Blog Tesla Competition: Culture Eats Strategy!

[Patrick0101]

If you read traditional auto press, you’ll frequently see stories along the lines of “big automakers are going to start making EVs in a couple years and when they do, Tesla is doomed.” Traditional automakers have the resources, factories, and engineers to design electric cars and they are very good at manufacturing, so, on the...
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[PMerlevede]

The article ignores that the Jaguar i-Pace and the Audio e-Tron will be available in 2018 (certainly in Europe) and that Mercedes and Porcshe will come with models in 2019. And at least 3 other brands will release cars one can buy by the end of 2019. When I replace my model S by the end of 2019, given I live in Belgium, where some friends of mine are working in the plant where the Audi e-Tron will be assembled, I'll definitely give that car a serious look ! And I quite liked the Jaguar XF I had prior to my Tesla, so I'll sniff out the i-Pace as well... At this point it looks that the only reason to buy a Tesla might be the AutoPilot and the Supercharger network. Given the other brands now also seem to get serious about building their own Supercharger network by 2020, I sincerely hope that Tesla will evolve the S and X by the end of 2019 (AP functionality, facelift, larger battery, ... )

 

[Ed Hart]

A very well-written piece. Please let me add this comments:

GM: Despite an outstanding effort by GM Engineering, the dealers have consistently seen the Bolt as a classic “bait and switch” tool. “Sure, we have electric cars”, then start selling against electrics. It meets all the definitions of a compliance car, no matter how strongly GM Engineering thought they were getting the company ready for the future.

Kodak’s film business model, with gross margins above 90% had created an organization that had to be completely dismantled in order to move to electronics imaging. They saw no way to compete in consumer electronics, with the typically thin margins in that space. Instead, Kodak management chose to “ride the horse until it drops”, making sure the tens of thousands on Kodak pensions were protected. It will be an interesting analysis in business schools.

Change: it's the hardest thing anyone every has to do. Great leaders “lay pipe” in the direction they want the company to go and remove roadblocks – funding and people issues – while riding herd on the players that will take them into the future. Few things are harder for incumbent companies

Tesla is a unique competitor, historically, in that they are moving at a hyper, almost-reckless pace not possible in a mature incumbent organization. Additionally, Tesla is pursuing a mission to create sustainable transportation. If global transportation converts significantly to electric but Tesla fails to keep pace, they will still – with some pain – declare their mission to have been successful.

Somewhere, I saw a very serious interview with Musk about the auto industry and incumbent car makers. At one point, one of the other brains in that head grabbed the mouth and blurted out, “I can’t believe they are giving us this much of a head start!” Well….believe it, because as you say, Culture Eats Strategy….every time!

 

[teslaspotter]

A very well-written piece. Please let me add this comments:

Hi ED!
I like your comments,though true & painful to the bone regarding inability of some corporations to change..But for some reason the blog you are commenting is not loading!

 

[mberta74]

Great article, and very true...

The current Automakers have a legacy supply base that supports a 12 volt DC electrical system, they also have dealerships that make money by servicing the vehicles they make.. They can't give up those two item's....

So they will never be serious about the EV market, Tesla started with a blank sheet of paper, without the need to be-hold to the current supply base, they re-invented the supply base they needed.. They also found out where the profit centers on the vehicle and brought those items in house, which enables them to control all cost and add to the profit margins. Plus the service items on a Tesla include Tires and windshield wipers, you don't need service centers for those items. Over the air software updates can occur at any pace for the rest of what is needed in the vehicle..

The legacy makers are here to stay, they will just become smaller as a result of Tesla's disruptive technology, not the other way around.

 

[BartJ]

The article ignores that the Jaguar i-Pace and the Audio e-Tron will be available in 2018 (certainly in Europe) and that Mercedes and Porcshe will come with models in 2019.

exactly ... “will” be available....

let’s see first !

 

[timreeser]

The writer ignores one fundamental of business -- profits. The reason the big OEMs have been slow with EV's is they aren't willing to knowingly lose money in large quantities like Tesla. Tesla lost $20k on each car in 2017. Anyone who competes with them at a similar price will also lose about the same (GM is losing less than that on the Bolt, but still losing money on each Bolt they sell--so of course they will upsell you whenever they can). So they will all wait as long as they can to ride their current ICE investments and ride battery costs down and the volume curve up -- and in the meantime they expect Tesla to bankrupt in 18 months from their losses. Tesla admits now that the model 3 will be negative margin for the year, and I expect well after that--so it won't save the company. The Semi will also be a huge negative margin (the batteries cost well more than their sales price). They won't be increasing volumes on the S or X--where they could actually make positive margin (with all the software options and Performance option).
Full disclosure--I love my Model X, I am CEO of an Electric Truck business, and I don't own any Tesla stock--short or long.

 

[N5329K]

Culture does eat strategy. Most legacy carmarkers will start getting serious about EV's only when they have no other choice. In the meantime, you'll see lots of announcements, concepts, PR efforts and compliance cars that never quite see production, or else see limited, half-hearted production. And as batteries get cheaper, bigger and better, the Supercharger network becomes less important. Not unimportant. Just less. If you're always starting the day with a full tank of electrons, how often will you really need to Supercharge? Not that often, I think.
But there are exceptions to this. They are found in "second-tier" legacy manufacturers.
Nissan is serious about selling the Leaf, and improving it. Hyundai is serious about selling its Ioniq family, and improving it. Volvo is serious about Polestar. And several Chinese manufacturers (BYD, for example) don't need the US market in order to build and sell serious numbers of EV's. The US market could see a spillover from China's domestic EV sales, though whether Americans will buy Chinese models and whether Chinese manufacturers can support cars in America is a big dark question mark..
BMW is poised to go either way. Audi/VW, well, we'll see.
I think that means Tesla still is well placed to dominate the domestic EV market, unless it screws that up with Model 3.
We'll see about that, too.
Robin

 

[ABCTG]

GM maybe has the greatest chance of adapting.

Would they rather just continue to sell gas powered crossovers in China, and large trucks in the US? Yes.
They are on notice in China to build EVs
and globally GM already makes many different sizes of vehicle.

For example; Not for sale in the US is a much smaller pickup available in Mexico
Tornado 2017 | Camioneta Pick Up | Chevrolet México


As long as the legacy automakers are begrudgingly moving to EV, I would not purchase any of their EV vehicles.


The DNA of Tesla is mass adoption of EVs


However, Tesla would also, right now, rather sell a much more expensive model;

Do they have any affordable EVs available? No.



An issue facing mass adoption of EVs is the electric power supply;

What happens when everyone in a neighborhood plugs in their Evs and they start blowing out the neighborhood transformers?

The solution to which might be more neighborhood residential solar.

The infrastructure would also need battery storage, not just in the households, but in the grid itself.

Will the power companies be proactive? Probably not, and it may be up to Elon to find the solution.

 

[Runarbt]

... Tesla admits now that the model 3 will be negative margin for the year, and I expect well after that--so it won't save the company.

Thats not what I have heard Tesla saying. At 2500/week Model 3 makes money, and at 5000/week Tesla as a whole will be showing profit. (non-GAAP). Maybe also GAAP profit sometime during the year.

 

[Phillip L]

GM maybe has the greatest chance of adapting.

Would they rather just continue to sell gas powered crossovers in China, and large trucks in the US? Yes.
They are on notice in China to build EVs
and globally GM already makes many different sizes of vehicle.

For example; Not for sale in the US is a much smaller pickup available in Mexico
Tornado 2017 | Camioneta Pick Up | Chevrolet México


As long as the legacy automakers are begrudgingly moving to EV, I would not purchase any of their EV vehicles.


The DNA of Tesla is mass adoption of EVs


However, Tesla would also, right now, rather sell a much more expensive model;

Do they have any affordable EVs available? No.



An issue facing mass adoption of EVs is the electric power supply;

What happens when everyone in a neighborhood plugs in their Evs and they start blowing out the neighborhood transformers?

The solution to which might be more neighborhood residential solar.

The infrastructure would also need battery storage, not just in the households, but in the grid itself.

Will the power companies be proactive? Probably not, and it may be up to Elon to find the solution.

Given that most charging should be done at non-peak times, when power now moving through the neighbourhood transformers is lowest, means there is a lot of underutilization of the grid at those times. After all, the grid handles peak power consumption very well now.
And I am sure Tesla easily could monitor when the car is plugged in and drawing power, and the geographic location of the car. It would be a short jump to the ability to smooth out charging of all the Teslas in a neighbourhood to prevent jumps in charging by all the cars at once, yet still allow fully charged cars for everyone by 6 a.m. Extrapolate that ability being a requirement for all ev’s by 2025 and a tie in to the grid, and it could be done. Within the last few years, I have been offered a new programmable thermostat that would allow the utility to adjust the temperature setting of our central air conditioning by a few degrees at the few times of the year that the grid is stressed during a heat wave. Not too far fetched to see a similar thing being done for ev’s.

 

[Ulmo]

If you read traditional auto press, you’ll frequently see stories along the lines of “big automakers are going to start making EVs in a couple years and when they do, Tesla is doomed.” Traditional automakers have the resources, factories, and engineers to design electric cars and they are very good at manufacturing, so, on the...
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Extremely well said. That’s why people like you will (probably) always get featured on the front page of TMC instead of me. It was so well written, it reminded me of what I already knew, and put it in better thought form.

 

[Ulmo]

(That same legacy success even bogs down Tesla, but for now, as you said, they still have runway left .)

 

[Ulmo]

Thats not what I have heard Tesla saying. At 2500/week Model 3 makes money, and at 5000/week Tesla as a whole will be showing profit. (non-GAAP). Maybe also GAAP profit sometime during the year.

I’ve asked for better accounting per product line broken down across the entire company's history (which requires deepish dives into R&D effects (rather than quarterly broken totals of all revenue and spending)), but haven’t seen it. However, I do know they intend to continue reinvesting revenue for some time.

 

[Patrick0101]

The writer ignores one fundamental of business -- profits. The reason the big OEMs have been slow with EV's is they aren't willing to knowingly lose money in large quantities like Tesla.

You're right. I should have added this as a factor. The legacy carmakers have their hands tied by a board of directors and shareholders that expect quarterly dividend payouts.

Tesla, on the other hand, has investors that are looking for top-line growth. These are the types that invested in Amazon in 1996 rather than Barnes and Noble.

 

[ABCTG]

a new programmable thermostat that would allow the utility to adjust the temperature setting of our central air conditioning by a few degrees at the few times of the year that the grid is stressed during a heat wave. Not too far fetched to see a similar thing being done for ev’s.

The very fact that in 2018 the grid can be stressed by heatwaves would indicate that the power companies are unable or unwilling to engineer solutions.

One example is Australia; where heatwaves caused major power outages and Tesla stepped in to implement a solution.

Most major cities around the world including the US would be unable to cope with the EV charging demand.

Time of use may be helpful, but would not a solution.

 

[DIL]

This is the classic Innovators Dilemma.

What the theory — and the extensive evidence — in fact support is that incumbents often are the ones to spot and develop new technologies while easily reorganizing themselves to do so. The problem is they fail to value new innovations properly because incumbents attempt to apply them to their existing customers and product architectures — or value networks. Often new technologies are too new and weak for the more advanced and mature value networks that incumbents operate.​

I lived this in the aerospace industry, watching the incumbents compete against SpaceX. It's most definitely a cultural issue, a fascinating study in organizational psychology. The things that made Boeing (or GM, or Kodak) successful in its heyday have been hardwired at every level, from supplier relationships to management incentives. It's hard to change all that overnight, if at all.

I think we all hope that Tesla gets some compelling competition soon, for their sake and for the greater good. I don't doubt it will happen, the question is only who and when...

Thanks for a thought-provoking piece.

 

[Phillip L]

So do you think real ev competition for Tesla will come from other upstart new car manufacturers, rather than the old establishment car manufacturers?

 

[Ed Hart]

Great article, and very true...

The current Automakers have a legacy supply base that supports a 12 volt DC electrical system, they also have dealerships that make money by servicing the vehicles they make.. They can't give up those two item's....

So they will never be serious about the EV market, Tesla started with a blank sheet of paper, without the need to be-hold to the current supply base, they re-invented the supply base they needed.. They also found out where the profit centers on the vehicle and brought those items in house, which enables them to control all cost and add to the profit margins. Plus the service items on a Tesla include Tires and windshield wipers, you don't need service centers for those items. Over the air software updates can occur at any pace for the rest of what is needed in the vehicle..

The legacy makers are here to stay, they will just become smaller as a result of Tesla's disruptive technology, not the other way around.

For those who have not seen these charts from the National Automobile Dealers Association, it confirms you point about service being the source of profits for dealers. I don't have any data after 2014. Maybe it changed a bit?

 

[Phillip L]

So really, selling a new ice car, is just a means to book future repairs. Especially notable from 2006 to 2010 when it actually cost the dealers money to line up future visitors to their repair bays. That is an incredible graphic. Those are razor thin margins, less than a hundred bucks in the last year of the graph. No wonder they are not interested in selling ev’s.