Car Development Cost

"Snuze: Needs another Swede" (markg) 05/01/2015 at 08:10 • Filed to: None

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Here’s your question of the morning...

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Aston had to raise $300,000,000 dollars to design and develop the DBX. Three hundred million dollars. One million dollars, three hundred times. And that seems light compared to some projects I’ve read about. I recall hearing the C7 Corvette team wanted to finally go mid-engine and asked for $900,000,000 to make it happen. That’s almost a billion dollars. Of course they ended up getting less than half that, because Gov’t Motors, but seriously?!?

Can anyone explain to me why it costs so damn much?!? I don’t mean this to be trite, I actually really want to know. In the ship building industry, development budgets are usually way less than that. How does that make sense?

yamahog > Snuze: Needs another Swede 05/01/2015 at 08:24

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Yes, 300MM is relatively low but I’m not sure what the volume is.

In automotive, that “development” cost includes design, market research, prototype and production tooling as well. Also, hiring new people, paying for them to travel during launch if necessary, it goes on. So it’s not just the “research phase.” Not sure if shipbuilding is the same way.

E. Julius > Snuze: Needs another Swede 05/01/2015 at 08:28

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I would guess that a large portion of the costs come down to production infrastructure. Obviously cars are extremely complex, and tons of engineering work goes into them, but the fact that they need to be produced at high volume means there are lots of costs beyond that.

Tooling and installation is pretty expensive, and that only covers the cost if you’re planning on shifting the capacity at an existing plant from one product to another. I would imagine Aston is hoping to copy the likes of Porsche with the Cayenne and dramatically increase their volumes with this new model, so they’re probably looking to expand production capacity. If they end up building a whole new plant in Alabama, that gets really expensive, really fast. Lots of high volume plants hang out closer to the billion dollar range.

There’s also the costs associated with doing something you’ve never done before. Aston has the sport car/GT car thing down fairly well at this point, but I would guess there’s some additional work that needs to be done for them to learn how to develop a kind of vehicle they haven’t done before.

MasterMario - Keeper of the V8s > Snuze: Needs another Swede 05/01/2015 at 09:08

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The more people that use a product the more you need to idiot proof it and that drives up cost. Then add in the fact that a vehicle can kill you have even more cost for safety

BATC42 > Snuze: Needs another Swede 05/01/2015 at 09:13

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The development cost for a mass manufactured car would be in the couple billions. That’s why many manufacturers are going the “one paltform, many cars” way.

First you have R&D costs, between the blank paper and the first prototype you have a lot of steps, including but not limited to platform development (chassis and all that stuff), engine (yes, even though an engine is shared between many cars, you still have to make sure it’s going to fit properly in the car, that the airflow in going to be sufficient, ...), interior, .... It’s an iterative process. And even though most of it is done on computers nowadays, engineers are still an expensive ressource.

While conceiving the car you also have to think about the means of production. And a stamping tool is crazy expensive to make (they are machined, and an hour on a CNC, for a “basic” part is crazy expensive, plus material, and it can take a couple hundreds hour for a very complex part to be machined. It’s even more expensive when you need, like for a stamping tool, a perfect surface), and you need a huge number of them for a mass produced cars. And you also have to develop the tools, to make sure the metal, plastic or whatever else you’re going to use for your part, is going to be made properly. You don’t want it to be destroyed during stamping, and you don’t want residual stresses in it either. Once again its very iterative to do so.

All that is done in parallel, you have to do a bunch of tests, between manufacturing tests and road tests, that’s a whole lot of money to spend. Then you have to think about the production line, and that you’ll need to train the workers for the new car, that you’re going to need new tools (robots, hoists, whatever, ...) for manufacturing.

All in all. Manufacturing prototypes is expensive, because they are one off. Creating the manufacturing tools is expensive. The R&D is expensive in terms of materials and tools (you have to think that an hour of simulation on a supercomputer is not free, even though the compnay already bought it). To do all that you need engineers, and we are quite an expensive ressource to rely on. Then you have all the functions that over around making and developping a car. And in all of that, the materials you are using to make the car or its tools, well, they are the cheapest thing.

So 300 millions, is actually quite low for a brand new vehicle with technology that’s new to the company making it.

Snuze: Needs another Swede > yamahog 05/01/2015 at 13:14

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Well I take it as $300M to go from “hey, let’s make a new model” to delivering the first vehicle in showrooms. I just don’t understand how that can be profitable. Stand back, because I’m about to pull wild numbers out of my ass...

To make the numbers work in any meaningful way they’d have to sell probably 5,000 units a year at $10k profit per unit to break even in 6 years. So I don’t know, maybe this makes sense?

The shipbuilding industry is different, every ship is a “prototype” in so far as we try to fix shit that didn’t work on the last one. Cars are stamped out and put together on jigs, every car is an identical clone of the one that came before it. With ships, sometimes things don’t work out like they do in CAD, or the customer decided to chang etheir requirements set, or the previous ship didn’t live up to expectations. Usually it’s all 3. So we kind of redesign as we go. But a lot of that get’s rolled into the as delivered price of a vessel.

We also don’t have marketing costs, and tooling is almost non-existent. We do usually cast the bow bulbs, since most ship building is short production run (10’s of ships vs. 10’s of thousands of cars). Everything we do is done with cranes and either welders, bolts, or rivets.

It just blows my mind that you can eat up $200+ million in that stuff.

Snuze: Needs another Swede > E. Julius 05/01/2015 at 13:20

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That’s a good point, I wonder if their $300M figure includes a plant or significant retooling. Obviously there’s things we don’t have to do in my industry (marketing, market research... etc), and we also don’t have nearly the tooling costs. Almost everything we build is with cranes and welders, except the bow bulbs, which are usually cast. But I just can’t see how you can eat up that much money between marketing and tooling.

As for doing something you’ve never done, that’s like basically every single ship. Unlike cars where every one is more or less a clone of there previous, every ship is unique, sometimes drastically so. Customer needs change, or the previous one didn’t live up to expectations, or sometimes shit just doesn’t fit like it does in CAD, (usually all 3) so we often design as we go. But we roll that into the per-ship costs, and it’s pretty much expected in the industry. But our initial design costs, going from and idea to having a set of blueprints and ready to lay keel, is usually drastically less. Like, 1/5th as much.

Snuze: Needs another Swede > BATC42 05/01/2015 at 13:25

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But from the shipbuilding industry, everything is a one off. Due to the cost and scale, and time to build, we can’t afford to do prototypes. That and the fact that designs change, sometimes significantly, between hulls of the same ship class because either the previous one didn’t perform as expected, customer requirements change, or sometimes stuff just doesn’t fit like it does in CAD. The two things I can see the auto industry has that we don’t is marketing and tooling. We build stuff with cranes and welders, and occasionally casting, no fancy CNC stuff here. I’m not saying I don’t believe it, if Aston says they need that money then they probably do. It just seems crazy to me that you can burn up that much money in marketing and tooling.

yamahog > Snuze: Needs another Swede 05/01/2015 at 13:49

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Ok, so we’re on the same page re: terminology.

But yea, this is why OEMs have to share costs using things like common platforms, engines, plants, etc. So many components are contracted out to Tier 1/2/3 suppliers, and they all need to be paid too. A grille with a camera in a housing will have a supplier who molds and paints the grille, maybe the housing as well, a supplier who provides the camera to the grille supplier, and even further down the line is someone who provides wires/camera components and software.

Also, some cars will have higher margins, some will be higher volume. For example, I’m pretty confident Aston Martin will be making way more than $10k per vehicle, though I’m not sure how many of these SUVs they plan to sell, and it may be few enough for them to have some pedestrian protection requirements waived. On the other hand, you have to sell a lot of cheaper cars to make money. In the larger companies, you can have one brand as the volume seller to help prop up the luxury brand for higher margin sales. Apparently Mercedes-AMG has 5% ownership and will be supplying powertrain and electrical systems for Aston Martin, so that cuts down on those investments.

E. Julius > Snuze: Needs another Swede 05/01/2015 at 13:49

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The tooling and marketing definitely ad up. Last figures I saw projected total OEM tooling expenditures to hit over $15 billion by 2018, and the big OEMs like GM, Ford, etc. have marketing budgets in the billions as well. Granted, Aston is operating on a much smaller scale, but even a small percentage of numbers like that could represent a substantial portion of $300 million.

I also think what you talk about with regards to the process of changing the ships through iterations of the design is relevant to the automotive industry as well. As some other commenters have pointed out, there’s a huge amount of iterative design that has to go on in automotive before you can release a finished product. With the exception of bleeding–edge technologies like 3D printing and Ford’s F3T (which can’t work for everything and isn’t widely available, respectively), prototype tooling has to be made to test things. This is a huge expense in the development process, and a big change means all new tooling. If your volumes are as small as Aston, and especially once you’re getting close to production, those costs are going to be close to what you’d spend for the final production tooling each time you have to make a big change.

Manufacturers also have to do extensive testing before they can sell vehicles. Crash tests, emissions tests, fuel economy tests. If you want to sell it globally you have to pay for dozens and dozens of tests all over the world. Those costs add up.

There’s also the additional aspect of design and luxury. I’m sure your naval architects and designers do great work, but I’m assuming designing something that’s pleasing to the eye is a secondary or tertiary concern. For a consumer product, particularly a luxury product, there’s a whole army of designers focusing primarily on how pleasing something is to the eye or touch. Then these people all have to work with the engineers to make sure it’s all possible to make, then the production people have to meet with their people and/or suppliers to make sure they can consistently produce parts that meet the visual expectations. Lots and lots of stuff that just adds up like crazy.

Not to mention they have to pay for people from jalopnik to fly to islands in Spain, stay in luxury hotels and thrash their cars over the weekend ; )

Snuze: Needs another Swede > E. Julius 05/01/2015 at 13:57

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All very good points. Like I said, we just lift and weld, so I’m not very familiar with tooling costs. But you make a good point that it can add up. I think maybe that, and as you pointed out, marketing, do really add up, significantly more than I would have expected.

And before we build anything we have a design spiral as well, it’s a very iterative process. But I guess due to methods of manufacturing we can afford to make changes from ship to ship vs. retooling for a new car.

And you’re right, luxury isn’t much of a concern in building warships. As long as it floats and shoots, we’re happy. Though based on my time in the Navy and what I’m seeing now, crew comfort is starting to become more of a concern. It’s still very much secondary, but at least it gets notice. After all, a comfortable and happy crew performs much better. Hell, when I was in I joined the submarine force because the food was so good!

E. Julius > Snuze: Needs another Swede 05/01/2015 at 14:01

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Ha I remember reading in a few old books that the submarine force used the quality of their food to convince people to spend months in a tube underwater! I wonder how the percentage of off the shelf components would compare between automotive and shipbuilding. I’m sure that would affect the relative development costs in a meaningful way, but I honestly don’t know enough about either situation to make a guess as to how much that could contribute.

Snuze: Needs another Swede > yamahog 05/01/2015 at 14:05

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I have some friends who work for automotive suppliers. And the amount of money that floats around in that industry does make me raise an eyebrow. A certain OEM paid the company to fly round trip to deliever parts the same day. It was like a $3,000 flight round trip in coach because they booked it that morning! In shipbuilding of course we also deal with lots of suppliers. Though unlike cars where many things change on every new model or every refresh, we are still using a lot of the same old crap. I do a lot of HVAC and the Navy standard ventilation fan spec was written back in like 1948, and we still use those specs today. But we have different focuses than the auto industry.

You’re right about profits and margins, I was pulling wild numbers out of my ass on the Aston SUV. I have no idea what typical automotive margins are, but from what little I’ve seen it seems to me that Aston is going slightly down-market to compete with the Cayenne, so I’m thinking pricing is going to be in the $100k neighborhood. I figured 10% would be a nice piece of action on that, but again, no idea.

Snuze: Needs another Swede > E. Julius 05/01/2015 at 14:10

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I can tell you that, especially these days, we use COTS to the MAX! No more cold-war budgets, so we have to build cheap and reliable. Which is actually another reason we go COTS. A lot of stuff has been in use for years. I do a lot of HVAC work, and the Navy standard ventilation fan spec was written in like 1948, and we still use it because the fans have been proven to work in pretty much any situation you’d want, and they are extremely reliable. But the designs are so old the cost has been amortized many times over.

I feel like it used to be that way with the automotive industry, look at the old Small Block Chevy V8. Probably half the engines ever produced in the world are SBCs. It was a robust design that just plain worked. But look at how many engine designs they have developed just in the past 10 or 15 years. It seems like due to emissions, regulations, etc, the automotive industry is driven much harder by innovation than shipbuilding,

E. Julius > Snuze: Needs another Swede 05/01/2015 at 14:31

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That’s actually pretty interesting about the fans. Something impressive about engineering that can stand the test of time.

I think you’re on to something with your thoughts on the amount of innovation that’s required in the auto industry. Not only are OEMs constantly being pushed by regulations to improve things like emissions, safety standards, etc., there’s also a large expectation from consumers that the products improve. Since the lifecycle of a car is so much shorter than that of a ship, you’ve got to be innovating at a rate where your product in 5-10 years is better than the last one, and all your competitors are doing it as well.

In the end, I think this whole thing comes down to the fact that it’s really difficult to grasp the scale of an industry that you’re not connected to. Hell, it’s difficult to grasp even if you are connected to it! Sometimes when I’m at work (I work for an automotive supplier), I think how incredible it is that multimillion dollar companies can live and die producing one type of part that costs a few cents a piece. One component out of hundreds in an automobile can support an entire sub–sector of the industry, with hundreds of millions of dollars of revenue at stakes and thousands of jobs. And that’s just the Tier 1 suppliers. Multiply that out over all the parts, the entire supply chain… the sheer amounts of cash involved are absolutely insane.

Snuze: Needs another Swede > E. Julius 05/01/2015 at 15:41

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You’re absolutely right. I have a few friends that work at an automotive supplier that only makes windshield washing equipment (hoses and nozzles) and some of the stories are crazy to me. But I suppose my industry sounds just as weird to them.

E. Julius > Snuze: Needs another Swede 05/01/2015 at 15:58

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I’m sure it does. The type of project management involved with building a ship must be of monumental proportions. I’d love to get a look at it, I’ve never done anything of that scale myself.