Tesla's a Threat to the Auto Industry, But Detroit's Reacting All Wrong

The entire car industry should probably study Tesla, to understand if and how it plans to take such market share from all current incumbents. Assuming they will all learn the same underlying secret, what car will they make after they finished their collective hypothetical study?
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A recent flurry of articles, such as this one on Forbes, reported Steve Girsky's disclosure of GM's new secret team, tasked with studying EV maker Tesla and its CEO Elon Musk. There is probably no one better than Girsky, GM's current vice chairman and a former leading automotive analyst on Wall Street, to study and understand the threat and opportunity that Tesla represents for the car industry. Tesla's $15 billion-plus market cap demonstrates that the stock market is betting on Tesla's potential to take a significant share of the broader car market, not just luxury cars.

If those analysts are right, GM shouldn't be the only company worried about Tesla's future plans. The entire car industry should probably study Tesla, to understand if and how it plans to take such market share from all current incumbents. Assuming they will all learn the same underlying secret, what car will they make after they finished their collective hypothetical study?

Some of the most serious reporters concluded that Mr. Musk should throw his doors open and share all his secrets with the current carmaker. Tesla had already partnered with both Toyota and Daimler, so one should assume they shared some secrets with those market leaders. The reasoning concluded that companies like GM would not be able to replicate anything resembling Tesla's great achievements due to different culture. The point is lost on most people who mass-market carmakers should probably never try to repeat Tesla's model -- in making cars or in business model. What works for Tesla will not work for GM, and most likely be value destructive for any mass-market incumbent.

But the car makers can learn a lot from such a study. Imagine for a second that car companies are like yachts racing in the ocean. While the entire industry represent yachts jostling for position along a similar course, Tesla's catamaran diverged from the pack, and all of a sudden seems to be gaining tremendous speed. If Captain Musk allows you to peek onto his boat and monitor his instruments you should also take advantage to learn the ocean currents and wind pattern he's mapping along the course. Their underlying assumptions are more interesting than the shape of their car. Their battery business assumptions are just as interesting as the shape of their battery pack.

Those carmakers producing 1 million-plus cars per year should not attempt to build Tesla's current or even future car. That won't make a difference to any of them, even if it may annoy Tesla. While most of them most likely already drove and even tore apart a Tesla Model-S, they will likely learn more from reading Tesla's P&L than they would from the car's engineering. And I say so with the utmost respect to JB Straubel's engineering achievement at Tesla. Understand the economics underlying Tesla, and design a better mass-produced GM, Ford or Hyundai car for the masses. Produce a car that can change the market in 2017 and capture a bigger share of the profits in the competitive car industry. Do so by aiming to beat all other gasoline cars, not by competing with Tesla's next luxury sedan.

Lessons from Tesla

So, what will industry learn when their teams analyze Tesla:

1) An electric car is an object of desire: First and foremost, Tesla is selling cars to people who love the experience of owning and driving the Model-S. Instead of deciding on "what environmentalists will be willing to give up to drive electric"-- such as having only two seats in the back of an odd-shaped car -- Tesla decided to build a car that supersedes all buyer's expectations. Musk knows that every customer who bought a Tesla Model-S becomes a sales person to a community of like-minded people.

The lesson: Your next electric car should offer more of a car for less cost than comparable gasoline cars...not the other way around. Let's just say that $30,000 mini-car is not a great deal for most of the population; a brand new quality crossover for $10,000 is a great deal.

2) An electric car is a modern appliance: But like BMW said during their i3 EV launch, it is more like a cell phone than a refrigerator. The modern EV will be constantly upgraded, see Tesla's constant software updates and extend that to upgraded physical components. When you design its battery, remember that your average smartphone lives for 3 years at most in your pocket, an EV should drive on roads for more than 20 years. If you remember what batteries were like 20 years ago (hint: "Motorola Brick"), you can understand how it would feel to own the same battery offered today in a car 20 years from now.

The lesson: Design a car that provides car buyers with the possibility of upgrading both battery and software, while retaining the car. Such a possibility will enhance the resell value of cars, and in doing so could drastically reduce the monthly lease new buyers will face at the dealership.

3) An electric car is Moore's Law on wheels: Mr Musk said in a recent analyst call that he sees the price for batteries dropping under $200 per kwh in "the not-too-distant-future" vs $500 per kwh when the roadster shipped 5 years ago. Other industry experts agree that the cost reduction trend will continue at a pace of roughly 8% less per year. At that pace, $100/kwh is just a question of time - 8 years after $200/kwh to be exact. Batteries are "Exponential Technology" - they benefit from reduced cost, improved storage and longer life with every generation, all of which are compounding year over year. Exponential technology is the most disruptive force that hits incumbent industries. Don't believe me, ask Peter Diamandis at Google who compared it with "asteroids hitting dinosaurs".

The lesson: Carmakers should design the next EV assuming exponential improvement in battery technology, not in denial of that inevitable curve. Plan for range target that is at least 200 miles, and much like Apple, remember that as your sales volumes will grow, the battery pack will gain in range and reduce in price. So average your future cost estimated down heavily and plan for profits to come after volume goes up the s-curve instead of focusing all your calculations on the first batch of cars. Those $100/kwh batteries that seem impossible today, are just as real as the $200/kwh batteries everyone said we will never see - inevitable given enough time.

4) An electric car drives -- and sells -- differently: Tesla skipped over the dealer model, preferring to sell a highly differentiated car directly to customers in their owned and branded stores. Tesla avoided the conflict that mixed EV & ICE dealers experienced: Dealers simply can't be expected to invest heavily into creating demand for a new product category. The temptation of converting walk-ins, who are mostly curious non-buyers, into good old car sales is as big as the current car inventory waiting in the front lot. Letting mixed gasoline/EV dealership sell new EVs will inevitably end up with mixed results - some will be fantastic change agents, but others will not even have a charge spot to charge the EV as mandated by Detroit or Tokyo. The key issue is lack of consistent customer experience, which is the definition of brand. That, together with the high cost for channel training and constant re-training makes wide and distributed channel a killer for any new category introduction.

The lesson: If you launch a new category, consider very seriously launching it under a new brand with a whole new experience. Direct sales will allow incumbent carmakers not only to control its brand experience; it also translates into a lower per-unit cost of sales once volume starts to pick up. Ask Apple... when you have a differentiated product, you want a differentiated destination store for people to come and experience it. If you do it right, the retail value per square foot beats the rest of the industry - by a mile!

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