I doubt someone in the near future (5+ years) will build an EV that will compete with TM products. I think any near term competition will be Hybrids which some people who have range anxiety and are afraid to totally forgo what they are accustomed to....a gasoline station on every corner.....will look as a 'safe' (for them) alternative to an EV and still 'help' the environment and save a few $ on gas.
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I doubt someone in the near future (5+ years) will build an EV that will compete with TM products. I think any near term competition will be Hybrids which some people who have range anxiety and are afraid to totally forgo what they are accustomed to....a gasoline station on every corner.....will look as a 'safe' (for them) alternative to an EV and still 'help' the environment and save a few $ on gas.
Sure, good points, because they are doing amazing things we give them great leeway of almost always being late and having the numbers sort of creep (remember when the 2011 Model S was touted as a <$50K car). But if they want to make headway on the secret master plan they'll need to increase the pace. Just like they are adding factory capacity to build more batteries and cars, they can add design and engineering capacity to produce car designs at a greater pace. Might be after 2020, no reason it couldn't 2017.
chickensevil
Active Member
They technically followed through with that by releasing the 40kw car to those who originally ordered one. Dropping the bottom model and then raising the price of the 60kW by 2500 is really not all that bad though. I wouldn't call that much of a price creep. And I can see why they originally thought a 40kW battery would be better than it was since the Roadster had something about that size. Then they realized how much it hit on their range and decided against it. But given that they almost doubled the battery size from the roadster to the 85kW and yet the price went DOWN by almost 30k should be a pretty solid testament in and of itself.
adiggs
Well-Known Member
This is a point (energy in pack going up 60% while lowering the price of the car 30k+) that I like to make whenever I'm at an event or other circumstance where I can point at both my Roadster and somebody else's Model S. Effectively the same number of cells in the battery packs, about the same weight I believe, but my Roadster gets out of the garage with a 50-something kWh battery pack, and the Model S gets out with an 85 kWh battery pack.
If the next battery chemistry change is the same magnitude, them the comparable cell battery pack will be something like 120 or 130 kWh (that's an option I want for Model X durn it, and then see retrofittable to existing Model S's).
callmesam
Member
This.
Or at least be able to swap for a 130kWh pack on long road trips. The rest of the time, I'm happy with my "city" battery.
chickensevil
Active Member
And this is why I know many people, including myself, would be excited for a new roadster because between the improvements in the battery capacity as well as the improvements in the drive inverter/motor and other power electronics, if you threw all that back into a tiny little 2 seater sports car how crazy fast is that thing going to be and how much longer distance will it have? I think the weight difference was by like 2,000 pounds or something close to it, so you are going to be able to accelerate faster and go farther just by transposing the core components and doing nothing else. I think they could easily break the 3.5 second barrier and maybe even the 3 second barrier, and also give a roadster a greater than 300 mile distance.
I can't wait for when they get around to doing a new roadster in around the 2018/2019 timeframe as sort of a "look how much we have improved the tech" type thing. The performance of a McLaren P1 and the price of a Viper (or maybe low end Lambo)
#6 Tesla’s Competitive Advantage part 2a: Understanding the Tech Adoption Curve
(This is post #6 in a series explaining my long-term TSLA investment philosophy. For previous posts, see Articles/megaposts by DaveT)
In my last post I covered how battery cost savings was one of Tesla’s main competitive advantages. In this post, I’d like to focus on another competitive advantage, and that’s Tesla’s understanding of the Tech Adoption Curve. I'll divide this into two posts since it requires some background on understanding disruption.
First, before we get to the Tech Adoption Curve let’s spend a few moments talking about disruption. “Disruption” is a business/tech concept that has gained a lot of traction over recent years due to the exceedingly fast and drastic changes caused by technology, software and the Internet. Industry leaders can become “disrupted” when a new market entrant takes advantage of new technology to gain an advantage in the market with price, features, quality, etc. Often the technology advantage of the new market entrant is so drastic (and the new market entrant keeps innovating on the technology) that existing market players find their market share being eaten up and eventually the new market entrant becomes the market leader.
Disruption has happened and is happening on a multitude of fronts all around us today. The Internet has disrupted hundreds if not thousands of industries. We’ve said bye-bye to the yellow pages, CDs, fax machines, mail order catalogs, dwindling newspaper subscriptions, encyclopedias, etc, etc, etc. And say hello to the birth of thousands of new industries and companies.
Disruption almost always catches the market leader by surprise. They’ve usually known years if not decades of market dominance, have large cash reserves, and have a long history of success. So when disruption starts, usually the market leaders are the first to deny or minimize it. It’s difficult for them to imagine a small little company becoming a threat to them. In fact, often it’s offensive and ludicrous to even consider the possibility.
However, technology progress often presents new opportunities for new companies to make an entrance in a field dominated by existing, well-established players. Usually technology progress starts off by providing a new feature that is enabled by technology but that feature is priced relatively high, since the technology is not yet widely adopted (economies of scale are not taking advantaged of and the new tech is still new so it’s pricey). Since the price is high, it’s usually the super-motivated early adopters/geeks/fanatics that pay the high price for the new feature. The existing market leaders usually look upon this with amusement, calling it a fad for the few.
However, as technology progress the costs and the feature that the new company provides becomes drastically more affordable. This is when adoption moves from just the fanatical early adopters and moves toward the enthusiastic early adopters. They still are early adopters willing to pay a premium for the new feature/product but they weren’t willing to pay as much as the super early adopters. The existing market leaders look at this still with amusement and as a fad.
Eventually, the cost of the new technology continues to drop to the point where the new company is able to offer the new feature/product at a more affordable cost than even the market leaders (or the new company is able to provide a much more compelling product at a competitive price). This is when the mass adoption begins and when the market leader starts to lose market share.
At first, the market leaders enter a period of denial, then blame, and then confusion. They don’t understand how it’s possible that this tiny little company can be taking customers away from them. But quarter after quarter, the numbers don’t lie and eventually the new market entrant becomes the new market leader.
This is how disruption works.
In some industries this can happen in a matter of a few years (ie., software/internet), but in other industries this disruptive process can take decades. Either way, it’s the same story of a new market entrant taking advantage of technological progress and the dropping costs of that technological progress to offer a product/feature that is significantly better or cheaper than what is being offered by the existing market leaders.
By the time the market leaders figure out what’s going on, it’s usually too late. Their market share has been decimated and profits have turned to losses. Sometimes companies can recover by reinventing themselves, but only if the new market entrant (who’s now the leader) is lazy and doesn’t continuously innovate at a fast pace. But if the new market leader is focused on fast continuous innovation, then there’s very little chance of the old players regaining their prior form. If anything, it’s more likely that a new market entrant competes with the new market leader by innovating even quicker than the new market leader (ie., Google took over search by providing a new feature PageRank and then innovating more quickly than any of its competitors. And they competed with the iPhone by innovating at a blistering pace with Android.).
Alright, so let’s tie this in with Tesla and cars. Existing auto manufacturers have enjoyed decades of fairly predictable advances in auto technology, mostly mechanical advances with the engine/transmission and manufacturing processes. However, the auto industry has yet to experience a wave of technological progress in the form of batteries and software. This is where Tesla enters.
With the advent of lithium-ion batteries, Tesla realized that this was the piece of technology that would usher in an era of electric vehicles that would disrupt the entire auto industry (50% of new vehicles sales by 2030 will by electric, according to Elon Musk) and eventually shift the entire transport of the world to fully electric.
The key was not just that lithium-ion batteries offered a tremendous amount of energy density (compared to older battery technologies) but that the technology was improving (ie., 7-8% drop in costs, or increase in energy density) every year and for the foreseeable future. Eventually (ie., within 15 years for cheaper cars but much earlier for pricier cars) the cost of a battery pack that goes 200 miles+ in a charge would become cheaper than an ICE powertrain.
The advantages of the electric powertrain lie in performance, clean air, and fuel savings. However, the disadvantage of the electric powertrain is mainly it’s high cost. This disadvantage decreases every year as battery improvements yield their 7-8% annual improvement. The other disadvantage is charging stations and this disadvantage also decreases as more charging stations are deployed.
Okay, so now that I’ve set up the stage for what disruption is and also introduced the main empowering technology (improving batteries), I’ll continue in the next post to describe what the Tech Adoption Curve is all about and why it gives Tesla a competitive advantage.
(This is post #6 in a series explaining my long-term TSLA investment philosophy. For previous posts, see Articles/megaposts by DaveT)
In my last post I covered how battery cost savings was one of Tesla’s main competitive advantages. In this post, I’d like to focus on another competitive advantage, and that’s Tesla’s understanding of the Tech Adoption Curve. I'll divide this into two posts since it requires some background on understanding disruption.
First, before we get to the Tech Adoption Curve let’s spend a few moments talking about disruption. “Disruption” is a business/tech concept that has gained a lot of traction over recent years due to the exceedingly fast and drastic changes caused by technology, software and the Internet. Industry leaders can become “disrupted” when a new market entrant takes advantage of new technology to gain an advantage in the market with price, features, quality, etc. Often the technology advantage of the new market entrant is so drastic (and the new market entrant keeps innovating on the technology) that existing market players find their market share being eaten up and eventually the new market entrant becomes the market leader.
Disruption has happened and is happening on a multitude of fronts all around us today. The Internet has disrupted hundreds if not thousands of industries. We’ve said bye-bye to the yellow pages, CDs, fax machines, mail order catalogs, dwindling newspaper subscriptions, encyclopedias, etc, etc, etc. And say hello to the birth of thousands of new industries and companies.
Disruption almost always catches the market leader by surprise. They’ve usually known years if not decades of market dominance, have large cash reserves, and have a long history of success. So when disruption starts, usually the market leaders are the first to deny or minimize it. It’s difficult for them to imagine a small little company becoming a threat to them. In fact, often it’s offensive and ludicrous to even consider the possibility.
However, technology progress often presents new opportunities for new companies to make an entrance in a field dominated by existing, well-established players. Usually technology progress starts off by providing a new feature that is enabled by technology but that feature is priced relatively high, since the technology is not yet widely adopted (economies of scale are not taking advantaged of and the new tech is still new so it’s pricey). Since the price is high, it’s usually the super-motivated early adopters/geeks/fanatics that pay the high price for the new feature. The existing market leaders usually look upon this with amusement, calling it a fad for the few.
However, as technology progress the costs and the feature that the new company provides becomes drastically more affordable. This is when adoption moves from just the fanatical early adopters and moves toward the enthusiastic early adopters. They still are early adopters willing to pay a premium for the new feature/product but they weren’t willing to pay as much as the super early adopters. The existing market leaders look at this still with amusement and as a fad.
Eventually, the cost of the new technology continues to drop to the point where the new company is able to offer the new feature/product at a more affordable cost than even the market leaders (or the new company is able to provide a much more compelling product at a competitive price). This is when the mass adoption begins and when the market leader starts to lose market share.
At first, the market leaders enter a period of denial, then blame, and then confusion. They don’t understand how it’s possible that this tiny little company can be taking customers away from them. But quarter after quarter, the numbers don’t lie and eventually the new market entrant becomes the new market leader.
This is how disruption works.
In some industries this can happen in a matter of a few years (ie., software/internet), but in other industries this disruptive process can take decades. Either way, it’s the same story of a new market entrant taking advantage of technological progress and the dropping costs of that technological progress to offer a product/feature that is significantly better or cheaper than what is being offered by the existing market leaders.
By the time the market leaders figure out what’s going on, it’s usually too late. Their market share has been decimated and profits have turned to losses. Sometimes companies can recover by reinventing themselves, but only if the new market entrant (who’s now the leader) is lazy and doesn’t continuously innovate at a fast pace. But if the new market leader is focused on fast continuous innovation, then there’s very little chance of the old players regaining their prior form. If anything, it’s more likely that a new market entrant competes with the new market leader by innovating even quicker than the new market leader (ie., Google took over search by providing a new feature PageRank and then innovating more quickly than any of its competitors. And they competed with the iPhone by innovating at a blistering pace with Android.).
Alright, so let’s tie this in with Tesla and cars. Existing auto manufacturers have enjoyed decades of fairly predictable advances in auto technology, mostly mechanical advances with the engine/transmission and manufacturing processes. However, the auto industry has yet to experience a wave of technological progress in the form of batteries and software. This is where Tesla enters.
With the advent of lithium-ion batteries, Tesla realized that this was the piece of technology that would usher in an era of electric vehicles that would disrupt the entire auto industry (50% of new vehicles sales by 2030 will by electric, according to Elon Musk) and eventually shift the entire transport of the world to fully electric.
The key was not just that lithium-ion batteries offered a tremendous amount of energy density (compared to older battery technologies) but that the technology was improving (ie., 7-8% drop in costs, or increase in energy density) every year and for the foreseeable future. Eventually (ie., within 15 years for cheaper cars but much earlier for pricier cars) the cost of a battery pack that goes 200 miles+ in a charge would become cheaper than an ICE powertrain.
The advantages of the electric powertrain lie in performance, clean air, and fuel savings. However, the disadvantage of the electric powertrain is mainly it’s high cost. This disadvantage decreases every year as battery improvements yield their 7-8% annual improvement. The other disadvantage is charging stations and this disadvantage also decreases as more charging stations are deployed.
Okay, so now that I’ve set up the stage for what disruption is and also introduced the main empowering technology (improving batteries), I’ll continue in the next post to describe what the Tech Adoption Curve is all about and why it gives Tesla a competitive advantage.
#7 Tesla’s Competitive Advantage part 2b: Understanding the Tech Adoption Curve
(This is post #7 in a series explaining my long-term TSLA investment philosophy. For previous posts, see Articles/megaposts by DaveT)
In my last post I gave the background behind disruption and the enabling technology of improving batteries. In this follow-up post I’ll introduce the Tech Adoption Curve and explain why it gives Tesla a major competitive advantage.
Usually when new technologies are introduced people think adoption will happen faster than it usually does. There are many reasons for this. For one, the technology looks so promising and the new feature/product looks so appealing that people think that everyone is going to buy it. But the problem is the new technology is expensive thus making the new product/feature very pricey and that limits that market size to the super early adopters. Even as the product gets a little cheaper, often people think the product is going to take off, only to be disappointed with weak sales and little interest. Eventually, people adjust their expectations and no longer expect a huge take-off of demand. Rather, the expectations adjust into what people think will be a slow and gradual adoption of the technology.
However, at some point when the technology becomes cheap enough, adoption passes a tipping point and adoption of the new product/feature takes off beyond almost what anyone expects. The curve looks like a hockey stick and people are taken off-guard. While the mistake in the earliest stages of the new tech is to overestimate demand, the biggest mistake in these later stages is to underestimate the demand. Since once companies underestimate the demand, they are forced into a reactive position of catching up and this opens the field to new market entrants as well.
Let’s apply this to electric vehicles.
In recent years we’ve seen a lot of auto manufacturers release electric vehicles with high expectations of demand, only to be disappointed later (ie., LEAF, Volt, etc). When they first introduced their EVs, they thought that tons of people would flock to buy the cars because of the advantages of an EV, but they soon learned that people weren’t willing to pay much more for an EV than a ICE car. (http://wheels.blogs.nytimes.com/201...0000-electric-cars-a-year-by-2013-says-chief/)
What Nissan, Chevy and others have learned is that there wasn't as much demand for their EVs as they initially projected so they’ve had to adjust their expectations.
They might have initially expected the future demand for their EVs to look like this:
But after initial bleak sales, they’ve had to adjust their expectations to look more like this:
However, in Tesla’s case they approached the whole EV adoption/demand issue in a totally different way. They understood that initial demand for EVs would be limited due to price. Thus, they started with a compelling, pricey car (ie., Roadster) and a modest goal of selling a few thousand of them. And they knew even with their second major product that demand would still be limited, so they didn’t even try to shoot for a mass market car. They created the Model X to compete in the premium luxury car market and expected 20k annual sales and the Model X with 15k annual sales. They knew that the price of the batteries needed to come down before they could create a compelling, affordable mass market car and that’s why Tesla has waited all these years before even attempting to build an affordable car.
Other manufacturers optimistically imagine that people will buy their EVs even when their EVs are priced higher than comparable ICE cars. But the reality is that the market is very limited when people can get a comparable ICE for less.
In Tesla’s case, they realize that the market is limited for an EV that’s priced higher than a comparable ICE and they’ve refused to release such products. Rather, they’ve chosen to release products that are better than comparably priced ICE cars (ie., Model S). And this is the same motto they will use to release their 3rd generation vehicle. They don’t naively imagine there’s going to be a huge market for Gen3 EV if it’s priced higher than comparable ICE cars. Tesla understands that Gen3 (and any other car they make) needs to be priced comparably with other ICE cars in its market segment and it needs to provide better performance.
So in effect what Tesla has done is manage their early expectations of the adoption of electric vehicles. While other auto makers have entered the market with lofty expectations, only to be disappointed, Tesla entered the market with realistic expectations.
Now, here’s where things get juicy. At a certain point, the cost of batteries gets to a point where an electric vehicle can be made that is truly affordable and has high performance. Once this tipping point is reached, the adoption curve spikes up like a hockey stick. Those companies that had adjusted their expectations downward, now are at a disadvantage since they have to re-adjust their expectations (but they will likely be hesitant to do that since they were burned before).
The advantage Tesla has is that they are expecting what is known as the Tech Adoption Curve. Elon and JB have mentioned this in the past regarding tech adoption, that the biggest mistake early on is to overestimate demand and the biggest mistake later is to underestimate demand. In other words, Tesla has been disciplined in the early stages to not over-estimate demand, but in the later stages (ie., Gen3) they will be disciplined to not under-estimate demand. Herein lies a major competitive advantage of Tesla.
If you survey and research other auto makers, it becomes fairly obvious that no other auto maker is expecting the massive disruption of electric vehicles like the management at Tesla. At best, most auto company CEOs view the ICE car as here to stay, only it will become more efficient (ie., hybrid, etc). They view electric cars as a growing field but just one of the many powertrain options of the future - ICE, hybrid, plug-in hybrid, diesel, natural gas, electric, fuel cell, etc.
This is why when the tipping point occurs with electric vehicles, it is likely that most auto makers will miss out. They will look at the mass demand for Gen3 as some kind of fluke or mania, and not realize that a massive tipping point has just occurred. Rather than calling an emergency meeting with their management, most auto makers will continue to march on with their existing plans to build and invest in more ICE, hybrid, diesel, natural gas, etc. as well as electric cars. They might boost their investment in electric vehicles but it will likely be inadequate. All the while, Tesla is marching ahead with the goal of not underestimating the massive adoption curve. Tesla will likely be building multiple Gigafactories and car factories and will be looking to build millions of cars going into the 2020s. The other auto makers will be in a position of reacting, while Tesla will be proactively making bold moves.
The bolder and bigger the moves that Tesla makes, the greater the advantage they accrue. They will experience greater economies of scale, greater brand presence, more superchargers, more service stations, more stores, more word-of-mouth, more revenue leading to more investments, etc. In other words, as Tesla focuses on not underestimating demand, they can invest like crazy and the investments snowball into greater advantages.
Other auto makers might find themselves in a position where they are reluctant to push EV sales hard because that might mean the cannibalization of their existing ICE/hybrid car sales. Also, their new EV cars might not have the same margins as their existing ICE cars because their ICE cars will have much larger economies of scale and years of refinement. Thus, it makes more sense to push ICE cars for higher margin. In any case, it’s going to be a challenge for existing auto makers because they’re divided, and probably more loyal to what’s been feeding their cash cow. However, for Tesla there are no existing loyalties to ICE cars. Tesla breathes and lives only one loyalty, and that’s to electric cars. They do not fear cannibalizing sales of their existing cars, and as a result they can go all-in with the electric vehicle revolution.
I’ve adapted what’s known as the Tech Adoption Curve to reflect how I see demand for electric cars in the next 20+ years. The disruption, though occurring over decades, will be thorough and complete. The theory of the Tech Adoption Curve is that adoption starts out with innovators at a very slow pace, then expands to early adopters and eventually to the early and late majority. However, the pace of adoption picks up very quickly from early adopter all the way to the start of late majority, where the pace starts to slow.
IMHO this is a roadmap to the future disruption of the auto industry.
Here’s a few more notes about the graph below:
- Innovators are everybody before 2017 (roadster owners might be considered pre-innovators and early innovators. Model S/X owners are innovators and until 2017 they make up only 2.5% of the market, including demand for other electric vehicles).
- Early Adopters start from 2017 to 2023. This stage is marked by the release of Gen3. And this stage EVs take over 13.5% more of the market. This is where the demand curve shoots up like a hockey stick and surprises most people.
- Early Majority starts in 2023 to 2029, and this is where EVs take 34% more of the market (for a total market share of 50% by 2029). 2023 also might mark the release of a Gen4 (even more affordable vehicle than Gen3) by Tesla.
- Late Majority starts in 2029 to 2035 and this stage EVs pick up another 34% (for a total 84% market share). However pace of adoption starts to slow as most of the market has already transitioned to EVs.
- Laggards starts in 2035 and is the last stage where the remaining market share (note: we’re talking about new vehicle sales) switches over to EVs.
In summary, currently Tesla is one of the only auto makers that understand the Tech Adoption Curve and that the key is to not underestimate demand when the Early Adopter stages commences in 2017 with Gen3. This is why I believe Tesla will aggressively pursue expansion of multiple Gigafactories and car factories to execute on this crucial time period of 2017 to 2023. Tesla is in an unique position to take advantage of this disruption as they have no legacy ICE products to support/maintain and no conflicting loyalties. Further, Tesla is alone among major auto makers in this view of the auto industry, where they see a complete transition to electric vehicles. In other words, Tesla is the only major auto maker who really believes in the Tech Adoption Curve for EVs above, and in fact has made it it’s mission to do everything it can to facilitate and promote this massive transition. The reason Tesla's understanding of the Tech Adoption Curve is a major competitive advantage is because it allows Tesla to make massive investments and big bets toward the adoption of EVs in their eventual domination of the auto industry, while other OEMs are biased against the Tech Adoption Curve because of their existing loyalties to their ICE car lineups that are their cash cows and will be reluctant, slow and reactive in their investments towards EVs.
On a final note, it’s interesting that all of Elon Musk’s companies have been involved in disrupting existing industries:
Zip2 - though smaller startup, dealt with disruption in publishing industry
Paypal - disruption via online payments
SpaceX - disruption of aerospace industry
Solarcity - disruption of energy industry
Tesla - disruption of auto industry
(This is post #7 in a series explaining my long-term TSLA investment philosophy. For previous posts, see Articles/megaposts by DaveT)
In my last post I gave the background behind disruption and the enabling technology of improving batteries. In this follow-up post I’ll introduce the Tech Adoption Curve and explain why it gives Tesla a major competitive advantage.
Usually when new technologies are introduced people think adoption will happen faster than it usually does. There are many reasons for this. For one, the technology looks so promising and the new feature/product looks so appealing that people think that everyone is going to buy it. But the problem is the new technology is expensive thus making the new product/feature very pricey and that limits that market size to the super early adopters. Even as the product gets a little cheaper, often people think the product is going to take off, only to be disappointed with weak sales and little interest. Eventually, people adjust their expectations and no longer expect a huge take-off of demand. Rather, the expectations adjust into what people think will be a slow and gradual adoption of the technology.
However, at some point when the technology becomes cheap enough, adoption passes a tipping point and adoption of the new product/feature takes off beyond almost what anyone expects. The curve looks like a hockey stick and people are taken off-guard. While the mistake in the earliest stages of the new tech is to overestimate demand, the biggest mistake in these later stages is to underestimate the demand. Since once companies underestimate the demand, they are forced into a reactive position of catching up and this opens the field to new market entrants as well.
Let’s apply this to electric vehicles.
In recent years we’ve seen a lot of auto manufacturers release electric vehicles with high expectations of demand, only to be disappointed later (ie., LEAF, Volt, etc). When they first introduced their EVs, they thought that tons of people would flock to buy the cars because of the advantages of an EV, but they soon learned that people weren’t willing to pay much more for an EV than a ICE car. (http://wheels.blogs.nytimes.com/201...0000-electric-cars-a-year-by-2013-says-chief/)
What Nissan, Chevy and others have learned is that there wasn't as much demand for their EVs as they initially projected so they’ve had to adjust their expectations.
They might have initially expected the future demand for their EVs to look like this:
But after initial bleak sales, they’ve had to adjust their expectations to look more like this:
However, in Tesla’s case they approached the whole EV adoption/demand issue in a totally different way. They understood that initial demand for EVs would be limited due to price. Thus, they started with a compelling, pricey car (ie., Roadster) and a modest goal of selling a few thousand of them. And they knew even with their second major product that demand would still be limited, so they didn’t even try to shoot for a mass market car. They created the Model X to compete in the premium luxury car market and expected 20k annual sales and the Model X with 15k annual sales. They knew that the price of the batteries needed to come down before they could create a compelling, affordable mass market car and that’s why Tesla has waited all these years before even attempting to build an affordable car.
Other manufacturers optimistically imagine that people will buy their EVs even when their EVs are priced higher than comparable ICE cars. But the reality is that the market is very limited when people can get a comparable ICE for less.
In Tesla’s case, they realize that the market is limited for an EV that’s priced higher than a comparable ICE and they’ve refused to release such products. Rather, they’ve chosen to release products that are better than comparably priced ICE cars (ie., Model S). And this is the same motto they will use to release their 3rd generation vehicle. They don’t naively imagine there’s going to be a huge market for Gen3 EV if it’s priced higher than comparable ICE cars. Tesla understands that Gen3 (and any other car they make) needs to be priced comparably with other ICE cars in its market segment and it needs to provide better performance.
So in effect what Tesla has done is manage their early expectations of the adoption of electric vehicles. While other auto makers have entered the market with lofty expectations, only to be disappointed, Tesla entered the market with realistic expectations.
Now, here’s where things get juicy. At a certain point, the cost of batteries gets to a point where an electric vehicle can be made that is truly affordable and has high performance. Once this tipping point is reached, the adoption curve spikes up like a hockey stick. Those companies that had adjusted their expectations downward, now are at a disadvantage since they have to re-adjust their expectations (but they will likely be hesitant to do that since they were burned before).
The advantage Tesla has is that they are expecting what is known as the Tech Adoption Curve. Elon and JB have mentioned this in the past regarding tech adoption, that the biggest mistake early on is to overestimate demand and the biggest mistake later is to underestimate demand. In other words, Tesla has been disciplined in the early stages to not over-estimate demand, but in the later stages (ie., Gen3) they will be disciplined to not under-estimate demand. Herein lies a major competitive advantage of Tesla.
If you survey and research other auto makers, it becomes fairly obvious that no other auto maker is expecting the massive disruption of electric vehicles like the management at Tesla. At best, most auto company CEOs view the ICE car as here to stay, only it will become more efficient (ie., hybrid, etc). They view electric cars as a growing field but just one of the many powertrain options of the future - ICE, hybrid, plug-in hybrid, diesel, natural gas, electric, fuel cell, etc.
This is why when the tipping point occurs with electric vehicles, it is likely that most auto makers will miss out. They will look at the mass demand for Gen3 as some kind of fluke or mania, and not realize that a massive tipping point has just occurred. Rather than calling an emergency meeting with their management, most auto makers will continue to march on with their existing plans to build and invest in more ICE, hybrid, diesel, natural gas, etc. as well as electric cars. They might boost their investment in electric vehicles but it will likely be inadequate. All the while, Tesla is marching ahead with the goal of not underestimating the massive adoption curve. Tesla will likely be building multiple Gigafactories and car factories and will be looking to build millions of cars going into the 2020s. The other auto makers will be in a position of reacting, while Tesla will be proactively making bold moves.
The bolder and bigger the moves that Tesla makes, the greater the advantage they accrue. They will experience greater economies of scale, greater brand presence, more superchargers, more service stations, more stores, more word-of-mouth, more revenue leading to more investments, etc. In other words, as Tesla focuses on not underestimating demand, they can invest like crazy and the investments snowball into greater advantages.
Other auto makers might find themselves in a position where they are reluctant to push EV sales hard because that might mean the cannibalization of their existing ICE/hybrid car sales. Also, their new EV cars might not have the same margins as their existing ICE cars because their ICE cars will have much larger economies of scale and years of refinement. Thus, it makes more sense to push ICE cars for higher margin. In any case, it’s going to be a challenge for existing auto makers because they’re divided, and probably more loyal to what’s been feeding their cash cow. However, for Tesla there are no existing loyalties to ICE cars. Tesla breathes and lives only one loyalty, and that’s to electric cars. They do not fear cannibalizing sales of their existing cars, and as a result they can go all-in with the electric vehicle revolution.
I’ve adapted what’s known as the Tech Adoption Curve to reflect how I see demand for electric cars in the next 20+ years. The disruption, though occurring over decades, will be thorough and complete. The theory of the Tech Adoption Curve is that adoption starts out with innovators at a very slow pace, then expands to early adopters and eventually to the early and late majority. However, the pace of adoption picks up very quickly from early adopter all the way to the start of late majority, where the pace starts to slow.
IMHO this is a roadmap to the future disruption of the auto industry.
Here’s a few more notes about the graph below:
- Innovators are everybody before 2017 (roadster owners might be considered pre-innovators and early innovators. Model S/X owners are innovators and until 2017 they make up only 2.5% of the market, including demand for other electric vehicles).
- Early Adopters start from 2017 to 2023. This stage is marked by the release of Gen3. And this stage EVs take over 13.5% more of the market. This is where the demand curve shoots up like a hockey stick and surprises most people.
- Early Majority starts in 2023 to 2029, and this is where EVs take 34% more of the market (for a total market share of 50% by 2029). 2023 also might mark the release of a Gen4 (even more affordable vehicle than Gen3) by Tesla.
- Late Majority starts in 2029 to 2035 and this stage EVs pick up another 34% (for a total 84% market share). However pace of adoption starts to slow as most of the market has already transitioned to EVs.
- Laggards starts in 2035 and is the last stage where the remaining market share (note: we’re talking about new vehicle sales) switches over to EVs.
In summary, currently Tesla is one of the only auto makers that understand the Tech Adoption Curve and that the key is to not underestimate demand when the Early Adopter stages commences in 2017 with Gen3. This is why I believe Tesla will aggressively pursue expansion of multiple Gigafactories and car factories to execute on this crucial time period of 2017 to 2023. Tesla is in an unique position to take advantage of this disruption as they have no legacy ICE products to support/maintain and no conflicting loyalties. Further, Tesla is alone among major auto makers in this view of the auto industry, where they see a complete transition to electric vehicles. In other words, Tesla is the only major auto maker who really believes in the Tech Adoption Curve for EVs above, and in fact has made it it’s mission to do everything it can to facilitate and promote this massive transition. The reason Tesla's understanding of the Tech Adoption Curve is a major competitive advantage is because it allows Tesla to make massive investments and big bets toward the adoption of EVs in their eventual domination of the auto industry, while other OEMs are biased against the Tech Adoption Curve because of their existing loyalties to their ICE car lineups that are their cash cows and will be reluctant, slow and reactive in their investments towards EVs.
On a final note, it’s interesting that all of Elon Musk’s companies have been involved in disrupting existing industries:
Zip2 - though smaller startup, dealt with disruption in publishing industry
Paypal - disruption via online payments
SpaceX - disruption of aerospace industry
Solarcity - disruption of energy industry
Tesla - disruption of auto industry
everman
Member
This is such a fantastic series, thank you DaveT! I can't wait for the correlation between the hockey stick demand / sales and stock price!
RationalOptimist
Member
Great pieces, Dave. I think this is indeed the right way to think about the competitive landscape. You would think that some people in competitive companies would indeed see the risks they face, but the courage they would need to take a Tesla-like bet on this type of disruption is actually much greater even than Tesla has summoned. Because for them such an act would inevitably cannibalize their existing business... and that's incredibly hard to do.
Dave. Excellent addition to your series. The more I contemplate what it will take at this point for us to get to the 'hockey stick' situation where the EVs will become the predominant vehicles the more I feel that it will be when we reach a point where two things have happened.
First, TM does need to produce a price competitive vehicle in the $35K range that exceeds the competition in performance AND second, they need to advance the ability to charge a 200 mile (min) battery in a similar time that it takes to fill a gas tank. At that point, price, performance and convenience arguments are all addressed and it becomes a 'no brainer' to go with an EV.
First, TM does need to produce a price competitive vehicle in the $35K range that exceeds the competition in performance AND second, they need to advance the ability to charge a 200 mile (min) battery in a similar time that it takes to fill a gas tank. At that point, price, performance and convenience arguments are all addressed and it becomes a 'no brainer' to go with an EV.
Here are some few thoughts on this.
In the large premium segment (ie., $55-120k market), adoption toward EVs has already taken hold and is evidenced by the Model S's strong sales in this segment. Model X will eat into the large premium SUV segment as well. So the dominoes have already started to fall in the high end segment.
Now for the entry level luxury market (ie., $30k-$55k market), nobody has been able to make an EV that's comparable in performance at the same price as the other cars in this segment. As a result, adoption of EVs in this segment is minimal to non-existent.
What Gen3 does is start the dominoes in the entry level luxury market, since Gen3 will have comparable or even better performance than its competitors but at the same price.
Regarding, charging speed... I'm not sure they need to get charging to the point where it's as quick as filling a gas tank (even though eventually one day it will be like that). Initially, most people are going to be charging at home overnight, so the need for charging elsewhere will be limited to longer trips. In those cases, since they are experiencing greater convenience by charging overnight at home, they probably will be willing to wait a bit longer during road trips. I agree though Tesla needs to continue to iterate and decrease Supercharging charging times, and every little bit helps. I think if they can get to a point where a person can charge 150 miles in 15 minutes, then that's very compelling.
On another note, the vast majority of cars sold are under $30k so very strong adoption of EVs in that market likely won't take place until we see a compelling EV in the $20-30k price range where people don't see it as a compromise but an upgrade from their current ICE. Currently a LEAF just poses too many compromises (range, ride quality, performance, etc). And this is where I think Tesla will turn it's focus on for Gen4 (maybe due out 2022-2023?).
Thanks. You and I have traded thoughts on the Gen4 before. I was of the opinion that someone else (Nissan) may be the master of that market before TM gets there (2022?). However, I have come to the conclusion that I am probably wrong (say it ain't so!:scared
. I believe now TM will be involved in Gen4, but I think it will be in partnership/cooperative venture with a Chinese manufacturer and be a subsidiary of TM.Thanks. You and I have traded thoughts on the Gen4 before. I was of the opinion that someone else (Nissan) may be the master of that market before TM gets there (2022?). However, I have come to the conclusion that I am probably wrong (say it ain't so!:scared
Tesla will likely use a Chinese joint venture partner to establish a factory in China (for Gen3 by 2020) but that's because they need a Chinese joint venture partner to establish domestic production in China by law. If the Chinese law didn't require it, Tesla would for sure not use a joint venture partner as a Chinese joint venture partner adds complexity, reduces profit, and adds little to no value.
Regarding Gen4, a Chinese manufacturer adds no value except to satisfy Chinese law when establishing domestic China production which they'll likely do, just as in Gen3.
After reading this, I immediately remembered that dominoes contain not only kinetic, but potential energy. This allows a falling domino to actually knock over one somewhere between 1.5 and 1.67 times its size. Model 3 will be a substantially bigger domino, but I think the tech adoption curve interpolates well between the Roadster, Model S and X dominoes in what is about to be a lot of kinetic and potentially energy falling on the market.
As always, great stuff.
Yeah, it was good to hear Elon saying that Tesla would do whatever it takes to see the auto industry transition to electric.
It makes sense to do a pickup truck after Gen 3 (sedan/crossover) since the economy car will be too difficult to do right after since battery costs needs to drop more. So a pickup truck can be a decently high margin item and an important vehicle in the Tesla lineup. Also, I can see Tesla add another car to the Model S/X platform and another car or two to the Gen3 platform before the time is right (mostly meaning battery costs have dropped enough) for them to do a $20-30k Gen4 car. The Gen4 car IMO will power the Early Majority adoption (in the Tech Adoption Curve). Gen3 powers the Early Adopters adoption, and Model S/X powers the Innovators adoption.
Dave I'm really enjoying this thread and I thank you for your insights.
I agree that Tesla understands the Tech Adoption Curve. One aspect I haven't seen you mention is the gap between the Early Adopters and Early Majority as described in the book Crossing the Chasm. Quick summary for those who aren't familiar with the idea:
Early Adopters are willing to put some effort into getting the most out of a new type of product. Majority customers expect products to Just Work without any more effort than they were expending on the older product. The tech innovator can sell their product to Early Adopters on the basis of technological innovation. In order to sell to the Early Majority the company has to adjust its product's ease of use and its marketing to fit the new mainstream market.
For example, Apple didn't invent the smartphone. Blackberry, Palm, Nokia and others were there first. Apple's iPhone took off because it was compelling to the majority customers. Apple made it across the chasm; Blackberry and Palm didn't.
For electric vehicles I believe charging represents a big part of the chasm. EV charging in the past has been a sort of chicken and egg problem. Nobody would build a charging network because there were no vehicles to charge, and nobody would buy an EV because there was no place to charge it. Tesla decided to solve the problem by building both the car and the network. In order for EV's to be usable by the majority the Supercharger network will have to be well established. Yes, I know nearly all charging should take place at home. But in order for people to get over the dreaded Range Anxiety once and for all they have to know that charging is something they never have to think about.
Maybe I'm getting ahead of your agenda but I look forward to reading what you have to say about the chasm and Tesla's probable strategies for overcoming it.
I agree that Tesla understands the Tech Adoption Curve. One aspect I haven't seen you mention is the gap between the Early Adopters and Early Majority as described in the book Crossing the Chasm. Quick summary for those who aren't familiar with the idea:
Early Adopters are willing to put some effort into getting the most out of a new type of product. Majority customers expect products to Just Work without any more effort than they were expending on the older product. The tech innovator can sell their product to Early Adopters on the basis of technological innovation. In order to sell to the Early Majority the company has to adjust its product's ease of use and its marketing to fit the new mainstream market.
For example, Apple didn't invent the smartphone. Blackberry, Palm, Nokia and others were there first. Apple's iPhone took off because it was compelling to the majority customers. Apple made it across the chasm; Blackberry and Palm didn't.
For electric vehicles I believe charging represents a big part of the chasm. EV charging in the past has been a sort of chicken and egg problem. Nobody would build a charging network because there were no vehicles to charge, and nobody would buy an EV because there was no place to charge it. Tesla decided to solve the problem by building both the car and the network. In order for EV's to be usable by the majority the Supercharger network will have to be well established. Yes, I know nearly all charging should take place at home. But in order for people to get over the dreaded Range Anxiety once and for all they have to know that charging is something they never have to think about.
Maybe I'm getting ahead of your agenda but I look forward to reading what you have to say about the chasm and Tesla's probable strategies for overcoming it.
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