It’s a perplexing question with no easy answer. Unlike the period of automotive stagnation during World War II (and the ensuing catch-up demand), the COVID-19 pandemic has inflicted serious financial harm on industry, governments, and individuals. A loss of revenue, for families and companies alike, means that any new spending will come with tough choices.
This will certainly be true in the global automotive industry, the numbers generator of economic prosperity. The car business is unique in that it combines high levels of technology with staggering amounts of money, incoming and outgoing. The number of employees, and the billions invested in factories, engineering centers, warehouses, and testing areas, make for astronomical fixed costs, which must be offset by healthy sales of profitable vehicles. When sales drop sharply, as in ’08 and now with COVID-19, the incoming money flow quickly drops too low to cover the expenditures. As sales fall, company leadership tries to drive down costs, but many can’t be cut in the short term. The crisis-driven response usually takes the time-honored form of mandatory tightening of every department’s budget. (Advertising takes the biggest hit—even a marketing veteran will admit that half of advertising spend is wasted, and as the saying goes, nobody can figure out which half.)
But draconian budgeting can’t change the fact that the reduced revenue streams won’t support the ongoing fixed-cost levels. The company quickly slips into the red. Now major expenditures are scrutinized, and hard choices are made. The cuts that hurt the most relate to future models. Hundreds of millions are spent in the three-to-four-year gestation process of a new vehicle. Canceling or deferring future product becomes the logical place to save large amounts of capital, with consequences that won’t manifest for a few years. In view of the reduced cash flow, many “nice to have” products are simply dropped. What was to be an all-new version of a decent-selling vehicle (at an investment of more than a billion dollars) is replaced by a “minor freshening,” with the replacement pushed out by a few years. Since cash flow and profitability are the principal drivers, it’s only logical that the best-selling, most profitable programs stay in place.
As we speak, highly paid executives around the world pore over the future vehicle portfolio and try to meet reduced capital-outlay targets while protecting the family jewels. In such an environment, it’s hard for coupes, roadsters, or even sport sedans to survive. They get whacked.
My last GM tenure coincided with the 2008 economic crisis. At the time, we had earmarked close to $1 billion for a mid-engine Corvette, along with a visually different Cadillac variant. At the end of hours of painful meetings, the mid-engine program was canceled. We managed to save about $250 million, which bought us a revised, improved, but still front-engined C7. Absent that crisis, the world would have seen the mid-engine Corvette as a 2015 model.
The same is likely happening now around the automotive world: Performance vehicles are being axed. Car companies, especially those with a sporting or racing heritage, know the future risk but have little choice. It’s like a WWII B-17 limping back to its base, three of its four engines gone. The captain orders the crew to toss everything overboard. Out go the machine guns and all kinds of equipment. It’s expensive getting that B-17 back into service, but the crew makes it home.
It isn’t always like that. I recall one instance vividly. I was president of Chrysler, traveling from bank to bank, fund after fund, trying to renew our crucial revolving credit agreement. Our CFO put on a convincing financial pitch. I followed up with the future product portfolio, complete with dramatic slides showing realistic clay models of every new car or truck. At that point the program included a production version of the Dodge Viper, designed to be the fastest and most expensive American car ever made. We had the investment earmarked at $50 million in the presentation. The money people were all duly impressed, and we were getting commitments.
During the Q&A a gentleman asked me, “What if things don’t go as planned? If you find you have to cut or defer something, what would it be?” I put on my finest bean-counter demeanor and replied that we’d cut the Viper first, to safeguard the essential programs. The man shouted, “Wrong answer!” The Viper, he said, was the car that would show the world what Chrysler could accomplish, what others couldn’t or wouldn’t dare, a new spirit of competence and daring. “Without that Viper,” he said, “it’s just the same old ‘wait until next year’ stuff.”
He’d given the speech I myself had made dozens of times inside Chrysler. My one attempt at projecting an aura of capital discipline and fiscal responsibility had ended in an embarrassing failure. Canceling everything that’s fun in order to bring the next minivan out on time isn’t always the right answer.
But that’s only the supply side. What about potential customers, many of whom have lost jobs or even whole businesses? What about the retirees, invested as they are in a stock market that took an extraordinary hit? Will they demand something sporty, distinctive, expressive of their personalities? Or will they opt for the safety and security of a reliable mass-market mid-size car or SUV? Will the frightened public buy nothing but comforting blandness?
My guess is that many will behave exactly that way—but not all. Having recently been reminded of their mortality, these people may emerge like a butterfly from the cocoon, indulging in a car that gives them style, fun, performance, and a degree of uniqueness. If they can’t afford a new one, they’ll turn to the pre-owned lots. And as the supply of late-model enthusiast cars dwindles, the market must and will be replenished.
We are alive at an interesting time. A time of reduced financial resources, of staying at home more, a time for choices by individuals, corporations, and governments. But there will be an economic resurgence. And there will be great cars to buy, be they conventional or futuristic. Personally, I can’t wait for my C8 Corvette to be delivered. That will make the world seem normal again.
Bob Lutz has been The Man at several different car companies.
This content is created and maintained by a third party, and imported onto this page to help users provide their email addresses. You may be able to find more information about this and similar content at piano.io