Innovation Think Tank Says Tesla Isn’t Disruptive, But Mini-EVs Are
Imagine, if you will, a town in northern China such as Gaotang. The road is alive with cars and scooters. But the cars have been miniaturized, making Mercedes-offshoot Smart Cars look robust and bulky. They can cost as little as US$1,000, are made from stamped steel, have no safety features to speak of, have maximum speeds of 25 to 43 miles per hour, and don’t require driver’s licenses.
They are also biggish business in China, with about two million units sold in 2014 and more than 100 manufacturers. At least by European and North American standards, those numbers look large. But with almost 1.4 billion people in China, very low penetration sales add up to very large numbers very quickly. And with EVs having a sales price of 5-7 times that of LSEVs, the higher volumes do not equate to more dollars.
According to a new report from the Christensen Institute — of Clayton Christensen and The Innovator’s Dilemma fame — they are the truly disruptive innovation in the automotive space, not Tesla. The report is authored by Chandrasekar Iyer, a Visiting Fellow seconded from Tata Consultancy Services (TCS), a now-global technology and business consulting firm based in India.
That Christensen does not consider Tesla to fit the model that he and Michael Raynor defined in their books and research is not news. Christensen is the Kim B. Clark Professor of Business Administration at the Harvard Business School and in 2015 he asked his research associate Tom Bartman, and colleagues at HBS’s Forum for Growth and Innovation, to see if Tesla fit the bill. Per Bartman and team, no.
A quick visual primer on disruptive innovation to see what the question is all about is important.
Per the model, the only disruptive innovations are those that are low-end or new-market disruptions, either serving the lowest budget existing buyers with a lower-cost, differently featured offering, or bringing entirely new consumers to the market with a solution.
According to Bartman and team, Tesla didn’t fit that bill in 2015, but was better considered as a sustaining innovation. As Bartman concluded:
“… because it’s a sustaining innovation, theory predicts that competitors will emerge. Our analysis concludes that a competitive response won’t happen until Tesla expands outside its current niche of people who prefer electric vehicles to gas-powered cars—but if it expands by creating more variety (such as SUVs) and more-affordable vehicles, competition will be fierce.”
It’s an interesting and perhaps academically appropriate take, but as the Tesla Model 3 is now the #4 selling car of any type in the USA and the Tesla Model S is dominating its market segment in North America and Europe without any real competitive response on the roads, it misses the mark. Partly, that’s because of a question considered key by the team, “does it create new value networks, including sales channels.”
Bartman et al. appear to have missed Tesla’s innovations around distribution channels and the incredible drag on incumbents due to their existing dealer networks. Some of the clarity around why electric vehicles are so problematic to dealership models has become more public since 2015, but it was observable then. Similarly, Bartman et al. appear to have focused solely on the car as a car, not the car-as-an-app, the car-as-an-autonomous vehicle and the charging model innovations, all of which are much harder for legacy manufacturers to replicate than simply a luxury electric sedan.
Is it important whether Tesla is a disruptive or sustaining innovation? Only to academics, really. Tesla is leading and part of a massive disruption to the automotive industry, and the industry is lagging badly.
In 2015, Bartman et al. also made an assertion that the area of actual disruptive innovation was the “neighborhood electric vehicle,” souped-up golf carts used for security and in retirement communities. He also referenced the developing world as a place where this would emerge.
Fast forward 3.5 years, and the new report details the emergence of this type of vehicle in China, asserting strongly that it is a disruptive innovation while Tesla is not. Once again, this is perhaps riding the precise definition a bit hard, but there’s no denying that low-speed electric vehicles are widely sold and used in mostly rural areas of China. They are outstripping traditional EVs by volume. This has been widely reported in multiple outlets, although most EV outlets tend to focus on the much more expensive 3D-printed or GM-affiliated SAIC version.
The report is a good addition to Bartman et al.’s work from 3 years ago, but suffers from the same lack of awareness of the challenge of EVs to legacy distribution models and why Tesla is disruptive, asserting that “In the case of EVs, traditional automakers can leverage existing dealerships and target existing customers, who are the lifeblood of any company.”
The current dealership model in the developed world, as opposed to the more rapidly transforming world of China and India, is a significant hindrance to EV sales. Dealerships make the majority of their revenue and profits from post-sale maintenance, and as such are strongly incented to move cars rapidly. The longer sales cycle for electric cars for the average consumer, combined with the overall lower revenue and profit, inhibits dealerships from selling them. This has been explored multiple times with assessments of sales behavior in GM and Nissan dealerships, and is not controversial.
Tesla has eliminated the dealership. It has a much lower cost sales and distribution model which doesn’t have intermediaries who have significant political and economic power within the ecosystem of legacy manufacturers. Its direct-to-consumer model and no-haggling e-commerce are a significant step past the Saturn division of GM, which had a no-haggle policy, but otherwise was a traditional dealership business model. Christensen, Iyer, and Bartman would do well to review the full range of innovation that Tesla is bringing to bear in their assessments.
Is the growth of LSEVs in China a disruptive innovation in the Chinese marketplace? Probably. But scooters and motorcycles face stricter safety regulation in North America and Europe than LSEVs do in China, and wealth in China is being generated not in rural areas but in urban areas, as with the rest of the world. In cities, LSEVs have more difficulty competing, and China is increasing its environmental and safety regulations.
China’s population of close to 1.4 billion means that there is certainly a profitable, high-volume by western standards but low-margin business to be made selling scooter replacements with roofs to mostly rural dwellers. The numbers lead to great headlines in North America and Europe as we struggle with the comparative math. That doesn’t mean that those vendors necessarily will displace and out-compete companies making larger EVs today, as Christensen’s model would have it, or that Tesla is not disruptive.
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