Tesla: More than a product innovation
As a happy Subaru owner, a while back I asked myself, “Why is the automaker so slow to build an all-electric vehicle (EV)?” Adventurous and environmentally conscious folks adore the brand, and so the lack of an EV was, in my view, a glaring omission in the lineup. I pondered that for a while, and with the announcement of Subaru’s Solterra, I wanted to a take a closer look at the EV space to answer my own question.
…It’s quite hard to do that without spilling a bit of ink on Tesla.
Tesla has had a profoundly meteoric rise in the automative world. In less than two decades, the company has amassed a market capitalization in excess of pretty much every other auto manufacturer combined. Ford, GM, and others have all been at it for over 100 years and suddenly find themselves threatened by Tesla’s success. In a recent discussion, Ford CEO John Farley stated:
“[The Tesla Model 3] was the best-selling vehicle in the UK. Most months, it’s the best-selling vehicle in California. Not just electric, but overall. If we’re going to succeed, we can’t ignore this competition anymore.”
But why is Tesla such a threat to these entrenched auto manufacturers?
To look at a Tesla compared to a Ford sedan, for example, Tesla’s ascendence seems obvious. Tesla cars look nothing like any other vehicle out there. They are sleek, fast, and futuristic. They’re flat out fun to drive, and come with a host of novelties such as Autopilot, over-the-air software updates, and others. Not to mention you can charge the thing up directly at your house and never visit the pump again. For those reasons, it’s easy to study Tesla as a pure product innovation — like a MacBook suddenly arising amid a field of old IBM ThinkPads. But in fact, Tesla is much more than a nice car: it’s a highly disruptive manufacturing model.
Let’s pop the hood of my Subaru. The first thing you might notice is that there are parts, and lots of them. I’ve called out a few:
If you were to look closely, you would find a Subaru OEM (Original Equipment Manufacturer) stamp on most parts. However, that doesn’t tell the full story. Subaru partners with Toyota, a key investor, to acquire many of these parts from the latter’s suppliers. With a little digging, you can unearth who actually manufactures the parts:
Suspension: KYB
Engine Plastics: Franklin Precision Industry, Inc.
Engine Internals: International Crankshaft Inc, U.S. Engine Valve, and others
Battery: Exide Technologies
…and so on
Outside of a few key vehicle systems, such as its famed All-Wheel-Drive, Subaru doesn’t so much build vehicles, it assembles them. And this is generally true of other car makers as well. The process looks something like this:
- Establish relationships with many suppliers.
- Pick out (mostly) existing parts, like axles and crankshafts.
- Fine tune assembly.
- Brand yourself (“built Ford tough”).
- Distribute via franchises.
…Enter Tesla.
Tesla got its start with the high end Roadster. This 6-figure vehicle started off with a similar model to automotive incumbents: specialize in the power train (batteries, electric motors) and leverage suppliers (like Lotus) for less essential parts. However, two factors nudged the new automaker in a different direction:
- Early on, Tesla lacked the bargaining power and scale to build a complex supply chain enjoyed by the incumbents.
- Tesla realized a key benefit of electric vehicles: they require far fewer parts than internal combustion vehicles.
The first point should be pretty obvious; you won’t ever win an industry by playing the incumbent’s game, especially when they’ve been doing so for over 100 years. Moreover, building a few hundred cars is unlikely to give you the economies of scale needed to drive down costs to customers. So what did Tesla do? Well, if your product doesn’t have as many parts, and no one can or will sell them to you, you go backwards in the supply chain.
Elon Musk describes this process as “Building the machine that builds machine.”
While there are legitimate concerns about Tesla’s quality control and production velocity, once perfected, the benefits of it are extremely high:
- Tesla can continually differentiate its product so that it looks very different from anything else on the market. Existing automakers and traditional suppliers cannot recreate Tesla parts because they can’t buy or build Tesla machines.
- Tesla can better optimize manufacturing to suit the whims of its business. There are simply fewer friction points, like supplier agreements and negotiations to manage.
- Once Tesla has a built a successful factory with its own machines and processes, it can treat the factory as a product in and of itself (“The factory is the product”). This should be much more scalable than, for example, Toyota’s operations, which in the US alone has a dozen or more manufacturing hubs scattered across the country.
In short, the reason Subaru has been late to the EV party is because building an EV is not a matter of swapping a gas tank out for a big battery. Asking Subaru to “just build an EV” is like asking a marathon runner to compete in the 200 meter sprint. There are genetic, structural, and operational practices that are a century old, and not easily untrained.
As a case-in-point, Subaru will have to use something “off the shelf” for their EV — in this case, they’ll use Toyota’s new EV power train for the Solterra. The end result is something that’s … not very differentiated …
In sum, I think it’s best to view Tesla not just as an automaker, but as a pioneer in an entirely new vehicle manufacturing paradigm. So it’s true that Tesla’s market cap is comically high, but at the same time, it’s also not hard to see why investors value the company quite differently than they do legacy automakers.
