Tesla is Smarter Than Other Auto Companies

Tesla is Smarter Than Other Auto Companies

by | Apr 8, 2014 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership

“Car dealers are idiots” said my friend as she sat down for a cocktail.

It was evening, and this Vice President of a large health care equipment company was meeting me to brainstorm some business ideas. I asked her how her day went, when she gave the response above. She then proceeded to tell me she wanted to trade in her Lexus for a new, small SUV. She had gone to the BMW dealer, and after being studiously ignored for 30 minutes she asked “do the salespeople at this dealership talk to customers?” Whereupon the salespeople fell all over themselves making really stupid excuses like “we thought you were waiting for your husband,” and “we felt you would be more comfortable when your husband arrived.”

My friend is not married. And she certainly doesn’t need a man’s help to buy a car.

She spent the next hour using her iPhone to think up every imaginable bad thing she could say about this dealer over Twitter and Facebook using various interesting hashtags and @ references.

Truthfully, almost nobody likes going to an auto dealership. Everyone can share stories about how they were talked down to by a salesperson in the showroom, treated like they were ignorant, bullied by salespeople and a slow selling process, overcharged compared to competitors for service, forced into unwanted service purchases under threat of losing warranty coverage – and a slew of other objectionable interactions. Most Americans think the act of negotiating the purchase of a new car is loathsome – and far worse than the proverbial trip to a dentist.  It’s no wonder auto salespeople regularly top the list of least trusted occupations!

When internet commerce emerged in the 1990s, buying an auto on-line was the #1 most desired retail transaction in emerging customer surveys. And today the vast majority of Americans, especially Millennials, use the web and social media to research their purchase before ever stepping foot in the dreaded dealership.

Tesla heard, and built on this trend.  Rather than trying to find dealers for its cars, Tesla decided it would sell them directly from the manufacturer. Which created an uproar amongst dealers who have long had a cushy “almost no way to lose money” business, due to a raft of legal protections created to support them after the great DuPont-General Motors anti-trust case.

When New Jersey regulators decided in March they would ban Tesla’s factory-direct dealerships, the company’s CEO, Elon Musk, went after Governor Christie for supporting a system that favors the few (dealers) over the customer.  He has threatened to use the federal courts to overturn the state laws in favor of consumer advocacy.

It would be easy to ignore Tesla’s position, except it is not alone in recognizing the trend.  TrueCar is an on-line auto shopping website which received $30M from Microsoft co-founder Paul Allen’s venture fund.  After many state legal challenges TrueCar now claims to have figured out how to let people buy on-line with dealer delivery, and last week filed papers to go public.  While this doesn’t eliminate dealers, it does largely take them out of the car-buying equation.  Call it a work-around for now that appeases customers and lawyers, even if it doesn’t actually meet consumer desires for a direct relationship with the manufacturer.

Apple’s direct-to-consumer retail stores were key to saving the company

Distribution is always a tricky question for any consumer good. Apple wanted to make sure its products were positioned correctly, and priced correctly. As Apple re-emerged from near bankruptcy with new music products in the early 2000’s Apple feared electronic retailers would discount the product, be unable to feature Apple’s advantages, and hurt the brand which was in the process of rebuilding.  So it opened its own stores, staffed by “geniuses” to help customers understand the brand positioning and the products’ advantages. Those stores are largely considered to have been a turning point in helping consumers move from a world of Microsoft-based laptops, Sony music products and Blackberry mobile devices to new iDevices and resurging Macintosh popularity – and sales levels.

Attacking regulations sounds – and is – a daunting task. But, when regulations support a minority of people outside the public good there is reason to expect change.  American’s wanted a more pristine society, so in 1920 the 18th Amendment was passed prohibiting alcohol. However, after a decade in which rampant crime developed to support illegal alcohol production Americans passed the 21st Amendment in 1933 to repeal prohibition. What seemed like a good idea at first turned out to have more negatives than positives.

Auto dealer regulations hurt competition, and consumers

Today Americans do not need a protected group of dealers to save them from big, bad auto companies. To the contrary, forced distribution via protected dealers inhibits competition because it keeps new competitors from entering the U.S. market. Small production manufacturers, and large ones in countries like India, are effectively blocked from reaching American customers because they lack a dealer base and existing dealers are uninterested in taking the risks inherent in taking these new products to market. Likewise, starting up an auto company is fraught with distribution risks in the USA, leaving Tesla the only company to achieve any success since the dealer protection laws were passed decades ago.

And that’s why Tesla has a very good chance of succeeding. The trends all support Americans wanting to buy directly from manufacturers. At the very least this would force dealers to justify their existence, and profits, if they want to stay in business. But, better yet, it would create greater competition – as happened in the case of Apple’s re-emergence and impact on personal technology for entertainment and productivity.

Litigating to fight a trend might work for a while. Usually those in such a position are large political contributors, and use both the political process as well as legal precedent to protect their unjustified profits. NADA (National Automobile Dealers Association) is a substantial organization with very large PAC money to use across Washington. The Association can coordinate election contributions at national and state levels, as well as funding for judge elections and contributions for legal defense.

But, trends inevitably win out. Today Millennials are true on-line shoppers.  They have no patience for traditional auto dealer shenanigans. After watching their parents, and grandparents, struggle for fairness with dealers they are eager for a change. As are almost all the auto buyers out there. And they are supported by consumer advocates long used to edgy tactics of auto dealers well known for skirting ethics and morality when dealing with customers. Those seeking change just need someone positioned to lead the legal effort.

Tesla wins because it uses trends to be a game changer

Tesla has shown it is well attuned to trends and what customers want. When other auto companies eschewed Tesla’s first entry as a 2-passenger sports car using laptop batteries, Tesla proceeded to sell out the product at a price much higher competitive gas-powered cars. When other auto companies thought a $70,000 electric sedan would never appeal to American buyers, Tesla again showed it understood the market best and sold out production. When industry pundits, and traditional auto company execs, said it was impossible to build a charging grid to support users driving up the coast, or cross-country, Tesla built the grid and demonstrated its functionality.

Now Tesla is the right company, in the right place, to change not only the autos Americans drive, but how Americans buy them. It’s rarely smart to refuse a trend, and almost always smart to support it. Tesla looks to be positioning itself as much smarter than older, larger auto companies once again.

Investing in, or against, indexes – DJIA, GM and Cisco

by | Jun 8, 2009 | Current Affairs, General, Leadership, Lifecycle

Unless you have a lot of time to research stocks, you probably invest in a fund.  Funds can be either an index, or actively managed.  People like index funds because you aren't relying on a manager to have a better idea.  Index funds can only own those stocks on the index.  Like the S&P index fund – it can only own stocks in the S&P 500.  Nothing else.  Interestingly, the Dow Jones Industrial Average is considered an index fund – even though I don't know what it indexes.  And that is important if you are an investor who benchmarks performance against the Dow.  It's even more important if you invest in the Dow (or Diamonds – the EFT for the Dow Industrials).

GM is now off the Dow ("What does GM bankruptcy mean for Index Funds?").  Because it went bankrupt, the editors at Dow Jones removed it.  But it wasn't long ago that the editors removed Sears and Kodak.  But not because these companies filed bankruptcy.  Rather, the Dow Jones editors felt these companies no longer represented American business.  So the Dow is a list of 30 companies. But what companies is up to the whim of these Dow editors.  Sounds like an active management (judgement) group (fund) to me.

Go back to the original DJIA and you get American Cotton Oil, American Sugar, Distilling & Cattle Feed, Leclede Gas Light, Tennesse Coal Iron and Railroad and U.S. Leather.  Household names – right?  As the years went buy a lot of companies came and went off the list.  Bethlehem Steel, Honeywell, International Paper, Johns-Manville, Nash Motor, International Harvester, Owens-Illinois, Union Carbide — get the drift?  These may have been successful at some time, but the didn't exactly withstand "the test of time"  all that well.  Even some of the recent appointments have to be questioned – like Home Depot and Kraft which have had horrible performance since joining the elite 30.  You also have to wonder about the viability of some aging participants, like 3M, Alcoa and DuPont.  So the DJIA may be someone's guess about some basket of companies that they think in some way represents the American economy – but it's definitely subject to a lot of personal bias.

Like any basket of stocks, when the DJIA is lagging market shifts, it is not a good place to invest.  And the editors are greatly prone to lagging.  Like their holdings in agriculture and basic commodities years ago, through holding big industrial companies in the 1990s and 2000s.  And the over-weighting of financial companies at the turn of the century when they were merely using financial machinations to hide considerable end-of-value-life  problems.  When the DJIA is holding companies that are part of the previous economy, you don't want to be there. 

The Dow should not be a lagging indicator.  Rather, given its iconic position, it should hold the "best" companies in America.  Not extremely poorly performing mega-bricks – like GM.  GM should have been dropped several years ago.  And you should be concerned about the recent appointment of Kraft.  And even Travelers. 

Those companies that will do well are going to be good at information, and making money on information.  So who's likely to fall off (besides Kraft)?  DuPont, which has downsized for 2 decades is a likely candidate.  Caterpillar is laying off almost everyone, and cutting its business in China, as it struggles to compete with an outdated industrial Success Formula.  Bank of America has shown it is disconnected from understanding how to compete globally as it has asked for billions in government bail-out money.  And the hodge-podge of industrial businesses, none of which are on the front end of new technologies, at United Technologies makes it a candidate — if people ever recognize that the company would quickly disintegrate without massive U.S. government defense spending.  Even 3M is questionable as it has slowed allowing its old innovation processes to keep the company current in the information age.

Adding Cisco was a good move.  Cisco is representative of the information economy – as are Verizon, AT&T (which was SBC and before renameing, GE, HP,  Intel, IBM, Microsoft, Merck and Pfizer (if they transition to biologics from old-fashioned pharmaceutical manufacturing ways – otherwise replace them with Abbott).  But all those other oldies – like Walt Disney (sorry, but the web has forever changed the marketplace for entertainment and Walt's folks aren't keeping up with the times), Boeing (are big airplanes the wave of the future in a webinar age?), Coke (they've kinda covered the world and run out of new ideas), P&G (anybody excited about Swiffer variation 87?), and Wal-Mart – which couldn't recognize doing anything new under any circumstances.

As an investor, you want companies that can grow and create a profit.  And that's increasingly not the DJIA – even as it slowly adds a Microsoft, Intel and Cisco.  You want to include companies in leadership positions like Google and Apple.  Their ability to move forward in new markets by Disrupting their Lock-ins and using White Space to launch new projects in new markets gives them longevity.  As an investor you don't want the "dogs" – so why would you want to own DuPont, et.al.?

Investors may have been stung by overvaluations in technology companies during the 1990s.  But that was the past.  What matters now is future growth ("Technology on the comeback trail").  And that can be found by investing in the future – not what was once great but instead what will be great.  Invest for the future, not from the past.  And that can be found outside the DJIA.  Unless the Dow editors suddenly change the portfolio to match the shift to an information economy.

(For additional ideas about recomposing the DJIA, see my blog of 3/12/09 "Dated Dow")

About Adam Hartung

by | Apr 17, 2009 | Uncategorized

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Adam Hartung helps companies innovate to achieve real growth. He began his career as an entrepreneur, selling the first general-purpose computing platform to use the 8080 microprocessor when he was an undergraduate. Today, he has 20 years of practical experience in developing and implementing strategies to take advantage of emerging technologies and new business models. He writes, consults and speaks worldwide.

His recently published book, Create Marketplace Disruption: How to Stay Ahead of the Competition (Financial Times Press, 2008), helps leaders and managers create evergreen organizations that produce above-average returns.

Adam is currently Managing Partner of Spark Partners, a strategy and transformation consultancy. Previously, he spent eight years as a Partner in the consulting arm of Computer Sciences Corporation (CSC) where he led their efforts in Intellectual Capital Development and e-business. Adam has also been a strategist with The Boston Consulting Group, and an executive with PepsiCo and DuPont in the areas of strategic planning and business development.

At DuPont Adam built a new division from nothing to over $600 million revenue in less than 3 years, opening subsidiaries on every populated continent and implementing new product development across both Europe and Asia.

At Pepsi, Adam led the initiative to start Pizza Hut Home Delivery. He opened over 200 stores in under 2 years and also led the global expansion M&A initiative acquiring several hundred additional sites. He also played a lead role in the Kentucky Fried Chicken acquisition.

Adam has helped redefine the strategy of companies such as General Dynamics, Deutsche Telecom, Air Canada, Honeywell, BancOne, Subaru of America, Safeway, Kraft, 3M, and P&G. He received his MBA from Harvard Business School with Distinction.