Many discussions of automotive history center around what historians call “counterfactuals”: trying to envision what might have happened if certain things had turned out differently than they did in actual fact. For automotive enthusiasts, this often boils down to a simple question: “Why didn’t they just … ?” The answers are often equally simple — and sometimes depressingly mundane. In this editorial, I’ll talk a little about the most common reasons enthusiasts’ favorite counterfactuals never came to pass, which also reveals some of the general lessons I’ve learned about the auto business through my years of doing Ate Up With Motor.
WHERE THE RUBBER MEETS THE (ECONOMIC) ROAD
Automotive enthusiasts, as a rule, are enamored with cars (and/or trucks, a point I concede only grudgingly): their styling, their engineering, their driving dynamics, the nostalgic association they carry with a particular era or lifestyle, what they reveal about the aesthetic or cultural trends of their time, and perhaps their legacy on the racetrack or in other forms of motor sport. That affection might be highly romantic, it might reflect a nerdish fascination with technical minutiae, or both, and it’s often accompanied by a fascination with the larger-than-life characters who pop up along the way, like heroic race car drivers, iconoclastic engineers, and visionary designers.
Notably absent from this list are finance directors, industrial planners, or investment bankers. (This is not to discount the people who’ve devoted their whole careers to studying industrial history and corporate economics, but while I’m grateful for their efforts, I daresay they represent only a very small minority of auto enthusiasts.) There are of course some devoted fans of the industrial magnates who’ve founded automakers, and even of some the would-bes and almost-weres who’ve crashed and burned in the attempt, but the fascination there generally seems to be with valorous individual success rather than with profit & loss reports, financial projections, and general bean-counting that goes into the operation of a labor- and capital-intensive endeavor like making automobiles.
Nonetheless, if we can set aside the glamor of a well-turned fender or a wall of racing trophies, making cars is very much about finance, capital, logistics, supply chains, and labor — more so, ultimately, than styling or even engineering. Something might be technologically feasible, it might look great, it might even be a good idea, but it won’t ever make it to showrooms unless the finance people decide that there are economically viable places to build it (and all the thousands of pieces that go into it) and that there’s likely to be a worthwhile return on the substantial investment involved.
COLD WATER AND COUNTERFACTUALS
Just about every automaker that’s ever existed has had its share of talented engineers and designers, many of whom are or were passionate enthusiasts. For every “Why didn’t they just … ?” counterfactual enthusiasts might propose after the fact, it’s safe to assume there was at least one person internally (whether within the company proper or at its subsidiaries, suppliers, etc.) who suggested just such a thing at the time. If the idea was racy, exciting, or technologically daring, the odds are even greater. Just about every car designer and every automotive engineer has come up with and sometimes fought for various interesting, even dazzling concepts that never saw the light of day for various reasons.
Let’s suppose that the designers, engineers, and product planners of a hypothetical automaker have come up with a great new idea. For the sake of discussion, it doesn’t matter exactly what it is; it might be an all-new vehicle that seems like a sure winner, a new variation of an existing model, or an urgent response to a competitor’s hot product. It might not even be that elaborate — for instance, it might be as simple as adding an existing engine to a model that didn’t previously offer it, or mixing and matching some off-the-shelf hardware and trim to support a new merchandising gimmick.
Whatever the details, we’ll assume the proposal is promising enough to merit serious internal discussion, all eventually leading to the central question, “Should we build this or not?” More often than not, the answer is no, which sends the people who came up with the idea back to the drawing board.
Why? Here are the seven most frequent reasons for rejecting an automotive product proposal:
- “We don’t have the facilities to build it.” The availability (or unavailability) of production facilities is one of the biggest and most troublesome obstacles in the auto industry. No matter how brilliant a product proposal might be, it’ll be a nonstarter unless there’s a way to build it that makes economic sense. It’s important to understand that there’s not necessarily a strong correlation between a product’s unit cost and how expensive it is to manufacture; a cheap economy car could be very costly to build if it requires an all-new assembly plant! Some of the considerations involved include the following:
- Is the proposal compatible with existing assembly lines? It’s often possible to build several different products on the same lines (sometimes even at the same time) so long as they’re roughly similar in layout and structure. However, building (for example) a unitized subcompact on lines designed for body-on-frame trucks may necessitate a major overhaul and a huge investment in new equipment.
- Do existing production facilities have sufficient capacity for the anticipated volume? Even if existing plants could build the proposed product, they may not have capacity to spare, which can be the death knell for proposals whose expected sales aren’t sufficient to justify factory expansion or new plants. On the other hand, underutilized factories are typically money-losers even if the products they produce are individually profitable, so anything that can bring a plant closer to break-even levels can be very attractive — attractive enough, in some cases, to justify greenlighting proposals that don’t otherwise have a lot to recommend them.
- Would the proposal disrupt existing production workflows? Even if a proposal would require no new facilities or equipment, it might interfere with the normal, speedy flow of the existing assembly lines — for example, by requiring extra assembly operations or forcing line workers to switch back and forth between different sets of tools. Slowing down the line is costly in its own right, which can count against proposals that would otherwise seem straightforward and inexpensive.
- “It wouldn’t have enough commonality with existing products.” From a manufacturing standpoint, the cost of tooling for a new product or even a new component is almost always significantly greater than the cost of designing or engineering it. Unit cost depends greatly on volume — producing 100,000 copies of a component is typically cheaper, on a unit basis, than producing 50,000 — which creates a strong financial incentive to share tooling (which isn’t necessarily the same as sharing actual components) as widely as possible. This can lead to product decisions, pro or con, that don’t otherwise make a lot of sense. For example, three different models might need to share the same basic suspension (despite it being less than ideal for any of them) because their individual volume doesn’t justify the cost of unique hardware for each. A product that doesn’t allow much commonality with the existing lineup costs more to build and is less profitable, even if it sells very well, which finance people tend to regard as, at best, a missed opportunity. They may also see it as a missed opportunity to shore up the profit margins of other models by spreading the cost of their tooling and/or running gear over a larger number of units.
- “It would require too much reengineering.” Design and engineering work doesn’t typically entail the same kinds of hefty capital investment as tooling or factory construction, but it isn’t free. Even if the work is performed by existing employees already on salary, they have a finite amount of time, so assigning them to one project takes time away from others that might offer a greater return on investment. This can count against proposals that involve extensive changes to existing models or equipment. While it’s customary to make running changes throughout a model’s lifespan, they’re typically focused on rectifying issues that have appeared in service and maintaining regulatory compliance. More substantial changes, like adding a new engine option a vehicle wasn’t originally designed for, can be harder to justify financially, especially considering that seemingly trivial changes can have a cascading effect. For example, even if the new engine drops right into the engine bay, it might exceed the torque capacity of the existing transmission and require cooling system upgrades. The added weight of those revisions might necessitate suspension changes and bigger brakes, and before long, the simple engine swap becomes a major project involving many detail changes, which might not be worth the expense — or the time — for a model approaching the end of its design life.
- “Our suppliers aren’t set up for it.” Few automakers manufacture every single component of the vehicles they make. For certain components (such as fasteners, seat tracks, or door latches), it’s much cheaper to use commercial off-the-shelf hardware. Even if a specific application requires specialized components, it’s often cheaper to go to a supplier who already has the equipment and expertise to build that sort of thing. In many cases, suppliers can actually design certain components to order as well as manufacturing them. While this kind of outsourcing can have advantages, it can also be a limiting factor if the automaker’s suppliers aren’t equipped to produce certain necessary components (or if they quote exorbitant prices that amount to the same thing). This issue comes up most frequently if a proposal involves new types of components or components using different materials than usual (e.g., titanium rather than aluminum or steel), but suppliers may be similarly reluctant to take on low-volume custom jobs (which is why some quite pricey exotic vehicles have ended up sharing minor components like switchgear with some incongruously humble mass market cars).
- “It would create regulatory compliance problems.” In most major automotive markets today, new cars and trucks must comply with a long list of regulatory requirements, from crash safety and emissions to lighting and drive-by noise standards. Automakers may also have fleet-wide fuel economy or emissions targets to consider, so even if a proposed model can pass the requisite emissions standards by itself, its fuel consumption or CO2 emissions might raise the fleet average enough to risk fines and penalties. On top of that, it’s not necessarily enough to comply; certification or type approval may require extensive, costly testing to demonstrate compliance. Often, the question is not so much whether a proposed model or model change can successfully pass these tests, but whether the likely sales would justify the time and expense of certification. (Such considerations have a lot to do with why modern vehicles typically offer far fewer powertrain variations than in eras past.)
- “It wouldn’t fit into our existing lineup.” This objection typically takes one of two forms:
- “We don’t have anything else like this.” We are often snarky about branding, which has become an obsession in the business world to what I think is an unhealthily cult-like degree, but it’s hard to deny the challenges involved in trying to sell something significantly outside the parameters of your existing brand. This isn’t only a question of customer skepticism, although that may be considerable — dealers (who, in the auto industry, are typically independent franchises or franchise organizations) are sometimes quite wary of new products, which could require substantial investments in service training, parts, and tools as well as new marketing strategies. If the product is a low-margin item and/or seems at odds with what’s been in demand, dealers may say, “We can’t sell this,” or “Who needs it?” (They might not be wrong, either.)
- “We already have something like this.” Product proliferation can be a tricky thing to manage. The easiest and most straightforward way to expand an existing lineup is to offer a variation that’s largely similar, but either a bit cheaper or a bit more upscale. On the other hand, if the new product is too similar to existing models, it may just split sales rather than expanding them, which might not be worth the investment. If the new product would “cannibalize” an existing one with higher profit margins, it could result in a net loss even if overall sales do increase. This is a balancing act, especially with niche products like sports cars, which don’t usually sell in huge numbers.
- “There doesn’t seem to be a market for it.” This generally boils down to one or more of the following objections:
- There hasn’t really been anything like it before. Unknown quantities make investors (and senior executives, who have a fiduciary responsibility to investors and often are shareholders themselves) very nervous. This is frustrating to creative people, who typically take great pride in coming up with new ideas, and who will try (often in vain) to argue that being the first to establish a new market segment can be extremely lucrative. Unfortunately, trying to do something new can also be extremely risky, even if the idea is basically sound, and even if there eventually ends up being a big market for something similar. (It could be years before conditions are right, as happened with what we now call crossovers.) The more expensive a proposal would be, the more difficult it becomes to overcome capital’s fear of novelty.
- The last time somebody tried something similar, it was a flop. A corporation and its investors might take a chance on an untried idea if it seems sexy enough, especially if it’s cheap, but association with a past commercial failure can be an almost insurmountable obstacle, even if the financial exposure would be relatively small. In some cases, even a tenuous resemblance to an especially notorious flop can kill an otherwise promising proposal stone dead. Arguments that the earlier flop was poorly executed or failed for some avoidable reason aren’t necessarily persuasive unless you can also point out some similar recent successes. Investors and shareholders may forgive a failure in a well-established market segment, but risking their money on an idea that has seldom worked commercially may look like negligence, and the fear of embarrassment can be even more powerful than the fear of financial loss.
- “I just don’t get it.” In a modern corporation, any proposal has to go through many layers of management approval. Some of the executives who need to sign off on the idea may not grasp its intent, no matter how carefully or prettily it’s explained to them. This is most often a problem with proposals that are too radical or, paradoxically, too subtle; the boss may be baffled by the former and not see the point of the latter.
This isn’t an exhaustive list, of course. There are can be many other reasons for rejecting a specific idea, some quite odd and basically sui generis. However, the above are common enough to provide a good framework for understanding historical decisions that might not otherwise make a lot of sense from an enthusiast perspective.
Please note that I’m not implying that these are necessarily GOOD reasons for rejecting an idea. Not pursuing a lucrative opportunity may have costs of its own, and there are plenty of historical examples of automakers making product decisions that epitomize the phrase “penny-wise, pound-foolish.” However, what sounds good to an enthusiast isn’t necessarily the same as what appeals to a corporate finance director or board chairman, and understanding the objections described above is an important step in making sense of that divide.