The last 12 months Tesla Motors stock has been on a tear. From $25 it has more than quadrupled to over $100. And most analysts still recommend owning the stock, even though the company has never made a net profit.
There is no doubt that each of the major car companies has more money, engineers, other resources and industry experience than Tesla. Yet, Tesla has been able to capture the attention of more buyers. Through May of 2013 the Tesla Model S has outsold every other electric car – even though at $70,000 it is over twice the price of competitors!
During the Bush administration the Department of Energy awarded loans via the Advanced Technology Vehicle Manufacturing Program to Ford ($5.9B), Nissan ($1.4B), Fiskar ($529M) and Tesla ($465M.) And even though the most recent Republican Presidential candidate, Mitt Romney, called Tesla a "loser," it is the only auto company to have repaid its loan. And did so some 9 years early! Even paying a $26M early payment penalty!
How could a start-up company do so well competing against companies with much greater resources?
Firstly, never underestimate the ability of a large, entrenched competitor to ignore a profitable new opportunity. Especially when that opportunity is outside its "core."
A year ago when auto companies were giving huge discounts to sell cars in a weak market I pointed out that Tesla had a significant backlog and was changing the industry. Long-time, outspoken industry executive Bob Lutz – who personally shepharded the Chevy Volt electric into the market – was so incensed that he wrote his own blog saying that it was nonsense to consider Tesla an industry changer. He predicted Tesla would make little difference, and eventually fail.
For the big car companies electric cars, at 32,700 units January thru May, represent less than 2% of the market. To them these cars are simply not seen as important. So what if the Tesla Model S (8.8k units) outsold the Nissan Leaf (7.6k units) and Chevy Volt (7.1k units)? These bigger companies are focusing on their core petroleum powered car business. Electric cars are an unimportant "niche" that doesn't even make any money for the leading company with cars that are very expensive!
This is the kind of thinking that drove Kodak. Early digital cameras had lots of limitations. They were expensive. They didn't have the resolution of film. Very few people wanted them. And the early manufacturers didn't make any money. For Kodak it was obvious that the company needed to remain focused on its core film and camera business, as digital cameras just weren't important.
Of course we know how that story ended. With Kodak filing bankruptcy in 2012. Because what initially looked like a limited market, with problematic products, eventually shifted. The products became better, and other technologies came along making digital cameras a better fit for user needs.
Tesla, smartly, has not tried to make a gasoline car into an electric car – like, say, the Ford Focus Electric. Instead Tesla set out to make the best car possible. And the company used electricity as the power source. By starting early, and putting its resources into the best possible solution, in 2013 Consumer Reports gave the Model S 99 out of 100 points. That made it not just the highest rated electric car, but the highest rated car EVER REVIEWED!
As the big car companies point out limits to electric vehicles, Tesla keeps making them better and addresses market limitations. Worries about how far an owner can drive on a charge creates "range anxiety." To cope with this Tesla not only works on battery technology, but has launched a program to build charging stations across the USA and Canada. Initially focused on the Los-Angeles to San Franciso and Boston to Washington corridors, Tesla is opening supercharger stations so owners are never less than 200 miles from a 30 minute fast charge. And for those who can't wait Tesla is creating a 90 second battery swap program to put drivers back on the road quickly.
This is how the classic "Innovator's Dilemma" develops. The existing competitors focus on their core business, even though big sales produce ever declining profits. An upstart takes on a small segment, which the big companies don't care about. The big companies say the upstart products are pretty much irrelevant, and the sales are immaterial. The big companies choose to keep focusing on defending and extending their "core" even as competition drives down results and customer satisfaction wanes.
Meanwhile, the upstart keeps plugging away at solving problems. Each month, quarter and year the new entrant learns how to make its products better. It learns from the initial customers – who were easy for big companies to deride as oddballs – and identifies early limits to market growth. It then invests in product improvements, and market enhancements, which enlarge the market.
Eventually these improvements lead to a market shift. Customers move from one solution to the other. Not gradually, but instead quite quickly. In what's called a "punctuated equilibrium" demand for one solution tapers off quickly, killing many competitors, while the new market suppliers flourish. The "old guard" companies are simply too late, lack product knowledge and market savvy, and cannot catch up.
- The integrated steel companies were killed by upstart mini-mill manufacturers like Nucor Steel.
- Healthier snacks and baked goods killed the market for Hostess Twinkies and Wonder Bread.
- Minolta and Canon digital cameras destroyed sales of Kodak film – even though Kodak created the technology and licensed it to them.
- Cell phones are destroying demand for land line phones.
- Digital movie downloads from Netflix killed the DVD business and Blockbuster Video.
- CraigsList plus Google stole the ad revenue from newspapers and magazines.
- Amazon killed bookstore profits, and Borders, and now has its sites set on WalMart.
- IBM mainframes and DEC mini-computers were made obsolete by PCs from companies like Dell.
- And now Android and iOS mobile devices are killing the market for PCs.
There is no doubt that GM, Ford, Nissan, et. al., with their vast resources and well educated leadership, could do what Tesla is doing. Probably better. All they need is to set up white space companies (like GM did once with Saturn to compete with small Japanese cars) that have resources and free reign to be disruptive and aggressively grow the emerging new marketplace. But they won't, because they are busy focusing on their core business, trying to defend & extend it as long as possible. Even though returns are highly problematic.
Tesla is a very, very good car. That's why it has a long backlog. And it is innovating the market for charging stations. Tesla leadership, with Elon Musk thought to be the next Steve Jobs by some, is demonstrating it can listen to customers and create solutions that meet their needs, wants and wishes. By focusing on developing the new marketplace Tesla has taken the lead in the new marketplace. And smart investors can see that long-term the odds are better to buy into the lead horse before the market shifts, rather than ride the old horse until it drops.
In the long term Tesla has a good thing going, but electric cars are not going to be the next big thing for a while. Tesla has succeeded by finding a niche of yuppies that want to burn their cash to assuage eco guilt. And that’s fine, there’s nothing wrong with catering to nonsense if there’s a buck to be made. But what about the other electric car companies? What about Fisker? They’re either on government life support or died.
And now Tesla wants to get into battery swapping, and frankly the numbers don’t add up. There was already another company that tried this and had filed for bankruptcy (their name is BetterPlace).
You’re right in that the car companies need to stay on top of technology, but in reality because of limitations to the battery technology we’re a decade away from a mainstream electric car. Batteries are too expensive, charge too slowly and have too little power density.
Hey –
Your last post [Why Tesla Beats GM, Ford, Nissan] was freaking awesome. I have gone ahead and added your stuff to my Feedly account. Please keep me updated if you post anywhere else.
Keep rocking –
Jon
Illumined you have no clue. What are you talking about that ugly Fisker car? Anyone with half-brain knew where that was going to end. If you look at a Fisker and even dream that can be compared to Tesla you have no understanding about cars. So you think Tesla is for yuppies. Well this yuppie here has been saving to give it 50% down and get one given the low operating costs and low maintenance is giving me a ROI more favorable than buying a mediocre 335xi. Find me a luxury sedan offering 8 year unlimited miles. It seems you not only have a very bad taste but also you have poor quantitative skills. Tesla is definitely a disruption and a beautiful thing.
Illumined, try to read more before you make a fool of yourself. Tesla is offering some battery swapping stations as a trial. That is to silence few losers who have been complaining Elon did not made them available. Very few people would use them.
ey-
Your last post [Why Tesla Beats GM, Ford, Nissan] was freaking awesome. I have gone ahead and added your stuff to my Feedly account. Please keep me updated if you post anywhere else.
Keep rocking –
Dante
I found this a brilliant article that has all the right conclusions to it. History as proved over and over again that disrupters that focus on well known markets and inovate get ahead of giants and leaders of industry. Just look at Apple and you can see what it is being talked about. Electric isn’t the next big thing? Off course not but it is the biggest thing automakers can focus. People everywhere are getting conscious of the cost of petrol, the polution it generates it makes business sense to companies. An automaker that could offer viable cost reducing solutions to the trucks and public transportations I guarantee they would make a fortune. The economics of eletric makes sense it is not a hippie thing!
BMW is taking a hint from Tesla and investing in their own eletric line and are doing it the right way. Ford, GM and even REnault are all going the wrong way and are heading to an early retirment, and are going to see Tesla rise!
Great stuff here! regards
Paul
Testla cars are good, but i think they have to do something better to still egsist on the world market…
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