Everybody Hates Tesla: disrupting profit share, supply chain & channels. Self-driving, not so much.

Part 1: Electric vehicle impact on industry profits & Suppliers


EV adoption will threaten automotive profit distribution sooner than expected and much sooner than unit volumes would imply.  Tesla is the most visible entity bringing about this and many other large but less-noticed changes.  As part of this visibility, 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 years late with its promises is enough to earn it a spot as a sore subject for the automotive ecosystem.  Tesla has 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.   The entry of highly experience manufacturers into the EV realm accentuates all these trends.

 

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) never exceeded about 35,000 for 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.

 

 

Range vs volume.png

 

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 higher prices by being smooth, quiet, well-handling, and powerful by the nature of their electric drive.  These innate characteristics de-value the skills luxury OEMs have in coaxing the same outcomes from gas vehicles, diluting brand identity as more manufacturers introduce EVs.  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 costs $500 in electricity versus $2,000 in gasoline.  For Kansas City, KS, the numbers are $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 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, simple wires connect the battery pack to motors proximate to the wheels, and there’s no exhaust.  While there is plenty of room for growth for parts suppliers in certain EV components and auto electronics, the net impact of a share-shift to EVs is likely a net loss for the massive auto supply industry, which employs millions.  It seems clear that EVs are substantially discontinuous with the skills of many suppliers.

 

Tesla anatomy.png

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 car manufacturers beat Tesla in EVs.   

It’s not cricket.  Especially for a company with imperfect reliability (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. 

 

Tune in next next month for Part 2, Dealerships & Autonomy