Wednesday, January 14, 2009

Remaining Competitive in an age of dawning EV's - a look at Tesla Motors

As my old Strategy Professor used to teach, sustainable competitive advantage is maintained by a Company enjoying at least one of two primary factors (which in rare cases can even be combined):

1) Low-cost - "Make it cheaper than everyone else and charge the lowest price."

2) Differentiation - "Make it better than everyone else and charge more for it."

In short, Michael Porter, has taught the world that in order to enjoy either of these factors a Company must engage in rivalry with other competitors in its market...and that is not all. While doing so, Companies must contend with several other factors: the power of its suppliers to limit options, the freedom of its customers to choose another product, the entry of substitute technologies that make its product useless, and the threat of new entrants.

Whether or not you subscribe to rote theories of business strategy, the core ideas make pretty plain sense.

So taking a "strategic" look at Tesla Motors business it is hard to find a sustainable competitive advantage. Tesla makes EV's, and they are one of the first automakers to do so. That has given them a slight lead on the market. That is the good news; now here is the bad:

- They have no realistic barrier to entry as some of the most powerful companies in the world are already tooled up and manned to make the same basic car (minus the powertrain) faster and cheaper than Tesla. Give them a year or two, and the powertrain will also be in their grasp.
- Battery suppliers are legion and competing each other down to the last red cent with greater and greater power and safety every month. If Tesla were buying from this market, it would be good news, but they have made their own bets on battery technology and have not seemed open to using other people's batteries.
- Customers are as free as a bird to choose one automaker over the next only having to meet the price of the new car. This gives them strong power to shift away from Tesla at a whim. And,
- Substitute technologies of bio-diesel, hydrogen combustion, compressed air, boosted gasoline, and even network-recharged battery swappers (the likes of Better Place), make the options to Tesla's embedded battery car compelling, at the least.

This strategic score-card says to me that the electric car business, in the way Tesla has approached it (centralized factory mass-production, dealerships, contract car building knowledge and early production through Lotus, contract captive battery production in Asia, etc.) does not hold sustainable profits. If I were them, I would focus on the core product of the drivetrain (battery, controller, and motor) and sell this package to every automaker in the business before these others take the time and money to develop their own. That could be a way, perhaps the only way, to take what Tesla has achieved and to develop a sustainable competitive advantage.

Two years ago, we approached Tesla with this very idea and asked them to sell us batteries and controllers and rotors. We were willing to pay for their expertise and to slap a badge on the side saying "Powered by TESLA". What could be better?

For a short while, they had a division that entertained this idea, and then they shut it down. I was dismayed and sad for them, because it appeared that they were giving up on one of the best parts of their business.

Then, just yesterday, they announced formally a partnership with Mercedes Benz to provide the batteries and chargers for a limited set of 1000 EV Smart FourTwo's. They even said that this could lead to more if all goes well, and that it was not exclusive but rather open to other manufacturers. BRAVO!

(Electric Smart FourTwo,

For what it is worth (from the peanut gallery), this could be the first step in a while that Tesla has taken toward sustainable profitability.

It will be interesting to see how many other automakers they sign up. I hope many. We, for one, will be talking to them if they are open for such discussions. I sent them my first correspondance in two years this morning.


jhimm said...

except that people have been brain washed into believing that electric-hybrids and pure battery motors ARE THE FUTURE and all other contenders are folly. they have been brain washed into believing that electric cars are extremely green, and use no fuel. they forget that the electricity has to come from SOMEWHERE, and that in the US that is usually from coal. which makes even more carbon than gasoline, and is in even shorter supply.

so Americans are hooked on electric cars and are likely to remain so for a long time, even though they make no sense at all.

and anyone who thinks that the Tesla vehicle and the GM "Volt" are marketing to the same demographic needs to go back to business school. unless Porsche or BMW decide to create an EV (which they aren't going to), there will be no direct competition for Tesla anytime soon.

not that i think Tesla is sustainable. it isn't. but the reasons aren't nearly as simple as "growing competition" or "cheaper batteries". basically it boils down to "how many $100,000 electric sports cars can you really sell in a year, and how can you really make enough profit from those to sustain an entire company?" which is a much harder question to answer and requires examining companies like Lamborghini, Ferrari, Fiat, Bentley, &c. almost all of which, with the exception of Ferrari, have failed to turn a profit over time. and Ferrari only does so because of the overwhelming dominance of its racing division which generates massive brand recognition, loyalty, demand and, in the end, profit, due to sale of racing parts and the entire artificial economy of its racing division.

Tesla will fail. but it will not be because of the "Volt" nor, unfortunately, because Americans will suddenly discover sequential turbo powered, small displacement diesel engines running off centrifuged algae (which is where our car market -should- be going, but isn't).

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