Why Today’s Leading Automakers Should Fear Tesla
The purpose of this article is to challenge the narrative that is commonly heard on mainstream news sites that Tesla has sold a few cars to a few people who just care about the climate, but that Tesla doesn’t know what it is doing. The second part of that is often that Tesla’s leader, Elon Musk, is a great fraud, someone who can get his faithful excited but never delivers on his promises.
Before I tell you my perspective on Tesla, I’m going to give you some perspective that I got from working for IBM for 13 years in the ’80s and ’90s and seeing some of its mistakes. The culture of IBM may be similar to the culture of the top automakers in the world (Toyota, VW, GM, etc.). If you aren’t interested in my time at IBM, skip the next paragraph.
When I started at IBM as a 20 year old software engineer at the height of IBM’s dominance of the computer industry, it was quite a culture shock. I was very impressed by the company’s ability to recruit the best and the brightest minds from colleges around the country. I was less impressed with its ability to effectively use that army of talent. I found that IBM had been handicapped by its previous success. The company had been through a long and painful battle with antitrust regulators claiming they had a monopoly in the computing market. This battle and IBM’s incredible success over the previous 75 years meant that the company’s attitude was very conservative. It meant executives thought it was important to not be too aggressive and their biggest worry was that, if they crushed their competition, they would once again be back in court.
This caused them to pull their punches and encourage their young engineers to not aim for the stars — to just follow the IBM way and not kill the goose that laid the golden eggs. Even when they made brilliant decisions like the decision to set up a skunkworks project in Florida to develop the IBM PC, their lack of vision caused them to make serious errors, such as negotiating a very poor contract with Microsoft that let them sell their software to clone manufacturers and capture most of the profits from the PC industry. IBM management had grown up in an environment where mainframe hardware had been very profitable and they couldn’t imagine that personal computers would be very successful, and even if they were, they couldn’t imagine that the software for the machines would be more than a tiny fraction of the sales or profits from the hardware.
Image © Kyle Field, CleanTechnica (free for use anywhere with credit)
Bringing this back to the automotive world, this is similar to the attitude that Galileo Russell recently expressed after spending time in Detroit talking to a roomful of automotive engineers. Existing manufactures don’t even realize the threat that they are facing.
The economics of driving electric cars is already dramatically better than gas cars, but there are two things that are problematic — the batteries are expensive and the charging time and availability have been less than great. Tesla is solving both of those issues as you read this.
In order to catch up to what Tesla has done in electric cars, you need to commit to dedicated electric vehicles. Designing cars that support both gas and electric powertrains won’t be as good as cars designed from scratch to be electric.
The second issue that the automakers have to contend with is they have have invested a ton of money in engines and transmissions and outsourced their electric motor, battery, and software needs. They have to figure out a way to reduce that investment in designing all of those gas and diesel engines, because there won’t be much demand for new gas or diesel cars and they need to scale back those significant costs while investing in making great electric motors, inverters, batteries, battery models, and vehicle software. Those are vastly different skillsets and the companies need to decide how much retraining versus replacing of workers is necessary.
At IBM, I saw a huge program of trying to retrain factory workers whose jobs were replaced by factory automation into software engineers. They trained some great engineers that went on to do some great things, but they also had many failures. Overall, I think the program was considered a failure. The important thing is for them to start the transition before it is too late. They no doubt will have to hire many new people to bring in needed knowledge and skills, and they need to start transitioning the people designing engines and transmissions either to other tasks or out of the company.
For many years, the formula has been, develop a new engine that is a little cleaner, a little more powerful, and a little more efficient than our last-generation powertrain, and put it in a car or SUV that has new styling and call it “All New.” That has worked well for 40 years, but when compared to a Tesla that is dramatically more powerful, 4 times as efficient, and safer than their “All New” cars and SUVs, they will have great difficulty in selling the vehicles without giving huge incentives that cause them to lose money on every vehicle.
Why hasn’t Tesla been causing big problems for them yet? Read on and you will see Tesla has in every market it has entered. They just haven’t gotten to the small crossover and pickup markets that the industry has retreated to. As Tesla moves into those markets over the next two years, the pain it will inflict on companies like Toyota and Ford, which have apparently not prepared for EVs in their most profitable market segments, will be considerable.
Tesla’s Bold Claims
Tesla has made bold claims about every vehicle it has announced — things like cost, efficiency, volume. Those bold claims were derided as impossible to meet by its competitors. In every case, Tesla delivered on its claims, just not always on time. The result is that it has consistently taken a top spot in sales in the markets in which it’s entered and left competitors to fight for the scraps.
Zach’s recent article on Elon’s production estimate made in 2014 regarding 2020 was shocking to me. In the year-ending 2013 10K, Tesla had been manufacturing the Model S for 18 months and had delivered almost 57,000 vehicles. Elon made a very bold claim that he was comfortable that Tesla would “be able to achieve at least a half a million cars a year by 2020.” Tesla’s current guidance for 2019 is that it will deliver 360,000 to 400,000 cars. In 2020, it will have greatly increased production capacity, enabled by the Gigafactory 3 in China. Demand should be substantially enhanced by 3 main factors:
- The much lower priced locally produced Model 3 selling into the largest auto market in the world, which is quickly transitioning to electric vehicles.
- Volume production of Model Y will start in 2020.
- All of the Model 3s delivered in 2017, 2018, and 2019 will be shown to millions of friends around the world, generating a second wave of demand from people who never considered a Tesla before.
My prediction from an article 3 months ago was that volumes in 2020 would increase 78% from the previous year to 800,000 vehicles. That is optimistic, but also a slowing in the rate of growth Tesla achieved last year (143%) and my expectations for this year (80%). For Elon to be on track to exceed a very bold prediction of increasing Tesla’s sales by more than a factor of ten over 5 years is very impressive and does a lot to discredit his critics. Tesla critics’ claims have been horribly inaccurate. If you would like a good laugh, just read any of these articles highlighting their incorrect predictions and claims.
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Abbreviated History of Tesla
In 2012, Tesla surprised everyone with the award winning and review topping Model S, which moved to the top of its market and stayed there.
In 2015, Tesla came out with its overly fancy Model X with falcon-wing doors plus auto-opening and -closing front doors, and it has mostly stayed near the top of its market.
In 2017, Tesla came out with its first mass market car, and after some difficulties ramping production, it went to the top of the US entry-level luxury market and stayed there, and more recently saw the same success in several European countries. In addition, it encouraged hundreds of thousands of people who have never spent $40,000 on a car to make the “Tesla stretch” and buy the Model 3.
Every automaker has either abandoned the sedan market (Chrysler, Ford, GM) or de-emphasized it greatly (everyone else). They have been fleeing to the crossover, SUV, and pickup truck markets for the majority of sales and the entirety of profits.
Tesla has announced the Model Y will be entering volume production next year. It’s been derided by some critics as just a tall Model 3 and not roomy enough. The critics haven’t been inside it. They will be shocked at how, like a Tardis, it’s bigger on the inside. I rode in the Model Y on March 14th during the unveiling event. The only pictures of the 3rd row I’ve seen are in my article published the next day. Everyone thinks the 3rd row seats will be for toddlers, but I showed in another article that it is an optical illusion that the Model Y is small and sleek — actually, it is quite large and tall. When the reviews come out and people realize they can own a great looking, great handling, fast crossover that costs less to own than a dated, slow, and poor handling competitor, their sales will slow as people wait to get their Model Ys. We can assume, as well, that the Model Y will receive the top NHTSA safety score of any crossover ever.
If you can replace a Ford F-150 (which costs about $50,000) and a Porsche 911 (which starts at $91,100 and goes to triple that price) with a Tesla pickup truck that starts below $49,000, a lot of people are going to find that a great value, especially when the fuel and maintenance costs are less than a quarter of either of those two vehicles. There will be a few who are put off by Tesla’s cyberpunk styling, but with pickup sales expected to exceed 3 million units in 2020 before the Tesla Pickup is released, Tesla should not have trouble ramping up to a million units a year. It has a history of rocketing to the top sales position as it enters markets, and expanding the size of the market segments it enters while devastating the sales of its competitors’ products.
Conclusion
As you can see in the chart above, Tesla has been able to grow its revenue at a 107% compounded rate over the last 11 years. This isn’t uncommon for startups, but when you get to tens of billions of dollars, growth rates even for leading companies like Apple and Amazon have slowed dramatically. I’ve tried to show how in this article some of the reasons Tesla can continue its growth at rates never before seen in a company the size of Tesla.
Luckily for Tesla’s automotive competitors, Tesla won’t have the ability to replace their sales for many years, but seeing that the last time the industry had a slowdown in sales, it triggered a series of bankruptcies, the industry should not ignore the threat of Tesla to move immediately to the top of a market segment it has never participated in before, taking most of the profits and causing many consumers to stop buying the competitors’ products until they can get a Tesla.
The biggest problem the automotive industry has is that almost every review or ride of a Tesla ends with a version of this quote: “The problem with driving the Model 3, even for a short while, is that you’ll immediately want to own one. This is now the new car to beat, electric, petrol or otherwise.”
Use my Tesla referral link to get 1,000 miles of free Supercharging on a Tesla Model S, Model X, or Model 3, here’s the link: https://ts.la/paul92237 (but if someone else helped you more, please use their link instead of mine).
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