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Why I Think Tesla is Unlikely to Fail

Discussion in 'Tesla Motors' started by wdolson, Dec 28, 2015.

  1. wdolson

    wdolson Active Member

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    Speculation and predictions of Tesla's demise are rampant. Some people here as well as a number of "experts" in the auto media believe that the mainstream car makers are on the verge of killing Tesla with their own BEV. Tesla may still fail, their success is not guaranteed, but I don't believe any failure will be for the reasons the experts believe.

    There are a number of sites out there with analysis of why startups fail, many cite a study of failed start ups that came up with 20 reasons. Such as this:
    The Top 20 Reasons Startups Fail

    I'll go through each reason for failure and how much it applies to Tesla, or not. For some of these, Tesla is beyond the stage where companies fail. Tesla is into the late entrepreneurial stage at this point. On to my analysis...

    1) No Market Need - This is the biggest reason for start ups to fail. "Need" is a term that is open to interpretation, but in this case I think a good case can be made that there is a need for long range BEVs. At least as much need as there was for a number of other start ups that succeeded. Even if you aren't concerned about the environment, battery technology has been inching to the point where long range BEVs were going to get competitive with ICE cars on price and there are a lot of economic advantages to BEVs.

    2) Run Out of Cash - Tesla has almost run out a couple of time, though this is less likely now than with many start ups. Tesla has the advantages of a strong stock price in combination with a product that is selling close to expected numbers with a good profit margin per product. Tesla did have to raise some cash earlier this year to get through to the Model X launch, but as long as the stock price remains strong, Tesla has an ATM to tap if they need to.

    With mismanagement, Tesla could run out of cash, but with their spending patterns up to now and the X going from a money burner to an income source, the odds of them running out of cash are low.

    3) Not the Right Team - This was an issue up to the Roadster launch and it is the reason Elon Musk is now CEO. By the time the Roadster was close to ready, Tesla was headed for failure from running out of cash, problems with the team, and mismanagement. Musk stepped in and pushed out a number of people who were more trouble than help, and streamlined the operation. Since then the team may not have been completely happy all the time, but they are pretty effective.

    4) Get Outcompeted - This is the one so many people are wringing their hands over, but it is one of the least likely at this point. The odds of this are very small though. The key technology for electric cars is the batteries, and there are two factors: quality and price. For quality, batteries need high capacity, charge time, whether it has a memory or not, and how many charge cycles it can take without degrading. The ideal battery would have ultra high capacity, never degrades with infinite charges, and has ultra fast charge times. In the real world, all the battery technologies we know of right now have limitations in all these areas and every chemistry has trade offs with other chemistries. As for price, the price of batteries has been dropping somewhat steadily for many years.

    As for price Elon Musk is a numbers guy, he ran the numbers and came to the conclusion that a large vertically integrated factory located as close as possible to the source of raw materials could make batteries cheaper than anyone else, hence the Gigafactory. It is possible he's wrong, he is not infallible, but even if he's wrong, it's unlikely he will be wrong in such a massive way the competition will have a major advantage. Even if the Gigafactory doesn't beat the competition on price by a wide margin, it is almost certainly going to be competitive.

    The only scenario I can think of where Tesla gets out competed on price is if another car maker got a solid patent locked down on a killer battery chemistry that is way ahead of current chemistries AND they are able to get their batteries into production and into cars about 10X faster than anyone else. Current wisdom is that any major breakthrough in battery technology is going to take at least 10 years to get from the lab into cars. Possibly longer.

    This is such an unlikely scenario that getting outcompeted in anything less than the next 10 years is unlikely. The potential market for pure EVs is massively larger than it is now, on the order of at least 100X bigger. Right now consumer demand isn't huge because there is no affordable long range BEV on the market. Tesla has the range, but at a price, and the rest of the market is just getting ranges up over 100 miles. Most BEVs are also small vehicles that are often weirdmobiles, which doesn't appeal to the core of car buyers.

    Once there is a long range (better than 200 mile) affordable BEV available, the public will start paying attention and demand will likely go up. It's highly likely that demand will end up stripping supply once people realize they can have a BEV that meets most, if not all their driving needs. Once that point it reached, the bottleneck to mass marketing of BEVs will be batteries.

    Tesla is the only company that will be in a position to build a large number of long range BEVs. LG Chem supplies a lot of companies with batteries, but they supply small battery packs to a lot of low production vehicles and in a few cases they will be supplying larger battery packs to a few limited production vehicles. Most car companies are scared to commit to a given battery chemistry for fear it will be obsolete in a few years. Tesla is taking the strategy of building the best they can with what is available today, and they will switch chemistries as needed. Unless there is a radical change in chemistry, it is unlikely the Gigafactory is going to need too dramatic a change to adapt to the next generation of chemistry. A major change is going to have a lot of lead time too because of the 10+ years between lab and production. So Tesla is going with good enough for today and we'll adapt as needed for tomorrow instead of sitting on the sidelines paralyzed by the possibility the chemistry they commit to today won't be used in a year or two.

    People just can't grok how much world battery production has to increase and how much it will be a bottleneck when BEVs take off. If the Chevy Bolt turns out to be a mega hit with customers and lots of people want one, they can't have one because Chevy won't have the ability to build more than the planned 35,000 a year for some time after introduction (at least a year or two). On the other hand, even if the Model 3 is delayed, Tesla has a road map to get to 500,000 cars a year in a short time. And critical to this calculation is Tesla will not be battery limited in this ramp up. They will be the only car company with the battery capacity to build 600,000 BEVs a year by the early 2020s (even if they aren't building that many cars).

    So even if other car companies come out with a BEV that gets customers salivating even more than people salivate for Teslas (hard to imagine, but maybe somebody will hit on some killer feature everyone else has missed), Tesla will be the only car company in any position to deliver on a higher demand for BEVs. The competition also has to overcome resistance from dealers who don't want to sell BEVs. That can be overcome, but it's an extra obstacle Tesla doesn't have to contend with.

    5) Pricing/Cost Issues - Tesla has been very careful in this regard. The plan from the beginning was to come out with a full electric vehicle that had good range and was fun to drive, but was expensive (the Roadster), then come out with a more affordable car (the Model S and X), and finally come out with an even more affordable car. Tap the well heeled who are early adopters and are willing to accept teething problems in somewhat limited production cars, and then once they knew how to build cars AND the public's appetite was whetted, deliver a car for the masses that a large percentage of new car buyers could afford.

    This plan almost came unraveled with the massive cost overruns on the Roadster. This was partly due to inexperience at all levels, but most critically it was a problem with upper management. When Elon took over and started running the company more competently, the cost overruns came way down. They still have them to some extent, but it's more on scale with typical engineers being overly optimistic about schedules than the waste that was going on during Roadster development.

    6) Poor Product - Some people make noises about this based on things like the Consumer Reports reliability report, but overall it really isn't a problem. The bulk of problems were on early cars and while not all problems have been completely resolved, the cars coming off the lines today are much better than 2013 models. The fact Tesla is aiming to produce more cars in Q4 2015 than ever before is an indication that any reports of quality problems are not hurting sales all that much. Tesla has the highest owner satisfaction rating in the car business, and this is despite the problems.

    So ultimately this one is probably one of the lowest probability failure scenarios.

    7) Need/Lack of Business Model - Elon has the advantage of running 4 start up companies in his life. He is very good at putting together business models and has a clear and detailed roadmap for Tesla out to 600,000 cars a year with a decent strategy for the next steps beyond that.

    8) Poor Marketing - So far this has not been a problem at all. They spend no money on media ads, yet the world beats a path to their door. Something almost every other company in the world is envious of.

    9) Ignore Customers - There have been some complaints here about this, however, they have the best customer satisfaction in the industry for a reason. If more than 90% of owners say they are happy with customer service, then they probably aren't ignoring their customers very often.

    10) Product Mis-Timed - This almost killed Tesla in the 2008 economic crash, but they survived and grew through the worst recession in 80 years. At this point this doesn't apply anymore.

    11) Lose Focus - This could happen, especially if Elon steps down to concentrate on SpaceX, which there are rumors he may do when the Model 3 is launched. I think they did lose a little with the Model X. The car ended up being more complicated than it should have been, but overall I think they are focused enough to make a few mistakes and survive.

    12) Disharmony on Team/Investors - This is related to #3 and did almost happen back in the Roadster days. It's unlikely now.

    13) Pivot Gone Bad - They are pivoting to the Model 3 in the next few years and it is possible they will make a major mistake there. This is a possibility if the Model 3 is poorly designed, but the likelihood of that is relatively low. This is probably the most likely failure scenario, but I still think it's unlikely.

    14) Lack Passion - This is definitely not the case.

    15) Bad Location - This is the opposite of a problem. They lucked into the largest car factory in the West for pennies on the dollar and it was still full of equipment left over from the GM/Toyota days. And the factory was not far from their head offices in Palo Alto. They have access to all the talent in Silicon Valley with the factory a short drive away, few Silicon Valley companies of any size can claim that.

    They have had some problems breaking into some states, but it hasn't dramatically hurt their business.

    16) No Financing/Investor Interest - This was a serious problem in 2008 when the company almost went under. However they have the benefit of a very healthy stock price, which gives them access to cash if they need it. Something most start ups don't have.

    17) Legal Challenges - This is one of those wild card things that could hurt them. Some people predicted problems with auto pilot, but thus far the company has been amazingly free of legal challenges. There have been a few lawsuits, but none have threatened the future of the company. It's always possible somebody may come up with some kind of product liability lawsuit that puts the company in danger, but the probability is probably lower than a pivot gone bad and, as I said, I think that one is pretty low.

    18) Don't Use Network/Advisors - They seem to utilize intellectual resources pretty well. I haven't seen any serious problems here.

    19) Burn Out - This could be a problem for Elon especially, but also for a lot of their people. People are expected to work 60 hours a week and basically live there. This became a problem at Microsoft. Too many Microsoft employees burned out and went to work somewhere else, taking their expertise with them. It hasn't killed Microsoft, but they have lost some of the edge they once had. I could see Tesla losing its edge from employee burn out and turn over, and they are having a brain drain to other car companies in California, but I don't see it as an imminent threat to the company unless the brain drain gets much worse.

    20) Failure to Pivot - So far this hasn't been a problem, but they are in a space right now with no comparable competitors. Considering how flexibility and ingenuity are woven into the company's DNA, I doubt this will ever be a problem. It's much more likely they will pivot badly and fall on their face than fail to pivot.

    All in all, I don't see a likely scenario where Tesla fails at the moment. It is still quite possible they might fail, another big economic crash could kill them, so could a badly executed Model 3 launch, or a major lawsuit from a currently unknown vector. There are ways the company could fail, but I don't see them on a failure trajectory today, despite what the hand wringers like to say.
     
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  2. LargeHamCollider

    LargeHamCollider Battery cells != scalable

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    Just like to add that Tesla's "many small batteries " pack design strategy is fundamentally superior to the "fewer large batteries" strategy from a power/energy density and cycle life standpoint. Batteries are not scalable without compromise, absent a superior chemistry no manufacturer will be able to match Tesla's battery unless they adopt the same strategy and face the difficulties that come with such complex pack designs.
     
  3. CHG-ON

    CHG-ON Still in love after all these miles

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    Very nice review. Thanks.
     
  4. Vger

    Vger Active Member

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    This is a good analysis. I am a (retired) company founder and lived through almost all of these threats, so I feel them viscerally. I have a lot of empathy for Elon and his team in the near death experiences they have squeaked through. Elon is unique in doing it with TWO high-stakes, high complexity businesses simultaneously.

    As an investor, his success against ALL odds at SpaceX considerably increases my confidence in Tesla's ultimate success. When that rocket landed last week, I became much more receptive to the idea that Tesla will be first to mass-market, compelling, full-autonomous-capable BEV's.
     
  5. green1

    green1 Active Member

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    The only way I see Tesla could fail is in the future, once existing car makers finally catch up, if Tesla either stops innovating, or continues their current owner hostility (refusing to sell certain parts, refusing to release repair information, threatening those who do leak information, refusal to allow access to software essential for repairs)

    These are risks, but they aren't a risk until other manufacturers catch up, which could be a very long time, and they are easy things for Tesla to solve, if they decide to.
     
  6. vitaliy

    vitaliy Member

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    What a great review! Thank you!

    PS: If you don't mind me asking, how such a great business mind of yours and "Saving for a Model S" are coming together?))
     
  7. cpa

    cpa Member

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    Another situation which might become reality in a decade or so would be that Tesla would split into two companies--battery research, technology and manufacture and automobile manufacture.

    The Powerwall application (I saw where The Irvine Company has installed a large battery storage facility at one of their locations) may generate enough interest in battery storage that the demand and profit margin for storage batteries could be a viable entity on its own, and leave the headaches for automobile manufacturing and service to others.

    Just sayin' . . .
     
  8. wdolson

    wdolson Active Member

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    Apple has remained different from the beginning. They make it very difficult to repair Apple computers on your own for example. There are a lot of YouTube videos and such out there on the net, but Apple puts as many barriers as possible in your way. My SO has been a Mac lover from the beginning and had an iMac with a dying hard drive. I had a hard drive that would work fine in my spares and gave it to her. She took it to a shop to have them replace the drive which they did. However there is a sensor Apple embeds in Apple modified drives that controls the fans. If the sensor is missing, the fans want to run at full blast all the time. The only difference between an Apple "certified" hard drive and one used in any other computer is the sensor they install, but the Apple certified hard drive is 3X the cost. Apple does those things right and left.

    They also do everything they can to force people into living exclusively in the Apple world. 70% of iPhone users also use Windows at least part of the time, but the interoperability between iPhone and Windows is horrible.

    Looking at how Apple has not only survived, but thrived while clinging to these tactics, I can see Tesla sticking to them too. Right now I can see they are holding tight to this sort of information to keep their reputation intact. News stories tend to sensationalize any problem with Teslas and if some fool modifies a Tesla and kills themselves (which can happen with any car brand), the media will make a big deal about a problem with a Tesla. The handful of Tesla fires were covered like the cars were fire traps, but in reality the cars catch fire less than 1% as often as ICE cars on average.

    When they have 1 million cars on the road and the public has accepted the Tesla makes great cars, they might loosen up a bit. They will have to either open a lot more service centers or allow non-Tesla people to work on their cars. Right now there is one service center serving all of Oregon and Southern Washington. It's in the Portland metro area, but the SW corner and I live in the NE corner of the metro area (in Washington). The distance to the service center is a con on my pro/con list (though there are more pros than cons). We have a place with outstanding mechanics we take our ICE cars to that is only about 5 minutes from home, but Teslas are about the only cars they can't work on. It would be far more convenient to be able to take my car someplace closer than Tigard, OR. True Teslas need less maintenance, but things still break and need to be fixed.

    - - - Updated - - -

    I was able to save a fair bit this year, but it's still going to be a while. There is a chance I may be able to pull the trigger in the spring, but if that doesn't come together, I'm looking at fall of 2016.
     
  9. PRJIM

    PRJIM Member

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    One of the main issues that could spell disaster is the $/kWH. Tesla is basically on an island with their form factor and all the other OEM's in this space are standardizing on LG Chem NMC chemistry. How can Tesla reach economies of scale with this type of business model? LG Chem seems to be Tesla's biggest competitor at this point. Once we start to see $10,000 dollar 85kwh packs available then I will believe Tesla is on a path to success. Right now if you amortize the cost of a new/refurb pack outside warranty, these vehicles become cost prohibitive. Smaller packs with lighter weight will likely be the answer rather than building larger battery arrays.
     
  10. Lex

    Lex Member

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    Module replacements versus repairs served Apple well, both in quality -- user experience -- and in profit / loss.

    And a comprehensive service plan -- as comprehensive as possible (with caveats as usual ?) -- is a great revenue stream once everything is right.
     
  11. techmaven

    techmaven Active Member

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    You mention form factor, and then you talk about chemistry. Two different things. Other OEM's have no idea what they are doing and are clearly not ready for a BEV world. Their moves have far more to do with short term and short range BEVs to deal with CARB ZEV credit issues than really transforming light passenger vehicles. That includes Nissan. So called standardizing on LG is a short cut that will bite them.

    As for economies of scale, LG's total worldwide capacity is somewhere around 5.5 GWh. LG Chem only shipped about 0.9 GWh of automotive cells in 2014. Panasonic, on the other hand, shipped about 2.7 GWh. Tesla was about 2.5 GWh of that. Tesla will ship something around 3.9 GWh of cells in 2015, not counting Tesla Energy. LG Chem might ship, say, 1.2 GWh. In 2016, Tesla will likely ship something like 6 to 6.5 GWh of cells. LG Chem? Even if the Bolt ships sometime in late 2016, we're talking maybe 1.5 GWh?

    In 2017, the Bolt is likely topping out at 1.8 GWh. As for Tesla, the pilot plant should be cranking out cells in 2017, bringing Tesla's total capacity to somewhere around 12-14 GWh. VW Group, GM, Ford, and Nissan, and others won't match that all put together. After all, they're a bit late to get to that, as they need to have the projects well in the pipeline already. The plants we know that are going up aren't going to make up the distance.
     
  12. PRJIM

    PRJIM Member

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    LG is the main threat to Tesla as they are as vertically integrated (if not more) and provide a catalog of products to OEM's to design around. LG has multiple "Gigafactories" around the world in Michigan, South Korea and China. A lot of Panasonic's business is NIMH with hybrids. It looks like LG is betting big on NMC and has been able to create several different form factors, where as Tesla is reliant on the cylindrical form factor- in fact Tesla sources LG NMC cells for the Roadster upgrade. The statement was meant for effect in that it is ironic that even Tesla is purchasing NMC chem in cylindrical form factor from LG vs an updated Model S Panasonic sourced cell that Tesla purchases en masse. Can't be because it is more expensive right? Even if Gigafactory comes online its a demand issue to drive down $/kWH vs LG which right now is a capacity issue.
     
  13. techmaven

    techmaven Active Member

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    Not really sure what you are saying other than LG is making some cells, but please go through this thread first as it appears you are a bit behind:

    Battery for EV capacity developments

    Also, you seem fixated on form factor which is next to meaningless.
     
  14. physicsfita

    physicsfita Member

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    Resistance from dealers may actually be a big issue for Tesla. There are no stores or service centers in Michigan because the dealers got the laws written to box Tesla out. Tesla pulled out of the NAIAS stating, in part, that there was no point marketing to Michiganders if they couldn't sell the car in the state. Tesla registrations in the state are only in the hundreds. To be viable long-term, Tesla will have to deal with the resistance from dealers somehow.
     
  15. PRJIM

    PRJIM Member

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    LG has more than just batteries (and owns 90% of the OEM market). Form factor is very meaningful and determines the BMS design for many major OEMs.
     
  16. Vger

    Vger Active Member

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    With the construction of the gigafactory and the virtual "in-sourcing" of their battery supply, Tesla had the opportunity to review and revise their form factor choice to any extent they wanted to. JB says that they considered it all carefully, and decided that a cell only slightly larger than the 18650 was ideal. Tesla has a billion miles more real-world experience than anyone else on the road. They are not locked into an unfortunate historical accident in the small-cell form factor, they designed proactively for it.

    You may be reading the wrong ill-informed analysts harping on this issue.

    Just wait until the Bolt and other cars start getting large capacity batteries with large-format cells, and the collisions and fires start to happen. Look out!
     
  17. wdolson

    wdolson Active Member

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    I think Tesla's strategy is to wait for grass roots pressure. If the Model 3 makes the splash it looks like it's going to make, a fairly large segment of the public will be wanting a Tesla. When people from states where Tesla has essentially been frozen out come to Tesla, Tesla can tell them to talk to their legislators.

    Another strategy may be to wait until Tesla has a mainstream car and then file suit in federal court claiming interference with interstate trade. They may do both, get a grass roots movement going in states with restrictions and a federal lawsuit. What the states have done is essentially protectionist trade practices, protecting one group from someone new entering the market.

    But Tesla isn't really losing that much money by letting things sit for now. They lose out on some sales in some states, but overall they are building a reputation everywhere else and the states that continue to resist are going to look more and more like people who resisted the internet in 1995.
     
  18. macpacheco

    macpacheco Member

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    If Tesla sales is still supply constrained, why spend money and energy fighting for more demand ?
    The right time to do this might be Q2/Q3 2016 to influence the next election. Or wait until the 2018 mid terms.
     
  19. wdolson

    wdolson Active Member

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    I don't think they are supply constrained now. They have had two rounds of incentive programs at the end of 2015 to boost Model S sales. That indicates the Model S market may be getting close to topped out. The market for $100K cars is very limited and Tesla has come close to saturating it. They would get a few more sales if they could defeat the bans in places like Michigan, but it would probably cost more to fight that battle than they would make if they won at this point. When they have a mass market car, that's a different situation.

    The limitation they will be hitting soon is their production capacity. They added a second production line for the Model X, though both lines can make either car. Each line has a theoretical max capacity of about 50,000 cars a year and they pretty much hit that in 2015. Once Model X production hits its stride, they will be building 100,000 cars with both lines maxed out. That will be their peak capacity until they either add a new production line, make some tweaks to the existing lines to increase capacity, or until the Model 3 comes on line and its new production lines.

    They do have a final assembly plant in the Netherlands that is assembling parts made in California. This may increase their overall capacity over 100K a year. I'm not sure if that plant is part of the 100K capacity numbers or not.
     
  20. ecarfan

    ecarfan Well-Known Member

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    Your description of the current production lines is not entirely accurate. Tesla's line #1 that has been making the S (which itself is not the original production line) is scheduled to be shut down once line #2 that is currently making the S and the X is running at full speed this year. The area where line #1 was will be used for the line to build the Model 3.
    I was told that during a recent factory tour.
     

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