Auto's EV Problem
Why supply outran demand and what to do when a strategy isn't working
The Context
I’ve been seeing an increasing number of headlines about the challenges of electric vehicles (EVs) in the auto industry.
Volkswagen is considering closing an EV plant
Volvo backtracked - albeit modestly - on its EV goals
GM delayed the start of production at a battery factory in Indiana
Ford canceled production of a large electric SUV
Each of these are isolated events, but the fact that these headlines are all from the past 2 weeks suggest the ball is rolling on something bigger.
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This leads to the question…What do you do when a strategy isn’t working?
Is it Bad Strategy or a Bad Market?
The first area to look when strategy isn’t working is to determine if there’s a market problem or a you problem.
In other words, are competitors having success at your expense, or is the whole industry trying to solve similar challenges?
If it’s a market problem, broader forces are at play or perhaps there’s information known now that wasn’t known at the time
If it’s a you problem, it could be that the wrong bet was made
The evidence points to the auto industry facing a market problem. Most competitors are trying to solve EV challenges and the problem isn’t isolated to one brand.
EV’s Challenge: Going from Early Adopter to Early Majority
New product adoption - as is happening with EVs - is a well studied field.
It starts with people willing to sacrifice product quality and cost in exchange for being early (“Innovators / Enthusiasts”) and moves to early adopters before starting to reach the “majority”.
Electric Vehicles are stuck somewhere in the Early Adopters, right around “The Chasm”.
They’re a good product but not compelling or cheap enough to drive large scale adoption.
As a result, new purchases are languishing. It seems that the market has found it’s equilibrium on where buyers stand today - about 7-8% of quarterly light duty vehicle sales.
The strategy for these automakers - going all-in on EV - was built around mass adoption, but the expected pace of adoption hasn’t materialized.
One challenge? Demand was propped up by incentives and subsidies which masked the true market demand and rate of adoption.
Navigating Regulatory-Driven Demand
Production and EV hype outran demand because federal subsidies favored electric vehicles.
In an effort to spur demand, a $7,500 federal credit was instituted for EV purchases.
Subsidies can’t create demand that doesn’t exist; they can shift it between price buckets.
Someone willing to pay up to $30,000 for an electric vehicle may buy one with a $7,500 credit on a $35,000 vehicle
But, someone that never wanted one in the first place won’t make the purchase no matter the subsidy
This subsidy, along with an increasing prominence of EVs on the road, accelerated demand faster than the natural pace of adoption.
In effect, it pushed all the buyers that wanted an EV into the purchase, but slowing demand suggests the early wave of adopters has been primarily captured.
In the absence of being forced to buy electric, consumers have a choice.
Today, they’re making a choice to stick with the familiar or move toward hybrids.
Auto Skipped the Transition Step
Large scale change happens as a transition, not an event.
Moving people from all they’ve known (gas engines) to a completely new and unproven type of car (electric) is a slow process.
Transitioning in steps builds trust and creates more behavioral change.
This happens by moving someone from the known, to the partially known & unknown, then finally to the unknown.
Hybrids present this intermediary between the familiar (gas) and the unfamiliar (electric).
Despite no subsidies for Hybrid vehicles (Plug-in Hybrids may qualify depending on certain characteristics), sales growth remains well above the industry and all electric.
This suggests that customers are willing to try something other than gas, but going fully electric is too unproven, new, and oftentimes expensive to justify an immediate switch in the vast majority of the auto market.
What to Do About a Bad Strategy
Photo by Felix Mittermeier on Unsplash
Strategy is wrong when enough data piles in that a behavior can reasonably be called a trend.
Bad results can come from a good strategy - plans don’t always work out because markets and customers change.
There’s plenty of reasons to believe that electric is coming, but its breakout moment isn’t likely coming in the next few years.
My uninformed prediction is that adoption will take a steady - not exponential - march upward as prices decrease and the product improve
The best response to a trend not in your favor is to deal in the facts that exist today, not the facts in place when the strategy was set.
Putting good money after bad strategy is worse than accepting the sunk cost and moving on
In consumer businesses, customers talk with their wallets.
If customers aren’t buying, and there isn’t a path to them buying at the levels needed to sustain investment, the right move is to re-assess the strategy.
Without a clear path to ROI, auto brands are “right-sizing” their EV investment and planning to the most realistic view that they have of consumer behavior today.
Bringing production more in line with supply and demand is best for the long-term health of the industry even if it’s at the expense of short-term write-downs and strategic redirect.
Last Thoughts
When strategy doesn’t work, it’s a market problem or a company problem. Here, it’s a market problem.
Auto brands misread EV demand because subsidies masked their true rate of adoption. Now, with a more clear picture of the market, brands can develop the right strategy to match supply to the current state of the industry.