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.

 

 

If at first you don’t fail, try, try again – General Motors (GM)

by | Dec 2, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership

"Henderson Never Fit In At GM Helm" is the Detroit Free Press headline.  Imagine that – the CEO of GM has been asked to leave.  Industry sales are down about 24%, and GM is down 32%.  Meanwhile, Mr. Henderson had proposed selling 4 divisions (Saab, Opel, Hummer and Saturn) – which were the most interesting divisions in the company – and none of those deals have closed.  In fact, 3 have fallen apart completely.  Only the Hummer sale to a Chinese firm is potentially going to happen.  In fact, it's hard to find anything good that's happened at GM since Mr. Henderson took over.  Including closing Pontiac.

When the government invested in GM this year the existing Chairman/CEO, Rick Waggoner, was forced to resign.  Imagine that, after puting several bilion in a company the investor's transition team replaced the CEO who got the company into bankruptcy, almost out of cash, with no plan for recovery.  Also, the Board, which had allowed GM to get into such a mess without even raising tough questions, was replaced.  All seems remarkably sensible given the sorry state of the company.

The goverment led transition team, which rocketed GM through bankruptcy, cleaned the ceiling, but then selected Mr. Waggoner's hand-picked successor (Mr. Henderson) to replace him.  The claim was they'd need 6 months to search for somebody new and didn't want to take the time.  And they put in a lifetime monopolist, Mr. Whiteacre of AT&T, as Chairman. And a 40+ year industry veteran was made head of marketing (Mr. Lutz.)  And a 40+ year company employee was kept as CFO.  And we're supposed to be surprised that things aren't going well? 

The Chairman and replacement CEO says of the company says "Whiteacre: GM On the Right Path," also in the Detroit Free Press.  But do you believe him?  What does he know about competing successfully against intense foreign led competitors who move fast?  The AT&T that trained him early in his career failed horribly, never succeeding in any market outside the U.S. and getting cleaned by offshore competitors in hardware and mobile telephony.  And as head of Southwestern Bell, all he did was rebuild the old "Bell system" of land-line companies – without effectively taking a leading position in any new telephony business.  Or any other business.  Broadband, mobile phones, digital television – can you think of any market where today's AT&T is a technology, product development, innovation or other market leader?  He may have bought up a bunch of the old spun out businesses, but those are on their last legs as people give up land lines and transition to a different sort of connected future.

What's surprising is that GM isn't doing worse.  But it's unlikely Mr. Whiteacre, or Mr. Henderson's replacement, will do much better.  Several candidates are from inside GM – all with the same Lock-ins that allowed Messrs. Waggoner, Henderson and Lutz to perform so abysmally – despite incredible pay packages for many years.  In "Selling GM's CEO Job to be Tough Task" (Detroit Free Press) headhunters claim that the industry is so complex they'll have a hard time finding someone talented who will work for the pay.  Balderdash.  That's only true because they are so Locked-in to traditional thinking about who should lead GM that they keep trying to recycle already overpaid CEOs who have done little for shareholders.  That's not what's needed at GM.

Give us a break.  Who would want an industry veteran in the job at all?  And why would a recruiter hunt for somebody with a lot of industrial-era Lock-ins.  GM's investors (that's the citizens of the USA and Canada,) employees and vendors need somebody who's ready to move beyond the old industry and company Success Formulas and do something very different.  Willing to develop entirely new scenarios of the future which alter the competitive playing field and then Disrupt the organization in order to start doing new things.  Before Tata Motors and China's Chery auto join the other companies ready to put GM into the grave.

It's amazing how "inside the box" the people who are leading GM, and advising the company, remain.  Why not try to recruit somebody from Tesla to take over?  The long-delayed electric Chevy Volt might well get to market faster – and in a more desirable form – if that were to happen.  Or how about an heir apparent at fast growing Cisco Systems?  Those people know how to pay attention to the market and move quickly to give customers what they need – profitably.  

Turning around GM requires leadership that will change the Success Formula.  Not try to Defend it, or Extend it with slowly evolving variations and minimal change.  The whole house needs to be cleaned.  The investor representatives who led the transition pulled up short of finishing their job.  Only by bringing in new managers who are willing to see a very different future, unbounded by the GM legacy, can GM's competitive position be changed – and if GM tries to keep competing the way it has Toyota, Honda, Hyundai, Kia, Tata Motors, et. all will eat GM's dinner.  And only by Disrupting the old Lock-ins, using White Space teams to develop new solutions, can GM regain viability.