Everybody Hates Tesla: disrupting profit share, supply chain & channels. Self-driving, not so much.
EV adoption will threaten automotive profit distribution sooner than expected and much sooner than unit volumes would imply. Tesla has brought about this and many other large but less-noticed changes & threats. The Company has been afforded unprecedented (and sometimes counterproductive) latitude by customers, investors & the media.
In Season 3 of the great TV series “Everybody Hates Chris,” a precocious teenaged Chris Rock exclaims, “Look at me, I’m killing it, I’m two feet from a girl!” This was enough to attract the venomous envy of his schoolmates. In the same way, Tesla’s status as a loss-making auto manufacturer usually a couple of years late with its promises is enough to earn it a spot as a sore subject for the automotive ecosystem. Tesla has masterfully used the extraordinary latitude it’s been afforded by investors and customers to disrupt the profit, supply and dealership structure of the industry. This latitude is also potentially the Company’s biggest weakness, contributing to Groundhog Day execution problems and unnecessary “self-driving” claims.
Electric Vehicles (“EVs”) could disrupt profit structure.
Driving range is the only thing that matters. Tesla’s big and very transparent bet was that range is the most important EV feature, and it deserves endless credit for this now-obvious realization. In comparison, GM, Nissan, Toyota and other “OEMs” repeatedly introduced EVs with sub-100 mile range. Even when almost given away annual EV unit volumes in the developed world (we’ll discuss China in another article) for never exceeded about 35,000 any manufacturer . People just don’t want (weird-looking) cars that don’t go very far, electric or not. Tesla worked backward from the size and cost requirements of a 200-mile battery pack, and in 2012 introduced the large, expensive and sleek Model S with 208 miles of range. The company now sells 100,000 vehicles a year. This has been a startling lesson for the formerly skeptical industry, who must now join the bandwagon in earnest. GM’s 2017 EV, the Bolt, with 200 mile+ range, already has thousands of monthly U.S. sales, with no dedicated charging network. In North American and similar markets, range isn’t the most important thing — it’s the only thing.
EVs are inherently premium vehicles. Tesla’s success so far is at the expense of high-end luxury cars. Based on our first-hand experience, Tesla’s new, mid-sized Model 3 is just as likely to take share in the mid-range luxury segment. EVs justify their added costs by being smooth, quiet, well-handling, and powerful by nature. These innate characteristics de-value the skills luxury OEMs have in coaxing the same outcomes from gas vehicles, diluting brand identity especially as more EVs come to market. Given that luxury vehicles are up to 10 times more profitable than average, a re-organization of industry profit structure is possible (and not necessarily to Tesla’s benefit).
With range anxiety abated, consumers will notice EV operating cost advantages. Regulators are emboldened. Driving 10,000 miles in the San Francisco Bay Area in a premium vehicle would cost $500 in electricity versus $2,000 in gasoline. Kansas City, KS: $400 & $1,500, respectively. And this is before savings on brakes, transmissions, and other components. Example: commercially operated Model S’s travel 300,000 miles between brake changes. Consumers are cost sensitive even at most luxury price points, and for many consumers EV costs savings will compensate for remaining objections.
It’s no coincidence that the availability of attractive EVs, spearheaded by Tesla, has emboldened governments in France, the U.K., and elsewhere to begin outlawing combustion engines.
Threats and insults to the supply chain.
EVs are a problem for the automotive supply chain. In a gas vehicle, complex mechanical and electronic systems carry fuel and air to the engine, burn it, mechanically transfer piston motion to the wheels, and exhaust the heat and fumes. In an EV, wires connect the battery pack to motors proximate to the wheels, and there’s no exhaust. While there is plenty of room for growth in certain EV components and auto electronics, at this point EV share growth is a net loss to — and substantially discontinuous with the skills of — the massive auto supply industry, which employs millions.
Tesla is a specific threat to the supply chain and therefore itself. A number of us at GTK were treated to a SpaceX tour, Elon Musk’s space launch company, and we were struck by the aggressive in-sourcing. Tesla is on the same path. In addition to building its own batteries, Tesla is also departing from automotive norms by developing seats, robots, cameras and semiconductor chips. Look at the featureless dashboard of the Model 3, and what you’re seeing are downstream suppliers losing out. Given this Tesla-specific threat, it’s not hard to imagine suppliers acting to help traditional OEMs beat Tesla in EVs.
It’s not cricket. Especially for a company with imperfect reliability, while understandable for a new entrant, Tesla’s habit of publicly blaming suppliers for airbag, door and manufacturing problems builds resentment. One more reason for Tesla investors to be concerned about supply chain risk to the Company.
Dealerships & software upgrades.
Circumventing 1.1 million jobs. Your legislator demands you buy your car from a dealership independent of whoever made the car. It’s true: all 50 states have franchise laws that at a minimum prohibit direct-to-consumer sales of new vehicles from a car lot. Like successful iconoclasts before it (PayPal, Uber, Airbnb), Tesla is challenging this legacy by operating in a legal grey area: it has “showrooms” — not “dealerships” — which demonstrate models but relegate the actual purchase to an in-store computer and carry no inventory. In parallel, the Company is fighting state-by-state legal battles with mixed results. In Calfornia, Tesla has free reign. In New Jersey, it’s allowed four dealerships, and in Michigan not even a service center. By achieving reasonable scale with this approach, Tesla is threatening the decades-old channel structure of the new-vehicle industry, which employs 1.1 million.
Potentially years ahead in alternative transport models. The demarcation between OEMs and consumers brought about by dealerships means OEMs were never in the mindset of directly accessing the vehicle. For example, before Tesla no one upgraded vehicle software Over The Air (“OTA”), a commonplace occurrence in all manner of consumer devices. In fact, agreements between OEMs and their dealer network often prohibit this “end-run” of the dealership. Tier 1 supplier Delphi explains here. Tesla’s ability to OTA almost every vehicle function is many, many years ahead of others, potentially making it the vehicle of choice for delivering alternate transportation models.
Last, and so far least, self-driving.
An unnecessary complication. So far we’ve argued that Tesla’s influence is under-appreciated. We have the opposite view on Tesla’s AutoPilot “self-driving” and think Tesla’s urge to make AutoPilot magical as unnecessary: Tesla is groundbreaking regardless.
Tesla’s Autopilot functionality isn’t that differentiated, and was operational about a year after vehicles with steering assist were introduced by Mercedes. Tesla’s competition seriously questions the way Tesla evangelized the technology, and considers the very name “AutoPilot” as engendering driver complacency and contributing to sometimes fatal accidents. Also, AutoPilot was introduced with fewer safeguards than, for example, Mercedes’ system which demands regular driver input, but then backtracked to include similar safeguards. Any other large OEM would have suffered much greater scrutiny for the same fact pattern.
Some potential for a spectacular achievement. Tesla includes the AutoPilot hardware regardless of whether the option is selected, and therefore collects driving data on a scale no other OEM can match. Tesla’s data collection is an enormous advantage since autonomous driving systems are desperate for data on human driving behavior. If this data advantage allows Tesla’s camera-centric approach to achieve high levels of autonomy — and there are universal eye-rolls about this — it will be a spectacular breakthrough: all other OEMs are betting on LIDAR, which remains prohibitively expensive from a cost and form-factor perspective for passenger vehicles.
Unlike Tesla, traditional OEMs are too margin-sensitive to include hardware for which they are not paid solely to collect data. One work-around is for more forgiving financial markets to subsidize hardware deployment. Auto vision startup Nauto recently raised $159MM from venture capitalists to do just this for OEMs.
Conclusion and next steps. An inflection point in any one of how cars are powered, produced, sold, or driven would count as a once-in-many-decades event. That all are either happening or being attempted concurrently is astonishing, and that a single company, and one of the newest, has a role in all of them is almost not believable. In future publications, we’ll discuss specific investment opportunities. For now, we hope we’ve provoked your thinking and provided you a foundation to reach conclusions specific to your interests.