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 frame work 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 ass ociated with transaction costs or principal-agent theories have often been associated with contradictory empirical evidence on make-buy development de cisions, Our perspective follows some recent insights proposed by the prope rty rights theory of the firm, whereby a decision to pass the development o f the innovation from the assemblers to the suppliers exists when the suppl ier product shifts from bring complementary to being independent of the ass embler product. The hypothesis wt: explore is that modularization of the au tomobile is a strong enabler of product independence, being the key driver of increasing supplier responsibility. Our analysis is based on detailed ca se studies of two important innovations that were introduced in the automot ive 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 int roduction and development of the innovation, and explains how we can unders tand this role in light of the proposed framework. (C) 2001 Elsevier Scienc e Inc.