Cathie Wood, the founder of Ark Invest, has repeated many times that in a recession or economic downturn disruptive companies gain pace and expand their competitive advantage versus incumbents.
Even if all business is shrinking, the moment it’s getting just slightly better, disruptive companies grow faster, win more market share and more profit than the competition. That concept is very old and proven, and we have no reason to believe it to be different today.
This is a series of 7 articles and 7 videos highlighting 7 segments that together explain why Tesla is well positioned for a potential recession and will emerge stronger and faster out of the crisis in relation to other incumbent auto manufacturers.
The first article and video was about Safety. This is the second and is about Diversification.
Diversification at Tesla mostly relates to the Tesla Energy business — solar roofs and batteries — but that’s just a portion of the full story.
What are you doing if your cash cow product is losing demand, not because your product is bad versus what the competition is offering but because it’s a recession and everyone’s products or services don’t sell well anymore? If your health is at risk, nothing else matters.
Well, you make losses, cut costs, and may even go bankrupt.
This is exactly the situation automakers are in, and Tesla is an automaker, isn’t it? Some say it is; others say it’s a technology company.
Now you may think, “Well, he is trying to tell me that Tesla has other products as well.”
That’s true, but not the point I want to make. I want to explain that diversification at Tesla is different versus what you may think.
Let me give you an example. If all manufactures stopped production globally today without a single product leaving their facilities, a Tesla vehicle would still continue to collect data, change, and optimize services other automakers do not even offer. You differentiate because your vehicles or services are improving constantly, regardless of whether the factory produces the vehicles that brings the services to your customers or not.
How does that help with your business?
Well, think about over-the-air updates. They are mostly free of charge, but some cost money, offering an upgrade that enables your existing car to do more than before. Tesla monetizes services like data usage already today, but can do it in the future also with entertainment offerings or robotaxis services or other over-the-air updates.
If you buy a Tesla vehicle you buy the promise that one day the vehicle will drive itself and generate passive revenue, allowing you to monetize an investment that you may have made years ago. This is one example of a new service that differentiates you from all other automakers, diversifying with a product that is pure software. But there is more.
The service that is included in your vehicle will be unlocked once the autonomous software is ready, but to compete against it as an incumbent automaker is almost impossible, as no one has vehicles with the hardware or software to offer the same. This includes computer technology with very low energy usage to protect the range of your vehicle, beside many other factors.
To compare, Waymo offers autonomous driving services that are only for vehicles that are owned by them, not by the customers. Also, they can be used only in limited and defined regions. Associated costs make the business case questionable.
Tesla’s robotaxi services will be delivered from customer vehicles. That’s a massive differentiation and diversification. It’s a new product not even visible yet but unlocked one day by a simple OTA update. While you can fairly claim it’s not available yet, I would counter that many people bought Full Self Driving (FSD) today for having the option to unlock robotaxi services when available. I am one of those.
The diversification of Tesla goes far beyond additional products and services, but is a result of a vertically integrated company and product line that allows quick adjustment in your product footprint. Agility and flexibility are not just words but allow diversification when others are unable to. It’s not only about having a variety of different products, but also a question of whether you can offer a new product or service without associated costs when you need it.
To be diverse is an advantage in biology, the economy, and business for a variety of reasons. Today, it is a huge advantage in a situation in which a global recession is more and more likely to happen — or already here.
In the business world, diversification is a strategy to modify, extend, or differentiate the services and products of your company, with the strategy to optimize profits or limit losses.
To limit losses is more important in a crisis than before. Every dollar you have more than your competitors, if invested wisely, will result in incremental revenue later — be it because you invested that dollar in new capacity, R&D, or to reduce financial liabilities.
Other automakers produce:
- Spare Parts
- Spare Parts
- House Batteries
- Industry Batteries
- Solar Panels
- Glass Roof Tiles
- Over-the-Air Software Upgrades
- Autonomous Driving Systems
- Ride-Hailing Vehicles & Services
- Computer Chips for FSD
- Vehicle Computers
- Entertainment Systems
- Billions of Real-Life Autonomous Driving Data
- Car Insurance
- Superchargers, Destination Chargers, Home Chargers
- Data Volume and Connectivity
- Soon Ventilators
- And more …
and around the corner, air conditioning systems for your house.
That list will grow further and make Tesla as a company stronger, because if one or two products or solutions are for whatever reason not selling well, there are many other products that will, and under the line it balances revenue, costs, and profits with market demand and supply risks. Diversification is risk protection.
People always need some products, solutions, and services. The question is whether you produce what they are asking for or not. Right now, many products and services — in particular, online services — are actually doing well, or at least much better than offline services, because everything that is touchless is preferred for health reasons.
Think about Amazon, which announced recently it was hiring 100,000 employees to manage the huge wave of demand the company had received, and ask yourself how many of the suppliers from Amazon will do the same to cope with the demand wave. While the overall situation looks definitely grim and it looks like we will enter into a recession, some will still benefit relative to the peer group.
Therefore, your main goal is to be better than they are, and one way to do that is with diversification.
Another way to understand diversification is to look for instance at Siemens or General Electric, two companies which did this very well in the last century. They could always change their business focus on other parts or services of their diverse portfolio if for whatever reason business and demand changed and they had to adjust.
Agility and flexibility are key, and if you have read in the last few days that Tesla intends to produce medical equipment while other automakers react and don’t act, ask yourself why Tesla is faster and more responsive to that demand.
Diversification of products and services is the one part of the story everybody understands, but there are other parts that no one really considered diversification, yet it differentiates Tesla heavily from all others, making it more diverse, stable, and resilient.
The three amazing and incremental diversification levers from Tesla are:
The Subscription Model of software services and the ability as well as flexibility to sell pure software to existing customers which allows additional revenue streams with an above 90% profit margin on a hardware product that was already sold months or years ago. No other automaker can offer subscription models that can be activated or deactivated, extended, augmented, reduced, or blocked over the air in their existing fleet.
The Combination Model of a solar roof, a house battery, and an electric vehicle creates something new not offered before. The combination is more than each single product alone.
There is a huge market for people who want the complete energy production set, with solar and the house and the energy supply for your vehicles bundled in one solution from one supplier. The solutions are offered from other companies too, but no one offers all of it out of one hand, which is a huge advantage and differentiator. It’s like a new product. Tesla can run that approach with other solution sets as well if needed. Just pick what you find fitting in the product list and create a new one.
The Data Collection Model of real-life driven data, collected from existing customer vehicles, that allow Tesla to improve products (e.g., FSD or new products like Tesla Insurance). Every day, new real-world driving data is collected, and we know from companies like Google and Facebook that having data is the new gold in the digital times we are in. That data alone, if sold, could create billions of dollars of incremental revenue. Using it to improve the solutions and services Tesla offers drive diversification, too.
Imagine: all manufactures stop production globally, but a Tesla vehicle continues to collect data, change, optimize, and get remotely better in many ways. The autonomous driving system of a Tesla gets better and better regardless of how long the crisis lasts. You can monetize that as Tesla did, or you use it as a free service to differentiate your product against others in the market. In both approaches, you win and create customer loyalty.
The ability to drive incremental revenue to compensate losses is crucial today. To be clear, Tesla will of course suffer from the crisis as well, but the more important point is that other automakers which are not diversified will feel the direct impact much stronger and get weaker over time.
The announced financial government support for automakers in the US will help all to mitigate the risk of a bankruptcy, but the key question is pace of innovation. Cash will help in many respects, but innovation is difficult to buy. Without innovation, you cannot truly diversify.
The result will be that for Tesla it’s easier to capture market share when restrictions are lifted, and two out of 7 reasons why that is the case are Safety and Diversification.
The other 5 reasons will be explained in coming articles and videos, and all together are a huge benefit to emerge stronger out of a recession than the average competitor.
Stay tuned for reasons #3 — Demand & Supply.
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