The automakers have giant problem: People are just not going to buy their cars this year. Period. Full stop. End of sentence.
Aside from the financial problems that the US Automakers are now facing, they have a giant marketing problem. They have effectively announced that their current crop of automobiles are going to be obsolete in two years.
Consider this carefully
In December the US Automakers faced with financial ruin first demanded and then begged for enormous sums of money from the US Government. Their argument went basically as follows…
Yes…we are in tremendous trouble, but it’s only a temporary cash-flow thing. We’ve got great products in the pipeline…
…products with great mileage,
….hybrid or primarily electric drive products
…products that will help the environment,
…products customers will love,
…cars that will finally break our dependency on foreign oil,
…We all know the price of oil is going to go back up, either via the market of via additional taxes, so these will be the right cars for consumers, for the country, for us. We’ll have them on the market in 2010, 2011, or 2012, sometime relatively soon. So until then we just need some money to get us through our temporary cash-flow crises. Just lend us the cash (at below market rates) and we’ll bring the right cars to market.
Here’s the rub
Anyone buying a new car this year is going to buy an obsolete product. The car makers, in their desperation for cash, had to state their plans publicly in order to get the cash. The plan is not to produce the same cars in 2 years, or even incrementally improved cars. The stated plan is to sell a radically improved car in approximately two to three years.
Consumers, particularly those buying a new car, buy with one of two mindsets:
1. I’m going to keep this car for a long time, so I’m going to buy a new car to get all the benefits.
2. I’m going to sell this car after a few years and trade it in for another new car.
We are currently in the midst of a bad recession and credit crisis. This is certainly going to reduce the demand for new cars. But even for those consumers who actually have the cash at hand to buy a new car are not going to, because they have been told that that very car they were thinking about buying is going to be obsolete far sooner than any other new car they have ever purchased before. If the “car of the future” were available they might buy it today, but why would someone put perfectly good money into buying a new “last car of the previous generation”?
Why not buy a nice used car? Why not hold off for 6 months, or a year to see how these “car of the future” plans evolve? Even if your current car was actually being consumed by fire right now…why on earth would you buy a “new” car that is going to be obsolete before the warranty even runs out? The resale value of that car will be so low that your friends will laugh at you for buying a 2010 Edsel. Why would you do that to yourself?
Trapped like rats on a sinking ship…for the automakers there is no way out
The world of software has a nice solution to this “obsolete product” problem. Whenever they announce a radically new version of a product, they start offering existing users who purchase the existing (now “old”) version free upgrades. This removes purchase hesitation because the customer knows they are not getting obsolete goods. It works because the physical cost of software is pretty darn near $0; just download a new copy or get a new CD. This is radically not true for cars – the largest durable good investment consumers make. GM is not going to offer you a “free upgrade to the 2012 model” if you buy the obsolete 2009…they cannot, because the cost of goods of a car is huge! There is no upgrade path short of selling your old, previous generation car at a terrible loss.
A sad lesson from the recent DVD wars
The car world today looks a lot more like the “HD-DVD” (Toshiba) vs “BluRay” (Sony) debacle. At first consumers were reluctant to upgrade to either HD-DVD or BluRay from regular DVD players because (1) The new players were (relatively speaking) very expensive due to high to component costs, (2) No one wanted to be stuck with an obsolete product. This was hugely unprofitable for both Toshiba and Sony. Eventually Toshiba threw in the towel on HD-DVD, but even this was a Pyrrhic victory for Sony. They finally won the standards war, but are unable to charge a premium for their players because consumers in a recessionary environment are perfectly willing to wait a few years for prices to come down. Another victory like this and Sony will be standing in the bread line hoping it's a double-servings soup day. God knows what Toshiba is doing with the existing stock of HD-DVD players and components; even throwing this stuff away is not free -- maybe they can stuff them all as giveaways into the back of each 2010 Chevy Suburban and Cadillac Escalade?
Is this picture starting to look familiar? Add to this that a new BluRay player is $200 - $500. A next generation car will be significantly more than $10,000. This is a x50 time bigger purchase for consumers. People will be very cautious buying their next car because (i) They don’t want to spend hard earned money on a “new” car that will be obsolete soon, (ii) Many will wait a version or two into the next generation for prices to come down, (iii) there is large glut of previous generation cars (new and used) on the market. The net result is that the automakers will have to do something, anything, anything at all, to clear out their giant channel of existing cars and the cars sitting in the manufacture pipeline. Any way you cut it, they have virtually no pricing power whatsoever for the current generation of cars that they need to roll off the assembly line this year.
This is an ugly situation, basically short-term hopless for the automakers as far as I can see it.
You're some bright folks...anyone care to venture a solution of how you sell a costly product you have publicly stated will be obsolete in a few years?
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