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Tuesday, February 9, 2021

The ICEBerg :: Legacy Automakers Unable To Let Go of Their ICEy Ways

Just like the Titanic headed towards an iceberg, the legacy automakers are headed towards a disaster. The automakers, like the ill-fated ship, have been in a fog; their's is a fog of uncertainty rather than a literal fog. The uncertainty for automakers has been around electric vehicles (EV). Will there be customer demand for EVs? Will the technology be dependable? Will it be profitable? Or should they stick to internal combustion engines (ICE) that they used to build their business? 

Over the last decade, these questions have been answered; the fog has cleared; EV ranges have increased, the charging times have decreased, charging networks have proliferated, EVs are the future. Yet, the legacy automakers are unwilling or unable to steer away from this looming collision that I've dubbed the ICEberg. 

The combustion engine was once the machine that made the automakers profitable companies.  Now the combustion engine is an anchor around their necks, anchoring them to the past, preventing them from driving into the electric future. It is the ICEberg and they are about to crash into it.

Bloomberg recently reported that EVs are about to cross the tipping point where their initial price will be lower than similar class gas-powered cars. This (combined with the lower running costs and smoother, quieter ride) will mean that the majority of new car sales will quickly transition to electric during this decade. Once a tipping point is reached, the world changes quickly; companies that are caught on their heels could miss out and join the ranks of those that dominated one era but fell into obscurity after a transition.

Despite the evidence of this upcoming sea change, many of the largest automakers are bound and determined to ignore or downplay the looming change. Even when they acknowledge the importance to embrace the future, as VW's Chief Executive Herbert Diess has said, the company culture makes it nearly impossible to change.

Let's look at two of the biggest automakers and see how they are dealing with this: Toyota, in denial; and VW, in culture shock.


At Toyota's recent annual meeting, the company's CEO, Akio Toyoda, went on an anti-EV rant. As the Wall Street Journal reported, the things Toyoda said included claims that EVs were more polluting than gasoline-powered vehicles. This "longtail argument" has repeatedly been proven false by several credible studies.

Toyoda claimed that EVs are too expensive and that government EV mandates will price people out of new cars. It's true today that you cannot buy a sub $20k car with 300 miles of range, but that will not remain the case. Batteries have recently dropped below the $100 per kWh mark and they are continuing to decline, and when fueling and maintenance cost factors are included, EVs are already more affordable to own in many categories.

Toyoda's attitude has permeated the company and it shows in their marketing campaigns as well. See the ad to the right that bashes on EV recharging times. This ignores the fact that most charging happens overnight while you sleep. You wake up each morning with a 'full tank.' It also ignores the fact that on-the-go DC fast charging has gone from 50kW (CHAdeMO v1), to 120kW, to 270kW, to 350kW (CCS 1,000V) over the last decade. So today, you can recharge significantly faster than you could a decade ago.

As batteries chemistries continue to become more hearty and packs continue to get bigger, they'll become capable of even faster charging. Again, Toyoda seems to be willfully ignorant of this trend or intentionally spreading anti-EV information. 

Instead of talking about the convenience of charging at home or the environmental benefits of charging from an ever-greening grid (or even solar from your own roof), Toyota is putting out deceptive ads about “Self Charging” hybrids. 

This is a major inflection point in the auto industry. Toyota has been innovative in the past, but they are not currently displaying this innovative capability. Rather than trying to surf this EV wave, they are trying to hold back the tide. They should ask Kodak and Blockbuster how well that strategy worked. 

Perhaps Toyoda is not as anti-EV as these statements seem. One hypothesis is that Toyota is working on several EV projects behind the curtain. These projects, however, are not yet ready for prime time. They could be mass-produced today, but the trend in battery price reduction means that it would be more profitable for Toyota to produce EVs in 2025. When this profitability threshold is reached, then Toyota will announce their new product lines. They back-peddle on all the anti-EV statements by saying something like, "that was true at the time, but our new battery breakthrough eliminates all of the EV drawbacks..." This is the anti-Osborne effect method, downplay anything that you are not currently selling, even if you have similar products in development. 


VW is in a different place than Toyota. VW's Chief Executive, Herbert Diess, wants to go all-in on EVs. His efforts to reform the company have met with resistance from many levels within the company and in their dealership ranks. Even after the shameful events of Dieselgate, many within VW fight to retain their fossil fuel ways. Diess, frustrated with this resistance, demanded a vote of confidence in his leadership. He asked the board to let him lead the company into the future or send him packing. 

Powerful directors of various units within the company don't want to see VW change over to an EV company because it could mean the end of their department. EVs are fundamentally simpler machines than internal combustion systems. There are no pistons, no intake valves, no spark plugs, no crankshafts, no gearbox, no oil pan, no exhaust system, no catalytic converter; often there's no transmission... each of these are fiefdoms within the company and when you think your career is tied to a department, you'll fight to keep that department alive regardless of the CEO's vision. Other than the paint department, no one is safe. 

Speaking of jobs, VW's workers are mostly union employees. The union does not want to see layoffs and salary reductions. However, if the company is going to reinvent itself, that's going to mean rebuilding the company, which includes writing off stranded assets. All of this will be expensive. The company will have several years of little to no profitability as they transform. These lean years will mean fights with the union over jobs and wages. It will also mean unhappy shareholders. If you bought VW stock for its dividend payout, then you've already been disappointed when it dropped from 6.50 euros to 4.80 euros. We don't know what the future will hold, but I'm willing to bet that the dividend will continue on this downward trend as they have to build new factories or retool old ones for battery pack and electric motor production; as they have to pay severance packages; as they have to buy companies with the software skills for a modern computer-on-wheels car company. 

Let's not forget about VW's dealers. VW's marketing has been heavily advertising their ID.3 EV, talking about how battery-powered cars fight against climate change, and how VW is a pioneer in the drive to saying goodbye to Diesel and gasoline. Greenpeace Germany wanted to see if the dealerships reflected this messaging, so they sent secret-shoppers into dealerships around the country to see what the salespeople were saying. They visited 50 dealerships. Greenpeace found that if the secret shopper said they were interested in an EV, only eight dealers recommended the ID.3. If the secret shopper didn't mention EVs, then only 2 dealers even suggested the ID.3 as something that the shopper should consider. Despite being independently owned, dealerships and the salespeople that work there are the face of the company. If you want to buy a VW, you go to a VW dealership and talk to these salespeople. If they are not promoting EVs, even to customers that come in asking about EVs, then sales of VW's EV line will suffer. VW has a good EV in the ID.3, yet 84% of dealers did not recommend the car, even when shoppers asked about EVs.

VW is not the first automaker to encounter EV resistance at their dealerships. Dealerships are independently owned. They are not required to toe the company line. Much like the fiefdoms within a company, they act in their own best interest. Dealerships make most of their profits from service rather than sales. Sales can even be a loss leader for service. EVs, however, don't require much service relative to their ICE counterparts. In an EV, there are no spark plugs to change, no fuel filters, no oil changes... All resulting in few service visits and less service revenue. If EVs are not profitable for dealerships, they are more likely to steer people to the gas-powered cars that are profitable for them. 

Given this, the dealership salespeople are far more likely to repeat the anti-EV FUD that's circulated by groups with a vested interest in maintaining the fossil-fueled status quo. And this is exactly what the Greenpeace study found. When secret shoppers asked questions about EVs, nearly half of the answers were, at best, an ignorant “I don't know,” or at worse misinformation. Several salespeople volunteered various fearmongering myths about EVs to discourage shoppers from buying them.

Volkswagen is an 83-year-old automaker. They have a deep-set culture. A culture of making Diesel and gasoline cars; a culture where dealerships have an expectation for cars that need service; a culture where investors expect dividends; a culture where directors and vice presidents expect their departments to grow and thrive (or at least survive).  

Turning this behemoth into a modern high tech company will not be an easy feat. It's a culture problem. This is far more difficult to deal with than a technological problem. Every time the company promotes EVs as zero-emission or as better for the environment, it's an admission that their other products are pollution emitting and bad for the planet. They have products that some people at the company have spent their entire career developing, refining, honing. Being asked to recast that legacy as polluting and harmful is a pill too big for some to swallow. Some people within the company might see this as spitting on the sum total of the company history and all of their work for a current "fad" that "won't work" long term.

At the start of this VW section, I said that Diess called for a vote of confidence in his leadership. The board sided with Diess and he currently has their backing for “rigorously pressing forward with the largest transformation in the history of Volkswagen.” Diess went on to say: “In the upcoming years, we will continue to invest in electromobility, digitalization, and battery technology. At the same time, substantially reduce fixed costs and material costs throughout the Group in all brands and regions in order to ensure Volkswagen’s future viability.” We'll see if Diess can overcome the massive inertia within the company and dealerships.

Dealing With Disruption  

Disruption is not common in the auto industry, but it is common in the high-tech world. Maybe automakers can look there for some examples of coping methods. In the last few decades, Microsoft has reinvented or augmented itself several times. In the early 1990s, they were an operating system and office applications company (and they were ignoring the internet). Then in May of 1995, Bill Gates sent his famous “Internet Tidal Wave” company memo.  In it, he said, “I want to make clear that our focus on the Internet is crucial to every part of our business.” He went on to explain that they would not have an “Internet division”; instead, Gates expected every one of the company's products to embrace the internet. Later in 2001, Microsoft again added a new direction for the company with the Xbox gaming console. Then in 2010, they expanded into enterprise cloud with Microsoft Azure. Oh, and don't forget their failed phone efforts. This phone effort shows that you don't have to win them all, but the effort itself (win or lose) is a sign that they are not just complacently resting on their laurels. 

When you are in an industry that has a major disruption every decade or so, then when the next one comes along, you have leadership and employees within the company that dealt with the last one. There's a collective memory, there are toned organizational muscles ready for the fight. The auto industry has no such history, but perhaps they can learn from the industries that have this skill. For example, just as Gates did with his Tidal Wave memo, Diess could author an “Electric Vehicle Tidal Wave” memo to all of VW Group. The memo would set company-wide expectations that all departments are to be EV departments. All employee/executive bonuses would be tied to the company's EV sales growth. Similarly, there are ways that dealerships can have their incentives aligned to the parent company's EV goals.

Anyone that is not on board with this new company direction would be offered a severance package. This will be better for both the company and the employee in the long run. Long term, an employee would not be happy working someplace that they think is 'going the wrong way' and the company would be better off without people that want to anchor them to their ICE past. VW needs everyone rowing in the same direction.

Dealing With Company Culture 

A company's culture has been called its immune system. There are behaviors common in some companies that would not be tolerated in others and this is a function of their different cultures, leadership, and history. This immune system can also attack new ideas as if they were foreign invaders unless they are properly introduced into the culture.

Changing a company's culture is one of the most daunting leadership challenges. A company’s culture is not just one thing. It's how they communicate, their roles, goals, processes, shared values, practices, rituals, assumptions... all blended together in an interlocking system. 

Unless a company has a highly adaptive culture, it is unlikely that the culture will change significantly unless there is a serious shock to the system. The company has to collectively believe that the very existence of the company is at stake or else there's no motivation to do anything other than that which has worked in the past. This means that successful companies are often the ones that are most culturally ossified. This then means they are the ones least likely to adapt to market disruptions.

Success leads to complacency. Complacency leads to cultural ossification. This leads to an inability to adapt. Inability to adapt leads to extinction when things change. In the auto industry, things have just changed. 


Above are the stories of two legacy automakers. Both are headed towards an ICEberg. On the Toyota Maru ship, the captain insists that it's not an ICEberg and they will be fine; full-steam ahead. On the Volkwagen Zerstörer ship, the fog has cleared and the captain sees the ICEberg. He is calling for the crew to turn hard to starboard. However, the crew's response is, "We've been on this heading for 83 years; why should we change now?"

As Peter Drucker said, “Culture eats strategy for breakfast.” That's what we're witnessing. Not much has changed in the automobile industry in decades, they lack relevant strategic expertise, and they don't have a disruption-resilient culture. Even people with long careers in the auto industry have not had to deal with major disruption, let alone several hitting them at once. Even if management has an excellent transition strategy, they may not be able to adapt. Ironically, past successes are a primary reason they are not culturally equipped to deal with a radical disruption.

Over the next decade, we'll see how the transition plays out for these two titans as well as others in the industry. Will they maintain their status among the biggest automakers in the world or will they crash into the ICEberg and drown at sea like so many other companies that failed to change course when the world changed.

Alternative Analogies 

You've reached the end of the post proper. Writing this, I tried to stick with the ICEberg analogy, but a few other ideas came up. I thought I'd share the other possibilities here. 
  • BlackICE: Automakers have hit a patch of BlackICE and are headed toward a cliff; unable to steer away from it
  • Attractive nuisance doctrine: under tort law, this is a hazardous object that might attract and injure people. Similarly, the automakers are attracted to their status quo operations and it could be very hazardous for them. (this one is a stretch) 
  • Black Hole: Automakers are sucked towards a black hole. The question is, have they crossed the event horizon? 
  • Mathematical Attractor: In the mathematical field of dynamical systems, an attractor is one or more values toward which a system tends to evolve for a wide variety of starting conditions. System values that get close to the attractor values remain close even if slightly perturbed. 
  • Organ Transplant Rejection: EVs would be the new organ that the automakers need to survive, but the company culture antibodies are attacking it. 
Disclosure: I am long Tesla

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