Published on August 13th, 2016 | by Zachary Shahan0
What Goes On In The Minds Of Auto Execs?
August 13th, 2016 by Zachary Shahan
I’ve had a lot of fun recently while highlighting 50 “tips” for slowing the electric car revolution and writing about what the end of gasmobiles could look like, but the discussions left some people scratching their heads. Why would automakers conscientiously try to delay a switch to electric vehicles? Why would they not try to create attractive electric cars once they are shown how popular Tesla’s models are?
A transition to electric cars threatens the “financial health” of conventional auto companies. Many shareholders would be pissed to see so much investment in gasoline car technology “wasted.” Executives who built their careers on engine expertise would become much less valuable. Automakers would have to shift much of their business strategy, operations, factories, and workers. They’d be tossing their highly valued patents & knowledge down the drain.
However, that’s all just a simple summary. It hit me that a more detailed theoretical rundown would help more people to visualize the problem — to understand why BMW is trying to compare the 330e to the Model 3 in advertisements, why Ford is boasting about range on a plug-in hybrid that has only 22 miles of electric range and is advertising its cars using Captain America, why most electric models sold in the US aren’t available in Florida (and most other states), why no automakers other than Tesla have cars with super-fast charging, why Chevy isn’t creating this car (which a consumer designed) and BMW isn’t creating this one (which a consumer designed), why Fiat’s CEO told people not to buy the Fiat 500e, why Toyota is still hyping hydrogen, etc.
So, let’s dive into a thought experiment.
Numbers (… Fake Ones)
I’m not going dig through decades of investments from big auto companies, but below are some fake numbers from automaker “Bord” to play with in order to get rolling….
- Bord has 84 factories
- $84 billion has been invested into these factories
- 18 of these factories (~21%) are engine factories
- 6.5 million Bord vehicles were sold in 2015 for $150 billion in revenue and $7 billion in net income
- Bord had a 6.5% automotive gross margin in 2015
Essentially, Bord is making 6.5 million vehicles a year ($150 billion in revenue, $7 billion in net income) using factories that it put $84 billion into (with $17 billion going into the engine factories alone). After adding in cash used for other overhead, operations, etc., Bord walks away with a healthy little profit each year and sends some of that back to investors.
The Groundbreaking Q3 2016 Bord Shareholder Letter
Now, let’s say that Bord’s CEO sees that electric vehicles are the future, that they’re already essentially competitive, and that the most logical thing for the long-term health of the company is to switch to electric vehicles fast. Mr. Constable C. Smuggins, CEO of Bord, tells shareholders in a shocking quarterly letter:
We are planning to switch over 100% to electric vehicles in the next 3–5 years. We would do it sooner, but it takes time to create these new EV models and ramp up battery production capacity. Doing it later would be stupid, because people won’t want to buy our gasmobiles in 5 years when compared with our electric vehicles or other automakers’ electric vehicles.
Unfortunately, this means that our engine factories (which we put $17 billion into) are soon going to be useless. Well, the land and building shells will still be useful, but nothing we currently have or do inside will be. These factories will have to be completely revamped to produce batteries and electric motors. In order to do that, we will need to invest another $17 billion. Actually, we will need to invest $33 billion on top of that $17 billion for additional battery factories in order to keep producing the same number of vehicles we sold in 2015. This is a good thing, because we will have a competitive advantage in the industry from our $50 billion worth of battery factories. Don’t worry about us choosing the right batteries and manufacturing machines, though — we’ve got this.
Our other factories will need to be reworked to support the many new models we are introducing based on new electric powertrains. That’s another $50 billion.
We have a cash balance of $50 billion. Quite a lot, eh? Unfortunately, that’s clearly not enough to cover this quick transition. (If we could somehow spread the transition out by 2–3 decades, that would be much easier, but we don’t see that as sensible.) So, we will need to borrow a lot of money, and we are going to cut off dividend payments for several years. No worries — we’ve got you covered in 2025 or 2030, and we know you are long-term investors who also care about humanity and want to see a quick transition to clean technology that stops costly and horrendous global warming, so we’re sure you won’t bail on us.
To be honest, though, we don’t know a lot about batteries and don’t have experience making compelling electric cars, so we hope we don’t screw up too much while pouring $150 billion into this. (Oh, did I mention that we need to do some massive staff re-training, R&D, set up new supply chain partnerships, license new tech, and acquire a bunch of patents?) By the way, yeah, um, our thousands of engine-related patents are basically useless now, so we’re just going to toss them in the trash.
I know you’d rather get a few more dividend payments before we jump in, but frankly, everyone in the industry sees the light and is now going to do this, so we have to get moving.
Back to Reality
Yeeeeah … most shareholders of Fiat-Chrysler, Ford, BMW, Nissan, Daimler, GM, Toyota, Hyundai, and Honda wouldn’t be thrilled to hear such plans, and many would try to stop the move. (Volkswagen is getting away with something slightly approaching this thanks to the pickle it landed in by being a massive cheater and liar. Lucky VW!)
Overall, the question is: If you’re in the shoes of these large automakers, how do you dump your huge investments (sunk costs) and competitive advantages (which are centered around the internal combustion engine) in order to jump head first into a new technology? How do you tell shareholders that you’re going to go from making billions of dollars a year in profits to borrowing money for several years? How do top executives who built their careers on engine expertise suck it up and say that it’s time to retire the old dirty beast under the hood? Tough questions.
I know I demonize automakers a lot for doing a horrible job on their EV efforts and promotion, but it’s not really about demonizing them — the goal is to push them into a better approach, and to help inspire other consumers to do the same. But when you look at the challenges they face, this simplistic idea becomes less potent. That leads into a topic for a coming article — how I think these companies can and should proceed. First, though, I never got to the main question in the title: “What goes on in the minds of auto execs?”
Who the hell knows? These people vary in personality, career focus, and culture quite a bit. How much they understand that electric cars are the future, how much they understand the existential threat electric cars present to their businesses, how much they consciously think through the finances or run spreadsheets on the matter, how much they care about global warming and air pollution, and how much they genuinely try to delay an electric car revolution probably vary a great deal.
If you find any more interesting tidbits on how any of their minds work and what they are thinking, drop us a note. In the meantime, fanboy/fangirl or not, I think you have to give some thanks to Tesla Motors. If Tesla wasn’t around, the transition would be going much more slowly, the plans of automakers would be even much worse, and there’d be a lot less inspiration in this market and in the world in general. Thanks, Tesla!