Five Things I Learned from the 2008 Automotive Collapse That Could Apply Today

For many of us, there have been some eerie similarities between the calamitous fall of the economy in 2008 and today. For one thing, it was an election year, for another, the year started out fine before the bottom fell out. In fact, at the Detroit auto show, I remember clearly that the automotive companies were forecasting annual sales to be about the same as the year before and that the economy would stay strong — even though there were signs that the housing market had begun to cool. By the end of the year, monthly sales were off by 40% or more.

The COVID-19 pandemic gripping the world today is different and the decline has been swifter, more global and far-reaching, to be sure. Different issues are underlying the economic collapse, but some things happened in 2008 and 2009 that are relevant today in the automotive industry.

Here are the five things:
1. Cash matters more than anything else. Cash is survival. Profitability, earnings-per-share, revenue growth potential and other metrics that matter in a growing economy are meaningless for now. Ford canceled its dividend and drew down a credit line and has amassed $37 billion in cash. That sounds like an astounding amount of money and indeed it is. Ford’s current market capitalization is only $18 billion, so Ford has twice as much cash on hand as it has market value! That shows just how capital intensive this business is and how fast that cash pile will disappear in a world where sales might be down more than 50% and no plants are operating. VW’s CEO says it is burning 2 billion euros a week while its plants are closed. If this continues for six months with no letup, the entire industry around the globe will be on its knees and every country will be deciding whether to bail out these employers.

2. The consumer doesn’t snap back because of recency bias. Consumers will not be rushing out to make significant purchases following the reopening of the economy. The idea that the economy will surge forward in the third or fourth quarter is hopelessly optimistic. As humans, we are profoundly affected by things that happened recently and that we can recall. The rescue package from the government may soften the blow from the economic downturn, but that will be temporary. An extended economic closure will result in a protracted recovery where — like in 2008 — consumers will be saving their money to ward off disaster. Jobs lost will not be returned quickly as companies will find that they can be successful with fewer human resources. Thankfully, the housing market is not saddling the U.S. with negative equity, but it still is unlikely that the consumer will be unleashed in July as though nothing happened.

3. The market shifts upward. One of the surprises of the post-recession automotive world was that consumers moved up-market. Overall sales were lower, but what buyers wanted was more expensive. In hindsight, this makes sense because wealthier people were less affected by the downturn. In fact, if you didn’t lose your job, the world had become inexpensive and you had more disposable income. This could happen again as we emerge from the crisis. Vehicles already have become far more expensive than they were a decade ago as tech-rich options are common on vehicles. The more expensive the vehicles, the more likely that new business models around asset usage will emerge. The lease was an innovation when it began to emerge in the auto world in the 1980s and more flexible leases and subscriptions will likely become popular as the sticker price of new vehicles goes ever higher.

4. Pent up demand stretches over several years. This relates to the second point. Delayed purchases don’t just happen over a few months. In the past recession, they lasted over five or six years. This pent-up demand and the deep plummet in new vehicle sales had some positive results long term. Used vehicle prices remained high because of the absence of late-model used cars on the market, this drove people into buying new vehicles rather than used ones because of the relatively small spread between the prices. The downside is that recovery from the sales decline will be slow.

5. Restructuring can help the industry, but it is painful. There was a joke I saw recently. Which thing caused a digital transformation in your company: CEO, CFO, CIO or COVID-19. And the last one was circled. The massive restructuring in 2008 and 2009, caused dozens of bankruptcies, including GM and Chrysler, but it also made for a healthier industry, one that might just survive this calamity. But make no mistake, the weak players will be taken out. The next several months are likely to see many startups fail or be consumed by strategic buyers that can afford to buy them. The future of the Connectivity, Autonomy, Shared and Electrified pillars of transformation is very much in the crosshairs of change. I could make an argument that the crisis accelerates — or completely obliterates — these pillars of change.

There will be many other things that change in this crisis and it would be foolish to expect that it will turn out the same as it did in 2008 and beyond, but the lessons above might give a small guide to what to expect.