Even as the pandemic hits sales, [automakers] need to pour vast sums into developing electrical vehicles - with absolutely no guarantee of success.
-- FT Lex, July 29, 2020
Socioeconomic systems in transition are impossible to navigate. At the same time that the old order is in collapse, the keys to the new order are very difficult to forge. Plenty of people bet and lost - in many cases quite tragically - during the 1918 Russian revolution, the great depression that began in 1929, the 2008 financial crisis, as well as in many other transitions in between. It is easy to realize that things are changing, but what they are changing from is easier to identify than what it is they are changing into.
Let's consider a specific case. For about a decade now, governments round the world have mandated that automobiles change from hydrocarbon-powered internal combustion engines to battery-powered electric motors. Yet the availability of electronic vehicles for sale has far outstripped the demand for the vehicles themselves. Plenty of automakers are building EVs at volume. Unfortunately, that volume is staying on manufacturer and dealer balance sheets, because legacy automakers are designing and building EVs that few want to buy.
The future is right in front of every legacy automaker, yet the legacy automakers don't really know how to crack the nut. Build EVs, check. And build EVs they have. Unfortunately, it's hard to make money on a product when the unit volume is measured in 4 or low-5 digit range. In 2019, Chevrolet sold 4,915 Volts and 16,313 Bolts in the United States, for a combined sales volume of 21,228 EVs. That same year, Chevy sold:
- 575,600 Silverado pickup trucks in the US.
- more Blazers in the fourth quarter of 2019 alone - 23,008 - than they sold EVs for all of 2019.
- more than twice as many Cruize vehicles in the model's final and discontinued year of production - 47,975 - than it did their maturing new product line of EVs that same year. The Cruze sold more in decline than Chevy sold EVs at their peak: 43,669, in 2017.
- Tesla sold more Model 3s in two years (2018 and 2019) than Chevy sold in a decade's worth of Volts, Bolts and Sparks.
If at first you don't succeed, try, try again. That sounds easy enough for the legacy automakers to do: keep funneling cash flows from the lucrative legacy business of internal combustion trucks to finance more R&D of EV products (including, of course, an electronic pickup truck) until they get it right. Regulators have spelled out the future, and neither the debt burden nor equity holder's appetite for dividends preclude a healthy R&D spend. Tesla figured it out from scratch. How hard can it be?
Tesla the automotive company (ignoring the solar panel company) has (in that context) one mission - to make money manufacturing, marketing, selling and servicing a line of electronic transportation products. Sole mission and sole purpose make a clear investing proposition: this is an all-in wager. By way of comparison, legacy automakers have multiple missions: satiate bondholders and shareholders of a multi-line mass-transportation company. All-in wagers are not so appealing to investors in legacy firms.
This is especially true since it isn't clear just how quickly the clock is ticking on this transformation. EVs are the future, but when is that future? Proven hydrocarbon reserves are vast, demand for refined hydrocarbons (lubricants, jet fuel, automotive fuel) is down across all sectors and will remain depressed for years. Excess and untapped supply portend cheap refined petroleum product prices for a decade. Regulation could change that, but regulation is just as subordinate to economic needs as it is to environmental ones. The electronic vehicle manufacturer doesn't employ as many people (a.k.a. "voters") as the internal combustion engine vehicle business does. Cheap energy - be it electric or hydrocarbon - drives household productivity and therefore household leisure. Lots of entities stand to lose if the migration to EVs is too quick, EVs are the future, but that future might very well now be anywhere from one year to ten years out.
The standard playbook to navigate this dynamic is to do continuous market testing. The modern tech playbook would have that be done in the form of user need surveys, MVPs that gauge user interaction via instrumentation, and user satisfaction surveys, all in lock step. But if the market is in a volatile state, historical data is useless and real-time data only has value if the right filters are applied. Good luck with that.
During times of transition, there is no right policy, but there is wrong policy. The macro strategy risks are almost too obvious to point out. Bet too heavily on the future and you will lose. Cling too tightly to the past and you will lose. That's great policy, but utterly useless, unless you're JC Penny a decade ago standing at the city on the edge of forever with the ability to step back in time to alter the present. The micro strategy is where the transition is won or lost. The successful strategy will be one of muddling through.
In 1959, Dr. Charles Lundblom published a paper entitled "The Science of Muddling Through". The point was that policy change was most effective when incremental and not wholesale: evolutionary, not revolutionary. Dr. Lundblom was mocked by the intelligentsia of the day, who subscribed to the grand strategy theory that was fashionable at the time: that all outcomes could be forecast as in a chess match, that all plays could be anticipated and their outcome maximized toward a grand plan. The theory sounded great, but it assumed a static future path, muted all feedback loops, and was willingly ignorant of statistically improbable but highly significant events. Experience teaches us that the world is not so much chess as it is Calvinball. The grand strategy proved intellectually bankrupt as exhibited through its applications ranging from companies such as ICI Chemicals to the United States military prosecution of the Vietnam conflict. The prior resulted in monumental destruction of employee and shareholder value; the latter resulted in societal implosion.
Grand strategies will be all the rage in response to great challenge because they appear to have all of the answers. History teaches us that most, and likely all, will fail. In times of great transitions, Dr. Lundblom was right. Grand schemes and grand hypotheses will not win the day. Micro-level attentiveness, situational awareness, and adaptability will.
