Published on January 19th, 2018 | by Zachary Shahan0
A Tale of Two Teslas
January 19th, 2018 by Zachary Shahan
It seems there have always been two general views of Tesla — 1) disruptor ready to take over the world and 2) clueless startup on the verge of a dramatic crash & burn. As the company has grown and matured, you might think these divergent readings of the electric vehicle and sustainable energy company would have merged more, but it appears they haven’t. With the larger scale, the visions of world domination and the visions of a fiery Silicon Valley + Wall Street spectacle each appear to have each grown.
Many people who expected in 2008 that Tesla would fail still expect that today, and just believe that the failure will be that much more dramatic. Many people who thought in 2008 that Tesla had a bright future think today that it has an even brighter future. How do these two readings diverge so much and grow in opposite directions year after year?
This article is not about which viewpoint is right. It’s a reflection on this interesting phenomenon, one that was triggered by this Seeking Alpha article. I thought that piece looked like it was going to be a sensible and balanced article, but then I noticed — with quite a bit of surprise — that the writer kept saying traditional OEMs had the advantage when I thought Tesla did. So, I will contribute some counterpoints below, but my interest here is to reflect on the forest, not obsess over each tree.
Below are a few of the points where I thought the writer’s comments were confusing or just plain wrong.
Design: The writer claims no advantage on design for Tesla. This is a highly subjective matter, and the traditional premium-class models from BMW, Mercedes, Audi, etc. have some nicely designed and desired cars — that’s part of what they’re known for. Tesla seems to get a lot of props for the beautiful designs of its vehicles — in my mind, it gets broad praise for that that’s above and beyond the other brands. One short story made me think it’s not just “special people” who love the look — it’s just an anecdote, but it matches similar reactions I’ve seen from other “normal” people.
Here’s the story: Waiting in line to make a reservation for the Model 3, I was talking to the people around me. The lady in line behind me was in line at 6:00am simply because she thought the Tesla Model S was beautiful. (Remember, we hadn’t even seen the Model 3 yet.) She had seen a Model S on the road, thought it was beautiful, searched “T car” when she got home, but then found out the price was too high. A few months later, she found out about the lower priced Tesla Model 3 via Facebook and decided to get in line to reserve one. She didn’t mention global warming, air pollution, cool tech, or anything else — it was all about the beautiful design of the car.
But hey, opinions vary. “The Model 3 is fine, but I was expecting better,” the Seeking Alpha writer states. That’s a hugely different response than I’ve heard from … pretty much everyone. But let’s move on.
BEV (Advanced Drivetrain) Design: Here’s the writer’s opinion: “While Tesla had an early mover advantage in BEVs, traditional OEMs have slated large investment in BEV technology and are scheduled to release numerous BEVs over the next several years, creating a highly competitive BEV market. Furthermore, BEV technology will need to keep pace with alternatives, whatever the future holds. The OEMs have greater resources to dedicate to next-generation technology. Advantage OEMs.”
Seriously? This one is such a shocker I’m sort of speechless. It would be awesome if big automakers brought hundreds of electric models to market, but Tesla’s reputation as the producer of the world’s best electric is unlikely to change anytime soon as far as I can see. Despite the hype, no models seems to be coming to market anytime soon that will be better than a fully loaded Tesla. Toyota is still known as the leader in hybrids. Even if other automakers start producing more electric cars than Tesla at some point, its early decisions on BEV drivetrain design are finally being copied by others while it is surely looking at the next stage of innovation in this space. Remember, Tesla is fully committed to 100% electric vehicles. Other automakers still want to sell gas cars and hybrids.
Supply Chain Efficiency: I think the third word in this category is probably what the writer was trying to emphasize. He writes, “The largest OEMs have far greater economies of scale that result in favorable supply chain dynamics over Tesla. Advantage OEMs.”
That makes a bit of sense, but not really. Once Tesla became the hottest brand in the industry, suppliers were jumping to work with the company. Furthermore, Tesla has been steadily and very seriously developing the most critical components of an electric vehicle supply chain. Tesla also brought in top auto manufacturing executives, people who know how this is done and have the connections to get it done. Perhaps OEMs have something going on behind the scenes, but the concern many of us have about the EV transition is that they haven’t done enough to commit to and secure a large battery supply chain. This is widely seen as a big advantage for Tesla, but the writer somehow flips the script. I don’t think it’s that hard to get windows, doors, and seats — it’s all about the batteries!
While large OEMs could surely get things in order with batteries, suppliers are going to want to see clear demand for their electric vehicles before getting their own supply chains ramped up. Tesla has demonstrated that consumer demand for the Model 3. Other automakers?
As far as we’ve seen, battery makers are ramping up for moderate growth across the industry, with certain leaders in the industry spreading their production capacity across numerous automakers. They are not going to increase their production capacity 10x over if the demand doesn’t seem to be there, and automakers don’t seem to be conveying well enough to these battery producers that they expect massive growth in the industry soon.
Location: This one is just weird. Here’s the writer’s comment: “Why did Tesla locate its first manufacturing facility in the State of California? I cannot imagine a worse location! I won’t waste space elaborating. Advantage OEMs.”
Well, I guess that’s clear. … I assume he’s talking about strong regulations and high cost of labor, among perhaps some other matters, but like I said, this is just weird. First of all, Tesla’s factory was acquired for a super low price after Toyota and GM had to abandon it. It’s widely seen as a wicked, super lucky deal that was a huge help to Tesla and a big reason why the company is still here today. But there’s more benefit from the factory than a fire-sale purchase price.
California is one of the largest electric vehicle markets in the world. Generally, it’s one of the largest car markets in the world as well. By being a California company that is tackling matters Californians care about — global warming and air pollution — Tesla is a cherished brand and is basically guaranteed to do well in this hot and fast growing market.
California also has a rather special place in the eyes of the US and the eyes of the world. The home of Hollywood, Apple, Facebook, Google, it is a place where dreams are made … and sold. Being a California company is surely good for the brand, and thus for sales. Also, if it wasn’t deadly obvious already, the tech geniuses who call Silicon Valley home are a perfect fit for Tesla. Tesla is leading on software of various sorts, and its cars have often been called computers on wheels. I don’t really see how you ignore that when discussing location, but hey, this line is all you need: “I won’t waste space elaborating. Advantage OEMs.”
I think Tesla’s other locations are being picked for other competitive advantages, ones that the writer might agree more with. Overall, I just don’t see location as a huge advantage for anyone, but definitely don’t see being based in California as a bad thing for Tesla.
Automotive Sales and Service: I have to be honest, this one trips me out. This may have been the point in the article where I thought, “Okay, this guy’s either a shill or out of his mind.” Perhaps it’s the one that got me thinking about the overall theme of the article. Here are his comments on this topic: “Tesla owns and operates its sales and service centers, making Tesla a retailer.
- Traditional OEMs sell wholesale to their independently owned, franchised dealer networks. I can imagine that Tesla thinks this will help them own the customer relationship, but I believe evolution in connectivity and mobility overrides that argument.
- Furthermore, this wholesale vs. retail difference impacts comparability of gross and operating margins. Tesla’s sales and service centers require tremendous capital investment (leasehold improvements and equipment) and ongoing rent, other occupancy, staffing, management and overhead costs. Would you buy a Tesla if you couldn’t have it serviced? This represents a limiting factor for Tesla to gain market share until density of sales and service centers is achieved. Advantage OEMs.“
It’s not just Tesla and Tesla fans who have consistently seen Tesla’s direct sales model as a competitive advantage for the company. And large automakers and dealers have been trying to make the model illegal in states across the US for years! There are some pros and cons to each model, but to assume automakers have the net advantage here is not wise, in my humble opinion.
Advantage Tesla or neutral — (automakers do have a large network of distribution partners, which surely helps, but there’s a problem with those salespeople’s level of EV understanding and their interest (or lack thereof) in selling EVs. Also, people hate the dealership process.
“Tesla’s battery technology is currently controlled by Panasonic. Tesla does not have the financial resources to develop and sustain a competitive advantage in battery technology and is locked into the Gigafactory with Panasonic.
- I am not a battery or natural resources expert, but John Petersen indicates in “The Cobalt Cliff, Two Dire Warnings And A Musk Soliloquy” that Tesla and other EV manufacturers are facing an uphill battle with respect to cobalt supply. If true, BEV technology may lose ground to FCEV or other alternatives that consume fewer, scarce natural resources. Other OEMs have hedged their bets by exploring multiple technologies. Advantage OEMs.
- Panasonic, Samsung, LG Chem, Wanxiang, CATL and others are dedicating tremendous resources to advance battery technology, control supply chains, and drive production efficiency. Advantage third parties.“
First of all, I’m coming back to the cobalt matter in another article — a longer response to that John Petersen article — but this matter basically wraps into the supply chain topic higher up. The simple story: Experts in the field do not see cobalt as a death sentence for the industry, or for Tesla.
As far as battery development and production, this has been discussed many times. Tesla works extremely closely with Panasonic on this matter and has consistently gotten battery prices down to a lower level than competitors have for years now, from all reports I’ve seen on the topic. Tesla has top battery experts on staff further exploring possibilities, has modified battery chemistry, and would be a major target partner for anyone who came up with a genuine battery breakthrough.
Fuel cell vehicles are not going to compete with battery electric vehicles. That’s just silly.
The writer — “Chief Fundamentals Officer” — goes on to discuss a few more topics, including: Supercharger / Megacharger Network, Autonomous Driving, and Mobility or Ridesharing. As you might expect by now, he doesn’t give Tesla the advantage with any of those. It’s so absurd to me that I’m not even going to go there, but I think the overall point was made by now, so let’s jump into the summary points.
The overall point wasn’t “This guy’s wrong and I’m right.” Of course I think I’m right — otherwise I’d have a different opinion. The point that jumped out to me was: Wow, if this guy’s serious and not just presenting these arguments to potential investors/shorters for simple, selfish financial gain, there are vastly different opinions on who has the net competitive advantage in this industry.
We do see debates about some of these topics in comments on CleanTechnica. They can be interesting even if no one changes their overall opinion. But this long list of points makes it clear that Tesla followers may just live in two very different worlds. One world expects Tesla to crash and burn any day. One world expects Tesla to become one of the biggest automakers of the 21st century.
I’d say it’s undebatable that Tesla has already been one of the most influential automakers of the 21st century, but hey, maybe people in that other world would even disagree with that!