liability energy management; ABTS seat advantages issues in rear impact Decreased Fewer welds, fewer parts, and fewer fatigue warranty issues problems Increases leverage with OEMs Fewer production issues Premium pricing Sustainable competitive advantage with NC seat system patent protection; OEMs have to come to supplier for NC seat

Cost Revenue

Lower tolerance requirements; thinner gauge Cost steel than most seats Innovative design features zero check (no looseness in the system), continuously variable and continuously engaged track and recliner mechanisms; high strength characteristics; enhanced safety
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Revenue

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Competitor Analysis

Highly concentrated North America automotive seating markets General Assessment Info
Two 1st-tier players Johnson Controls Inc. (JCI) & Lear Corp split 60% of market, Fortune 500 companies, also had a dominant share worldwide No. 3 player Manga 10% share in U.S. Many potential competitors (not cost effective solutions) Already had an ABTS seat in product portfolio or were currently working on the technology Many small seat component suppliers were also designing or manufacturing ABTS seat mechanisms Elio Engineering Competitive Advantage: cost & functional, for 21 some time to come Case I-1 Elio Engineering Inc.

Competitor Analysis

Both Johnson Controls Inc. (JCI) & Lear Corp

Significant economies of scales in manufacturing and distribution Global presence Fairly strong relationships with OEMs Fast and easy access to OEMs for new products

Lear Corp competitive advantages

Outsource more of the design and manufacturing work Acts as a seat system integrator Strong supplier network critical success factors

Other small suppliers

Focus on niche markets for seats and/or specialize in certain seat components
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Competitor Analysis

JCL (reputation and capabilities) competitive advantages

Strong at effectively integrating strategic acquisitions into organizational structure Heavily vertically integrated Design and manufacturing expertise Able to handle complex manufacturing challenges on a large scale JIT (Just-in-time) capabilities supplier choice for Japanese automakers Excellent seat system and total car interior engineering capabilities Strong expertise in Concurrent engineering and software tools Ability to manage the seat system development form concept to production for OEM
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Competitor Analysis

Summary
Currently, no clearly superior ABTS technology on the market JCI and Lear had the advantage of leveraging their existing relationships and distribution networks for their ABTS products

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Exhibit 9 Company Profiles

For three companies: Johnson Controls, Inc., Lear Corporation, and Magna International Description of the Company Major Customers and Competitions Financials:
Annual Income Statement ($millions) Annual Balance Sheet

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Exhibit 9 Company Profiles (cont.)

Financials:
Annual Income Statement ($millions) Total sales Total expenses:
Cost of goods sold SG&A (Selling, General & Administrative) expense Unusual income/expenses

Pre-tax income Income after tax Net income (excluding E&D exploration & development)

Annual Balance Sheet

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Exhibit 9 Company Profiles (cont.)

Financials:
Annual Balance Sheet Assets Cash & equivalents Account receivable Inventory Prepayments & advances Other current assets Total current assets Long-term investments Property plant and equipment, other Property plant and equipment, net Goodwill/intangibles Other long-term assets Total assets Liabilities
Account payable Short-term debt Other current liabilities

Total current liabilities

Long-term debt

Total long-term debt

Other long-term liabilities

Total liabilities

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Exhibit 9 Company Profiles (cont.)

Financials (continue):
Annual Balance Sheet Stockholders equity

Preferred stock Common stock Additional paid in capital Retained earnings Other equity

Total shareholders equity Total liabilities and shareholders equity Share outstanding

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Industry and Regulatory Environment:

Barriers to Entry (BTE)

Classification of Incumbents: Tier-one, tier-two, and tier- three suppliers As a Tier-one Supplier Huge scale advantages in manufacturing and distribution At the far end of learning curve in terms of Design, development, and manufacturing processes

For standard product and incremental innovations

Lower cost position and shorter time to market Strong ties to OEMS position advantage Almost impossible to be replaced Emphasize reliability and standard processes

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Industry and Regulatory Environment:

Barriers to Entry (BTE)

As a Tier-two Supplier Possible with innovative technologies to be rewarded through new contracts directly with an OEM Extreme difficulties in Manufacturing & distribution BTE is lower in Design & development part of the value chain An example: Meritor Automotive Incs Seat Adjusting System Developed an ABTS seat mechanism, one of the lightest and most easily packaged Selected by GM, in 1998, to supply the OEM with 100 percent of power and manual seat adjusters for new GM truck program
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Industry and Regulatory Environment:

Barriers to Entry (BTE)

As a Tier-three Supplier or Below Faced fairly low BTE at the tier-three supplier level or below Hundreds of small to medium component suppliers possessed no significant sustainable competitive advantage

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Industry and Regulatory Environment:

Barriers to Entry (BTE)

At least two major option (due to board patent protection) 1. Enter the market as a tier-three or tier-two supplier of seat mechanisms or seat structures (outsource manufacturing to avoid major capital investment) Advantages: Could supply its technology to all tier-one suppliers Greater control over its core ABTS technology Disadvantages: Cannot build its integrating capabilities Likely to receive a relative small piece of final products total value Significantly increased the technological and market risk due to lacking manufacturing and marketing expertise

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Industry and Regulatory Environment:

Barriers to Entry (BTE)

At least two major option (due to board patent protection) 2. Partner with one of the tier-one or tier-two suppliers, or with an OEM and develop and market the seat in a joint venture, or through a licensing agreement Advantages Receiving substantial resources Significantly reduce technological and market risks Disadvantages An exclusive partnership with a tier-one or OEM would limit the size of total market Less control over its core ABTS technology and depending on its bargaining position, with a potentially lower margin

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Industry and Regulatory Environment

Role of Upstream or Downstream Products or Firms

A small portion of tier-one supplier with direct access to the OEMs Many tier-two and tier-three suppliers of components and raw materials, with very limited market power Exceptions OEMs insist that tier-one suppliers source from certain tier-two suppliers to ensure access to a particular component or technology

Regulatory Issues
Seat suppliers had to fulfill strict federal safety standards set by NHTSA and codifies in the Federal Motor vehicle Safety Standards (FMVSS) Demonstrate product safety
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Technological Barriers and Risks

Bottlenecks to Commercializing the Technology

Federal safety requirement Major structure test Material science Raw materials insufficient knowledge Untested performance under extreme temperature condition Large capital requirements (if manufacture in-house) Lack of competencies in manufacturing and distribution Lack of access to OEMs Other OEM Challenges Stringent seat design requirements Certification requirements and supplier preferences Unknown end-user about preference of seat style and ABTS seats
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Technological Barriers and Risks

Manufacturing Issues Manufacturing complexity & cost of a car seat
Number of parts/Tolerance requirements/Strength of the material used

Elios ABTS Technology

Fewer parts/ Lower tolerance requirements/Lower strength materials

Major manufacturing issues

Not its core competence Need large capital, building a new plant Common processes: stamping, pressing, welding, casting, and injection molding Implementation of a JIT delivery system Concurrent engineering additional challenge
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Technological Barriers and Risks

Relevant Supporting Technologies for Elios ABTS Seat Mechanism Concurrent engineering (supporting technology)
Allow the development team to understand technologies and products from a manufacturability standpoint during the early design stage, and Communicate product info to Design, Manufacturing, Marketing, and Management Achieve more robust designs, reduce development cost, facilitate implementation readiness, and decrease time-tomarket Need to access to and skills in integrated CAD, CAM, and CAE software

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Technological Barriers and Risks

Relevant Supporting Technologies for Elios ABTS Seat Mechanism Material science Material are often found by trial and error It can be outsourced to material science specialists

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Capabilities Requirements

A variety of capabilities to compete successfully Tier-one requirements

Strong relationships with OEMs A large global presence and scale Ability to manage the seat system development from concept to production for OEMs Strong supplier network Fast-time-to market, Low cost, High quality Position (Engineering capabilities) Concurrent engineering In-house design and interior system State-of-art manufacturing technology JIT capabilities Vertical integration
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Exhibit 10 Comparative Capabilities Profile of Selected Players

OEM Relationships Global Scale Tier-Two Relationships Total Program Management Acquisition Capabilities Vertical Integration Just-in Time Purchasing Manufacturing Technology In-House Design System Level Testing

Comfort Engineering CAD/CAM/CAE Benchmarking Research & Development Product Development Process Interior Systems Capabilities Financial Strength

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Decision Time

Is in Feb. 1999, four months past The NC design had developed substantially The Bostrom alliance agreement for the truck market had been concluded. The questions about Elios strategy for entery into automotive still remained. Paul & hari realized that they needed answers to these questions in the coming days. Should Elio joint venture with Bostrom? Should it partner with a tier-one or tier two automotive supplier? Was Elios technology strategy aligned with the requirements for a successful entry into the automotive market?
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Conclusion

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