When it comes to steel, the automotive industry is big business. According to Warrian and Mulhern in their paper, Knowledge and Innovation in the Interface Between the Steel and Automotive Industries: The Case of Dofasco, “The key motivation behind innovation in the steel industry has been the revolution in vehicle manufacturing, as automotive steel represents the largest source of revenue for integrated mills.” This blog post examines the relationship between the innovation motivation, and revenue.
Compared to standard bulk steel used in most construction applications, and rebar produced by cheap EAF furnaces, the steel demanded of steel producing firms by automotive companies is on another planet. The demands are exceptionally stringent, requiring exact metallurgical compounds with very specific properties to be produced over and over and over again, without any hint of difference in product. As we discussed in class, if Ford requires a very specific kind of steel to produce its F-150 frames, steel it requires for weight, strength, performance, and crash test purposes, and steel it has spent millions to calibrate its machines around, and your firm is contracted to deliver that steel, you have big business, but your job is not easy. If you fail to deliver steel, or deliver steel that does not meet Ford’s very specific quality requirements, you could be fined millions of dollars.
With so much risk accepted, why would a steel firm agree to produce specialized steel for an automotive supplier? Because the rewards are enormous. The kind of steel firms specializing is automotive steel produce are what is referred to as “value added steel.” At each step in the process of producing whatever steel their client has requested, these firms are adding some value to the material. By investing heavily in R&D in order to be able to add value that other firms cant, large rewards can be gained. For example, the firm producing Acura’s special door ring steel is currently realizing large profits because they are the only ones able to add value to steel in that way. The concept of value added is drastically different from the sheer quantity game that is common construction steel and rebar. By becoming involved in specialized products and adding value to their steel, firms are able to move away from the commodity nature of steel.
However, to truly realize large profits from adding value to a steel, it is helpful to be the only, or one of just a few firms, who can produce the specific kind of steel required. Because having a unique and useful product can be such a boon for profits, firms invest heavily in R&D. Warrian and Mulhern conclude, “In the face of international consolidation of the industry, it would appear that Dofasco’s future success depends on the strategic deployment of R&D toward the areas that are the company’s dual strengths: customer service and process innovation.”
Peter, Warrian, and Celine Mulhern. “Knowledge and Innovation in the Interface between the Steel and Automotive Industries: The Case of Dofasco.” Regional Studies 39.2 (2005): 161-70. Print.