Tesla Disruption

Many casual observers view Tesla as a disruption to the traditional auto industry, because they have delivered an electric car with range and high-end appeal that has been so far unanswered. The assumption is that the existing major automakers are incapable of understanding an electric powertrain. Professional observers, like Horace Diedieu, are more skeptical of the disruption claim. Horace is not a skeptic of disruption in general – he trained with Clayton Christensen himself, and speeks eloquently and often about disruption theory. But after investigating the history of automobile production and Tesla’s methods, his conclusion is that Tesla is not disruptive. I intend to argue that Tesla does follow Christensen’s pattern of disruption. My argument will be, perhaps, less rigourous that Mr. Diedieu, but I hope to be as persuasive. Note: Much of the analysis of Tesla versus the rest of the industry has moved forward to speculation over how autonomous vehicles might remake the auto market, transportation, cityscapes, and eventually society. I am starting with the assumption that wide-scale autonomous vehicles are far enough in the future that there is worth-while discussion to be had on how a company like Tesla will impact the traditional automakers in the meantime.

Disruption theory has several principals. The one that Mr. Diedieu focuses on suggests that disruption occurs only when the business model changes. If a new technology / feature / capability comes along and allows a company to adopt it without changing their business model, then it is called a sustaining innovation, and incumbent providers are generally expected to be able to defeat new market entrants. Mr. Diedieu argues that the most important component of the automobile business model is the manufacturing process. His research suggests that every significant change of leadership in the industry has been accompanied by an important change in the manufacturing process. Because Tesla is using traditional methods for most of their manufacturing, the change from an internal combustion power train to an electric one is almost certainly a sustaining innovation for the existing auto industry.

Another principle of disruption theory is that the basis of competition changes. Existing providers of a product focus on satisfying the ever-increasing demands of their best customers for improvements in a few critical performance metrics. Meanwhile, a new entrant provides a lower-level of these performance metrics to less demanding customers, and focuses on other metrics that are more interesting to that audience. One of the classical examples of this is the computer hard disk manufacturers working to deliver better cost per gigabyte, storage density, and total capacity to their large, demanding mainframe and mini-computer customers. PC manufacturers did not require the highest-end capacity or storage density in their applicaiton, and so could be satisfied by relatively low performance in these metrics. And because they were buying much lower capacities, they could tollerate somewhat higher cost per gigabyte. Because PCs would sit on or under a user’s desk, however, there were significant concerns about overall size and noise levels. The performance measurements for high-end applications could be ignored, and competition (in this market) shifted to new metrics.

If we think simply about exchanging an internal combustion power train (engine, transmission, fuel system, engine management system, exhaust system, polution control systems, etc.) for an electric power train (batteries, electric motor(s), motor controller, charge controller), we can easily believe that electric power trains are a sustaining innovation. Existing auto manufacturers should be able to make this change with as little difficulty as a model-year design change. Any benefits that Tesla gains from using an electric power train also accrue to the traditional manufacturers, and they continue to have the advantage of large-scale production. Instead, consider the basis of competition for each type of car manufacturer.

The competitive dimensions for a car can be grouped into a few buckets: power train (which directly or indirectly affects fuel economy, performance, ride smoothness, noise, etc.), styling (including exterior and interior appointments), and the increasingly important automation features (adaptive cruise control, intelligent braking systems, traction control systems, obstacle detection and avoidance systems, parking assistance, lane-departure, navigation, and eventually, self-driving capabilities). Note: safety is also a competitive dimention, but once you put the intelligent features like ABS, traction control, obstacle detection, etc. into automation, all that is left is structural features and restraints like airbags and seatbelts, most of which are mandated across all manufacturers by law). Auto manufacturers purchase many components from suppliers, especially bolt-on safety features like air-bags and braking systems, and most especially the infotainment systems. However, they invest lots of time, money, and internal expertise on their power trains. The power train defines one of the most important characteristics to distinguish one type of car from another. When a customer focuses on features like fuel economy, acceleration, corning performance, towing capability, freeway passing, reliability, maintenance costs, purchase costs, and to some extent, vehicle size / capacity, they are indirectly choosing one power train design over another. Many of these metrics are incompatible with each other – better fuel economy and lower maintenance costs are the antithesis of acceleration and towing capability, and so they cannot be maximized at the same time.

An electric power train can be designed to outperform an internal combusion power train for all of these metrics simultaneously, for a sub-set of vehicle types. Tesla competes in the mid-size luxury sedan market, and other than price and range between refueling, can easily beat every related power train metric for all other vehicles anywhere near its class, at the same time. Further, a Tesla can best the fuel economy metric for the most fuel-efficient car while simultaneously besting the acceleration of the highest-accellerating car. Some of this is due to design choices by Tesla, but most of these benefits come from the generic characteristics of an electric power train.

Traditional auto manufacturers absolutely can exchange their internal combustion power trains for electric ones, but this will eliminiate much of the traditional differentiation between brands and models of cars. Every car will be efficient, quiet, reliable, inexpensive to maintain, and high-performance at the same time. There will be little room for Porche or BMW to brag that their cars are better performance cars than a mid-grade Toyota or Honda. Likewise, there will be little room for Honda and Toyota to claim that their cars are more efficient, reliable, or inexpensive to maintain than Porche or BMW. If we assume that passive safety systems are mandated by law and therefore not a strong differentator, all that remains for competition are styling, automation, and in the case of a new entrant like Tesla, large scale operations.

To date, Tesla is meeting the minimum requirements for styling, but is not able to win on these dimensions alone. They are currently far behind on scale operations. The electric power train gives them a temporary advantage, which traditional auto manufacturers may be hesitant to adopt, but which they will as soon at the tide of consumer demand shifts far enough. This leaves automation.

Traditional auto manufacturers are far behind in this space. Although they have basic automation features in many cars, they are almost always purchased as bolt-on components from a supplier, are rarely integrated with other automated systems, and are generally designed to be static. Tesla, on the other hand, is developing their car as a automation platform, with a range of sensors and control points to deliver these active safety and automation features, most of which can be improved via an over-the-air software upgrade. This means that their cars can improve in this important competitive dimension at the speed of software.

This difference cannot be overstated. A new car shipping today might have a navigation system that was designed several years ago. The infotainment vendor designs a system, the auto manufacturer designs the new system into a new model of car (which only changes every few years), begins a production run, and starts selling cars with the new system. An infotainment system might allow minor updates, but this process is also very slow and sporadically applied. Imagine if your laptop computer could only have the software available when it was originally made, with few or no updates. This is normal in the auto industry. Tesla is delivering a more integrated, software-controlled system. It is designed to receive updates via wireless signals throughout its life. Although Tesla hardware doesn’t get updated any faster than other cars, the software that defines how it works does. A Tesla on the road today can receive a performance or convenience or even safety improvement from a wireless update.

This is a huge difference in how features are made (from software, not hardware), and how fast they can be designed and deployed. And developing integrated computer / software-based systems requires a specific style of management that the traditional auto makers have so far failed to demonstrate, and which cannot be purchased as a bolt-on component.

So the disruption argument can be summarized as: the electric power train neutralizes one of the most important performance metrics between different styles and makers of cars, and the automation platform of a car becomes the new area of innovation and competition. Tesla has built their company based on being first to the electric power train, but is making most of their investments in growing the automation platform. Traditional auto makers can adopt the electric power train, but this just brings them neutral with other makers, and destroys some of their differentiation. The automation platform becomes a new requirement where they have little or no historical expertise, and so far, are making few investments.

Tesla still needs to learn how to build cars at scale (GM is currently building the electric Chevy Bolt’s at higher volumes than all Teslas combined), but if they can learn to deliver continuously improved styling (which expertise can arguably be purchased), and maintain their lead in the automation platform, they can certain grow as fast as they like, and have the potential to capture a significant share of the automobile market.

So the final question is: can Tesla learn to build cars at high volume faster than traditional manufacturers can learn to design and operate as a computer hardware / software company? There is no clear theoretical reason why one should be more difficult than the other, but we do have one clear historical guide. Apple learned to scale-up production of iPhones faster than Nokia learned to be a software company.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: