RIP Automotive Conventional Wisdom
Let’s Scare the Neighbors
Cars have been around since the late nineteenth century, starting as a hobby for engineering enthusiasts intent on frightening their neighbors. By 1910 there were thousands of manufacturers producing steam, electric, gas and diesel vehicles of wildly different design, quality and price. They remained toys for the wealthy until Henry Ford combined Frederick Winslow Taylor’s industrial efficiency ideas with a moving production line. Together these enabled Ford to consistently lower cost throughout the twenty-year life of the Model T, passing savings on to the increasing number of consumers that could afford to buy it. By the mid-1920s Ford had defined conventional wisdom for automotive manufacturing: standardized models with limited options, powered by gasoline engines, produced at scale, minimized and deskilled manual labor, with vertical integration and tight contractual relationships with a just few suppliers. It worked spectacularly well and within a decade over 1,700 of Ford’s competitors closed their doors.
Middle Age Spread
Following a period of rapid growth and consolidation the manufacturing powerhouses that survived enjoyed substantial leverage over their suppliers and dealers. As profits rolled in, markets were segmented with new models and brands, international subsidiaries created, and fiefdoms built. Despite both valiant and reckless attempts to build new domestic automobile manufacturers, the financial hurdles to efficient scale doomed them to failure. Or at least that was true until Tesla. In 2015 Tesla sold more luxury cars in the United States than any other manufacturer. Tesla is disruptive, and it is no co-incidence that it is the only automotive manufacturer run by software guys. Much has been written about Tesla, but stepping back from the hype, there are three key decisions that Tesla made that set it up for success:
1. Legacy, What Legacy?
Tesla started with an electric-only vehicle that simplified platform and power train engineering, reducing both development and regulatory compliance costs. Just as importantly eliminating the engine, transmission, prop shaft, differential, exhaust and a host of other legacy technology created an opportunity for significantly more efficient packaging than the competition.
2. Apple Store for Cars
Having studied Ron Johnson’s success with Apple Stores, and realizing that electric vehicles had minimal servicing needs, Tesla decided on Internet sales supported by company-owned stores. This enabled Tesla to tightly control messaging and the customer experience. Both proved essential to building the goodwill necessary to overcome multiple product delays and deficiencies on the way to achieving record scores in Consumer Reports customer satisfaction surveys. As a bonus Tesla Stores provide convenient charging locations helping to overcome range anxiety. Initially eBay executives were shocked that people were buying expensive cars on the auction site; so it should be little surprise that a decade later consumers are comfortable using online configurators to spec and purchase new cars.
3. Scrum, Open Source & Off the Shelf
Perhaps most importantly Tesla employs modern software and hardware development best practices. Control systems leverage open source Linux software and cheap off-the-shelf components hardened just enough for acceptable duty cycles. Building on a community supported base enables Tesla to benefit from the long term evolution of a broad and robust software platform without having to underwrite its development, or be held captive to a Tier 1 supplier’s proprietary system. Screens, GPUs, CPUs and RAM can upgraded during the 12+ year life of the vehicle, enhancing both customer satisfaction and residual values while generating high-margin revenue. Agile software development sprints, open beta programs, push update capabilities, and cloud-based telemetry tracking enable continuous evolution; Tesla can fix bugs and enhance the user experience while owners sleep. Meaningful new features are sold to existing customers, immediately amortizing software development across the entire user base, not just future vehicle sales.
Lean, Scrappy & Innovative
As a company run by Silicon Valley software guys Tesla exhibits the scrappiness and innovation that characterized Ford a hundred years ago. As a startup Tesla did not have the industry or financial credibility to forge meaningful relationships with leading automotive suppliers, pushing Tesla to innovate. Yes, Tesla is facing scale-up issues at its Fremont plant and Elon Musk is perceived by many as too aggressive with the scope of his vision, financial projections, time to market, and releasing new features before they are fully baked. All true, but in a few years Tesla has overturned one hundred years of conventional wisdom, becoming a large scale manufacturer with sales growth, order backlog and customer loyalty envied by the rest of the industry.
Many competitors are trying to emulate aspects of Tesla. Unfortunately nearly all of their profit is driven by what Musk would call legacy business, placing them in the classic innovators dilemma. Tesla is the most visible sign of much more substantial technology-driven dislocation underway in the global automotive industry. In the words of BTO “You ain’t seen nothing yet”.
Let’s Scare the Neighbors
Cars have been around since the late nineteenth century, starting as a hobby for engineering enthusiasts intent on frightening their neighbors. By 1910 there were thousands of manufacturers producing steam, electric, gas and diesel vehicles of wildly different design, quality and price. They remained toys for the wealthy until Henry Ford combined Frederick Winslow Taylor’s industrial efficiency ideas with a moving production line. Together these enabled Ford to consistently lower cost throughout the twenty-year life of the Model T, passing savings on to the increasing number of consumers that could afford to buy it. By the mid-1920s Ford had defined conventional wisdom for automotive manufacturing: standardized models with limited options, powered by gasoline engines, produced at scale, minimized and deskilled manual labor, with vertical integration and tight contractual relationships with a just few suppliers. It worked spectacularly well and within a decade over 1,700 of Ford’s competitors closed their doors.
Middle Age Spread
Following a period of rapid growth and consolidation the manufacturing powerhouses that survived enjoyed substantial leverage over their suppliers and dealers. As profits rolled in, markets were segmented with new models and brands, international subsidiaries created, and fiefdoms built. Despite both valiant and reckless attempts to build new domestic automobile manufacturers, the financial hurdles to efficient scale doomed them to failure. Or at least that was true until Tesla. In 2015 Tesla sold more luxury cars in the United States than any other manufacturer. Tesla is disruptive, and it is no co-incidence that it is the only automotive manufacturer run by software guys. Much has been written about Tesla, but stepping back from the hype, there are three key decisions that Tesla made that set it up for success:
1. Legacy, What Legacy?
Tesla started with an electric-only vehicle that simplified platform and power train engineering, reducing both development and regulatory compliance costs. Just as importantly eliminating the engine, transmission, prop shaft, differential, exhaust and a host of other legacy technology created an opportunity for significantly more efficient packaging than the competition.
2. Apple Store for Cars
Having studied Ron Johnson’s success with Apple Stores, and realizing that electric vehicles had minimal servicing needs, Tesla decided on Internet sales supported by company-owned stores. This enabled Tesla to tightly control messaging and the customer experience. Both proved essential to building the goodwill necessary to overcome multiple product delays and deficiencies on the way to achieving record scores in Consumer Reports customer satisfaction surveys. As a bonus Tesla Stores provide convenient charging locations helping to overcome range anxiety. Initially eBay executives were shocked that people were buying expensive cars on the auction site; so it should be little surprise that a decade later consumers are comfortable using online configurators to spec and purchase new cars.
3. Scrum, Open Source & Off the Shelf
Perhaps most importantly Tesla employs modern software and hardware development best practices. Control systems leverage open source Linux software and cheap off-the-shelf components hardened just enough for acceptable duty cycles. Building on a community supported base enables Tesla to benefit from the long term evolution of a broad and robust software platform without having to underwrite its development, or be held captive to a Tier 1 supplier’s proprietary system. Screens, GPUs, CPUs and RAM can upgraded during the 12+ year life of the vehicle, enhancing both customer satisfaction and residual values while generating high-margin revenue. Agile software development sprints, open beta programs, push update capabilities, and cloud-based telemetry tracking enable continuous evolution; Tesla can fix bugs and enhance the user experience while owners sleep. Meaningful new features are sold to existing customers, immediately amortizing software development across the entire user base, not just future vehicle sales.
Lean, Scrappy & Innovative
As a company run by Silicon Valley software guys Tesla exhibits the scrappiness and innovation that characterized Ford a hundred years ago. As a startup Tesla did not have the industry or financial credibility to forge meaningful relationships with leading automotive suppliers, pushing Tesla to innovate. Yes, Tesla is facing scale-up issues at its Fremont plant and Elon Musk is perceived by many as too aggressive with the scope of his vision, financial projections, time to market, and releasing new features before they are fully baked. All true, but in a few years Tesla has overturned one hundred years of conventional wisdom, becoming a large scale manufacturer with sales growth, order backlog and customer loyalty envied by the rest of the industry.
Many competitors are trying to emulate aspects of Tesla. Unfortunately nearly all of their profit is driven by what Musk would call legacy business, placing them in the classic innovators dilemma. Tesla is the most visible sign of much more substantial technology-driven dislocation underway in the global automotive industry. In the words of BTO “You ain’t seen nothing yet”.