Are We Ready for Intelligent Cars (Yet)?

“The idea of combining Tesla, an electric-car manufacturer, with SolarCity, which makes solar energy storage panels, makes no strategic sense.”

This was the view of auto industry experts in the New York Times on August 4, 2016. The newspaper added:

“Even if energy generation, storage and an auto powertrain are a seamless product, so-called vertical integration, in which one manufacturer makes all the components, was the old Henry Ford model and later, General Motors’. That approach has gone down in automotive history as a colossal failure.”

Intelligent Cars, Inc.: Governance Principles to Build a Disruptive Company explains why the experts have got it wrong about Tesla.

The current challenge facing the auto industry is to design an Intelligent Car (i.e., a car that is fully autonomous, connected, cleaner, safer, software controlled, build with a modular architecture).

One of the ways that Tesla is interesting is that they seem to be one of the few car companies that understands how the structure of the organization is a critical aspect of achieving this goal.

As such, the focus of the discussion needs to shift from the “Intelligent Car” to the “Intelligent Car Company”.

So, what will the Intelligent Car Company of the future look like?

We focus on three principles.

A. Design-Oriented Network/Ecosystem

The primary objective of the company of the future is to gather together disparate new technologies and integrate them into a coherent product or service that delivers a value proposition that has relevancy for consumers.

Indeed, the future of the car industry — or any industry confronting profound technological change — will not be determined by developments in the technology — i.e., who develops the “best” engine, chassis, design etc., and the associated IP rights — but rather by the capacity of a firm to meet the design challenge associated with imagining and then assembling the products or services of the future.

In Tesla’s case, this has involved a clear and pre-defined journey from the low volume, high priced electrical Roadster, via the “mid volume”, “less-high priced” Models S and X, to (eventually) the high volume and low priced Model 3.

The result is a higher market value per dollar of physical assets.

Market Value (US$ M) per US Dollar of Physical Assets (March 31, 2015)

B. Visionary Leadership + “Flat” Culture

Hard choices regarding which particular approach is going to be adopted need to be made and that requires some degree of hierarchy, but the crucial thought here is that the process of making design decisions needs to be internally transparent and guided by a commitment to identifying the “best idea”, rather than allowing other considerations to intrude on decision-making.

The main task of business leaders is to reiterate constantly the vision of the company in order to ensure that decisions are not distorted by these other considerations.

In the case of Tesla, for instance, the vision of the company has — from the beginning — been “making the world a better place” by accelerating the world’s transition to sustainable energy. The final leg of the journey from the Roadster to Model 3 is the seamless integration of solar power with battery storage.

This is the context for the acquisition of SolarCity.

The result is a higher market value per employee.

Market Value Per Employee (US$ per employee — March, 2015)

C. Open Innovation and Inclusive Partnering

R&D — specifically, the current emphasis on hardware development within an internal department specifically tasked to do research — will become less significant in this kind of model.

At least, the focus of R&D will need to shift to software and the development of the core operating system that will coordinate the modular architecture of the intelligent car.

Although clear evidence of a disconnect between R&D spending and innovation is difficult to establish, R&D spending alone is not enough to ensure innovation. Tesla is the only car manufacturer that appeared in the Forbes World’s Most Innovative Companies 2015 list, but spent significantly less on R&D than its competitors (at least, according to the 2014 financial statements).

R&D Spending (2014)
So, were the experts correct in concluding that the acquisition of SolarCity is a mistake?

We don’t think so. Traditional acquisitions will be pursued, but only if it is absolutely paramount to break down any remaining barriers inherent in two autonomous companies working more closely together.

The real issue is whether the acquired company is allowed to maintain its own identity and corporate culture within the open and fluid ecosystem of the acquiring company. Vertical integration may well have been a “colossal failure”, but more dynamic forms of partnering — in a variety of forms — will be central to the disruptive companies of the future.