Carmakers can’t afford R&D cuts in tough times
The auto industry has historically been prone to wild swings in the number of new vehicles sold in the U.S.
Yet, with the exception of 2020’s global COVID-19 outbreak and the severe component shortages in the two years that followed limiting production, the new-vehicle market has been remarkably strong for more than a decade.
Even during the pandemic, consumer demand dropped for a relatively short period in 2020.
Put another way, this historically cyclical industry is probably overdue for a downturn. And with the economic uncertainty of potential trade wars looming with both friends and rivals, as well as the Trump administration’s massive cuts to the historically stable federal labor force making news daily, it’s no wonder some consumers may be putting off a new-vehicle purchase. Sales results from February showed a decidedly mixed bag for reporting automakers.
For automakers, frequent signs that consumers may be shying away from new-vehicle purchases because of the economy has previously triggered retrenchment: slowed production levels, cuts to marketing and advertising, trims to development efforts and ultimately layoffs if the trends hold.
The actions are all efforts to conserve capital, keep the automaker healthy and wait out any downturn — and for the most part, they work.
Yet, automaker executives may want to reconsider portions of their tried-and-true playbook during the next downturn.
While balancing inventory with demand is never a bad strategy, including necessary cuts to production, pulling back on R&D in the current environment is ill-advised. Unlike previous down cycles, there is a giant wolf lurking at the door this time in the form of Chinese automakers.
As we detailed recently, Chinese automakers already have a much quicker and more efficient time to market for their products than legacy automakers, even if those products aren’t yet on sale in the U.S. If global automakers pull back on research into electrification and driver assistance technologies, for example, as a strategy for short-term financial gain, they are likely to lose any technological advantage they may now hold if and when Chinese vehicles arrive in the market. And with those vehicles’ relative speed to market, legacy automakers would have little chance of ever catching up.
If the next downturn is near, as some expect, legacy automakers will be better served by keeping their best and brightest working hard on tomorrow’s technologies.
Yet, with the exception of 2020’s global COVID-19 outbreak and the severe component shortages in the two years that followed limiting production, the new-vehicle market has been remarkably strong for more than a decade.
Even during the pandemic, consumer demand dropped for a relatively short period in 2020.
Put another way, this historically cyclical industry is probably overdue for a downturn. And with the economic uncertainty of potential trade wars looming with both friends and rivals, as well as the Trump administration’s massive cuts to the historically stable federal labor force making news daily, it’s no wonder some consumers may be putting off a new-vehicle purchase. Sales results from February showed a decidedly mixed bag for reporting automakers.
For automakers, frequent signs that consumers may be shying away from new-vehicle purchases because of the economy has previously triggered retrenchment: slowed production levels, cuts to marketing and advertising, trims to development efforts and ultimately layoffs if the trends hold.
The actions are all efforts to conserve capital, keep the automaker healthy and wait out any downturn — and for the most part, they work.
Yet, automaker executives may want to reconsider portions of their tried-and-true playbook during the next downturn.
While balancing inventory with demand is never a bad strategy, including necessary cuts to production, pulling back on R&D in the current environment is ill-advised. Unlike previous down cycles, there is a giant wolf lurking at the door this time in the form of Chinese automakers.
As we detailed recently, Chinese automakers already have a much quicker and more efficient time to market for their products than legacy automakers, even if those products aren’t yet on sale in the U.S. If global automakers pull back on research into electrification and driver assistance technologies, for example, as a strategy for short-term financial gain, they are likely to lose any technological advantage they may now hold if and when Chinese vehicles arrive in the market. And with those vehicles’ relative speed to market, legacy automakers would have little chance of ever catching up.
If the next downturn is near, as some expect, legacy automakers will be better served by keeping their best and brightest working hard on tomorrow’s technologies.