The past year has been a difficult one for the auto industry. December auto sales were down 23% y/y, while the second half of the year was the worst for the industry since 2009.
The global semiconductor shortage is the biggest culprit – and it’s going to take several years to get things right. As a Chevrolet dealer told Bloomberg,
“This will be my lowest volume year in 20 years. We’ll end up around 2,500 units when I normally do 3,300 to 4,500,” Paddock said by phone. “Everything I’ve got coming in, we’re selling before they come in.”
If you’ve bought a car in the past year – or simply did any level of research about buying a car – you know it’s impossible out there. You have to make some major concessions on what you’ll get – color, features, and most importantly, price. Otherwise you’re just not going to get a car, because the perfect car for you doesn’t exist right now.
Consumers adapting to the new rules set by automakers
Axios said this week that the car shortage could change buying behavior forever. Because you can’t just go to a dealer and walk away with a car,
Supply chain disruptions could have a silver lining for automakers if Americans can be trained to order the exact car they want — color, features, bells and whistles — and then wait a month or so for it to be delivered.
I think what’s happening is the exact opposite. People are fine settling for a car that isn’t perfect – that doesn’t check all the boxes for color, features, and bells and whistles.
For basically all buyers, there were so few cars, so there was no such thing as the perfect car. And as we’ve seen, that hasn’t deterred people from actually buying cars.
And that has pretty big implications for automakers – just not in the “fully customized, perfect car made-to-order” way the Axios article sees the future.
The paradox of choice would suggest that maybe people don’t want to choose between a ton of models. Instead, carmakers should just build a smaller number of models that people do want to buy. And figure out how to either build them better or more cheaply.
Complexity = cost
Let’s say you’re an automaker.
You can be automaker A and make four models with three different packages for each model. That’s a total of 12 possible cars.
Or you can be automaker B and make 20 different models with five different packages for each mode. That’s a total of 100 different cars.
Who is going to have the more efficient cost structure? Obviously it’s A. And that’s the Tesla model.
In order to scale its business a few years ago, Tesla had to create one vehicle model at a time, so they had to be something they were sure people would want to buy. Then the next step was to create a lot of them. Then rinse and repeat.
Tesla wasn’t a legacy automaker so it had to be efficient with its capital, which meant build fewer models but get people to really want them. In its Q3 results, Tesla’s automotive gross margins hit a record 30.5%, its best in at least five quarters (CNBC). Then the company announced this week it delivered 308K vehicles in Q4, well above estimates for 267K (CNBC). So it’s producing more cars at a growing margin. That’s the kind of scale the legacy autos can only dream of.
[Note: this by no means justifies Tesla’s share price. That’s another issue altogether]
Enter Ford’s F-150 Lightning
Ford has realized that scale is the future of the industry – cutting the number of sedans it offers to just two (Bloomberg). Ford’s automotive segment margins have sat in the high-single-digits for years, so the company has a long way to go to catch Tesla.
One way it can do that – and is doing that – is creating cars that people want. The all-electric F-150 Lightning is one of those.
The waiting list for the F-150 Lightning reached 200K last month, while Ford just announced it would double production to 150K units per year. Do you think those people who put in a reservation for the truck care if it’s the perfect color or has the absolute correct entertainment/media package?
Probably not – instead people want the experience to be as easy as walking into an Apple Store and buying an iPhone. Know which model you want, pick the color and storage, and that’s it. You know the price, you know the specs – no getting upsold on anything else.
Tesla has the margins to prove that consumers are wiling to choose between a narrow range of models and features. It’s exactly like Apple and the the super-high-margin iPhone. Allow consumers to choose between a couple of different models, go DTC, and don’t allow for too much customization. Let the product (and the brand) speak for itself.
That’s what Ford is doing, especially with the F-150 Lightning and the Bronco. It can really take its performance to the next level if it starts selling direct-to-customer.
There’s just one problem – its century-old dealership model isn’t going to let that happen anytime soon.