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S1-E2: The Rethink Alignment team showcases its proprietary alignment framework while discussing Hertz Corporation's decision to eliminate one-third of its EV fleet.
Music sourced from Purple Planet Music at https://www.purple-planet.com
Music sourced from Purple Planet Music at https://www.purple-planet.com
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What is Unintended Outcomes by Rethink Alignment?
Rethink Alignment
Unintended Outcomes by Rethink Alignment Posted: March 5, 2024
Topic: Hertz Corporation's decision to sell one third of its EV Fleet
Howard Fields: Hi, and welcome to another episode of, Unintended Outcomes. I'm your host, Howard Fields. Joining me are two of my Rethink Alignment partners, Luke Chilone and Nathan Gilliatt.
In each episode, we analyze recent business news headlines utilizing a proprietary framework to reveal what may have happened and suggest a path forward.
Today, we're discussing the January 11th announcement by Hertz Corporation that it will sell off one-third of its global EV fleet and replace those vehicles with gas-powered cars. The reasons cited; weak demand for EVs and high repair costs. Clearly, this was not the outcome anticipated when the decision to invest in EVs was made in late [00:01:00] 2021. At the time, the move was considered a savvy comeback strategy for Hertz as it emerged from bankruptcy. Today, it's viewed as a bet gone wrong.
Nathan, let's, let's talk about this a little bit. Let's start with the problems EVs are expected to solve and how well they've met that challenge.
Nathan Gilliatt: Sure. Well, we don't really expect much of EVs. They're supposed to save the environment and reduce our dependence on fossil fuels. They're quieter; they're frequently linked to other science fiction-sounding advances that are just around the corner. They're a big deal.
They're a major trend that, that's probably the future. Arguably the present, I guess. But that's the big picture. You know, from a customer perspective, from a buyer, an individual buyer's perspective, they also have some additional nice things. They are expected to have lower maintenance costs. I saw some research recently that EV buyers are likely to [00:02:00] buy another EV, so clearly they're happy.
But we're talking about a fleet operator here. For a rental car company, what's the point? And I wonder if it was primarily perception that this is perceived to be the future, uh, perceived to be desirable, environmentally friendly, all of that.
And the company could portray that. They could show themselves to be a relatively early adopter in their industry. Maybe there was customer demand. EV owners that want to rent EVs on the road, and they might've expected lower maintenance costs.
Howard Fields: Well, do you see any evolution, particularly from the fleet perspective on how the problems are evolving?
Nathan Gilliatt: I think the question is, are you trying to lead the market or follow the market? And if it's about perception, if it's about meeting demand, you don't want to be too far ahead or too far behind. And I think what's changing is the assumptions about how fast the masses of rental car customers are going to [00:03:00] be adopting it themselves and ready to rent it when they rent a car.
Howard Fields: So, Luke, let's pick up on that. What's your take on the take-up, particularly from the customer base and, you know, this decision was well received when it was made? Has the value proposition changed much since then?
Luke Chilone: I’m not convinced the value prop has changed, Howard. We've seen this in hype cycle terms where expectations get clearly inflated very early on. When I view the holistic marketplace and marketplace is one of those framework elements that we work through all the time. There's a common vision, there's an anchor. Nathan mentioned it with this idea of sustainability and everybody's gonna have renewable energy and whatnot.
Now, in this particular marketplace, there's a high degree of alignment across a very large number of marketplace participants to kind of reach the vision. Chargers [00:04:00] and buyers and rental car companies are just three that we just talked about in, you know, in Nathan's, comments. So, what kinda scale and complexity that path forward is, is not gonna be a straight line. It's just very, very complex. So, I think the Hertz vision was deservedly well received. It rationally fits the bigger vision that I think all marketplace participants have, especially the consumer and, in this case, the car renter. I'd like to just go rent a Hertz rent a car that's EV and I'll still be contributing to a greener planet.
Howard Fields: Yeah. But, but again, the primary goal of renting a car is to get, you know, from point A to point B. This is great if I'm just going from the airport to downtown, but if I'm also gonna take a side trip on the weekend, maybe there's a bit of a challenge with that.
So, Nathan, why did the, why do you think the, market was stronger?
Nathan Gilliatt: You just mentioned one of [00:05:00] the points I wanted to pick up, which was part of the logic I've heard from people is when you buy an EV, you know, one of the counter arguments is what if you want to go on a long trip? And the answer is, I'll rent a car. So, there may be some undercurrent of EV owners expecting rental car companies to provide internal combustion vehicles for those occasional long trips. There's possibly miscommunication right there. So, what was the question? We're talking about what's changed in recent years.
Howard Fields: Yeah. What? Well, so what planning assumptions were made that are not proving out to be. So, because what you just said to me, you said, okay, maybe a mismatch on, where they want to go. I'm sitting here going, Hmm, could I, could I charge more for a combustion engine than I do for an EV?
Nathan Gilliatt: Oh, sure. sure. Now that, certainly, you can go that direction. and if that turns out to be what a lot of customers are looking for, then that's a completely [00:06:00] valid question.
I think the thing that's changed is I think we might be past the peak of the hype. We've gone from, so Tesla obviously, and some other companies that the electric car startups. We've seen that we've now got, what, three or four pickups, electric pickups on the market, and we have Ford dealers complaining that they can't move them. You can dig into why and what's the adoption in that industry, but that's not the industry we're talking about today.
The point of it is we're getting more messages that the takeoff of this category is not as fast as perhaps expected. So, one of the things that's changed is the overall perception is these are still a great idea, this is probably still the future. Is it this year's future? I don't know.
Howard Fields: Today's Market Watch has an article about Tesla. And while the discussion today is about Hertz, obviously a lot of that has to do with Tesla's [00:07:00] leadership in the marketplace. That's why they had the first deal, but that's not the only issue.
So, here's another question for you, Luke. As we often do with emerging technology, I mean, we're doing it with AI, we've done it with everything that's come before. It often seems that we overestimate the capabilities, in the near term. And so, in this case, the capabilities of EVs. Which technological or operational, or infrastructural issues are, are kind of holding this back, holding back the broader adoption of EVs?
Luke Chilone: Uh, I think if we're gonna look at this as a technology play, standardization is usually a win for the customer.
So, you can go buy an AAA battery anywhere you want, any brand, bring it home to your television remote control. It will work. You never worry about it. Oh, I need batteries. You buy the battery. That's kind of what you go now, that's the antithesis of [00:08:00] the providers or the companies who are in the product lifecycle. They like the proprietary elements that kind of guard the market. And I'm sure if we went and looked back even five or six years, there's an incredible number of articles about Apple charging cables. And they went from the 32 pin, and they didn't go to USB-C. And so, we've seen the movie before, you know, at some level.
So, the Tesla business goal is to sell cars. Unquestionably, right now there's a tail that kind of comes with that. The Hertz business goal is to rent cars. So, you picked up on something that was kind of interesting. Why don't we have both there? And they say, “Yeah, Mr. Fields, you know, where will you be driving this weekend?”
And you tell me you're going downtown. I suggest an electric vehicle to you, swap it out and, you know, help save the planet. Otherwise, you're going somewhere up in the mountains, so I’ll let you take your combustible. But Tesla has more control overachieving the outcome than Hertz does, right? So, Tesla can go ahead and put charging stations in and say, oh, buy my car.
There's a [00:09:00] place for you to go charge. Where Hertz has a huge dependency on others, cars, chargers, the repair business, and some of those expertises that kind of need to come, you know, to reach their business goal. So, it's a bit of a lengthy explanation, but I believe the answer eventually is standardization.
So, you just don't have to think about it. You don't have to worry about what kind of car you're renting. In this example that we're talking about with the Hertz article.
Howard Fields: Yeah, this is, you know, reminiscent of other scenarios, Beta versus VHS back in the early days of, home video. You would rent a movie and if it was the wrong format, you couldn't play it on your machine.
I mean, it was really silly. and you're right. The reason that the manufacturers do it is to build a moat, and to protect their piece of the market. But at the end of the day, that often works against the needs of the customer. Which is something that, really, in our analysis when we apply our framework. [00:10:00] We're always coming back to, “What's the customer trying to do, right?” And, and is what the manu… what the solution provider is providing, truly aligned with what the customer's trying to get done.
Nathan Gilliatt: And Howard, in our earlier conversations, you and I talked about the incentives for Tesla to make sure there were a lot of charging stations out there. They're not necessarily money making, but Tesla can subsidize it because they want their cars to sell. And in order to sell cars, it has to be possible to use them.
And the other charging stations that are out there are frequently incentivized by government payments with no underlying business case. And surprise, surprise, a lot of them are not well maintained. The thing is, if you're selling cars, you can justify internally your subsidies to a loss leader that supports the sale of your primary revenue driver. How does that work for Hertz? Their revenue driver is renting cars? What loss leader could they possibly, I don't see that they've got a [00:11:00] reason to be in the power station business. Because I don't think there's a match between what it would take to invest in that versus what it would do for their car rental business. Given that their customers today at least, are probably satisfied to take an internal combustion engine car.
So this is back to not being too far ahead of demand. And, and you know, similarly, I think, the renters, there's a question of how far are consumers into adopting these? Do they know how to drive one?
How different are they? Do they know? I mean, some of these have, you know, glass screens instead of any controls in the car. So, do you know how to operate the software that actually drives this thing? Uh, do you know how to charge one? Do you know how to do trip planning so that you get where you're going?
If you're an EV owner, maybe? I mean, on the charging, maybe you mostly commute and you charge at home. So how good are you at trip planning? Um, but is this kind of education, Hertz’s job? Is this their business or is [00:12:00] this the business of the car manufacturers who have a product sale to incentivize them to educate consumers on this stuff?
Howard Fields: Yeah. Luke, you were trying to jump in.
Luke Chilone: No, I'm sure the ACME flashlight company. That converted to C batteries instead of D batteries, who knows how many years ago, also built a moat for themselves and were self-serving, right? They came up with a way to make a product that was better, faster, cheaper, whatever we want, but they had to change the battery format.
Again, in a silly example, like batteries, there's four standard or five standard batteries. And if you are a manufacturer nowadays, you play by those rules. You don't go out and invent new batteries.
This is, this is kind of bleeding edge, an electrical vehicle, vehicles and the charging and infrastructure that's needed. Little bit different, right? We're still early on here.
Howard Fields: Yeah, that point you made about the subsidies, Nathan. Initially the government gave anybody money who [00:13:00] wanted to install a charging station. They didn't think about where they were putting them or whether it was a location where people would be comfortable charging, or would be there regularly. And so, there's not a lot of usage in some of the reports that I've read. And when these charging stations break, they don't get repaired. And so, there's a whole bunch of, of issues relative to the chargers that I think we could delve into.
But the other point I wanna make sure we touch on is, there is another alternative if you are into sustainability, which is the hybrid. That's been out there That's a much more proven technology. It's basically got the backup to the charging issue built into it because it runs on gas as well. And I just, personally, as I've looked at EVs since they became available, my equation kept coming out no. What you do is you buy a hybrid, and you get [00:14:00] great gas mileage. And you never worry that you're gonna get stuck somewhere because you didn't plan for it. So, another aspect of this from a, from the consumer, perspective, I think particularly as it affects Hertz.
Nathan Gilliatt: That brings us all the way back to the original question of what was the goal here? If this is corporate positioning, greenwashing is too harsh a term, but the idea of portraying the company as being on the current trends, being concerned about climate, that kind of thing. That pushes toward the electric. I've seen criticisms of hybrids as not really being a fix.
They just extend the use of fossil fuels. But the thing is, as you pointed out, people can drive them. So, what, what were the objectives here? Was this a positioning thing for the brand? Was this a, an honest attempt to serve customers? Are those in conflict?
Luke Chilone: Hmm.
Howard Fields: Yeah. and I, I totally, I totally get the [00:15:00] argument that hybrid. Simply extend a technology that will ultimately be replaced. But again, you've gotta consider where the consumer is in the adoption process, And, what they're prepared for. And so, I think that's a challenge. By the way, I'm sure Hertz got a great deal on all these vehicles. I mean, I'm sure from a financial standpoint that it made sense to do this. And oh, by the way, it made sense from a do what's right by the environment, sustainability. II think it checked a lot of good boxes for them. And you don't come out of bankruptcy every day. Right? I mean, they, they needed something to, to relaunch with.
Nathan Gilliatt: And it could be as simple as timing was off. This might have been the right decision three years too soon.
Luke Chilone: All.
Howard Fields: Yep. and yeah, I think, you know, I was gonna ask you a question about, were expectations set correctly, Nathan, but I think you've kind of, talked us through that. So [00:16:00] Luke, what do you think about the government's role in this and in moving this ahead, as a technological solution to the problem of pollution.
Luke Chilone: Well, I think there's two governments that we're talking about here. We're talking about federal and state. And one of the things that I thought of when Nathan was making his comment. Some states are saying, oh, by the way, by a certain year, combustible engines are gone. You can't have 'em in our state. So now, if you're a state, you don't have a choice. You have to have some other kind of vehicle there, whether we're early or late in the cycle.
But what I think the government did was they were effective in trying to get consumers to buy EVs with the tax credit programs that they've kind of had. And of course, due to the complexity that I mentioned earlier, a lot of other elements need to go right. But the federal government doesn't have a card to play in all of those other elements.
So, it was essentially a stimulus to a whole system. If I could start making [00:17:00] demand here, for example, will the charger segment of that holistic system accelerate faster? Now, they also played a card in the charger, and getting people to build chargers up. But as you both pointed out, it's just not, “Hey, let's go build chargers.”
The vast majority of owners charge at home. Which is different than charging in a public charging station. So, what I've seen is that the consumer is now starting to demand better infrastructure, better charging, and that's maybe good evidence of the stimulus into the whole system has gotten a good result.
The consumer is now saying, “Whoa, hold on. I'm not gonna only go to your… I just need to go wherever I need to go, 'cause I don't know where my next vacation is.” So, I would say quite a study in human behavior. And maybe it's working exactly as it is. But uh, Nathan's point, maybe the adoption curve is just a little bit off. In three years from now this will look brilliant.
Howard Fields: Yeah, I know from my own [00:18:00] personal experience in the development that I live in, they're struggling with this. We have an underground parking deck and have been told by the city that we can't put electric chargers underneath the homes that people live in. And so now we can only do it in the spaces that are the few spaces that are available for guests. So, we have to eat up some of those. I think it proves the point, there are many different scenarios that that need to be thought through. and solutions come up with individually.
Clearly one size thus is not gonna fit all in solving this problem. Which brings me, to my last question, which is, “What do you believe the key considerations are for companies looking to successfully navigate this evolving landscape, and to help drive adoption in this space?”
Luke Chilone: I could go first. Nathan, [00:19:00] I'll go back to, you know, Benjamin Graham’s investing principle; diversify. So, I could understand why Hertz made a sizable bet, maybe economically it was brilliant to kind of do it. But maybe in retrospect, if we don't ever judge what Hertz did, we weren't there, right?
Hertz could have said, “Maybe our message is we wanna be exactly where the curve needs to be. So, we're making a modest investment in electric until charging stations are all over the place or there's a more standardization.” Or some message that kind of sounded like that. So, I think where we are right now in 2024 it's a diversification investment strategy that probably manages risk and manages the finances the best.
Howard Fields: Okay. Nathan, how about you?
Nathan Gilliatt: So, I would definitely separate the manufacturers from the rental companies. Because their incentives are not, their interests are not the same. The rental companies, I would keep a close eye on adoption in general, [00:20:00] and stay in touch with your customers. Know what they want and try to be where they're going to be. Uh, not too soon, not too late. And be aware of the issues. You know, ask them, “Where do the cars go if you don't already know?” And, it's really providing what customers need and expect. For the manufacturers. I think we played a lot with incentives, and I'd really like us to work on removing constraints because it seems like that's what we're running into.
“I'd love to, but…” So what's that? What are the constraints and what can the manufacturers do? Possibly lobbying, possibly working with other businesses to identify the barriers to wider adoption. And that should be a major focus of their attention.
Luke Chilone: If I may, Howard, what's most interesting about Nathan's comment is, I suspect Hertz knows exactly where every car was picked up and dropped off for decades behind us. And I suspect there are a bunch of really smart people over there and they said, “Hey, this might work.” So, they didn't go [00:21:00] spray those cars into every dealership in the nation, in the world.
I think they were probably strategic about it. And I think that's what we're kind of encouraging here. Place your bets in a place where, you know, don't put 'em in, places people are gonna wanna drive for four days, without a charge. That's just not gonna work.
Nathan Gilliatt: Yeah, a lot of them in the Bay Area and maybe fewer of them in farm country.
Luke Chilone: Yeah.
Howard Fields: I want to thank you guys as always for spending some time not only discussing this online but preparing for this discussion. And of course, we should thank our viewers for joining us as well.
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