Is Tesla headed for a bumpy road?

Is Tesla headed for a bumpy road?

On the last day of March 2016, Elon Musk took to the stage at Tesla’s design studio in Hawthorne, California and promised us the future.

Musk was unveiling the Tesla Model 3, the latest in Tesla’s line-up of upmarket pure electric cars. Slated for $35,000 USD, it is the first of Tesla’s game-changing electric cars targeted at the mass-market. For the price of an expensive Toyota, consumers can get their hands on their own slice of Musk’s alluring vision for sustainable transportation, and a splendid topping of Silicon Valley chic.

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Since the Model 3’s unveiling, Tesla fever has erupted in a frenzy. $1,000 pre-order deposits for the Model 3 – expected to arrive by the end of 2017 – exceeded 325,000 in the first week, with thousands of Tesla loyalists worldwide lining up outside dealerships to secure their order. That’s more than double the number of cars the company has ever sold. Tesla’s value proposition – a zero-emissions electric car that (amazingly) performs better than most petroleum cars – has transformed expectations. The pundits are on the bandwagon, and for all automobile manufacturers, the point is clearer now than ever: ignore Tesla at your peril.

The parallels between what Tesla is building and Apple’s success with the iPhone are abundant: their prodigious leadership and cult-like customer loyalty are just a couple. These parallels have prompted many to believe that we’re witnessing the beginnings of the next iPhone. Steve Jobs’ mobile brainchild pulled the rug from beneath the feet of incumbents Nokia, Blackberry, and even Microsoft, reducing them to mere shades of their former glory. Apple’s iPhone changed what a phone meant, and some people think Tesla might be doing the same to cars.

But it’s rash to assume that. On top of the obvious fact that the iPhone was a remarkable slate of engineering and design innovation, the product catalysed structural transformations in the entire phone industry that have proven difficult to emulate.

Phones, unlike cars, are a relatively small expense for consumers. The most capable smartphone is unlikely to set you back more than $1,500 outright, and even then, most smartphones are purchased through subsidised and cost-effective carrier contracts. This is important because the best smartphone – widely regarded as Apple’s iPhone – is vastly more accessible to an average consumer than perhaps the best car. With an Australian market share of just under 38%, iPhones are amongst the most common phones around.

It’s amazing to think that nearly half of Australian mobile users, happen to use the best phones in the world.

We can’t say the same about automobiles. I don’t know anybody who owns anything close to the best car, and depending on how far you’re willing to stretch; the best car is probably going to cost a lot more than your house.

Importantly, this entire narrative hinges on identifying what being the ‘best’ actually means. Every industry has its own definition of the superlative: in real estate, for example, the best house is often determined by a property’s location, and in the market for beds, the best is most often determined by comfort.

Elon Musk’s Tesla enters an industry where ‘best’ is synonymous with luxury, technical innovation, and high prices; the results of design and engineering prowess. It’s why car manufacturers spend millions in research and development to devise magnificent plans for concept cars to show consumers that they’re certainly capable of building the best, without ever having any intention of selling you one. You probably can’t afford it, and for those who can, the economies of scale on the business’ end just don’t make sense.

TESLA CAR LAUNCH AT THE STAR EVENT CENTRE THE STAR, PYRMONT TUESDAY 9TH DECEMBER, 2014 PHOTOGRAPHER: BELINDA ROLLAND © 2014
Australian Tesla Launch (photo: Belinda Rolland 2014)

This kind of technical achievement defines the best in many high-tech industries; however, this character trait is one that inevitably leads to intense and unprofitable competition as firms engage in a rat race to one-up each other at every turn. In most cases, firms end up over-shooting their customer’s needs. A great example is the commoditised television industry which has struggled with low margins and low profitability for years, and still nobody cared about 3D. In the case of cars, I still have no answer for why a car’s 0 to 100 acceleration matters, ever.

The car industry is like this because it has always been difficult for firms to significantly differentiate their products. All cars are successful in chauffeuring users between destinations, and they all do it with approved levels of safety. Safety regulations prevent car manufacturers from deviating from design standards, or investing more heavily in innovations such as self-driving cars. Missteps can go so far as to end a customer’s life, so car manufacturers are understandably cautious in dabbling with the untried. As such, making a better car is simply an exercise in extending the capabilities of what is currently on offer – more comfortable seats, faster acceleration, and greater fuel efficiency to name a few. These all accumulate and end up costing a pretty penny; the Bugatti Veyron, awarded Top Gear’s ‘Car of the Decade’ comes in at a base cost of roughly $1.4 million.

So from a mass-market perspective, where an objective ‘best’ is simply out of reach, the definition of ‘best’ has become fraught with compromise, and therefore extremely fragmented. We have the best cars for families, the best cars for off-roading, or the best cars for environmental friendliness. But none of these cars can hold the mantle of being the best best car.

This was also once true of the phone industry until Apple released the iPhone which fundamentally changed the meaning of ‘best’ for a phone. The iPhone, by virtue of it being so much more than a communications device immediately became the best phone because it simply did the most stuff. Through the introduction of the App Store and integrating services such as iCloud, it has since been able to leverage network effects to further its position in the market. Attempts by competitors to build a better phone by incorporating better screens, faster chips and bigger batteries will inevitably fall short as they lack access to the iPhone’s greatest asset: its ecosystem. The battle for the best phone is no longer a spec war.

So why does this matter for Tesla?

It matters because Tesla is a manufacturer competing in a market where cars are essentially a commodity, and unlike the iPhone, the company hasn’t done anything enormously different to change the nature of its industry. Yes, Tesla makes electric vehicles, and yes they are well designed, and yes Tesla is a transformative brand; but a Tesla, like all other cars is still a product that delivers people from point A to point B. The iPhone upended its industry by being so much more than a phone, while a Tesla is still at heart, just a car. As such, Tesla positions itself as just another player in the automobile market – somewhere in the luxury territory – leaving itself vulnerable to the tit-for-tat competition that its competitors, with ample experience, have become so good at playing.

Tesla’s competitors are equally as qualified to match the company’s technical feats, as manufacturers such as GM and BMW have already shown; and competitors’ mastery of the manufacturing processes may prove the difference as Tesla tussles with the growing pains of learning how to reliably mass produce vehicles.

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Chevrolet Bolt & GM team

General Motors will release its Chevrolet Bolt electric vehicle by late 2016 or early 2017; a car that is just as capable as Tesla’s Model 3 and priced to compete. Just as importantly, the Bolt will beat the Model 3 to market by one year, or longer if Musk continues a trend of missing delivery targets. Tesla’s competitors – ranging from the work-a-day to the luxury – understand the threat, and they won’t be standing still. Once the dust settles on Tesla’s overwhelming hype, what consumers will see is just another luxury car manufacturer finding its way in a noisy, congested market.

This is of course not to say that Tesla won’t be successful as a long-term car manufacturer. I expect it will be, but mostly as a reprieve for those consumers jaded by the stale offerings of Japan and Detroit. This is Silicon Valley in a vehicle, a valuable claim in itself. What Tesla won’t be is a repeat of the iPhone, a product that eradicates a once commoditised industry and upends its value structure.

Tesla might make the best electric cars, but it’s failed in its quest to make the definition of ‘best car’, one of its own. However, in a slow-moving industry that is often forced to adopt collective standards, this will prove to be a mightily difficult task.



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