An Innovating Industry Stalled

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By: Peter Lauria

Slowly but surely, many drivers have started to embrace electric vehicles. But it is the mishaps that still worry millions of drivers—and make headlines.

For example, during a winter freeze in Chicago earlier this year, a new Tesla’s battery died, forcing the car’s owner to get a tow to the nearest charging station, half an hour away. In Ohio, a supposedly minor accident involving a Rivian R1T pickup truck ended up costing the owner $42,000—about $40,000 more than the insurance company offered. And in San Francisco, an EV charger in a garage burst into flames, burning down the home as the family escaped. “If we had lived upstairs in this house, we’d be dead,” the homeowner told a reporter.

With the world watching, the automobile industry has tried to transition drivers from gas- to electric-powered vehicles, an innovation that once seemed just a few years away. But the numbers tell a different story. First mass-produced well over a decade ago, EVs made up only 8 percent of total sales in the US last year. The growth rate this year is expected to be almost half of last year’s and a third of 2022’s. Just about every major auto manufacturer has cut back production, slashed sales, or abandoned plans for certain EV models. “The transition is changing speeds from faster to slower,” says Emile Santos, a partner at L.E.K. Consulting who analyzes the automotive market.

The reasons EVs have stalled are multifaceted, and many are outside of automakers’ control. Across the world, governments have promised to build enormous infrastructures—then quietly backed out. The EV itself has become a political football, dividing drivers along party lines. But more than anything else, experts say, the EV’s slow adoption is due to an industry that has lost its edge in pushing through innovations. It wasn’t all that long ago, for example, that automakers were making bold promises about self-driving cars, promises that sputtered after a series of accidents. And while hybrid cars may be selling quite well, they were first mass-produced almost 20 years ago.

Car leaders and analysts still believe in the future of the technology, and eagerly anticipate the day when EVs dominate the road. For that to happen, however, the industry needs to get back to its roots as “a true leader in innovation,” says Bradford Marion, global sector leader for the Automotive practice at Korn Ferry. Corporate leaders and economists alike are watching. As the largest manufacturing sector in the US—employing millions of people and contributing over half a trillion dollars to the economy annually—the auto industry must fundamentally change its approach to stay a step ahead, says Santos. “They are going from improving vehicles to manufacturing an entirely different vehicle,” he says.

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It may be hard for many to believe today, but Silicon Valley wasn’t always the epicenter of innovation. Once upon a time, the epicenter was the factory floors of automakers in America, Japan, and elsewhere. From creating the Model T to perfecting the assembly line to producing the first hybrid vehicle way back in 1997, the auto industry represented the vanguard of technological innovation for much of the 20th century.

Vanderbilt University associate sociology professor Josh Murray says innovation came fast and furious during the industry’s early days because operations were clustered together. The physical proximity of engineers, design teams, factory workers, and corporate leaders made flexible production possible. “People needed to be close together so they could figure things out quickly,” says Murray, coauthor of Wrecked: How the American Auto Industry Destroyed its Capacity to Compete. Soon, other industries, both foreign and domestic, were adopting the innovations of the auto industry. Today, concepts pioneered by the automobile industry, including lean manufacturing, just-in-time inventory, and advanced supply-chain management are used in retail, technology, aerospace, consumer goods, and many other industries.

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For many engineers and knowledge workers of the time, there was no more cutting-edge place to be than the auto industry. Manufacturing a car takes thousands of parts and hundreds of people working together, and the clustering of these workers in the same geographic area not only facilitated quick collaboration, but also fostered an unprecedented and distinct culture, pride, and motivation. Driven by what Murray calls the “politics of the possible,” workers and leaders came to believe that they were all in it together. This created a sense of purpose that encouraged risk-taking, experimentation, and competition. “That’s what you need for innovation,” says Murray.

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Just a few years ago, it seemed as though everything was aligned to supercharge electric-vehicle adoption. Lawmakers passed new infrastructure and chip-production bills that promised funding for large-scale charging-station development and battery production. A new administration committed to sustainability and decarbonization provided incentives and set timelines for a speedy transition to EVs. On the consumer side, appetite for sustainable products soared, and with jobs abundant and wages growing, people didn’t mind paying a premium. Automakers, seizing the opportunity, went all-in on EVs, setting ambitious targets and creating a new narrative to entice analysts and investors.

But much of that promise has so far failed to materialize. There are currently about 62,000 public charging stations with about 168,000 ports in the US, a figure that has more than doubled since 2020. That’s nowhere near the 28 million ports the Department of Energy estimates the country will need by 2030, however. Government mandates requiring two-thirds of all new passenger-car sales to be electric by 2032 have made the transition a wedge issue among voters. At the same time, the pandemic, soaring costs, and geopolitical tensions have complicated supply-chain issues and access to the raw materials needed for EV batteries. Moreover, even though prices for EVs are now on par with gas-powered cars, many consumers have delayed making the switch because of inflation, interest rates, and higher overall living costs.

Successfully transforming for the future requires a return to the past.

The auto industry faces its own unique challenges. Longer production cycles, coupled with tough safety regulations and massive capital investments, mean a lot more is riding on every new model produced. “Because of the product they are making, over time automakers became more cautious and risk averse than other industries,” says L.E.K.’s Santos.

As the auto industry grew, particularly in the latter half of the 20th century, it moved away from flexible production, says Murray. Outsourcing dispersed operations across wide areas and labor issues eroded relationships, making organizations less agile. The decentralizing of operations in the auto industry coincided with the arrival of an emergent tech industry with an entirely different approach to innovation. “The ‘fail quickly and learn’ approach doesn’t work in autos,” says Murray. “There’s not that kind of flexibility.”

As the lines between the auto and tech industries blurred, the cultural differences between the two became more apparent. Both auto and tech companies have tried to bridge those differences by hiring executives and leaders who can bring with them some of their industries’ cultural DNA. For the most part, that hasn’t worked. “It’s like relocating a polar bear to Africa,” says Korn Ferry’s Marion about the merry-go-round of talent between the tech and auto industries.

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Automakers remain both ambitious and enthusiastic about the transition to electric vehicles. Many consider the slowdown to be little more than a function of cyclical external issues. Public funds and private entities are investing heavily in building out the infrastructure needed to support the EV transition—more than $25 billion has already been earmarked for charging stations this year. Industry leaders also point to studies showing that most owners are very happy with EVs, often more so than their counterparts who own gas-powered vehicles. While declining sales and production estimates have hit automakers’ stocks hard this year—shares fell for most major companies after they reported largely disappointing second-quarter earnings—experts say the move will pay off with shareholders over the long term. Marion agrees, but notes that for now, producing electric vehicles is a money-losing proposition—and that it’s gotten even more costly as automakers have cut prices to appeal to a wide base of consumers. “All of the profits are still coming from gas and hybrids,” says Marion. “Leaders have a responsibility to balance innovation with shareholder returns.”

Bringing those two things in line will help preserve profits and manage expectations, balancing what Korn Ferry experts describe as the need—faced by all leaders—to perform and transform simultaneously. Santos says more work needs to be done to persuade the mass of undecided consumers that electric vehicles are a better option for them. As it stands, he says, automakers have already accounted for both the early adopters of EVs and the people who will never buy them. “Converting that group in the middle is where it gets challenging,” he says. Consumer education and political advocacy will help automakers to win over these buyers in the middle, he says. For instance, range anxiety—the fear of a battery dying—remains a major psychological hurdle for consumers. But he says this concern won’t apply to most people: Studies show most of us drive fewer than 40 miles per day, well within the range of both EV batteries and charging stations in major cities—making an EV more cost-effective than a gas car for most buyers.

For Murray, a successful transformation for the future requires a return to the past. In recent years, automakers have resurrected frameworks of flexible production, moving operations closer together or retrofitting old plants instead of building entirely new ones. This embrace of more agile production, combined with the recent agreements between automakers and workers’ unions, can be a foundation for reigniting innovation, he says. With contracts in place for the next four years or more, companies and workers can collaborate to transition operations and provide the training and development to accommodate the technological requirements of producing electric vehicles. As Murray puts it, “EVs offer a new opportunity to start from scratch.”

Photo Credits: PhonlamaiPhoto/Getty Images; Kaptnali/Getty Images; Cherezoff/Getty Images; Titi-Kako/Getty Images