The only way Tesla can hope to win

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It was recently announced that Elon Musk will have to step down as the chairman of Tesla and will not be able to take that role with the company again for three years. This conjuncture was the result of the settlement with the Securities and Exchange Commission on the charges against his intent to take Tesla private.

In addition to having to resign as Tesla’s chairman, Elon also stumbled upon the delivery delays issues. On September 17th he answered to complaining customer saying “We’ve gone from production hell to delivery logistics hell, but this problem is far more tractable. We’re making rapid progress. Should be solved shortly.” This is not a new scenario for Tesla – Musk has indicated in the past that the company’s customers may face a longer response time because of a significant increase in vehicle delivery volume in North America.

The epicenter of the entire situation Tesla is in, is the company’s business model and the commoditization of technology & design over time.

The automotive industry has come a long way from the days of the Ford Model T to the Tesla Model 3. But for all the technological advances on the product side, the business model hasn’t changed much. At a closer inspection one can see that, business model wise, there isn’t much difference between Ford’s 1908 Model T and Tesla’s 2018 Model 3. Specifically, the customer still needs to buy and own the vehicle.

Despite being operationally intensive, the car-ownership business model has been refined by the legacy manufacturers to almost perfection. Winning in the industry and with this business model, is all about scale. For an incumbent to win in the current environment, technology and design are not enough. It must streamline the production operations thus being able to serve more customers.

With the passing of time Tesla’s initial competitive advantage in technology (and design) is eroding. And this is happening in the context of a serge in demand for electric vehicles.

With the technology gap narrowing, Tesla finds itself competing against companies that spent the past 100+ years fine tuning the operational side of the car-ownership business model. So it comes to no surprise that various automakers (naming a few: Daimler, Toyota and Jaguar Land Rover), are making their moves and are showing off their own competitive and production-ready electric vehicles. They know how to win with the car-ownership business model – having done it for so long.

Although Tesla is experiencing some challenging times, the situation is not without resolve. But for Tesla to continue its heyday growth it needs to turn the table on the entire industry. And the best way to do it is do deploy a new business model. Moving away from the car-ownership business model to potentially car-as-a-service business model.

There’s plenty of evidence that the customers too, are ready for a reinvention of the car’s business model. Companies such as Uber, BlaBla Car or Getaround are proving that the sharing economy is more than just a buzz word and that its principles transfer nicely to the automotive industry.

What’s worth noting is that legacy manufactures BMW and Daimler are not standing still, they are already probing the car-as-a-service business model. Their bets in DriveNow and Car2Go respectively, have more value for the parent company than what the balance sheets are saying.

For Tesla to innovate the car business model not just the car it should focus its investments on proprietary sensor and AI technologies that will enable a business model shift.

It’s fare to assume that the legacy manufactures will have a hard time fully transitioning to a new business model. For their structures, processes and KPIs are heavily intertwined with the car-ownership business model, thus changing will take time. If Tesla will be able to be the first mover into a new business model, it needs to spend the time it has before competitors show up, scaling and consolidating its new position.

Taking into consideration the above mentioned challenges, Tesla does in fact need to step up its game in order to hope to win in the car industry. The demand for electric cars is rapidly growing making it hard for monopoly to exist in the market. Consequently, the alternatives appear and customers have a choice to make. For their choice to be Tesla, Elon needs to reinvent the car business model before others do. The quicker it is done – the higher are the chances of Tesla thriving in tomorrow’s auto market.

1 COMMENT

  1. As noted, there is both a growing list of competitors in the electric car marketplace , some of them major, well-financed players (https://www.energysage.com/electric-vehicles/buyers-guide/top-ev-companies/) and also changing dynamics taking place within the industry. Tesla was in a good position as splachy ‘first mover’, especially at the premium vehicle level; but, as in any industry, wins will go to the dynamic, creaative and flexible. Only time will tell if, and how, Tesla can do that.

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