Gigafactory, New Jersey direct sales sales, $TSLA stock reaching record highs - there was no shortage of current events to discuss. Tesla is no ordinary company, and by the end of this deep dive it will become evident why.
- Why Tesla exists (and the importance of starting with why)
- Competitive landscape (Musk urges competitors to copy faster!)
- The master plan (including a perfectly executed beachhead strategy)
- Middleman regulation (Musk shares his views on the NADA - straight from the heart)
- The best vote of confidence Musk heard in quite some time (related to the new BMW i3)
- The Significance of the Gigafactory
- Falcon Wing Doors, Autopilot, and who needs mirrors?
Tesla’s Fundamental Good
One of the first topics brought up in the Q&A was competition. A member of the audience asked:
The big global car makers are looking at what Tesla has done and the success you've had and are going to copy a lot of it. What is your strategy for keeping Tesla ahead of the game?
[Jump to 5:00]
Tesla may be a public company with a $30 billion market cap, but in comparison to Toyota, Honda, Ford, BMW - or any other non-Italian car company - they’re just a small up and coming startup. Tesla is a technology company. They were first to market and have a superior product: the software-enabled car. Under those conditions the winner-take-all game would have already been won in most technology-graced markets, but the economics of the auto industry of are a different magnitude. Paying high salaries for ex-Google engineers to write code that scales is different than the economies of scale when building a car. Gigafactories have their limits.
Elon Musk is a fearless leader. He laughs in the face of danger and he knows with certainty that all the major players in the industry will develop their own (or copy Tesla's) EV technology. The world needs electric cars:
We really hope that the big car companies do copy Tesla. When you consider what is the fundamental good that Tesla will achieve from a global societal standpoint, the biggest positive impact that we will have is by getting the rest of the car industry to move towards sustainable transport faster. I think that's really important. So copying Tesla is nothing to be concerned about, I wish they would do it faster, and I don't know why they are taking so long.
Tesla's WhyTesla exists for one reason: to advance the advent of electric cars. If the goal is to move society towards sustainable transport, the auto industry must embrace the changing times - away from internal combustion and towards fully electric. Tesla has a model(s) that works. With 2 billion cars worldwide and 100 million new ones manufactured each year, it would take at least 20 years for the majority of cars to be electric! A new year, another model, more environmental damage, continuous iteration. Time is running out. Mergers and acquisitions (Volkswagen, Audi, Porsche, Bentley, Bugatti, Lamborghini) tend to protect and stabilize, new market entrants tend to disrupt.
Prior to Tesla, Ford was the last American car company to go public and the year was 1956.
The industry needs an innovator. Elon Musk knew something had to be done when GM recalled the EV1s from their satisfied customers and CRUSHED them. See “Who Killed the Electric Car” and ev1.org for context. Out of context, is the photo of an emotional Elon Musk speaking against the National Automobile Dealers Association (more on that later).
The inevitable entrance of large automakers into the EV market does not concern Elon Musk; it’s exactly what he hopes for. If 100 million new cars are manufactured each year, Tesla would have to make 100,000 cars a year to just have 0.1% market share!
At current levels Tesla “expects to deliver over 35,000 Model S vehicles in 2014, representing a 55+% increase over 2013” according to the Shareholder Letter. That may impress Wall Street (shares were up 11% the next day) but it’s not even next to the decimal point for percentage of automobile market share! Tesla needs the rest of the auto industry to do what they know well - mass production - and copying/licensing/following Tesla is good way to start. The challenging part for the new market entrant is getting the rest of the industry to pay attention.
The strategy was clear from the very beginning (but few noticed)
If the stock's performance is any indication... The industry is paying attention.
Musk says that most car companies seem to lack the motivation for going electric - setting their production goal at the lowest number of electric cars required by law. Developing EV technology has high upfront costs, but the biggest risk is going to market with an unproven technology. It requires vision (and job security) to see it though as profits lag - and that’s assuming the company executes and the market is timed. Other risks include: new suppliers, redesigned factories, and a competitive environment that is not yet defined. There is no TPS Handbook - efficiencies must be self-taught. Also, the engineering challenges are hard, and the business model is different: EVs cost more money for less car.
Would customers even see the benefit?
Tesla believes that for electric vehicles to be successfully brought to market they have to be sold directly to customers, which clashes with the industry's dealership model. So why is Tesla motivated to pursue a direct approach and why is the NADA trying to outlaw it? Let’s assess each side's motivations:
If companies followed Tesla’s direct sales model the middleman would be left out
Pre-Internet: dealerships were the most efficient way for the auto manufacturers to distribute cars to customers (no longer the case)
The Internet cuts out the middleman and lowers markups/spreads/commissions towards zero (meaning: dealership profits don’t come from selling cars)
Dealerships make their money servicing cars (electric motors are longer lasting / it's hard to charge for an oil change when there's no oil!)
EV technology is relatively new and Tesla wants control over the customer experience
Educate customers rather than "sell" to customers
Franchises and startups don’t work (see: Fisker)
The dealership model is based on inventory (for a high priced, non-time-sensitive, infrequent, Amazon-Primable purchase) and car salesman
Maybe there's an explanation?
- According to CNET: "These types of regulations were common in many states to ensure that consumers had a local dealer to which they could turn for maintenance. As Tesla began its direct sales model, some states chose to modify these regulations."
- Tesla believes: "The Administration and the NJMVC are thwarting the Legislature and going beyond their authority to implement the state’s laws at the behest of a special interest group looking to protect its monopoly at the expense of New Jersey consumers. This is an affront to the very concept of a free market."
Our philosophy is not make a profit on service. Its terrible to make a profit on service. Unfortunately the way that the auto dealerships are set up is that they make most of their profit on the service.
If you look at any opinion poll anywhere in any context as to whether people want direct sales, the answer is overwhelmingly yes. The percentage of people in favor of allowing Tesla to do direct sales varies from a low of 86% to 99%.
If democracy was working properly and the legislators were implementing the will of the people; something else would be happening, and there would not be legislation trying to artificially restrict direct sales.
They Auto Dealers Association is crowing about the fact that they were able to defeat us in Texas and that they’re making so much progress in North Carolina and they’re stopping us in Virginia… I think it’s outrageous that they would crow about a perversion of democracy. That’s just wrong.
The Right Motivations
Musk believes there are only two things that will motivate automakers to mass produce an electric car: government regulation and competitive pressure. Government regulation is a relatively weak motivator, and car companies have a lot of lobbying power to keep it that way. Meaning, the motivator must be competitive pressure. Tesla had to build an order of magnitude superior car that just happened to be electric. The type of car that commands a higher price and subsidize the development of a cheaper alternative (that can attract mass market demand).
It may be tempting to address the broader market first; but Crossing the Chasm - marketing and selling high-tech products to the mainstream - requires narrow a focus. The new market entrant must be significantly better than the incumbent for a very specific customer segment; the more customers switch the more competitive pressure is applied. A beachhead was chosen. Tesla found the perfect point of attack against the (mostly German) competitors - and it was right on home soil.
"The Battle of Sand Hill" The Model S won the battle; and went on to secure the Googleplex as well.
The Strategy Worked
The Model S is so advanced it set a new standard for premium performance - instantaneous acceleration without a drop of gasoline. It’s sleek, luxurious, and was rated the safest car on the road with a five-star crash-test rating by the National Highway Traffic Safety Administration (NHTSA).
Awards Season: the Model S is on Fire*
*Fire is contained to the front of the car, passengers are not at risk, no injuries are suffered, the car warns you , no smell of gasoline, no explosion, and car must strike object first consequently putting the object at risk.
A car that people may want but cannot have (too expensive, limited supply)
The Model S may not compete for the EV market per se; but it's competitive.
Lets Take a Question from the Audience:
In order to just make sure that we have made the right decision we went over to try the new BMW i3 afterwards. My goodness, what a disappointment! . At that moment I just realized how incredibly superior Tesla is compared to the rest of the car industry. So my question is, with the huge gap you have created, do you envision Tesla becoming the largest car manufacturer in the world? In that light, and with the superior economics and quality of the car... How do you see the traditional car industry even surviving in the long term?" 
Musk said it was the “best vote of confidence he’s heard in quite some time.” (19:55) 
This is the plan for getting electric cars to the mainstream (in reverse chronological order):
Mass production of electric cars by leading automakers (Tesla cannot do it alone)
Automakers incentivized to mass produce electric cars (from competitive pressure)
An affordable compelling mass-market electric car goes to market (Tesla 3rd generation car)
Reduce cost with economies of scale and increase the supply of lithium-ion cells required for mass market demand (Gigafactory)
Build Gigafactory by 2017
Announce Gigafactory on company blog
The Significance of the Gigafactory
A mass market car is central to Tesla’s goal of accelerating mainstream EV adoption
Current supply of lithium-ion batteries makes it impossible to meet mass market demand
Tesla plans on producing 500,000 cars per year by 2020 (need 35 Gigawatt hours)
35 GWh/year is slightly more than the annual global production at current levels
The supply of lithium-ion cells must drastically increase for mass market EV adoption
Cost reduction from scale efficiencies is necessary for mass market adoption
Battery pack cost is at the core of meaningful price reduction
Tesla expects to ramp up production volume for the 3rd generation vehicle by 2017
Mass market volume will reduce battery pack cost by approximately 30%
Tesla’s Gigafactory investment solves for an externality that no other company is willing to (or is in a position to) solve
Mass production requires substantial investment in cell infrastructure (to meet mass market demand and to generate said demand at the lower price point)
Today, incumbent car manufacturers lack sufficient motivation to mass produce electric cars so a Gigafactory sized infrastructure investment remains unwarranted (not enough demand)
Uncertainty over demand projections for lithium-ion cells (or certainty they will not need Gigafactory sized production volume)
Less uncertainty if EV commitment is made (lithium-ion cells > hydrogen fuel cells)
Tesla incentivized to invest in a Gigafactory (company future depends on it)
Tesla best positioned to estimate lithium-ion demand (projections / pre-orders)
The Tesla co-founders addressed a question from the audience regarding the environmental impact of producing a Model S. Some studies claiming that the amount of energy it takes to produce the battery pack makes the Model S have a net negative environmental impact. Tesla has seen those studies and decided to look at the matter internally; going all the way up the supply chain, factoring in the full production energy of the battery pack, making the cells, the aluminum body, etc. The results of the internal study found that the energy payback for driving a Model S is a net positive and happens relatively quickly; within 10,000 miles.
It’s also worth noting that the life expectancy of the Model S will be around 20 years - which is significantly longer than what most cars last for (with replacement of the battery pack). Elon talks about how his involvement with SpaceX influenced the decision to make the Model S out of aluminum, whereas most cars are made out of steel (likely to rust). In addition, electric motors are known to last, while the car is designed with relatively few moving parts (less likely to jam/malfunction).
Falcon Wing Doors
Question: "Will the falcon wing doors from the Model X prototype be kept on the production version?"
Elon: We will absolutely be keeping the falcon wing doors in the production Model X. One thing that I really don't like about the car industry is that they will do these "show cars" that never come to reality - that just kills me. You shouldn't show somebody something really cool, and then not do it. Anything we show will actually make it to production. In fact, the rule actually goes beyond that at Tesla, which is any prototype car shown to customers, the production car must be better. That will be true of the a Model X too."
Elon is confident that Tesla will bring the first autonomous car to market, or as Tesla calls it: autopilot. He notes that the highest priority is to identify the “sensor suite” that needs to be installed, which will take time, but developing the technology is a long-term priority for Tesla. The reason the company wants to implement an autopilot approach rather than a completely self-driving car is because a fully autonomous approach gets exponentially more difficult due to unexpected scenarios (i.e. emergencies).
Humans adapt quite well to unforeseen circumstances, so commercializing an autopilot approach in the next few years is quite reasonable, and Elon believes Tesla will likely be first to do it.
Cameras vs Mirrors
Question: "You showed a prototype with fairly high tech mirrors; will they be in the production model?"
Elon: "That is actually a very good question. We are constrained by the regulators on the side mirrors. There is a whole bunch of regulation that cars have to have a side mirror, how it has to look, etc. The little side mirrors are like little air-brakes; they’re basically body flaps. It would be great to get rid of them in favor of cameras which are of a much lower form factor. We will definitely have that in the long-term - it's just a question of how long it takes for us to get the regulatory approval."
JB: "There are some great prototypes of them (the camera mirrors) internally. You get much more awareness, better visibility - it's just much better."
Elon: "I kind of like that (the side mirror prototype) for rear-view as well. If you see through a rear-view camera and a screen - instead of a mirror - you can actually get a much better image instead of just looking at the little mirror ahead, which is then just going to reflect back through the back window. You also never need to adjust no matter who is in the care because you're just looking at a screen. I think having cameras instead of mirrors would be a meaningful improvement for cars."
Closing ThoughtsWhy does Tesla exist?
- To accelerate the advent of electric cars and move society towards sustainable transport
- Motivating large automakers to mass produce electric cars with competitive pressure
- Build Gigafactory - economies of scale - 3rd generation car
- Model S will continue winning awards and breaking records (until the Model X goes into production)
- Create cars that people want (and just happen to be electric)
- Created the first connected car (software continuously updated, intuitive user interfaces)
- Remove obstacles that limit mainstream EV adoption:
- Regulation (despite the setbacks)
- Battery Range (up to 300 miles)
- Charging (global network of superchargers / experimentation with battery swap)
- Distribution (educating the customer, direct sales, limited/no inventory, showrooms/online)
- Familiarize yourself with electric cars (encourage others to do the same)
- Tesla is engineering the automotive technology of the future (they won't be the only ones)
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