Make-buy decisions in the auto industry: new perspectives on the role of the supplier as an innovator

Combining recent theoretical results related to the ownership structure of the firm with the notion of modular design, this paper provides a new framework to analyze the decision of the automakers of whether to develop a new component in-house or to subcontract it to a supplier. Older frameworks associated with transaction costs or principal-agent theories have often been associated with contradictory empirical evidence on make-buy development decisions. Our perspective follows some recent insights proposed by the property rights theory of the firm, whereby a decision to pass the development of the innovation from the assemblers to the suppliers exists when the supplier product shifts from being complementary to being independent of the assembler product. The hypothesis we explore is that modularization of the automobile is a strong enabler of product independence, being the key driver of increasing supplier responsibility. Our analysis is based on detailed case studies of two important innovations that were introduced in the automotive over the past decades: the Antilock Brake System (ABS) and the airbag. The paper evaluates the role of the suppliers and the assemblers in the introduction and development of the innovation, and explains how we can understand this role in light of the proposed framework.