Yesterday we told you about the new Toyota Highlander set to be revealed at the 2016 New York International Auto Show. Among its many changes is the addition of a new 8-speed automatic transmission with improvements to horsepower and fuel economy. This 8-speed joins existing Toyota products which use it like the all-new Land Cruiser and Lexus LX570 both out last year. This brings up an interesting question. Why doesn’t the Tacoma (recently redesigned) and the Tundra (in need of powertrain improvements) make use of the 8-speed transmission? Is profit to blame? The reason is likely more complex and here is what I think is going on.
On the truck team, you have a variety of team members including product planners, designers, engineers and accountants. When a new product is going to be developed, product planners first get involve. Their job is to survey customers, study the market and identify their products weaknesses and strengths versus the competition. They will also identify what the competitor has in terms of engines, transmissions, fuel economy and price points. On a series of spreadsheets, they will hammer out all of these details along with the take rates of their competitors – i.e., which trims sell better than others. They can do this through Polk automotive data via registration numbers. Taking all of this information into account, they will formulate a list of ways they need to improve their product. In this list will be easy items like increasing the size of the cup holders along with harder to deliver items like diesel engine options.
Next, product planners sit down with engineers and designers to see what items are actually obtainable and what the perceived costs would be. For example, product planners will sit down with Toyota Chief Engineer Mike Sweers and discuss diesel engines. They will lay out the consumer argument on demand, competitor offerings as well as forecasted changes in the marketplace (think CAFE). Sweers will then work with suppliers as well as within the company to determine what the price increase would be for a diesel option and what the expected improvements would be like fuel economy and say towing (depending on the size of the engine).
Then, with a list of desired changes, cost estimates, expected price points and an understanding on costs, accountants crunch the numbers to figure out if the plans are achievable. In other words, if they increased the size of the cupholder by X dollars, can they still hit their profit margin with the expected price point? You may be thinking, who cares about that, just make it happen. Not so fast. Price point is a HUGE deal for product planners and marketers. They need for consumers to see them as being competitive with other trucks on the market. If the Toyota truck is priced at $500, $1k,$2k+ or more over the competition, then sales will suffer. As one company rep told me, “it doesn’t always matter if our truck is THAT much better than the competition. You set a low price point and put cash on the hood any truck will outsell another.” Accountants know this as well and they need to set a profit margin that allows them to put rebates on the truck while still turning a profit.
With all of this analysis, everybody gets together for a series of meetings. It basically goes like this – product planner suggests an improvement like size of the cup holder. Engineers say we can do it, but we may have to shift the gear shifter a touch to make it fit. Designers may chime in and say by doing that, we will need to alter our designs for the cabin and cut a new plastic mold ($). Accountants or engineers will say, is this improvement really a big consumer demand or are we just making changes for the sake of making changes? Engineers may also say, well, if we reduce the other cup holder we can save money that can be used to increase the size of the other cup holder.
Now, this may sound ridiculous, but it really does happen. For example, on the Toyota Tacoma. Sweers talks a lot about how they were able to improve the transmission, put direct injection and port injection in the engine and improve ride quality through cost savings in the vehicle. I can’t recall exactly what the cost savings were, but I seem to recall high-strength steel prices dropping and being one of those savings. All of this keeps the price point about the same and makes the marketers really happy.
Finally, after all of this is hashed out, Toyota (and most other manufactures) take the list to the bosses to get approval. In the case of Toyota, Sweers flies to Japan and presents his business case to a group of decision makers. In his presentation, he has to have real examples on how it improves the customers lives and each change much directly relate to Quality, Dependability, and Reliability (QDR). If the increased size of the cup holder may cause the plastic to crack 10 years down the road (yes 10 years!), then the change can not happen since it fails the QDR test.
And yes, Toyota really does look that far down the road. When they designed the Tacoma, Sweers and his team looked at how things would hold up 10-15 years down the road. That’s another reason why Toyota always seems behind the ball on innovation. It is hard to adapt to fast changes of today when you are planning out so far.
How Does This All Work Out?
Understanding all of this is critical to understanding why decisions like transmissions and engine choices are made along with material choices in the cabin. With all of this in mind, let’s look specifically at the 8-speed transmission. While I would love to be a fly on the wall during the product development stage, here is my best guess at how things played out.
The perception out there is additional speeds MUST equal better highway fuel economy. This is simply not the case. It all depends on how they setup the transmission.
Let me give you two examples. First, I thought the Tundra would get the 8-speed transmission based on the new Land Cruiser and LX 570 both getting the extra gears and that would translate into better fuel economy. I was wrong. In fact, with the 8-speed, both of those SUVs have the same FE as the outgoing 6-speed. Why? They engineered the transmission to use the extra gears at low speeds for better towing and smoother take offs.
Now, that isn’t just Toyota. The new 2016 Chevy Silverado uses the new 8-speed transmission first introduced in the GMC Sierra. What’s interesting here is the new truck gets 1 MPG WORSE FE than the outgoing 6-speed transmission. Yes, worse. Chevy, like Toyota did in the above examples what the more gears for smoother takeoffs and towing.
This isn’t the case for everyone though. Ram uses the 8-speed for fuel economy and Ford is looking at 8-speeds as well. Not sure if Ford will aim for fuel economy improvements or smoother takeoffs and towing.
As astute truck fans know, the new Raptor is coming with a 10-speed transmission and a high-output transmission. Currently, some journalists believe this is for fuel economy, yet I think that is garbage. My thinking is it will geared for more torque than fuel economy. Why? Simple. When you buy a Raptor, fuel economy isn’t at the top of your list.
Product Planning hasn’t identified fuel economy as being THE top priority. Sure, the Tundra gets destroyed at fuel economy challenges and is attacked by critics for being a pig on gas. Yet, clearly product planning isn’t that concerned. Why would I say that? The products give me all the reasons. If fuel economy was a top priority for them, then the Land Cruiser and LX 570 would have transmissions setup to return better fuel economy. And the Tacoma would offer a hybrid version along with the Tundra. Both trucks would have had direct injection for years and 8-speed transmissions along with a host of axle ratios. Yet, none of this has happened.
The Toyota truck team knows in order to increase fuel economy, they either need parts prices to drop allowing them the budget to do so or they need truck prices to keep rising – again creating more $$ room to improve the product while keeping the profit margin. OR they need the product to drop substantially in sales for Toyota Japan to give them the clearance to sacrifice profits for improvements to regain market share.
Profit or more specifically profit margin. Like we discussed above, you can make all the improvements you want as long as you don’t alter the price point or reduce the profit margin. This is a real issue for many changes. Sure, consumers may say, “just do it and I’ll pay for it,” yet there are examples all over the place where this doesn’t pan out. A good example is the manual transmission. If you check any forum, people go nuts over manual transmissions and how automakers should bring them back. I always want to ask, “why do you think they are going away.” I’m sure the response will be something like “because people are lazy or don’t know how to drive.” Great. But, that doesn’t change the fact the take rate on manual transmissions keeps dropping and automakers are doing away with it because they can make more money with an automatic transmission setup.
Lastly, I’m not sure what the difference in parts costs would be between an 8 and 6 speed transmission. What I do know is even $50 can be a big deal. It is absurd to me that on a $30, 35, 40k+ truck that $50 would make a difference, but it does. It is crazy to hear some of these product planners, engineers and product reps talk about price points. While we may all think price doesn’t matter since nobody really buys the base level truck anymore anyway, manufactures spend a lot of time on it. Why? When was the last time you saw a truck commercial stating the average transaction price of their truck? You don’t do you, it is always the base MSRP that attracts attention.
Wrapping it all up, until product planners truly identify fuel economy as one of the top consumer metrics and more savings is realized in product development or truck price points grow allowing for an increase in profit margin, we won’t see an 8-speed for a while. And even if we do, it may not be to improve fuel economy. It may just make the truck smoother off the line.
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