Everybody hates tesla, Part 1

Click to listen on Apple Podcasts or Overcast.

For a menu of other apps, click “Subscribe” above. You won't have to subscribe to listen. Or just listen via the player above.

An unedited transcript is below.

The following is a transcript of the audio available via the player above.  The audio file is the definitive source.

Announcer:    Tech. Cars. Machines. Subscribe here or at GTKPartners.com.

Ali Tabibian:    Welcome, welcome, welcome, everyone to this episode of Tech. Cars. Machines. As you know, I'm your host, Ali Tabibian, and you can read more about me and the producer of this podcast series, GTK Partners, in the episode notes. We always [00:00:30] send you to the episode notes. For once, let me just read out the websites and locations where you can find us, www.gtkpartners.com. In particular, there's a tab there under the headline Tech. Cars. Machines. where you can get all of the episodes for web-based access and subscription and ditto for our occasional newsletter.

    You can find my background in the Team section of the website as well of course on LinkedIn under Ali Tabibian. And for the most [00:01:00] part, there's only one of those, at least one of those in the United States. If you have comments for us, by the way, we'd love to hear it. Best way to send it to us is to just send me a note on LinkedIn and that way, I'll essentially have a view of your background as well and can calibrate your feedback for the kind of listener you are. We like to basically serve as broad an audience as possible while being informative and serious about the work we do here.

    This episode will closely track a newsletter that we put out earlier this year. [00:01:30] It was called "Everybody Hates Tesla," and it was probably the most popular newsletter that we've ever done. I think I could say that with some reasonable confidence. And what the newsletter did was basically explore the world of electrification through the lens of Tesla and also described in a way that people really found quite revealing why the company attracts so much attention.

    And the reason for that as we did explore in the [00:02:00] newsletter and we'll do so for you in this podcast is that it really is startling how many different avenues of progress or groundbreaking the company has undertaken, not just in electrical vehicles but in the supply chain and channels and in self-driving. And for us, actually despite the amount of coverage the company gets for self-driving technologies, we find it really probably the least impressive component of what the company has managed to achieve and how much change it has either brought or is [00:02:30] spearheading in the 100-year-old world of the internal combustion engine-based transportation market.

    Our theme is that electric vehicle adoption will threaten automotive profit distribution much sooner than you'd expect from the unit volumes of electric vehicles. We'll discuss this and many other large but less notice changes and threats. We'll also discuss how the company has been afforded unprecedented and frequently counterproductive latitude by customers, [00:03:00] investors and the media.

    Why do we call it, "Everybody Hates Tesla"? The title is a play on a fairly famous and really enjoyable TV show called Everybody Hates Chris. In season 3 of that TV series, a precocious teenage Chris Rock who's childhood the series is about exclaims, "Look at me, I'm killing it. I'm two feet from a girl." This was enough to attract this poor guy the venomous envy of his high school classmates. [00:03:30] I think it was either high school or middle school.

    For us, this was a pretty funny analogy and Tesla has a status as a perennial loss-making auto manufacturer usually a couple years late with its promises. When it delivers, it tends to deliver with unreliability problems in its vehicles. All this is still enough for it to earn a spot as a really sore subject for the automotive ecosystem. When you get behind the curtain with the automotive ecosystem, really, Everybody does Hate Tesla. [00:04:00] Often it's for good reason.

    What's really galling to the automotive ecosystem is how much latitude Tesla has received from customers, investors and the media. To Tesla's credit, they have really used this latitude masterfully to undertake a mission-ready that's likely to disrupt the profits, supply and dealership structures that the automotive industry has been used to for a hundred years.

    We're going to break up the subject matter into two episodes. In this episode, [00:04:30] we're going to talk about what drives electric vehicle adoption and what that will do to industry profit structure. In the next episode, we'll talk about what Tesla is doing to change the dealership and distribution structure. This traditionally existed in the United States and also talk about what electrification and specifically Tesla is doing to the supply chain and we'll analyze the company's approach to self-driving and also analyze the accidents when Teslas have been in self-driving mode.

    [00:05:00] I'd like to start about electric vehicles in general and most of our comments here will really be about electric vehicle introduction in the developed world. China is a unique case and we'll talk about it separately in a subsequent podcast. Let me start piecing together for you the reasons why we think electric vehicles will significantly disrupt the automobile profit structure really even before the volumes build up.

    First, driving range is the only thing that matters. Tesla's big [00:05:30] and very transparent bet was that range is the most important feature in an electric vehicle. It really deserves endless credit for this now obvious realization. In comparison, GM, Nissan, Toyota and many others repeatedly introduced electric vehicles with sub-hundred mile range.

    For some of our younger listeners, this has been going on for over 20 years. Probably the most famous attempt at electric vehicle introduction was the GM-EV1 that was really a response to a California state [00:06:00] mandate for cleaner vehicles. That car came out probably 20 years ago. There was a famous movie called Who Killed the Electric Car? It was about this vehicle. You can go watch it, it's kind of interesting.

    Even before that, companies like Toyota had tried to make an electric vehicle that I believe actually ran on the typical lead acid battery that sits in the average vehicle rather than the more modern lithium ion based battery approaches. And this repeated introduction of electric vehicles with sub-hundred mile range really went nowhere. Even [00:06:30] when they were almost giving away these vehicles for extraordinarily cheap lease rates, unit volumes in the developed world really never exceeded about 35,000 units for any particular model from any particular manufacturer.

    People just didn't want cars that didn't go very far. Electric or not, and these cars frequently looked kind of weird and were made to look weird because a lot of these manufacturers felt that these vehicles and their under-performance [00:07:00] in terms of range and other features would pollute their brands so they try to make them look as distinct as possible.

    Tesla did something very different. Again, to the company's credit, they've been saying this for 10 years and they've laid out their business plan 10 years ago in quite a bit of detail and you can go study it and they've been doing exactly what they've told people they've been doing, they were going to do.

    They presumed that a 200-mile range was what would make a vehicle a useful general purpose vehicle with broad appeal. [00:07:30] They work backward from that 200-mile range, derived the required battery pack size. From there derived the size of the vehicle that would be required. They determined what the cost of that battery pack would be and therefore, what kind of price point it would essentially force your vehicle to be in. Long story short, in 2012, they introduced a large expensive and sleek, Model S with 200 miles of range.

    Fast forward several years excluding the Model 3 which [00:08:00] is the small sedan that the company makes, the company sells 100,000 vehicles a year. Model S and the SUV Model X and startlingly, they're selling these vehicles at a price point close to $100,000 on average. Now, there are some federal subsidies for electric vehicles, et cetera but these subsidies were available to anyone.

    This was a startling lesson for a formerly skeptical automobile industry who until quite recently were being dragged, kicking and screaming [00:08:30] into doing something that wasn't based on burning fuel. General Motors caught onto what was happening before anybody else. Let's give credit where credit is due.

    By 2017, they introduced the Bolt, which at a 200-mile plus range and very quickly, its volume built up to thousands of monthly sales in the United States alone. And here's the interesting thing, the Chevy Bolt doesn't have a dedicated charging network. When people talk about Tesla, they frequently talk about [00:09:00] the car and its charging network, and in fact, Elon Musk and everybody on [down 00:09:04] spends a lot of time showcasing how broad the charging network is and how many different locations, at what speeds, et cetera you can charge the vehicle.

    Here comes along the Chevy Bolt, works its way up to an annualized volume of 20,000, 30,000, 40,000 vehicles pretty quickly without a charging network. To us, the lesson is pretty clear, in the North American and similar markets, range isn't the most important thing. It's the only thing. [00:09:30] People will buy these electric vehicles whether or not you have as expansive and beautiful a charging network as Tesla does.

    Let's expand on this point a little bit. In North America and similar countries where people have pretty good access to in-garage or in-apartment building charging facilities or frequently drive to work and there's a charging facility there, in other words, they're not frequently forced into on-street parking as typically happens in a lot of urban areas. Even in Europe but certainly in Asia, it seems that as long [00:10:00] as you have range, and the tip over point does tend to be around 200 miles of range, it's enough to drive EV adoption.

    There's a chart in our newsletter that I'd like to describe for you here and you can find the chart at gtkpartners.com/tcm. Click on the Everybody Hates Tesla newsletter button and the chart shows this: From 1995 roughly to 2010, over a 15-year period, the range of the typical electric vehicle [00:10:30] was about 75 miles and the unit volumes really never went up beyond several thousand unit sales a year. This is for the United States.

    In 2012, Tesla introduced the Model S which had a 200-mile range, a little over 200-mile range and by 2017, so seven years after that initial 15-year period that we talked about, the unit volumes had gone from a few thousand to 200,000 vehicles a year. Substantially Teslas, a little over half of that [00:11:00] was just Teslas. A bit chunk of it was the Chevy Bolt that we talked about and there were a couple of other vehicles like the Nissan which significantly increased range themselves.

    We have well-sourced, anecdotal but well-sourced evidence that 90% of the usage of electric vehicles in the Bay Area at Tesla charging stations are essentially Model S and Model X owners who live locally. In other words, they're not on their way to somewhere and need to top up their battery. They're basically doing [00:11:30] something else while they're charging the vehicle for free, typically socializing, typically shopping. Those of you in the Bay Area know that you typically are charging your Tesla vehicle at a Tesla charging station in a mall, in a shopping center and another environment where it's kind of a convenient to basically be refueling your car while you're doing something else.

    You are not there because you didn't have enough range to get to work or get back home. Maybe they're getting a little bit of a kick out of that free charge, but realistically, it's not the difference maker into whether that vehicle [00:12:00] has a usable utility for them or not.

    Now, you might be thinking to yourself, "Sure," but that consumer wouldn't buy this vehicle if they didn't know that there wasn't some robust inter-city charging facility available so that, for example, I can make it from San Francisco to Los Angeles and know that somewhere in the middle, I can charge my car.

    While that may make a difference to some people who theoretically in their mind are going to make that occasional trip [00:12:30] to Los Angeles, trust me on the following: Nobody who needs to make an inter-city trip frequently sort of San Francisco to Los Angeles, other distance where you need to make a charging stock will buy an electric vehicle. I know there are a lot of Tesla fan boys that swear that repeated stuff for charging is no big deal on a trip like this but for normal people, it's ridiculous.

    And frequent inter-city travelers will stick and should stick to internal combustion engines until further notice. I think it's kind of humiliating to have a $100,000 vehicle and have to stop once maybe [00:13:00] twice along the road from San Francisco to Los Angeles and watch any other vehicle zip by as you're there waiting in line potentially for a charger to open up and pretending that it's all okay because you would have stopped for lunch twice anyway along this six-hour trip.

    We want to be clear. We're not saying that electric vehicles are for everyone but there is a 75 million passenger vehicle market globally, 15 million plus of that is the United States, probably 25 million [00:13:30] of that is in developed countries. In a market that size, there are probably going to be a lot of people who find electric vehicle pretty attractive for the purposes that we've described that they're appropriate for. The next question is which parts of this multimillion unit market will start adopting electric vehicles and what could that mean for the shape and the profitability of the industry.

    So, here's a quick summary. We've made the point that driving range is the only thing that matters, that a 200- [00:14:00] mile plus range seems to be the tipping point for purchasing an electric vehicle with or without a charging network being available. And so the question becomes of the millions and millions of units, which portion of them is going to get influenced by electric vehicles and will it happen in a segment where it could significantly affect the way that the industry is structured?

    We start with our hypothesis that electric vehicles are inherently premium vehicles. [00:14:30] You won't be surprised by this fact if you look at where Tesla's success has come from and it's been substantially at the expense of high-end luxury cars. Most of the data out there shows that the Tesla Model S, their big sedan, is taking share away from the likes of the BMW 7 Series, Mercedes S-Class and even Porsche's on record is admitting that some of their sales have been hurt by the availability of the Tesla.

    Based on our own firsthand experience in a Tesla Model 3 which [00:15:00] is the new mid-sized sedan, it's just as likely that this new mid-sized model will take share from similar mid-sized luxury vehicles, the BMW 3 and 5 series and so on. This is no big surprise when you drive around an electric vehicle and realize that it is inherently a smooth, quiet, well-handling and powerful vehicle by nature.

    Smooth because there's no small explosions taking place inside a cast iron or [00:15:30] aluminum engine block which is what happens in a combustion engine. That also means the vehicle is fairly quiet. In fact on of the problems with electric vehicles is you don't have the engine noise to cover up for a lot of other sounds that typically come into the passenger cabin, so you have to actually spend more time worrying about soundproofing to some extent.

    At least the Tesla approach to electrification which is putting the battery in one big flat panel along the bottom of the vehicle means that you've [00:16:00] lowered the center of the gravity of the vehicle and have made it inherently that much better handling. And electric vehicles and we won't get into all the details, here by nature have a lot of torque that means when you tell them go, they rev up very quickly.

    And what that means is you get that burst of acceleration that people love in vehicles that at least Americans tend to pay up a lot for. And again because there's that big, in the case of a Tesla Model S, thousand-pound battery packs sitting along the bottom of the car, you can get that surge of acceleration without the car leaning [00:16:30] backward, dipping forward when you're stopping as much as it would in another sort of vehicle.

    And it's a good thing for electric vehicles that they inherently deliver premium features because the cost of the battery pack is high enough where it wouldn't really makes sense to try to create an economy electric vehicle. In other words, electric vehicles with that all-important 200-mile plus range increase your cost of production because the battery is very expensive, so you look around and say, "Which kind of consumers would be willing [00:17:00] to pay for this anyway?"

    The cost-conscious consumer, if you look at a typical compact vehicle, is okay with a car being rough, noisy, not very well handling and not very powerful. So, you're not going to try to sort of force them to buy an electric vehicle at an enhanced price point. But if you look at the premium vehicle manufacturer, people go and buy let's say a Lexus or a Cadillac because they're very smooth and quiet or a Mercedes or let's say BMW and a Porsche because they handle well. [00:17:30] And you put all that together and you realize, "You know what? The natural place to go sell your electric vehicle is to those purchasers of premium vehicles."

    Now, here's the problem for the industry. It's those luxury vehicles that pay all the bills for almost everyone. Here's an example for Volkswagen. The three top-selling brands of the Volkswagen company are Volkswagen, Audi, and Porsche. Rough numbers, 10 million Volkswagen branded vehicles a year and 250,000 Porsche [00:18:00] branded vehicles a year. Porsche is roughly 250,000 units generate rough numbers about the same operating income for the Volkswagen company as the roughly 9 or 10 million Volkswagen branded vehicles.

    Think about that. By influencing the sale of let's say 50,000 Porsche vehicles, you can dramatically change the profitability of a company as large as Volkswagen, $200 billion of revenues and 600,000 employees and whatnot. And that's why we think that the threat of [00:18:30] electric vehicles to the automotive industry is foreign excess of what the unit volumes would imply.

    Now, the established car manufacturers are not slouchers when it comes to being competitors. They're highly, highly accomplished organizations and they're all working hard to introduce their own electric vehicles. It is a legitimate question though how committed they really are to cannibalizing their own combustion engine vehicles because that's essentially what some of the sales will do and whether [00:19:00] delivering the electric vehicle really leverages the same skills that those entities have built up over the last hundred years and delivering combustion engine vehicles.

    The answer is not clear and that's another point we'd like to leave with you. Since that electric vehicle inherently has a lot of the qualities that a Mercedes or BMW or Lexus or a Porsche try really hard to imbue in their vehicles the quietness, the smoothness, et cetera, by going electric, any competitor which doesn't have [00:19:30] those same characteristics will naturally have a lot more of them and will essentially reduce the competitive advantage and the brand definition that a lot of these companies have had.

    And you don't need to sort of pit Tesla against Porsche or Chevrolet, the Chevrolet Bolt versus a Corvette. Here's a simple example for you. People really consider BMW and Mercedes to have reasonably distinct brand identities. One focuses on the smoothness and the luxury of the drive and [00:20:00] the other one focuses on the sportiness of the drive and I think you can add Audi right in there as well and probably at this point, Audi has probably some of the best handle in German cars, even better than BMW if you go by the various ranking of the automobile press and users.

    Here's a thought experiment for you. Let's say Mercedes starts electrifying vehicles. That vehicle is inherently going to handle and drive a lot more like a BMW. What does that do to the consumer decision making process? When BMW or Audi electrifies [00:20:30] its vehicle, it inherently becomes smoother and quieter and starts becoming a more Mercedes-like drive. What does that do to the consumer selection process? And what happens when a less premium brand starts electrifying? How does the purchasing decision get influenced when I can get an electric Toyota Camry, put some leather on it, a few luxury features versus having to previously have gone to a Lexus to get some additional quiet and smoothness? 

    We're not being alarmist about all these but we are saying that the [00:21:00] influence of electric vehicles is really a lot more dramatic than people have really understood it to be. Everybody is really focused on range and the charging networks and sort of a lot of the technology but really the driving and handling of the vehicle is what consumers focus on with an any given price point.

    Here's another point. Operating cost of these vehicles are substantially less than the comparable combustion engine. Here's an example [00:21:30] for you, and this is based on my own calculations over several years of which I kept a lot of good records for. Driving 10,000 miles in the San Francisco Bay Area in a premium vehicle would cost you about $2,000 of gasoline. Basically, you get 20 miles of gallon. We have a pretty hilly city here in San Francisco which really damages the fuel economy. That's about 500 gallons of fuel a year multiplied by $4 a gallon. It's a little bit more now and roughly it would cost you $2,000 just in fuel.

    The same vehicle, [00:22:00] where it electric and where you to charge it overnight using the roughly 12 cents per kilowatt-hour that PG&E provides you in the city which is still actually substantially more than other parts of the country. That same vehicle would cost you $500 in electric power a year, $500 versus $2,000 a year in gasoline for a premium vehicle and a premium ride.

    If you run the same numbers like we did for Kansas City in Kansas, you'd be spending about $1,500 in fuel [00:22:30] and $400 in electricity. That's a big deal. Most vehicles in this country are purchased at a 35 ... New vehicles are purchased at a $35,000 roughly average selling price. Obviously, we're talking about more expensive vehicles than that but consumers are price sensitive and operating cost sensitive all the way through and including just short of the largest vehicle classes. Through and including the 5 Series BMW, the Mercedes E-Class, the Lexus ES and off of those purchasers consider these dollars and cents [00:23:00] issues where the cost of operating these electric vehicles we think will start changing people's mind about how quickly they want to adopt them.

    And the advantages go beyond just fuel as we'll talk about in a second. These electric vehicles have a fewer components and operate in ways that are inherently less costly to operate. You'll find a lot of people ... By the way before we get there arguing that over the long term, you're going to replace the battery pack and horrible things will happen and that will be really expensive.

    That's also what people said when the Toyota Prius came out. The experience [00:23:30] with the Toyota Prius and the longevity of its battery has been outstanding and none of those nightmares have come true. We don't know if that's necessarily going to be the case with the new class of electric vehicles but history says we're probably going to wind up doing better than people fear at this point.

    But let me go back and give you an example of other operating cost savings with electric vehicles. There's a company called Tesloop that commercially operates Model S's essentially as a limousine service, a point-to-point limousine service. [00:24:00] Their experience that a Model S will go about 300,000 miles between brake changes because electric vehicles use engine braking rather than the braking of theses pads that clamp your wheels.

    Another trend that is boding well for electric vehicles is that now that essentially Tesla has shown people that you can have a really nice vehicle with acceptable range, all sorts of other interesting amenities is government authorities [00:24:30] had become a lot more aggressive essentially insisting the fact that that transition away from internal combustion engines happen sooner than later. Great examples are in France and the UK which essentially over a 20 or 25-year horizon are programming in an outlawing of the combustion engine.

    I think we're going to bring the episode to a close right here. This is a two-part episode. In this part one, we focused on the relationship between the consumer and the manufacturer of the vehicle. In the next [00:25:00] episode, part two of two, we'll cover the relationship between the automobile manufacturer and its own suppliers and also talk about self-driving, why we think it's an unnecessary complication that Tesla has brought onto itself. And we'll discuss a little bit what our views are on potential reasons why for some of the accidents that have happened.

    We hope you enjoyed it. We'll see you next time probably in about two or three weeks with part two of two.

Announcer:    Tech. Cars. Machines. Subscribe here or at [00:25:30] GTKPartners.com.