In 1981, rock band Rush recorded a now-classic song with a story line combining themes about independence, central authority, vast changes in technology and automobiles. The song describes a world of both great technical sophistication but matching authoritarian controls on technology, specifically technology related to automobiles -- an automotive dystopia with highly sophisticated but boring, passionless cars and stifling restrictions on their use. The protagonist of the song, presumably a teen, still has the urge to get out and "elude the Eyes" but must resort to Sunday trips to the country where he can rip around the countryside in a machine from yesteryear, carefully preserved by his uncle, "a brilliant red barchetta, from a better vanished time."
Rush's Red Barchetta seems to be an apt musical encapsulation of the funk being experienced today by both automakers and consumers. In fact, it is eerie how appropriate the themes from a progressive rock song of 1981 match the problems of 2023:
- a century of old, familiar technologies (internal combustion engines) causing global problems
- competing technology solutions to mitigate or eliminate traditional ICE problems
- competing regulatory pressures pushing specific technology solutions
- multi-national corporations attempting to select replacement technologies requiring multi-billion dollar bets
- massive, square wave changes in labor and supply markets brought about by a worldwide pandemic
- enormous uncertainty in customer demand for core drive train technology alternatives
- enormous uncertainty in customer demand for feature technologies (infotainment, safety, self-driving)
- longstanding manufacturer / dealer dysfunction
Metaphorically, both makers and buyers are temporarily stranded in a no-man's land far removed from an old-technology world whose economics and customer demands were understood and a new-technology world requiring billions of synchronized investments across multiple industries (manufacturing, energy production, energy distribution, retail) in which there is no single, obvious, correct strategy over the next ten to fifteen years. Those existential problems are further complicated by economic / demographic problems with buyers and longstanding dysfunction in the automotive retail ecosystem which are now stretched to their breaking point as all parties attempt to recover from distortions created by pandemic shocks.
How are these transitions going? About as well as one might expect in a capital intensive, risk-averse industry creating products that combine complex safety and environmental demands with fickle, often pointless fixation on electronic gadgetry.
Competing / Conflicting Regulation and Incentives
Every manufacturer and every government now viscerally understands the need to improve energy efficiency, reduce hydrocarbon emissions and optimize the ecological impact of new cars across their entire cradle to grave life cycle. Favored solutions for doing so still vary widely between countries and as a result, between manufacturers. Japan's government has, up until now, had a core contingent that thought hydrogen fuel cells were a viable path, leading Toyota among others to invest significant resources for trials in that area which have yet to prove remotely practical. Over the past twenty years, most countries just focused on raising MPG-equivalent ratings of fleets and tossed in rebates to customers as incentives. Over that period, consumers have generated consistent demand for such hybrid vehicles and several makers have developed reliable drivetrains with this technology and sold millions of vehicles.
Over the past three to five years, many governments including the United States enacted much more aggressive fuel economy targets and goals for carbon emission reductions, goals which CANNOT be met with any existing V8, V6 or I6 engine designs and likely not with V4 or V4 hybrid vehicles. Manufacturers have taken that as a clear sign that investments in redesigns for full electric cars MUST be made IMMEDIATELY. The flux in strategies for the makers resulting from these regulations is discussed in the next section.
What's missing in many countries -- certainly the US -- is an equal focus in government at the federal and state level on modernizing the electric grid to homes and essentially building out a charging station infrastructure equivalent in its ubiquity to existing gas / diesel stations. That infrastructure is so pervasive it is invisible to most Americans, even if they pass three stations on a single corner on their way to work. They're just there cuz they've always been there.
Of course, what's also missing -- PARTICULARLY in the US -- is a larger rethinking of our car culture in general. America had fantastic train service between many cities and useable urban mass transit in many large cities until after World War II. At that point, federal, state and local policies changed nearly overnight in ways that encouraged urban sprawl and destroyed mass transit systems. Today, America's car culture worsens urban sprawl, raises costs and lowers standards of living for younger workers increasingly unable to afford $40,000 vehicles with $3.50/gallon gas, 50 mile round trip commutes and inflated rent / mortgage expenses resulting from that same urban sprawl and NIMBY zoning restrictions limiting new home construction.
Technology / Drive Train Whiplash
As governments adopt new restrictions and incentives for autos, makers are experiencing whiplash in their choices of underlying drive trains and general feature technology used in vehicles. Government mandates for higher fuel economy have led most makers to stop making ANY cars with V8 engines entirely and many makers have even abandoned standard ("naturally aspirated") V6 / I6 engines. The dilemma they face is what to adopt to replace those older, tried-and-true designs. Just a smaller standard 4-cylinder? A turbo-charged 4-cylinder? A 4-cylinder+electric hybrid? A turbo 4-cylinder hybrid? Or a pure electric motor?
What's the problem, buyers might ask? Just pick a couple of technologies, bet on those and if one clicks, dump the other one and go with the winner, right? Not exactly. The underlying chassis of an ICE vehicle, hybrid vehicle or pure electric vehicle is different because of the center of gravity, paths for electrical conductors, heating logistics for the cabin and the batteries, etc. If a vehicle is designed for a V4/hybrid and later the maker decides to go pure electric, that vehicle's chassis will likely require a complete redesign. Now ponder the unanswered questions facing makers.
- Will pure electric vehicle demand hit a wall due to regional grid issues?
- Will pure electric vehicle demand hit a wall due to inadequate investment in retail charging locations?
- Will designs for smaller turbo-charged V4 and V6 engines encounter reliability issues that cause customer demand to plunge?
- Will mileage optimizations for smaller ICE/hybrid combinations prove too incrementally inconsequential, causing customers to shun hybrids and just go EV?
- Will hybrid and EV manufacturing hit a wall with availability of lithium and other rare earth metals?
- Will makers sticking with ICE find electric technologies solving most of their supply chain and grid concerns, causing demand for traditional ICE powertrains to vanish?
These are NOT easy decisions with guaranteed answers with guaranteed payback intervals for car companies. Think of the decision paralysis makers went through adopting simple stuff like airbags, anti-lock brakes and collision avoidance systems. Decision making has not been any car maker's forte.
In-Car User Experience Whiplash
Consumers have over thirty years of experience in adjusting to "user experience" whiplash in PC software, cellphones and even household appliances like TVs and Bluetooth-enabled washing machines and refrigerators. Some of that frustration is the natural result of new technologies that logically supplant older approaches for collecting user input or displaying status. More recently, consumers have grown suspect that much of the change experienced in products year over year is merely change masquerading as innovation. In other words, the hated concept of "model years" applied to software running inside cars used as a means to incent customers to dump the old and buy something new.
The idea that a similar approach of "change for change's sake" with "auto OS" platforms may also be suppressing demand for new cars, for multiple reasons. First, the fact that functionality one has become habituated to could be relocated or re-sequenced (or removed) without prior consent is bad enough. Second, most companies do a horrible job at providing help content online so having user interface behaviors change and attempting to document those changes online ("to switch traction mode, press Home, then swipe down to display the control panel screen, then click on the tire icon, then choose the boulder, the beachball, the ice cube or raindrops for rocks, sand, ice or mud traction, then click the OK button, then save it to your driver profile…") is fraught with the likelihood of customer dissatisfaction.
The most important concern with this "user experience churn" is its potential impact on actual safety. Sure, the average owner MIGHT adjust to this madness on their own vehicle after a month or two of driving. But hundreds of thousands of drivers rent unfamiliar new cars every day at airports. No one wants to sit in a rental parking lot for an hour delving through touch screen menus on an unfamiliar vehicle to figure out how to enable fresh air mode. They want to get in the car and head to their hotel or meeting location without delay and are likely to to be in traffic at a point where they need to use some function whose implementation is NOTHING like their own vehicle.
Labor Market Issues
Concerns about continual changes in "user experience" lead directly to labor market issues in ways many might not expect. Newer cars not only have vastly more complicated "user experience" software systems but vastly more complicated "drivetrain control systems" as well. Makers have attempted to tag such complexities as a feature to buyers since improvements CAN be made by simply pushing new software without physically altering the vehicle and -- in some designs -- without having to visit a dealer.
Old-school automotive engineering assumed designs could not change on the fly without vast expense upstream and downstream so the level of effort applied to human factors, design and manufacturing was much higher. With software-based features, absent changes to physical touch screens, GPS sensors and cameras, most functions can be changed as quickly as new code can be loaded onto EPROMS or memory chips. Isn't this a good thing?
Well...
Software has been present in vehicles since the introduction of electronic ignition and has grown more complicated as logic was used to alter timing / enrichment for performance and emissions. Software engineers within the automotive industry had similar backgrounds and skills to software engineers working on control systems in other disciplines like aviation or manufacturing involving telemetry, feedback loops, etc. that controlled machinery but weren't critical in driving human interactions via screens or input devices. Software engineering for consumer applications like PC software, smartphone apps and appliances and electronics has adopted vastly different paradigms for prioritizing feature work over fix work and timing new releases and bug fixes. These paradigms are focused primarily on marketing and branding goals of being first to market or assuming the first to launch will be able to win new users even if the first release falls short of perfection. Most criteria are thus based on user experience and are largely subjective.
As an example of how these newer "beat the calendar" tactics differ from older "get it right or people die" tactics of yesteryear, here are two approaches adopted in many development teams who deliver web portals, smartphone apps or PC software.
minimum viable product -- An approach aimed at avoiding getting beaten to the marketplace by a potential competitor by identifying the smallest set of functionality required for a product to gain adoption and only delivering those functions in early releases. Full functionality gets delivered incrementally over a longer period with subsequent releases which might be weeks, months or quarters apart.
canary releases -- An approach for exposing small incremental changes to functionality to a subset of existing users and carefully monitoring their behavior for signs of success or failure. This essentially uses existing live customers as guinea pigs for testing of new features and bug fixes, usually without their consent. Many organizations use this approach because they are unable / unwilling to spend the time and money required to devise internal test mechanisms to generate all of the input scenarios or high load the software might encounter in the wild.
As an owner of a vehicle, the idea of the behavior of your vehicle changing at the whim of the manufacturer without prior notice should give pause. The idea that the maker has bought into "continuous delivery" to add functions you might not want / need but risks the stability of the existing car with each new patch should also raise concerns.
Treating automotive design and support as a giant software problem with continuous releases poses a different labor problem as well which involves these expectations of a $60,000 vehicle:
- Cars need to remain operable for 15-20 years to justify the skyrocketing prices
- Cars must function in weather extremes that are never applied to "indoor" stationary appliances
- Cars have historically been tweaked slightly every model year to spark sales and justify ever-increasing prices -- that tweaking now includes changes to infotainment functions and other cabin functions
- Proliferating "auto OS" platforms across makes, models and model-years fragments the code base for such systems, requiring retention of more developers and testers to maintain each version for the entire lifetime of the vehicle -- which could / should be 15-20 years
Corporations already have trouble retaining engineers to support systems that are merely five or ten years old. Developers want to work on new products with new software tools. No developer wants to be stuck maintaining COBOL code in Southwest Airlines' scheduling app and no developer is going to want to be stuck writing security patches for a 2021 Chevrolet Tahoe in 2031. This has already been a problem with many software systems but the risks might have been mitigated by the code operating on a single processor in a non-networked environment. The software may eventually encounter a defect but the defect cannot propagate to other nearby devices or be used to propagate malware to unrelated systems on the same network.
Those mitigating factors do not exist with vehicles that may use BlueTooth or wifi to access your home network to monitor electric consumption so the vehicle doesn't charge when you are running your oven and AC or when it needs to check for nightly software updates. As a result, these new control systems MUST remain running but will CONTINUE being exposed to security risks requiring continual patching for the lifetime of the car. Have governments considered regulations dictating the minimum support life of vehicle software? Have car makers pondered how their designs will reflect those support life needs and how their hiring practices will adjust to meet those regulations?
One thing that IS certain is that makers are concluding their ranks of ICE veterans are too high and are taking steps to address it. On March 9, 2023, GM announced a new buyout targeting any US managers with more than five years' service and any global executives with more than two years' service. GM has set aside roughly $1.5 billion to cover the expenses for any that take the offer. This follows a prior buyout around 2018 that targeted 18,000 salaried workers, leaving GM with roughly 81,000 workers as of 2023. The offer is only one month salary per year of service with a limit of twelve months payout so it is essentially an offer of up to one year's salary. Assuming an average salary of $150,000, the $1.5 billion earmarked would cover another 10,000 employees.
Of course, Ford made a major shift on March 2 of 2022 by splitting its books between ICE platforms and electric platforms. This change not only has impacts for cost allocations of design and manufacturing but for the structure of sales channels through dealers and/or directly to customers. At the time of the announcement, Ford stated it was NOT planning to spin off one of the two divisions because they needed to be able to work together yet Ford also said the ICE division ("Ford Blue") needed to focus on profits and the electric division ("Ford Model e") needed to focus on new software and manufacturing techniques for high growth and that these goals couldn't achieve the required focus in one entity. The more cynical observer might still conclude spitting the books early will simplify an eventual write-off / sell-off if Ford succeeds at milking enough profits from Blue to fund where they need to go with "Model e" then immediately cut Blue loose if ICE demand tanks.
Both moves seem to indicate neither GM or Ford feels confident predicting what their workforce of the future needs to look like but both are confident it is SMALLER and has far fewer staff who cut their teeth on ICE platforms.
Supply Chain Strategy Failures
By themselves, the technology shocks around drive trains and "auto operating systems" have been challenging enough but the worldwide COVID pandemic exposed an unrelated strategic flaw in every high volume automaker that created cashflow problems in the short term and is triggering other ripples in maker / dealer sales chains that will be addressed later. The flaw stemmed from a fixation on "just-in-time" procurement of critical components and other non-auto market forces that took the auto industry's turn in line once it panicked and cut its orders. Most are familiar with the story…
During initial lockdown, travel restrictions led rental companies to halt all ongoing new car purchases and -- with no clear sign of when flying would return -- sell off nearly 100% of their existing fleets. That distorted the new car market via two paths. It cut fleet sale volumes from manufacturers to rental firms overnight. It also reduced retail demand by flooding used car markets with fleet vehicles at fire sale prices. Manufacturers processed those two inputs and immediately zeroed out purchases of some of the most EXPENSIVE components in any car -- the Engine Computer Units (ECUs) and customized integrated circuit chips used throughout vehicles.
The semiconductor fabricators responded by swinging capacity to other demands which spiked at precisely the same time -- demand for chips related to video conferencing gear, audio conferencing gear, new laptop computers for millions of workers who needed to work from home with a laptop rather than a desktop PC, etc. Chip making capacity was also booked by a spike in demand for specialized GPU chips used for advanced video games and complex data calculations used for cryptocurrency mining. Once those new contracts were signed, the ENTIRE auto industry found itself at the back of the line for new ECU chips. Even Toyota, which had invested in a backlog of such chips and took much longer to burn down its internal stash, eventually hit the same wall as other makers and began having problems shipping vehicles by late 2021.
Distorted Product Mixes
The chip based supply issues across all makers reinforced another problem for makers and dealers alike. Assume a maker offers seven different lines ranging from commuter econoboxes, family sedans, entry level sports cars, SUVs, trucks, luxury sedans and luxury trucks. Assume unit volumes in normal times were slightly skewed to the lower and middle price ranges. Now in a market with a 30% shortage of chips that control EVERY vehicle, if the maker can only make 70% of the prior UNIT count, they are better off ensuring they have a chip on hand for every high margin vehicle before bothering to make any econoboxes. And that's exactly the decision nearly every car maker made. The same logic applies to allocations of battery capacity. Do I make 15 econoboxes or one F-150 Lightning with my limited supply of lithium ion batteries? I make $25,000 on each Lightening and only $500 per econobox so my choice is $25,000 in profit or $7500. Let's make the ONE Lightning.
Since the higher end cars are purchased by higher income customers with less price sensitivity, allocations have shifted heavily towards the most expensive vehicles and prices on those vehicles have skyrocketed. Manufacturers and dealers have the exact same incentive -- which hurts consumers. Manufacturers want to maximize their revenue against a smaller unit base. Dealers have their own fixed costs to cover each month and would rather sell a $70,000 vehicle than a $35,000 vehicle. Even as manufacturers push new technologies, this dynamic is prioritizing use of limited resources on expensive, HEAVY, niche vehicles which reduces the number of econoboxes that can be produced to accelerate actual emissions reductions.
Remember emission reductions? The GOAL of this whole exercise?
Distorted Retail / Wholesale Pricing Behavior
Like larger car culture in general, the dynamics of the retail and wholesale car markets within the US have existed for so long, the original motivations for their structure and their unique behaviors are a mystery to most, including those within the industry. Retail new-car markets are structured in most states to require consumers to purchase new vehicles from independent dealers rather than directly from the manufacturer. This two-tiered flow can create perverse economic effects when manufacturers eager to report aggressive unit sales / revenue targets to THEIR stockholders maintain production and "stuff" cars into dealers who might not be able to sell that quantity without lowering prices or eating higher floating interest expenses for the vehicles on their lot. To some extent, manufacturers can do this to dealers because in many cases, dealers do not get to choose which vehicle models / trim levels are allocated to them to sell. If they push back on having new vehicles stuffed onto their lot in tough times, the manufacturer can reduce allocations during better times or give them the vehicles with the least popular colors and options as (not so) subliminal punishment.
Manufacturers typically set suggested retail prices on vehicles but even in normal circumstances, those numbers are often only accurate within plus or minus ten to twenty percent. In pre-pandemic times, popular cars might sell at sticker with $300 or $700 in extra "destination" charges tacked on by the dealer. Average cars might typically sell at 2-5 percent under sticker based upon the battle of wits between buyer and seller. Less popular cars would often sell for prices far under list via a variety of financial tricks. A truck listing at $70,000? How about a manufacturer's rebate of $5000? How about $10,000 off sticker? How about $10,000 below sticker AND keep the rebate? How about $14,000 for a fourteen year old trade-in with a blue book value of $7000? Did that customer just pay $55,000 for a $70,000 truck? Or did they just pay $48,000 for a truck that was never worth $70,000 to begin with and will be worth $45,000 by the time they get it parked in their garage?
Three years into this post-pandemic auto market meltdown, dysfunction between manufacturers and dealers appears to be worsening. As one example, Ford seems to have solved its chip supply issues, allowing it to complete more vehicles. Wholesale units grew from 1,104,000 to 1,147,000 for the last quarter of 2022 and from 3,942,000 to 4,231,000 for the full year from 2021 to 2022. Ford's earnings report referenced lingering supply issues that kept those 4Q production trends from improving further which -- in hindsight for Ford -- is probably a good thing. During 2021 and much of 2022, dealers had virtually no stock on their lots but that has changed DRASTICALY in the past few months. Dealers are now AWASH in vehicles that are remaining on their lots for MONTHS.
Understanding the dysfunction is easier by stepping outside the normal perspective of new car dealers and consumers and adopting the vantage point of used car dealers. In the pre-pandemic era, new / used car markets evolved an economic balance that optimized the flow of new and used sales based upon "normal" market conditions. Those conditions boil down to the following:
- try to keep new car prices as close to MSRP as possible
- make exceptions above MSRP only for extremely hot models and do it with local surcharges rather than raising then lowering MSRP as conditions evolve
- hide discounts against MSRP from consumers by inflating trade-in values
- in reality, limit trade-in values paid to new car buyers at or below reference prices in Kelly Blue Book or NADA bibles
Under "normal" market conditions, this modus operandi ensures any discounting from MSRP remains difficult for consumers to detect which can create more downward pressure in actual selling prices for new vehicles. This regime also ensures incoming used cars at trade-in enter the flow well BELOW their nominal market value. This gives dealers a chance to quickly flip the newer used cars in good condition for a quick profit or unload them at wholesale to second-tier used car dealers without tying up money in them waiting for them to sell.
In pandemic conditions, new car supplies plummeted, jacking new car prices up and restricting used car supply, causing those prices to skyrocket as well. In reality, the majority of consumers who bought cars during this automotive famine were buyers with higher incomes with less price sensitivity to pandemic surcharges. Since the supply chain woes continued for at least 30 months, dealers grew accustomed to relying on those surcharges to cover their operational expenses and inefficiencies. Unfortunately, 30 months has been enough time for buyers who have the income and desire for a new car to get one and they are out of the market. The buyers remaining do NOT have high incomes and CANNOT afford the surcharges dealers have added. Those buyers are sitting on the sideline, NOT BUYING. But dealers are doing everything in their power to ignore that market signal.
Because dealers borrow money for any inventory on their lot (new or used), any vehicle physically sitting on the lot more than two or three months becomes a BRIGHT RED FLAG to the dealer to do whatever it takes to unload it. This tactic is more typical for used cars which can be unloaded via existing wholesale auctions already set up for that purpose. However, dealers are also using that auction process for NEW cars, which seems to reflect a lack of understanding of the basic concept of object permanence understood by most toddlers. Dealers' thinking seems to be: If I have a vehicle on my lot not selling at a $70,000 MSRP but I'm worried that if I lower the price to $60,000 on VIN=a, then when I get another identical $70,000 car with VIN=b, I won't be able to sell THAT car at MSRP either. Instead of discounting the car I physically have, I will drive it forty miles away to an auction and sell it THERE for $60,000 and somehow, my retail buyers will never see that and the next guy might come in and purchase the next vehicle VIN=b for the full $70,000.
On the surface, this fixation on inventory turn in a slow market doesn't make sense. If you have vehicle A on the lot for $70,000 creating interest charges at 5%, unloading THAT vehicle A only to replace it with identically priced vehicle B also listing for $70,000 with 5% interest rates doesn't change the monthly interest being incurred. To the extent that a "November 2022" F-150 is identical in functionality and value to a "February 2023" F-150, dumping the "older" unit at auction doesn't seem to make much sense. Clearly, it makes more sense if you have a "November 2021" F-150 from the 2022 model year and it is now 2023 -- having the 2022 model on the lot can make customers question the desirability of your 2023 product and act as a lever to pull down your 2023 prices and sales.
This MIGHT work for ONE vehicle among hundreds of dealers with hundreds of thousands of cars. It DOESN'T work when all of the dealers are doing the exact same thing and THOUSANDS of identical vehicles are selling at 16-20 percent discounts and those figures are being shared with Kelly Blue Book, NADA and state tax authorities. Even if buyers aren't sophisticated enough to review wholesale prices, BANKS definitely look at these indexes and will not loan more than the wholesale price. To the extent dealers can somehow keep prices up, this means BUYERS right now are likely buying cars that are already well "under water" by chipping in much more cash as a down payment. If those buyers encounter financial difficulty and have to sell the car, they will instantly realize a much larger loss than what is normal for the normal cliff encountered when driving a car off the lot.
Supply Issues for Car Owners
Supply chain and labor woes don't only affect those considering BUYING a new or used car. The same issues affect repair and collision work on existing cars. As one notable example, Tesla owners who become involved in accidents are finding collision repair delays lasting up to six months. Even if insurance coverage provides some rental car coverage, it's unlikely policies cover rental costs for MONTHS. In the case of Tesla, it isn't clear how much of these delays are due to availability of parts versus availability of factory certified repair shops. Anecdotally, one independent mechanic in Chicago operates a repair shop in an industrial park and his diagnostic test drive route through the park is adjacent to a firm he calls the Tesla graveyard. The firm has 20-25 vehicles with varying degrees of damage parked outside which haven't moved in months awaiting repairs.
I imagine similar issues are being encountered with other parts needed to repair other new vehicles with esoteric batteries, unique touch screen head units, etc. These owner expenses are likely to compound in the short term and drive up insurance rates on ALL vehicles, further impairing affordability for typical buyers and adding more demand uncertainty to the market.
Clearly, the auto industry is living through interesting times. However, it also seems clear that the square wave shocks encountered since 2020 have not worked their way through the ecosystem. They are still bouncing back and forth inside the industry which is creating additional uncertainty with buyers about what they want and with makers on where they place their bets. In the short term, it seems like makers have priced new vehicles out of affordability for much of the current buying market and may be stifling demand from the smaller number still able to afford vehicles at current prices. Guessing how makers will emerge from this strategic fog over the next fifteen years is already impossible. Imagining how some could survive if the industry experiences another shock like a pandemic, war or similar disruption is impossible. The margins of error are already too thin.
WTH
