Tesla & Global Electric Motorcars (GEM) in light of Disruptive Strategy

Tesla Motors, founded in mid 2003, is an American automotive and energy storage company that specializes in manufacturing electric cars, their powertrain components and battery charging equipments. Tesla’s mission is to accelerate the world’s transition to sustainable energy. Their first electric sports car Tesla Roadster gained widespread attention during its debut in 2008. In 2012 Tesla produced its first luxury sedan car, the model S that crossed 100,000 units in sales by December 2015. It was considered as the world’s best-selling plug-in vehicle that year. As of 30 September 2016, Tesla has sold more than 163,000 cars worldwide since delivery of its first Roadster in 2008. Tesla models are generally priced at over $70K. A single charge of these vehicles typically lasts over 200 miles and can speed over 100 MPH.

Global Electric Motorcars (GEM), is a US manufacturer of low-speed vehicle (LSV) category producing neighborhood electric vehicles (EV) since 1998. GEM produced LSV’s since 2001 and has sold over 50,000 GEM battery vehicles as of October 2015. The GEM vehicles are street legal in all 50 states on the public roads posted at 35 MPH or less. The car can accelerate to a top speed of 325 MPH and can have a range of up to 30 miles on a charge. The vehicle generally costs between $17K — $32K

I often hear experts portraying Elon Musk’s Tesla as “disruptive” innovation and I can’t agree to it. Disruptive innovation has got certain characteristics. There are two type of disruptions as per Clayton Christensen — low-end disruption & new-market disruption. A low-end disruption provides good enough service for over-served customers. A Tesla vehicle sells at the high-end of the market for roughly $100,000 and they don’t cater to over-served customers. Hence Tesla is not a low-end disruption. A new-market disruption provides a product that is more simple or convenient than the existing products. New-market disruptions target non-consumers who historically lacked the money or skill to buy and use the product. Tesla is not targeting over-served customers, offering a lower performance product at a lower price or create a new market by targeting customers who can’t afford to buy similar products (non-consumption).

If we take a look at the competition, the theory of disruptive innovation says that if the innovation is disruptive, it will not face strong competitive response, however the new models of Tesla SUV is facing arduous competition from incumbents like BMW and Mercedes.

Tesla is a very good case of sustaining innovation as it offers incrementally better performance at a higher price. A sustaining innovation provides performance improvement in the attributes most valued by the industry’s most demanding customers. They are targeting an affluent audience that can spend anywhere around $100,000. I other words, they target the most attractive customers in the mainstream market who are willing to pay for improved performance.

The theory of disruption predicts that if a new entrant (like Tesla) attempts to enter the high-end of a market as a sustaining innovation then the large, powerful incumbents will attack the new entrant. Incumbents like BMW and Mercedes has already developed their own electric vehicles. They see a threat in Tesla as they continue to grow and capture the most attractive customers in the automobile market. These incumbents are powerful brands and can easily take over the market using their global network of customers & franchises.

It is important to look at the strategy followed by the incumbents. The deliberate strategy of the power brands BMW & Mercedes is to produce high-end luxury vehicles for the industries most profitable customers. They were very successful with their deliberate strategy over these years. Having a high-end electric vehicles fit well into their existing strengths. When they look for innovations in the automotive sector, the high-end electric car manufacturing is an emergent strategy for them. They don’t want this opportunity to be untapped, and hence they will need to develop some new technology for them to product electric vehicles.

To develop any product or technology, you need 3 basic elements to be successful they are — Resources, Processes and Profit Formula. With decades of experience and access to great resources tied to industries best processes & clear profit formula; it makes the game easier for these large incumbents. They can set up design, assembly, testing, marketing and sales processes relatively faster. All these would tighten the competition for Tesla.

Just by looking at the way Tesla is organized its business activities, we can see that, unlike the entire automotive industry being modular, Tesla is following an integrated strategy. Each part of the Tesla models are interdependent on the Software. It integrate the battery voltage management, motor control, diagnostics, touchscreen, mobile apps, traction & stability control, OTA updates etc.

Tesla is not made for any specific job to be done in mind. Their product is built around features like energy rating, sustainable energy, better acceleration, mileage in comparison to other electric cars etc. These are great attributes that has got strong correlation, but we cannot surmise any of the above attributes as the actual cause to buy a Tesla Car. In theory if there is no specific job-to-be-done for any product / service, there will be steep competition.

GEM on the other hand is a disruptive innovation. In developed countries they were able to target the most profitable customers who were willing to pay for improved performance. They were able to disrupt the golf carts by offering better performance Electric Vehicles that are exceptional. In developing countries they were able to target non-consumption by offering the cars for a lower price. The incumbents are not threatened by this low cost offer as the cars are inferior in performance to them and the is just good enough for the target market. Every improvements in the product performance make it closer to the performance demanded by the mainstream customers. GEM is a company that is build around a specific Job to be done. They help people and cargo move easily while leaving a small footprint. Their cars are configurable and can be built specifically for the job to be done. This make the experience of product selection better and it integrates well to make the perfect Electric Vehicle choice for its customer. Whenever someone think about a cost effective Electric Vehicle, GEM pop up and that makes GEM a purpose brand.

If we look through the lens of strategy development process, GEM has got a deliberate top down strategy that they are are meticulously following right from inception. They have identified a performance and non-consumption gap early on and created a market disruption which hasn’t changed a lot till this time. On the other side Tesla follows an emergent strategy. They have changed from their initial deliberate strategy of building a minimum viable electric vehicle product to test the market. They looked out for their performance defining factor which is the battery vertical and skated toward improving the performance factors that drive more profit for the business. The second installment of Tesla’s Master Plan released recently by CEO Elon Musk expands the boundary beyond the traditional car market. The new strategy is to innovate the energy systems and reconfigure the cities. Tesla is looking at the future and adapting a strategy to cater for a world of automobile that is autonomous, sustainable and help you make money when you are not using your car by opting for tesla fleet system.

The Future of Tesla

The car business segment for Tesla will continue to face fierce competition from legacy manufacturers like BMW. Large companies has got the advantage of having better resources like cash, brand value, knowledge from experience and other resources that are accumulated over time. These will help the incumbents innovate quicker and come up with more models of Electric Vehicles that Tesla would hardly able to produce. The game would then change to Tesla’s single model versus many models that suits every need (job-to-be-done for its customers). Having resource limitation, Tesla would then prioritize on improving one product than focusing on variations.

Tesla as a small company has got a higher overhead cost structure, that would make them difficult to restructure to efficiently scale in order to build profitable low unit price cars. Incumbents will be able to benefit from the economy of scale. They will be able to produce low cost competitive models by keeping the pricing low.

Tesla’s announcement on producing low unit price cars will cause a problem in their sales strategy. When Tesla approaches dealers or salespeople to sell low price models, they would be hesitant to promote it as the incentives are low comparing to high price models. The sales people would end up spending the same amount of time and effort to sell a low price model, earning a low incentive than making a higher incentive from a high price model. Network effect would benefit the incumbents in this case as they can use their extensive world wide sales network to offer the low price models.

Having realized their true performance driver as their Battery Technology, the future of Tesla should steer towards their excellence in that domain. The emergent strategy justifies this and they should continue to innovate the energy sector by combining the Power Wall and Solarcity. If the automobile incumbents can hire Tesla batteries to create better products, Tesla should continue to be the suppliers of battery as an independent entity outside the main automotive sector. They can also churn revenue from recharge stations that powers inside-Tesla cars. Tesla can then use this good money to innovate the autonomous fleet market of the future.

The Future of GEM

GEM has disrupted the low end market. They are totally ignored by the mainstream as they are focusing on non-consumption and performance gaps. Their customers don’t care about performance because they can’t afford to buy a better one. GEM’s main competitors are bicycles, moped, walking, public transport etc. Low carbon footprint, easy to park, comfortable in countryside slow traffic lanes would increase their demand in the low end of the market. Slowly they are innovating on an emergent strategy focusing mainly on configurable production model. You can customize the car to fit your job to be done, making it easy for customer acquisition. GEM assembles and produces only power trains. Hence their innovation is depended on other factors like battery life. If they can partner with a battery manufacturer like Tesla, they can tactically address competition from Chinese low-speed Electric Vehicles. In future if the battery costs are going down, they will compete against traditional car manufacturers.

The cost structure of GEM will make it difficult for any traditional car companies to compete against them. The only way to cripple the growth of GEM will be by acquiring similar Chinese Electric Vehicle manufacturers.

Summary

GEM will continue to disrupt the Electric Vehicle industry and the continuous innovation would improve the performance over time. Tesla would flee from the luxury Electric Vehicle business due to their inability to scale in par with the competition. It would focus more on clean energy & autonomous fleet service of the future. They would disrupt the energy sector by coupling the PowerWall + Solarcity concept.