Recently, an article about Sandy Munro’s most recent interview was posted on CleanTechnica. The article and video are very interesting in quite a few ways. I commented with my thoughts and the replies convinced me to write this article.
Sandy is a veteran of Ford, who was advised by the late Edward Deming to migrate away from the automaker, so he branched out on his own. His business is about optimizing production to increase quality, lowering costs, and solving technical challenges to bringing products to market. He has worked with automakers, military, aerospace, medical, and other technology companies. His thoughts about legacy automakers are not very flattering, stating that Tesla has a 10 year lead over other US automakers. My comment was that I slightly disagree and consider Tesla to have a virtual 10 year lead over other automakers.
Legacy players are stuck in an oligopoly mindset, which is a viewpoint that takes hold when your competitors are small in number and very defined. This leads to an environment of “safe” business decisions, meaning only incremental advancements in technology actually make it to the marketplace because bigger risk is unnecessary, since the other players are of the same mindset and disruption is rare since the barriers to a new entrant becoming a major automaker are very high. So, you become comfortable and actually drive away ambitious ideas because they mean higher risk of losing what you have.
The oligopoly mindset also mostly keeps pricing wars at bay because you all win when you don’t compete on price. Price fixing (collusion) is illegal in most places, but in an oligopoly market, formal collusion agreements are unnecessary, you know your margins, your competitors have similar margins, costs of production are well understood, and you can likely buy a report from Sandy Munro on what your competitor’s car costs to build, with the MSRP available on their website, saving you even the need to reverse engineer the car yourself (if all you want is the production cost).
However, Tesla defied all odds and survived as an automaker. It is very likely the legacy players never took Elon or Tesla seriously. He never worked for a legacy player, hence did not have much relevant experience, and he did not have a university background in automotive design. EVs were “impossible” because of the barriers to entry in automaking as well as the EV technology learning curve that would be involved. There was straight hubris that EVs were not viable or profitable because automakers chose to believe the future was gas and diesel vehicles or hydrogen, and it had been decades since any new automaker came along and survived (outside of China). This gave Tesla an opening to grow without any real competition beyond lip service. GM eventually tried with the Bolt, hoping to get lucky a second time (years after it had used the EV1 as a sacrificial lamb to get California off its back). The Bolt was likely meant to kill the Model 3, and Tesla with it. This failed.
Today, thanks to Tesla pressure, we are now at the point where legacy players are starting to take EVs seriously. Volkswagen Group may in fact have grand aspirations, while many of the legacy players are virtually asleep at the wheel. There are green shoots all over the place that anyone can allude to — Ford’s investment in Rivian, GM’s new Bolt, FCA actually playing catchup, and so on — but these are baby steps.
So, what’s the likely sequence of events from here? Tesla is going to keep expanding. As long as customers keep buying its vehicles, it will be able to scale indefinitely. This will take time, but Gigafactory 3 (GF3) in China is being built at breakneck speed, Germany may be the site for GF4, the Semi and Model Y are coming, and the Roadster 2.0 is on the drawing board. Not to mention that Tesla Energy has huge potential. So, Tesla is not going anywhere unless the shorts find a way to financially destroy Tesla or customers stop buying them (the media war against Tesla is continuing in part with this purpose). As for “Tesla killers,” no automaker can actually kill Tesla, only customers can by not buying from the company.
The legacy players, on the other hand, have to overcome a great deal of inertia in order to transition to EVs. An EV is not that much different than a regular automobile, you minus the gasoline engine, its accoutrements, the fuel system, and then add the batteries and motor and you have the Bolt. The other components of the vehicle do not have to change much, the body can remain about the same, the suspension may have to go with a heavier rating, the seats, seat belts, plastic parts, wiring, and so forth can basically be reused and are for many ICE-based EVs. This can be improved upon. With every Tesla currently on the market being built as an EV from the ground up, it has proved many optimizations are possible, not to mention the non-oligopoly mindset of Tesla.
Personally, I would like to see improved rust resistance and an end to planned obsolescence for all vehicles. Tesla is hoping to build cars that don’t need repairs and diagnose themselves, another shot across the bows of legacy players. Legacy players seem addicted to their lowest cost, lowest acceptable quality products (Deming did help Japan compete on quality, but even the best ICE does not hold a candle to EV longevity potential). Then again, it may not matter that a legacy player is selling an inferior EV. Customers often respond to brand names and advertising and may buy them anyways.
In a previous video, Munro spoke about departments at legacy players being set up as silos — you have the HVAC department, the transmission department, and so forth. While Tesla does not operate like this. It seems that it is considered how every component will work with every other one, and this leads to optimizations. Not to mention that Tesla works to bring things in house while the legacy players try to outsource everything (as mentioned by Munro). Outsourcing may make your car easier to build, but it leads to reduced flexibility to make improvements — not a concern when your goal is a comfortable oligopoly market.
There is huge inertia preventing legacy players from moving to EV production: the fact that their investments in ICE-specific assets would become stranded, the mindset that creative destruction is to be feared, the new design elements that need to be brought to the fore by designing new vehicles from the ground up as EVs instead of converting them from ICE vehicles, the Tesla pressure not just to transition to EVs but to abandon fear of rapid progress, and if much of the design is outsourced they have to either find outsourcers who can adapt to the new paradigm or start to bring things back in house.
On the other hand, unlike Tesla, legacy players have much more in assets that can help them transition to EVs. They already have more manufacturing facilities. Unchanged components can be reused and the suppliers of them continue on with business as usual. They already redesign their ICE offerings on a 3–6 year basis (typically), so can decide to design EVs from the ground up instead. They have decades of automotive construction experience, much (but not all) is transferable. They have financial assets, and can get subsidies extremely easily from governments eager to have them locate a factory in their state/province/country. Notice how subsidies given to Tesla are demonized but subsidies given to legacy players are practically celebrated. Double standards for the win.
So, what does the future hold? Any legacy player that does not transition and create products that sell well will die a slow death. All the others are in for a tough time, all depending on when they decide to transition and how quickly they can pull it off. It’s not going to be easy to admit, “We are about to go off a cliff, so we need to rejig our entire business now,” but any legacy player that does not realize this is exactly what they have to do is going to find that things seem fine for a while and then everything comes crashing down very painfully. If legacy players wake up today, they can get started on the hard work of converting to EVs and survive. If they doddle, they will either be playing huge catchup as things get incrementally harder to keep up with, or they will fail while trying to play catchup and that virtual 10 year lead I mentioned will be 10 actual years, or in the case of failure, it will be infinite.
Which straw will finally break the camel’s back? There are so many possibilities, from a recession to an oil price spike (who could forget 2008), Tesla scaling, a legacy player that sees the writing on the wall and gets ahead of the competition (VW perhaps?), Chinese EVs being exported, a watershed climate change event, new pollution or carbon mitigation laws, autonomous vehicles? A combination of these or other unforeseen events?
The history books will be written by acknowledging how Tesla pressure brought us the EV revolution. How the legacy players respond/survive or fail is an unwritten chapter at this point, and all the legacy players have the opportunity to wake up before it’s too late. How many will and how many will be remembered in the same vein as DeLorean and Studebaker?
Thanks to Kurt Lowder for writing the Sandy Munro article and thanks to those who replied to my comments for the idea for this article.