Betting on the long shot

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Everyone loves the thrill of a low-odds bet paying off – the long bomb finding a receiver in the end zone, the three-point buzzer-beater from mid court, or the band that defies its label’s advice and records a rock opera instead of shorter songs.

That notion of risking it all in hopes of a big payoff might make for great movies. But ask for advice from a former executive who’s living in a jail cell or suffering from a forced early retirement, and you’ll likely hear the benefits of playing it safe.

Nobody’s ever been fired for hiring IBM.

That risk aversion gives many business planners an inherently negative bias when forecasting economic growth and product demand. Decisions stemming from forecasts often make the difference between investing in new people and equipment or shutting down production of moderately successful products. Executives are less likely to be punished for guessing low than guessing high.

Buying new equipment that goes unused is an easy mistake to spot. CEOs notice big capital outlays, and continuing finance charges can be a constant reminder that excess optimism can generate red ink.

It’s much harder to spot the evidence of under-investing. Companies that minimize spending and grow at the same rate as the general economy can appear successful for years – until suddenly they aren’t. Shops can do more with less for a while, but eventually, lack of investing saps production growth and increases structural costs.

This issue focuses on upcoming trends in 2020 and hopefully provides some guidance and data to set expectations for the year. Several large organizations predict auto sales will fall this year, making the cautious hold back on investments and wait for clear signs that conditions are improving.

For today’s auto industry that’s problematic for two reasons – predictions for sales to fall to less than 17 million have been constant for three years and wrong every time so far (see editor’s take on 2020, page 20). Even if they’re right, radical change overtaking the industry demands investment to prepare for that transformation.

Tesla was the fastest growing automaker in 2019, growing sales by about 50%. With global capacity increasing with a new plant opened in China and another underway in Germany, expect 2020 and 2021 to be strong as well. Other producers of electric vehicles (EVs) haven’t fared as well (see infographic, page 16-17), but more vehicles are coming from more automakers (see electric drive, page 24-25). In addition, hybrid powertrains are becoming mainstream with many companies pledging to have electrified options on most vehicles within the next five years.

So, playing it safe is getting riskier. Avoiding capital or research spending to boost the bottom line will almost certainly lead to slower growth and missed opportunities in coming years.

While companies must use common sense to determine how much to spend on the future, this may be the one time in history where betting on the long shot looks like the safest play.