Tesla — “Apple Of Cars” — Entering Its Golden Age
Originally published on EVANNEX.
By Charles Morris
Comparisons between Tesla and Apple are nothing new, but with the Silicon Valley automaker poised for a new wave of growth, it’s a good time to revisit the parallels between the two disruptive companies. A recent article from ARK Investment Management explains the similarities in eerie detail.
In 2007, Apple had already existed for three decades, but beginning in that year, a wave of new products — the iPhone, iPad, Apple Watch, and App Store — catapulted the company into a new dimension, and caused revenue and market cap to grow tenfold.
Before blastoff, Apple was selling computers, which were widely regarded as a commodity product, mainly to a few niche markets such as audio/video professionals, people who resented Bill Gates and people who just had to be different. However, the company’s strategy of vertical integration and consumer focus — precisely the opposite of the business model that PC makers were pursuing — allowed it to charge premium prices and command fanatical customer loyalty.
ARK Invest Founder and CEO, Cathie Wood, talks about Tesla and points out similarities with Apple (Source: Yahoo Finance)
The parallels to Tesla should already be apparent, but looking at Tesla’s position in 2018, they become even more striking. ARK’s analysts see “the outlines of another Apple in the making,” and point out that “Tesla resembles Apple in three key areas: a strategy of vertical integration, an imminent product inflection, and a business model transitioning from hardware to services.”
Apple’s strategy of vertically integrating hardware, software, services, and retail was very much a contrarian one. In 2007, conventional wisdom was that companies should focus on “core competencies.” Apple’s competitors all specialized in one layer of the stack. However, in a time of rapid innovation, vertical integration can enable a company to get a head start on the rest of an industry by developing key enabling technologies in-house. To give just one example, Apple was able to create the first multi-touch smartphone because it created its own multi-touch system, something no other company was anywhere close to developing.
 Vertical integration similarities (Source: ARK Investment Management) |
“Tesla picks up on Apple’s vertical integration strategy but takes it further,” write the ARK analysts. “In addition to hardware, software, and retail, Tesla also owns and operates manufacturing facilities as well as a global Supercharger network. Vertically integrating battery pack production at its Gigafactory is why Tesla is the only high-volume EV manufacturer today. Had Tesla waited for the supply chain to catch up, it wouldn’t have been able to launch and scale the Model 3 for years. In our view, this is a key reason why no automaker has released a viable competitor to the Model 3 thus far and why no company will be able to do so until 2020 at the earliest.”
Apple’s spectacular 2007 to 2012 growth was driven by the release of the iPhone, iPad, and the App Store in quick succession. As is the case with Tesla, Apple’s vision of the products it wanted to build was often ahead of current computing, microprocessor, and battery performance. Things started to take off around 2007 because the enabling technologies to build a high-performance handheld computer finally became available. “Having built up decades of software and hardware expertise, Apple was positioned to seize this opportunity and create the blueprint for modern mobile computing,” notes ARK.
 Falling cost of lithium-ion batteries (Source: ARK Investment Management) |
Like Mac computers in the early 1990s, Tesla’s vehicles haven’t broken into the mainstream, because they are simply too expensive. The main reason for this is battery costs, which are dropping rapidly. ARK estimates that the cost of lithium-ion batteries will fall below $100/kWh, achieving cost parity with gasoline cars, by 2022. Elon Musk has said that he expects to reach this tipping point by the end of 2018.
This cost decline is a big deal, to put it mildly. Once EVs reach cost parity, there will simply be no technical reason for anyone to build fossil fuel cars anymore (although financial and political reasons are likely to keep them on life support for quite a while). “Tesla has spent more than a decade preparing for this moment and, in our view, has the most compelling EV pipeline of any company,” says ARK. “The Tesla Model 3 and Model Y (a crossover SUV) have the potential to catapult EVs into the mainstream, much like the one-two punch from the iPhone and iPad in mobile computing.”
 A look at the growth trajectory of both Apple and Tesla (Source: ARK Investment Management) |
Tesla’s vertical integration — it’s selling not just a car, but an “ecosystem” of products and services — creates many income opportunities. “In the 2000s, Apple’s iPod+iTunes combination created a dual revenue stream from hardware and music,” ARK notes. “Today, thanks to its massive installed base of iPhones, Apple offers a range of services spanning music subscriptions, cloud storage, and app sales that generates $36 billion annually and accounts for roughly a third of Apple’s market cap. Competitors like Samsung that do not control the customer relationship generate no material revenue from services.”
In ARK’s view, every successful growth company goes through a “golden era” when the stars align and expansion takes place more rapidly than anyone could have foreseen. “For Apple, that time was from 2007 to 2012. For Tesla, we believe the golden era is just beginning.”
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