Anyone who has visited a “financial planner” has heard the words “diversification” and “diversify”. The diversification principle says that it is impossible to know the future and consequently select only investments that will pay off handsomely.
Experience has shown that by investing broadly, one can protect against a sudden market shift or self inflicted problems within the investment companies. Diversification helps avoid a wipe out of significant value had the investor had only invested in this one area.
So, the principle of not putting ones eggs in one basket can be just as relevant in other industries. How about the auto industry?
In the early 80’s, the US auto industry began to lose share to cars made in Japan. Cars from Toyota, Honda, and Nissan (plus others) were perceived as better on quality and price terms than those of the big three. As manufacturers began to study how both quality and cost could be so superior, they found that Japanese manufacturers formed close partnerships with certain suppliers. If the supplier would manufacture parts to very tight tolerances each and every time, it turned out this company could also produce parts in a more cost effective manner.
It is many years later now. This Japanese bred quality approach has pretty much be adopted worldwide. Major original equipment manufacturers have settled on a few major suppliers for their global businesses. Automotive manufacturers point to these major parts suppliers offering technology and lower prices due to volume. They also promise untouchable quality. Hmmm.
Untouchable quality actual means “initial” quality, the trouble free performance of the supplier’s parts for say the first three years. The common industry wisdom was that once a car is sold by the original owner, all bets are off. Who knows what that original owner did to the car? Compared to car performance in the years before 2000, todays automobiles are relatively trouble free.
The recent airbag recalls, however, sheds a different light upon quality. Airbags which are clearly a huge step forward in automotive safety are in fact a form of IED (improvised explosive device). At the heart of an airbag is an explosive container which when detonated, fills the airbag in fraction of seconds. This is a one time event. There is no second try for the airbag detonator.
In actual use, an airbag’s life history includes freezing cold days, steamy hot ones, and long periods of no driving at all. The airbag travels over bumpy roads, hits sidewalk curbs, and travels at a full range of altitudes. And when the crash sensor triggers, the airbag is expected to deploy the airbag flawlessly.
So, it should not be a huge surprise that if there were a design shortcoming in the airbag design, it might take a long time to actually realize there was something wrong with airbags.
Unfortunately with the Takata airbags, the rigorous quality checks confirmed that each airbag was like the one produced before. There was no way to verify how airbags would perform after several years of in place use.
So here’s the quandary.
Depending upon large suppliers like Takata, auto manufacturers obtained uniform quality at a low cost. If some thing were to go wrong with a Takata part, the defect would be present in an awful low of the auto makers products. And unlike a radio or seat cushion where a quality defect could be seen quickly, an airbag defect could only be known if the airbag was deployed. Hmmm.
For this small number of unique parts which are critical to safety but which may never be used, putting all ones eggs in one basket may not be the wisest decision.
I wonder whether automakers are studying this airbag crisis in a way that ask the question, should OEMs diversify their airbag suppliers?