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Auto Market Challenges Chipmakers’ Stamina

10/1/2013 11:10 AM EDT
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LarryM99
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Modular vs. vertically integrated
LarryM99   10/1/2013 1:45:19 PM
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The fundamental mismatch is that cars last too long for the product cycles in the electronics industry. We did some consulting to Visteon years ago, and the advice that I gave them then was to standardize interfaces and form factors in the cars for electronic components. I have often wondered how far you could take building up a car by plugging together major components built to standards, just like we can do with PC boxes. At a minimum, there should be standardized slots for entertainment and navigation systems with defined power capabilities and limited access to automotive data. This is more than the current situation, where there is sort of a standard-sized slot in the dash and a very customized wiring harness.

Unfortunately, this advice is fundamentally counter to the business model of automotive manufacturers. Their insistance on building cars as vertically integrated platforms is great for them, but it severely limits customers to what they offer unless the customers are willing to hack into their cars.

DMcCunney
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Re: Modular vs. vertically integrated
DMcCunney   10/1/2013 2:25:29 PM
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I have often wondered how far you could take building up a car by plugging together major components built to standards, just like we can do with PC boxes.

I might argue that auto manufacturers increasingly are doing that, to achieve lower costs and economies of scale.  IIRC, for example, Chevrolet actually makes the engines for most of GM's non-truck lines.  In many cases, models will use the same chassis and running gear, with only the body differing between models.

I haven't Looked Stuff Up to get details, but my impression is that the industry has been steadily moving in that direction for decades.


In many respects, automakers mirror the PC market.  Outside of luxury brands, cars are commodities, margins are thin, brand loyalty is fleeting, and lowest cost producer is likely to win.

AlPothoof
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Re: Modular vs. vertically integrated
AlPothoof   10/2/2013 3:58:09 PM
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What goes around comes around...

Back at the turn of the millenium, I toured the Auburn/Cord/Duesenburg Museum in Auburn, IN.  One of the displays they had was a poster listing all the US car manufacturers that had existed between 1900 and 1950 (with a notation of the few that were still around).  There were something like 300 companies listed.

The vast majority of these "manufacturers" were really little more than assemblers; they'd buy axles from A, engine from B, transmission (or chaincase) from C and so on, then wrap it up with their own body (which was often contracted out to a coach builder).

Later came Checker Motors (I grew up near Kalamazoo, MI, where they were located).  Their model was the same: buy axles, motors, suspension and so on from the Big 3 (and their suppliers), attach it to their chassis and cover it with their own body.

When Detroit started downsizing their cars late 60's-early 70's, Checker could no longer buy their larger components for a competative price.  They went out of business.

I came to the conclusion that a company had to have a certain amount of proprietary content in their product if they were to survive (but I don't know that the lower limit is).

I would also argue that PC's went through the same thing: in the early 90's, everybody and their brother was assembling desktop systems from components and putting their own label on them.  Now, we've got 2 or 3 major desktop PC manufacturers and perhaps 5 or so laptop manufacturers (the laptop side seems to have more proprietary design content).

DMcCunney
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Re: Modular vs. vertically integrated
DMcCunney   10/2/2013 4:56:17 PM
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@AIPothoof: Later came Checker Motors (I grew up near Kalamazoo, MI, where they were located).  Their model was the same: buy axles, motors, suspension and so on from the Big 3 (and their suppliers), attach it to their chassis and cover it with their own body.

Yes, I was thinking about them.  IIRC, they bought chassis and running gear from Chevrolet.  They were essentially custom coach makers, putting their body on someone else's frame. I've ridden in classic Checker cabs, and you still occasionally see the odd Checker Marathon (taxi body but not in yellow, and packaged as a family sedan without the taxi jump seats in the back.)

When Detroit started downsizing their cars late 60's-early 70's, Checker could no longer buy their larger components for a competative price.  They went out of business.

Their alternative would have been new downsized models of their own, but the market for purpose-built taxis wasn't big enough to support that,  (And while taxis are increasingly down-sized now, too, a lot of them were things like Ford Crown Victorias or Chevy Caprices intended for the fleet market where customers buy many at a time.)  Pressure these days on taxis is fuel economy, because stop and go city driving is the worst from an economy perspective, and fuel costs will be a major portion of a taxi's operating cost, so taxis are downsizing to get fuel economy.

I came to the conclusion that a company had to have a certain amount of proprietary content in their product if they were to survive (but I don't know that the lower limit is).

"Proprietary content" had a lot more to do with styling than components.  Models were differentiated on what they looked like, more than by wat was under the hood.


I would also argue that PC's went through the same thing: in the early 90's, everybody and their brother was assembling desktop systems from components and putting their own label on them.  Now, we've got 2 or 3 major desktop PC manufacturers and perhaps 5 or so laptop manufacturers (the laptop side seems to have more proprietary design content).

Agreed.  PCs became fungible commodities.  Given the same specs, it largely didn't matter whose name was on the box, and competition came down to price, with lowest cost producer winning.  You had to make and sell huge volumes just to cover costs. let alone make money, and smaller vendors rapidly became unable to compete.

AlPothoof
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Re: Modular vs. vertically integrated
AlPothoof   10/2/2013 5:58:53 PM
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@DMcCunney:

Their alternative would have been new downsized models of their own, but the market for purpose-built taxis wasn't big enough to support that.

Except that wouldn't match their model: they were't just custom coach builders, the frame was theirs too.  And the combination was modular: if you needed another 2 benches, 6, more (I've seen "stretch" Checker limos with 10 but I don't know what the limit was) they could just drop another center section in the frame and body and weld them up.  That meant certain sizes and strengths had to be adheared to.  As you say, the market wouldn't support the cost of reengineering for down-sized parts.

"'Proprietary content" had a lot more to do with styling than components.  Models were differentiated on what they looked like, more than by wat was under the hood.'

In a way, that's kind of my point: "badge engineering" isn't going to be enough.  If the only thing unique about your vehicle (or other product) is the color of the paint, you're not going to hold market share.  I think that's what killed so many of those early car companies: the only thing differentiating them was their body, everything else was interchangable.  Since the bodies followed the fads, they all looked alike and the market was too small to sell enough to stay in business.

 

DMcCunney
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Re: Modular vs. vertically integrated
DMcCunney   10/2/2013 10:51:49 PM
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@AIPothoof: As you say, the market wouldn't support the cost of reengineering for down-sized parts.

I wasn't aware Checker made "stretch" variants, but it's not a surprise.  There are custom coachmakers that will do stretch versions of whatever you like - I've seen a stretch Humvee limo tooling around NYC.  But those are custom one-offs with prices to match, not an option you can order from the factory.


I think that's what killed so many of those early car companies: the only thing differentiating them was their body, everything else was interchangable.


Except that it wasn't.  All of those folks were largely making all of their own stuff. It might not even have been interchangeable among their own models, let alone with anyone else's


I think what we saw was the inevitable consolidation that affects any industry.  Back then, the automobile was a whole new thing, with a huge potential market. Lots of folks tossed their hat into the ring and started building cars.  Costs were much lower, prices charged were higher and so were margins, and an auto company could make money making and selling a lot fewer cars.

As the market expanded, competition set in.  Henry Ford revolutionized the industry with his innovations in assembly line manufacturing, which allowed him to make and sell the Model T at a far lower price than his competitors to a whole new class of buyers who coudln't have afforded previous vehicles.


Competition occurred.  Some folks were successful and got larger.  Some folks couldn't compete and folded or were bought by a bigger competitor.  (General Motors was the result of comnining several smaller independent manufacturers into a larger entity.)  Cars became the norm, not the exception, and most people had one.


In any industry, the eventual result is a few big players dominating the market and some smaller niche market players serving segments the big boys don't.  That's pretty much what happened with automobiles in the US, with the Big Three dominating the market and others addressing specific niches.


The issues the Big Three faced came as the market and competition became global, and dominating the US market was no longer a guarantee of survival.  Foreign automakers led by Japan entered the US marketplace with vehicles better than what Detriot was turning out and rapidly became major players.  The Big Three are competitive again, but it took nearly going under and government action to force the changes that made them so, and their future is not guaranteed.  I expect to see further consolidation in the global auto marketplace in coming years, and expect more brands to go under or get acquired.  I don't see the Big Three as in immediate danger, but I don't see tham as invulnerable, either.


DMcCunney
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Define "innovation"
DMcCunney   10/1/2013 3:02:01 PM
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@Junko: Carmakers say they need innovation, and yet the typical automotive product development cycle is about five years. In most other industries, the whole world -- of technology, market trends, consumer preferences, and pricing -- changes within three years.

It depends on what you mean by innovation, and points out fundamental differences between the consumer electronics and automotive markets.

Auto design cycles are longer than consumer electronics design cycles, and pretty much have to be becasue of the nature of the product.  Retooling a factory that makes cars is a fundamentally different exercise than combining new chips on a motherboard.

Automaking innovation will perforce be incremental, and the process will be marked by lots of little changes, not big fundamental ones.

I'm old enough to recall when cars weren't a market for chip makers, because they didn't use chips.  Everything was mechanical linkages.  Now any car you buy witll have a plethora of sensors and microcontrollers, communicating over an internal local area network with its own specialized protocols.

This did not happen in a sudden dramatic matter.  It happened slowly, step by step, with each step of the way marked by the questions "What will it cost to do it?", "What will we get by doing it?", and (most important) "Will the market go for it?"  If you are an automaker, you want to limit your risks, and not do things that will kill you if they aren't successful.

I think if you could tour any major automaker's R&D labds, you would find engineers working on all sorts of things that are innovative, but they might not be things you would even be aware of if you buy a car that incorporates them.  They will be designed to reduce costs, improve servicabilty, and make cars safer to drive.

To top it off, automotive doesn't exactly offer either the fastest growing or the largest volume market for semiconductor companies.

No, but they offer a stable and steadily growing market large enough to be served profitably if you can get design wins.  Name me a chip maker that doesn't produce a variety of "bread and butter" chips that may not get the volumes of being selected for the new iPhone, but do provide steady revenue and profits that keep you afloat if you don't get the Apple design win.

junko.yoshida
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Re: Define "innovation"
junko.yoshida   10/2/2013 5:27:52 PM
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@DMcCunney, thanks for your thoughtful reply. Certainly, I believe that there are lots of innovation going on at major automakers' labs -- things of the nature consumers aren't aware of.

In my defense, I wrote this piece from chip companies' point of views. As more and more electronics is going inside a car -- whether infotainment or ADAS, I am hearing more chip suppliers complaining about the auto industry.

Sure, the automotive industry represents a "steady" market for some of these chip suppliers.

But to be clear, chip vendors are under pressure to innovate a number of key electroincs systems for ADAS.  When semiconductor companies come up with a new image sensor, software and camera modules that see things differently, for example, they find carmakers not exactly as their "partners" to innovate new ADAS technologies together.  Rather, chip vendors remain "suppliers" -- essentially to jump hoops for them.

Of course, in this case, chip vendors ARE automotive parts suppliers. And parts suppliers to complain is probably out of line in the eyes of carmakers. Perhaps. But as a Freescale executive was quoted by saying in the last graph of this story, I suspect the advancement of electronics systems inside a car will need a much tighter collaboration between the two parties, on a much more equal footing in the future...

The uncomfortable truth is that the fundamentals suggest that the industry needs to rethink how it goes about sustaining innovation. This requires a completely different kind of collaboration -- and true partnership -- to manage through new emerging challenges.  

 

TonyTib
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From an embedded perspective, I'm thankful
TonyTib   10/2/2013 6:16:18 PM
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I suspect the big automotive chip suppliers (Freescale, TI, Infineon, etc) aren't under any more price pressure than, say, Apple's suppliers.  I suspect they also like the longer, more pedictable automative lifecycle.  (Yes, automative has its cycles, but they're a lot less severe -- on both up and down -- than semiconductor's).

From an embedded perspective, industries such as automotive and telecom infrastructure which are big AND have long product cycles are a gigantic plus.  Spec in a x86 CPU or hot phone/tablet ARM chip and see if you can get it in a few years.  On the other hand, my company has a board using the TI 320C6701 DSP which has been in production since 2000, and we still don't have any problems getting them (unlike buying a new Pentium III).

daleste
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Re: From an embedded perspective, I'm thankful
daleste   10/3/2013 11:32:41 PM
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I would say that automotive suppliers are held to a much higher standard than suppliers to the computer and handheld industries.  There were times that we would wrap dollar bills around the chips to stay in the business.  The quality requirements required a lot more investment.  If your phone or computer stops working after the 1 year warranty, you throw it away and buy a new one.  If your car stops working, you get it fixed.  There were times that cars were being parked in a field waiting for our chips.  You can bet that the penalties cost more than the profit at that point.

junko.yoshida
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Re: From an embedded perspective, I'm thankful
junko.yoshida   10/5/2013 11:00:19 AM
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You wrote:

 The quality requirements required a lot more investment. If your phone or computer stops working after the 1 year warranty, you throw it away and buy a new one.  If your car stops working, you get it fixed. 


Exactly. If that's the case, shouldn't the cost of automotive-quality chip development be shared by both chip suppliers and carmakers? Or, am I just dreaming here...

DrQuine
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Re: From an embedded perspective, I'm thankful
DrQuine   10/6/2013 10:30:02 PM
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Safety, reliability, maintainability, and diagnostics are all needed for car applications. I'd think that a solid architecture that is sustainable would make a lot more sense than "reinventing the wheel" for every product cycle in every model of every car.

junko.yoshida
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Re: From an embedded perspective, I'm thankful
junko.yoshida   10/7/2013 6:26:51 AM
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Indeed, "a solid architecture that is sustainable" is the key.

But I think what's happening to the automotive industry and consequently to the chip suppliers who support the auto industry is this:

A slew of new technologies -- be it ADAS or connectivity -- are being introduced. The product cycle of a car would not change and yet the pace of technologies being innovated and introduced to cars is definitely picking up. 

 

Bert22306
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Upgrades don't need a whole new model
Bert22306   10/1/2013 3:55:11 PM
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I think there are a couple of points, that others have alluded to as well, that show why the automative market is a better bet than some might think. One is that upgrading the electronics in a car can be done at any time, and it can be installed in any number of different models produced by a manufacturer. Think of systems like OnStar, which are installed in all GMs, and which can and are upgraded irrespective of other model changes. Or entertainment systems in cars, which also can change at any time.

The other thing is that all of these electronics, as well as power steering systems, transmissions, engines, batteries, climate control systems, windshield washers and wipers, brakes, shock absorbers, wheels and tires, and on and on and on, are certainly modular and are installed in many different models. That's why anyone who looks under the hood or underneath, can see the strong family ties between, say, a Chevy and a Cadillac.

And there's another point. Cell phones and tablets are basically toys. Toys never last, because people get bored with toys and muct have a different one before long. Cars are more like, you know, your kitchen stove, your washing machine, even your house. These aren't things you change at the drop of a hat. And yet, compared to those other more or less permanent fixtures, cars do evolve quite rapidly.

DMcCunney
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Re: Upgrades don't need a whole new model
DMcCunney   10/2/2013 5:06:01 PM
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@Bert22306: The other thing is that all of these electronics, as well as power steering systems, transmissions, engines, batteries, climate control systems, windshield washers and wipers, brakes, shock absorbers, wheels and tires, and on and on and on, are certainly modular and are installed in many different models. That's why anyone who looks under the hood or underneath, can see the strong family ties between, say, a Chevy and a Cadillac.

Yep.  And an awful lot of that stuff is not actually made by the auto manufacturer whose label is on the car.  It's made by third-party suppliers selling to all of the automakers.  Consider the ubiquitous spark plug. People like NGK, Bosch, and Champion - Federal-Mogul are competing to get their plugs supplied in new cars from major manufacturers.


Increasingly, automaking resembles PCs - the automakers are assemblers, putting together parts made by others.


rick merritt
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Same dynamics in HDDs
rick merritt   10/1/2013 4:54:59 PM
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I think folks like Marvel feel the same way about the hard drive market. A few customers pound their profits down to pennies, yet they somehow stay in.

Sheetal.Pandey
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Re: Same dynamics in HDDs
Sheetal.Pandey   10/2/2013 2:16:38 PM
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Electronics in automotive has a long way to go before electronics industry considers maximum revenue coming from automotive. Cell phones and infotainment industry would remain quite a strong competition.

DMcCunney
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Re: Same dynamics in HDDs
DMcCunney   10/2/2013 4:32:26 PM
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@Sheetal.Pandey: I think we need to distinguish between two differnt kinds of electronics in automobiles.  One kind is what we already see a lot of: the sensors and microcontrollers used internally by the car, that do things like control brakes and provide ignition timing.  The other part arguably is consumer electronics and infotainment, as cars increasing have options for entertainment centers for the passengers and built-in GPSes for navigation.  The same underlying parts that might be in a smartphone or tablet are simply in a different form factor, but serving the same sorts of purposes.

DMcCunney
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Re: Same dynamics in HDDs
DMcCunney   10/2/2013 4:24:17 PM
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@Rick: A few customers pound their profits down to pennies, yet they somehow stay in.

Think of it like the supermarket industry.  Supermarkets sell mostly fungible commodities, where competition is on price.  (Milk is milk, regardless of whose name is on the label.)  They make pennies on a dollar, so it's all about market share, and getting as many dollars as possible to make pennies on.  Measurment there isn't profit margin, it's inventory turns and Return On Assets.

When there's a market for millions of something, chances are you can address it and make money, even if the amount you make per unit is less than you might make on a different product.

krisi
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electrification
krisi   10/2/2013 4:31:27 PM
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yes, increase in electrfication will happen...but the pace of it will be snail slow

DMcCunney
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Look at the factory
DMcCunney   10/2/2013 5:17:24 PM
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Another thought on auto industry innovation: instead of looking at the car, look at the factory that builds it.

One thing I think you'll see if you tour an assembly plant operated by one of the big manufacturers is steadily increasing automation and use of robotics, with a declining number of people required. Machines are doing more and more of the work that used to be done manually.

In addition, there have been changes in other areas, such as organization.  Led by the Japanese but now common, we see increasing emphasis on supply chain management and "Just In Time" inventory control.

While not obvious to a car buyer, this is as much innovation as what's currertly on an engineer's CAD station at an automaker R&D facility.

junko.yoshida
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Re: Look at the factory
junko.yoshida   10/2/2013 5:36:06 PM
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No question about innovation on the factory floor, @DMcCunney. I totally agree. 

Look no further than Taiichi Ohno, a self-taught engineer who developed the just-in-time manufacturing system at Toyota -- and that was introduced in Toyota plants in mid 1950. 

Toyota, Honda and Nissan are also known for their own robotics technology.

So, yes, lots of innovation is going at the factory.

DMcCunney
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Re: Look at the factory
DMcCunney   10/2/2013 11:10:32 PM
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@Junko: Look no further than Taiichi Ohno, a self-taught engineer who developed the just-in-time manufacturing system at Toyota -- and that was introduced in Toyota plants in mid 1950.

Speaking of Toyota, they got some local NYC press in an unexpected area.  Their engineers consulted with a local soup kitchen on improving operations.  The manager of the soup kitchen didn't see what auto industry engineers could do to make his operation more efficient, but they were able to analyze his traffic patterns and dramatically decrease the wait time to get in and get a meal.

Essentially, he was admitting people needing food ten at a time, so those waiting had to wait for ten seats to be clear before being admitted, seated, and fed.  The Toyata folks changed it so that one of his people was dedicated to watching for seats to become free, and admitting people as seats became available for them.  Wait time dropped from 90 minutes to ten minutes.  This sort of process analysis to streamline operations and make things more efficient is what the Toyota engineers do, so it was no surprise they could apply thier skills to a soup kitchen as well as an auto plant.  :-)

junko.yoshida
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Re: Look at the factory
junko.yoshida   10/3/2013 1:31:08 AM
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@DMcCunney, that's a good story...i love that! 

Thanks for sharing! 

DMcCunney
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CEO
Re: Look at the factory
DMcCunney   10/3/2013 2:22:41 AM
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@Junko: that's a good story...i love that!

I thought you might appreciate it.  I was tickled myself.

It was noteworthy is another fashion. Instead of donating money to a charity, Toyota donated skilled services.  The engineers doing the consulting were "on the clock", being paid by Toyota to do it.

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