Why Tesla Beats GM, Ford, Nissan

by | Jun 28, 2013 | Current Affairs, Defend & Extend, In the Rapids, In the Whirlpool, Innovation, Leadership, Web/Tech

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.

 

 

White Space for Electric Cars – Nissan, Chevrolet, Ford, Tesla

by | Nov 19, 2009 | Current Affairs, General, Innovation, Leadership, Lifecycle, Lock-in

According to Marketing Daily "Electric Cars Set to Tiptoe Into Showrooms."  Nissan is supposed to introduce the Leaf.  Chevrolet,  Toyota and Ford are all supposed to begin offering a plug-in hybrid.  None have announced prices, but all indicate they intend to price them at the high end – more costly than a like-sized traditional gasoline powered automobile.  One reason for the higher price is that dealers normally expect to make 20% of a traditional vehicle's price in high-margin maintenance and repairs, and because these electrics won't provide that revenue and margin the manufacturers believe the dealer has to make more on the initial auto sale – or they won't sell them.

The manufacturers themselves are not optimistic about sales.  They are targeting wealthy early adopter consumers for whom climate change and environment are critical issues.  Citing a lack of infrastructure for recharging, and battery technology that takes too long to recharge, the manufacturers are non-committal on how many cars they will make – preferring to wait and see if demand develops.

Sort of sounds like a self-fulfilling prophecy, doesn't it?  This approach is very unlikely to succeed, because they manufacturers are trying to sell electric cars to people who are already well served by existing petroleum powered traditional and hybrid cars.  These people have little or no reason to pay extra for new technology, so will be a hard sell.  And with built-in excuses for the technological limits, the manufacturers aren't being promotional.  Simultaneously, the manufacturers are more worried about the impact on  dealers than the success of the vehicles.

It's not the product that's wrong, its the approach.  These manufacturers are trying to launch a very different product, that really needs to appeal to very different customers.  But they are trying to do it in the totally traditional way.  Same brand names, same distribution, same sales people, same marketing, same financing – same everything.  They are trying to have the existing organization, with all its Lock-ins, do something very different.  And that never works.

Electric cars are ideal for White Space team introduction.  White Space projects are given permission to do what it takes to make a project succeed.  They are given permission to operate outside the Lock-ins.  It's that permission to find the right answer, to find the market-based solution, which allows the innovation to develop a new Success Formula that meets market needs. 

Electric cars are not a solution for the way automobiles have been used in the past.  To succeed requires appealing to different scenarios about the future.  Electric cars need to appeal to people for whom a traditional auto has limitations they don't like, and instead the electric auto is something they want.  People who are underserved by the current products.  The electric car will succeed with buyers who have reasons to want one.  For whom the electric car is the solution to their problem – not a second-rate, overpriced solution to an old need.

Cell phones didn't succeed because they were purchased by people who already had wired phones with long distance.  Early cell phones, for all their expense and weakness, were bought by people who had a real need for mobile telephony.  For years, mobile phones were used only by a small group of people.  It took years for cell phones to become commonplace.  We all now know younger generation people who have no land line phone – for whom the mobile phone has displaced a traditional phone.  But the cell phone didn't succeed by trying to be a high-priced alternative to the existing solution, it was a product that was desired by people for the advantages it offered – even when it was expensive, big and had limited range.  Only over time did the cell phone evolve to a new Success Formula that is making traditional phones obsolete – and leaving traditional phone companies with a very hard transition.

Electric cars need an entirely "greenfield" start.  Those responsible need to be chartered to "make this work" in an environment where failure is not an option for them.  They need to believe their careers depend on finding the right solution, and developing it.  And they need permission to do what the market requires.  They need to be able to have a stand-alone brand, and its own distribution system, and unique marketing.  They need the White Space with permission to do what it takes, and the resources to accomplish the task.  Free from worrying about dealer reaction, marketing impact on traditional autos in the brand, or requirements to solve "infrastructure issues."

Imagine urbanites who want cars just for short hauls.  Think about the ZipCar business in most major U.S. cities as the target buyer, rather than selling cars to individuals. Or think about other markets – outside the USA.  How about places like Taiwan or Malaysia where distances are short and traffic is bad and much fuel is wasted just sitting.  Towns like Tel Aviv.  Maybe as delivery vehicles in urban areas where traveling is rarely more than 200 miles in a day because most time is spent sitting at lights – or making the delivery.  There are places for which an electric car could be an ideal solution – just as they are today.  Where a head-to-head match-up favors the electric vehicle.

Secondly, who says a traditional dealer is the right way to sell this vehicle to these people?  Maybe it should be sold on-line, with somebody delivering the vehicle to the buyer and offering personalized instruction?  Maybe it should be sold out of a Home Depot, or Staples, or Best Buy like an expensive appliance or computer?  It's not clear to me that people, or companies, have much value for auto dealers – so perhaps this is the time to change the distribution system entirely — and perhaps take a lot of cost out of auto distribution.

There is a market for electric cars.  Today.  Just as the technology exists.  And if White Space teams were allowed to find and develop that market, we could have a robust electric car industry in just a few years.  But it won't happen via traditional approaches, from companies Locked-in to their traditional ways.  Those companies only see obstacles, not opportunity.  Without White Space, this will be just another example of a technology delayed.

But it does leave the door wide open for a company like Tesla.  Tesla is a stand-alone company pioneering the electric car market.  They are operating in White Space.  Easy as Tesla is now to ignore, they may prove to be the upstart like Southwest Airlines that succeeds and makes money while the traditional industry players keep struggling.