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This is a collection of Audio Summaries and Podcasts generated by Gemini Pro and Ford LLM Notebook to help Finance Professionals in Product Development learn more about the business and finance concepts
Hey there and welcome back to the deep dive. Today we're pulling back the curtain on something you probably interact with almost every day but maybe don't think about quite like this. The true cost of making cars. You see the sticker price, sure, but, the journey to get to that number, it's incredibly complex. Think brilliant engineering, fierce market pressures, intricate financial calculations.
Speaker 1:We've got some fascinating sources lined up that are going give you a real shortcut to understanding this whole ecosystem. Our mission for this deep show you how the auto industry, specifically the big OEMs, original equipment manufacturers, how they're navigating a really tight economic squeeze in 2025, and also the sheer almost mind boggling effort it takes just to build a car in first place.
Speaker 2:It's a great mission. Yeah. And really vital, I think, for understanding one of the world's biggest industries. Our sources give us this kind of layered view. We've got a recent industry report looking at urgent cost cutting by major players, you know, VW, Ford.
Speaker 2:Then there's a deep technical analysis from the International Council on Clean Transportation and even, interestingly, a candid discussion among engineers on Reddit, really digging into why developing a car costs so, so much. So what we'll uncover is this blend of immediate market challenges hitting these timeless, just inherent complexities of making cars. By the end, you'll see why your car is, well, both an engineering marvel and kind of a financial tightrope act for the companies building them.
Speaker 1:Okay. Let's unpack that. Automotive OEMs are slashing costs amid margin squeeze and market shifts in 2025. It paints a picture of intense pressure right now, almost existential for some, maybe. What's really driving this cost cutting?
Speaker 2:Well, basically, everyone's feeling the squeeze. The pressure on their profit margins is just immense. It's a classic scenario playing out across the whole automotive world right now. The article points to the few key things. You've got, historically inefficient production in some areas and increasingly competitive market, new players getting in.
Speaker 2:Then there's the looming threat maybe of a price war from Chinese imports. And on top of all that, these OEMs need to stay profitable enough to fund these massive, truly massive investments into the shift to electric vehicles. EVs. Like a perfect storm really.
Speaker 1:And these aren't just small tweaks. Right? The consequences we're seeing are pretty dramatic.
Speaker 2:Oh, far from quiet adjustments. That's right. The report specifically mentions big names, Volkswagen, Ford, Stellantis. They're making announcements about closing plants, cutting wages, job losses, wider restructuring, all across their global operations. These aren't minor things.
Speaker 2:They're fundamental shifts, really tough decisions impacting thousands of people. All of it aimed at driving lean manufacturing, boosting efficiency because of these financial pressures. It's a stark reminder even these giants aren't immune.
Speaker 1:It makes you wonder how deep it goes. What about something like logistics? That must be affected too.
Speaker 2:Absolutely. And what's fascinating there is logistics, you know, bringing parts in, shipping finished cars out, that accounts for around 8% of a vehicle's retail price, which is significant. But it's a sector that's super fragmented, fiercely competitive, operating on like razor thin margins. So yeah, OEMs are definitely putting more cost pressure on their logistics providers, but just cutting rates and jobs, that's probably not enough long term. The real solutions, the sustainable ones, lie in deeper optimization, process upgrades, maybe even fundamental design changes, supply chain changes that might actually cost more upfront to save money later.
Speaker 2:It's complex.
Speaker 1:That macro pressure, the efficiency drive, it really puts the tiny details into perspective, component, which brings us perfectly to that Reddit source. Why does it cost a company so much to develop a car? There was this engineer. Right? He said his job was just for one component on one system of a vehicle, and he marvels at how cheap cars are.
Speaker 1:Coming from someone on the inside, that's that's quite a statement.
Speaker 2:It is, isn't it? And it really gets at those fundamental, often hidden costs. Other engineers on that forum, they emphasize that every single part headlights, steering wheels, the tiniest bolt or clamp, even a simple plastic battery vent needs extensive design, validation, rigorous testing. Each one. And it's not just one or two people, it's hordes of highly specialized engineers, designers, software folks, technicians, admin staff, all needing decent salaries, all working for months, sometimes years, on what seems like a tiny piece of the puzzle.
Speaker 2:The collective brainpower is huge.
Speaker 1:And the tooling cost. Someone mentioned $100,000 just for one plastic injection molding tool? Wow. That lock manufacturers into designs for longer just to recoup that cost?
Speaker 2:That's exactly the challenge.
Speaker 1:Yeah, one user mentioned $100 for a plastic tool, a headlight mold, easily in that range. A press tool for say, a door skin. Another $100 maybe more. And that's for one our part. Then you scale that up, think about retooling an entire assembly line for a new model.
Speaker 1:The thread mentioned Chrysler spending over a billion dollars to retool a Michigan line. Ford scrapping old equipment to build new for the Ranger pickup. That's a massive upfront bet on that vehicle succeeding.
Speaker 2:And the testing, you said it sounds brutal, we expect safety, durability, but what does that actually involve? It is brutal and a huge cost driver, no question. Engineers talked about testing sensors for like 1,200,000 switch actuations, simulating a decade of hard use in weeks, vibration testing at 30, that's 30 times the force of gravity hammering the parts. And reliability, they literally destroy engines, gearboxes on test benches, lots of them. But safety, you have to physically crash multiple cars.
Speaker 2:Prototypes, remember, that costs way more than the final retail car. Yeah. Just to meet regulations over and over, get that tick in the box. And the regulations themselves demand cars last hundreds of thousands of miles, operate safely from what minus 40 degrees Celsius up to 180, that's an incredible non negotiable cost built in.
Speaker 1:Plus, cars now are basically computers on wheels. That adds another layer, doesn't it?
Speaker 2:Exactly. Mobile supercomputers, really. The source mentioned modern cars having over a thousand computer chips. Think about that. That means massive investment in software development, cybersecurity, testing across countless modules, millions of lines of code.
Speaker 2:It all adds up to this incredible complexity and cost. So when that engineer says it's a million little miracles that cars work and are affordable, yeah, he's not exaggerating. Every system, every part, every line of code painstakingly done. Okay, so we've got the why of cost pressures, the how of engineering But how do companies actually put numbers on this? How do they figure out the precise extra cost of say a new hybrid system versus an older one?
Speaker 2:Our next source, the Light Duty Vehicle Technology Cost Analysis, really digs into the methods analysts use, gets analytical. Right, this report dives deep into the methodology. It was used by a consulting firm, FEV, and the EPA, then adapted by the ICCT for Europe. It's what they call a ground up costing approach. They don't just estimate, they break technologies right down, piece by piece.
Speaker 2:They start with detailed teardowns. They literally take apart the new tech and a baseline equivalent. Then they meticulously calculate the cost differences but only for the components that actually change between the two systems.
Speaker 1:How granular are we talking? Like down to the cost of screws?
Speaker 2:Pretty much. They calculate costs based on eight core things: the raw material, the labor to put it together, manufacturing overhead, scrap or waste, then SG and A selling, general, admin cost profit margins, ED and T engineering design, testing, and even packaging. But the key metric they use is incremental direct manufacturing cost, or IDMC. That's the precise direct cost difference to the OEM for adding that specific new bit of tech.
Speaker 1:But that IDMC that's not the whole story for the company's bottom line is it? There are other costs involved.
Speaker 2:Exactly. That's where the EPA developed these indirect cost multipliers or ICMs. These get applied to the direct costs. They account for all sorts of OEM indirect expenses. Things like tooling depreciation, amortization, ongoing R and D, warranty costs, corporate overhead, transport, marketing.
Speaker 2:And these multipliers aren't six. They vary depending on how complex or mature the technology is. It gives a much fuller picture of the true cost burden.
Speaker 1:Okay, and technology doesn't stand still. Does this analysis factor in that costs might come down over time?
Speaker 2:Yes, and that's a really smart part of it. They use learning factors. These factors get applied to project costs for future years. The report looked out to 2012, 2016, 2020, 2025. They basically account for expected cost reductions.
Speaker 2:You know, as designs get refined, manufacturing gets more efficient, procurement gets better deals because the tech matures and scales up. It's a forward looking adjustment based on decades of watching how innovations get cheaper over time.
Speaker 1:And this specific report adapted it for Europe. What changed to make it relevant for, say, Germany versus The US?
Speaker 2:Well, the core manufacturing processes, the models they used largely stayed the same. US and Germany were seen as having similar industrial levels. But the cost databases were heavily updated. We're talking using actual German labor rates from 21 to an 11, European material costs, German manufacturing overhead rates. Interestingly though, the markup factors for things like SG and A, profit, ED and T, those were generally not changed much between The US and Europe Suggests they saw the supplier structures as pretty similar.
Speaker 2:And of course, they adjusted vehicle segments to reflect specific European models. VW Polo, Golf, Passat made it very localized.
Speaker 1:Right. This detailed method gives us some really concrete examples then. Let's look at some findings projected out to 2025. Any surprises in there about tech costs?
Speaker 2:Yeah, some really interesting ones. What's fascinating is that advanced tech doesn't always add cost. Sometimes it saves money. For instance, they compared a six speed automatic transmission to an older five speed automatic. The six speed actually showed a saving of €77 in direct manufacturing costs.
Speaker 2:Similarly, a six speed dual clutch transmission a DCT compared to a six speed automatic an €89 saving. Often due to fewer components, smarter gear configurations, It's that continuous engineering refinement. It challenges that assumption that more tech always means more expensive. However, stepping up further, an eight speed automatic did add cost compared to a six speed about 43 Euros mostly due to a more complex gear train.
Speaker 1:So more gears don't automatically mean more cost or even more parts sometimes. That's a neat finding. What about hybrids? We know they're complex.
Speaker 2:Right. For a small hybrid like a VW Polo converted to a power split HEV, the extra direct manufacturing cost was about $8,809 That projected out to a net incremental cost of $2,158 by 2025. The big lithium ion battery was a major factor there, naturally. Now for a different type, a P2 hybrid motor between engine and transmission in the same small car segment, the direct cost was a bit lower (four hundred dollars $704 with a 2025 net cost of $2,045 That P2 setup gaked some cost credit because it allowed for downsizing the gasoline engine and ditching the torque converter, so different hybrid designs, different cost impacts.
Speaker 1:Even small things like the AC compressor were looked at. More complex than you'd think.
Speaker 2:Definitely. Swapping a mechanical AC compressor for an electrical one added between 102 and 135 Euro in direct manufacturing cost, depending on the car size. By 2025, the net extra cost was projected at 109 to 146. And get this, over half that cost 52 percent came just from the electronics inside the compressor. Shows you where the costs are shifting with electrification.
Speaker 1:And CORE engine tech, downsizing turbocharging, always more expensive.
Speaker 2:Not always consistent there either, which is interesting. Downsized turbocharged direct injection gasoline engines, GDI engines, showed mixed results. Going from a basic 1.4 low four cylinder to a one point zero well three cylinder turbo GDI added about two thirty direct costs or two seventy six net by 2025. But sometimes downsizing actually led to cost reductions, especially going from bigger engines like a V six down to a four cylinder or V eight down to a V six. The larger engine blocks more cylinders, just inherently more material and complexity, so reducing that can save money.
Speaker 1:And finally, that sensitivity analysis manufacturing location, how big a difference does where you build it make?
Speaker 2:Huge. This gives real insight into global supply chains. The analysis estimated roughly if you move manufacturing from Germany to an Eastern European country where labor rates were about 23% of Germany's back then, the incremental direct manufacturing costs for engine tech could drop by anywhere from 16% up to nearly 57%.
Speaker 1:Wow. That's massive.
Speaker 2:It is. It's a rough estimate. Other factors would change too, obviously. But it powerfully shows the huge impact of labor costs on the final price and why manufacturers chase global production strategies.
Speaker 1:A remarkable difference indeed. Okay. So let's circle back. We have these specific cost breakdowns, these intense 2025 market pressures. What strategies are OEMs actually using beyond just simple cuts to tackle these deep costs?
Speaker 2:Well, beyond just squeezing supplier rates, they're really focused on network optimization, serious supply chain restructuring. They're using tools like digital control towers for better capacity planning, influencing long term decisions about sourcing, where to build things. We see examples mentioned like BNSF, GMXT, JB Hunt pushing for intermodal transport savings using rail and truck efficiently. Stlantis is described as transforming its whole supply chain design. VW North America specifically targeting cost reductions in finished vehicle logistics and raw materials.
Speaker 2:It's getting quite sophisticated.
Speaker 1:Inventory must be critical too, right? Can't have expensive cars on lots.
Speaker 2:Absolutely critical. There's a huge push for low inventory, protects working capital, cash flow, especially with inventory levels being quite high in North America and Europe recently. The long term goal for many is moving away from build to stock, just building cars hoping they'll sell towards build to order or BTO. Matching production much more closely to actual customer orders reduces waste, reduces capital tied up.
Speaker 1:And the industry structure itself. Seeing changes there. Consolidation.
Speaker 2:We are, yeah. It's a natural response to these pressures. Consolidation and partnerships are key strategies to find synergies, economies of scale. The report mentions the acquisition of DB Schenker by DSV. Those are huge logistics players merging.
Speaker 2:Most all for restructuring. These big moves show the drive for efficiency isn't just within companies, but across the industry through collaboration and getting bigger.
Speaker 1:Wow. What a journey through automotive costs today. From that immediate 2025 crunch forcing plant closures to the incredible intricate cost of designing every single bolt, every line of code, and then understanding how analysts actually break down the cost of each new technology. It really does give you a whole new appreciation for the cars we rely on, doesn't it?
Speaker 2:It really does. We've seen the auto industry as this fascinating, constantly shifting ecosystem, balancing just immense engineering complexity Yeah. Against these really intense market pressures. And that drive for profit plus the huge transition to EVs is forcing OEMs to innovate constantly, not just the cars themselves but their entire manufacturing process, their supply chains. It's continuous evolution.
Speaker 1:So what does this all mean for you listening? Well, next time you see a new car, maybe notice a specific feature or even just get in your own car. Maybe you'll think for a second about the billions of dollars, the millions of engineering hours, the thousands of brutal tests, and that constant relentless quest for efficiency that went into making that vehicle possible, keeping it safe and somehow still relatively affordable.
Speaker 2:And it leaves you with a question, I think. As technology keeps racing ahead as electrification accelerates, will the fundamental complexity and cost of building a car ever truly go down? Or will new innovations just keep shifting where the costs lie? Forever challenging the industry's margins, forever shaping what ends up in our driveways? It's definitely something to ponder as you watch this space evolve.
Speaker 1:That's all for this deep dive, thanks so much for joining us.