Tesla Competitor Analysis: Automotive Industry
Tesla and the 3 Hacker Laws
Introduction
This week, Hackerbay takes a look at the fastest evolving auto manufacturer of the decade: Tesla. The biggest force they’ve had to reckon with thus far has been General Motors, who are currently in the process of making changes in order to stay relevant in today’s competitive market. Like many other tech-aware companies, they have been leveraging the three Hacker Laws– Moore’s Law, Metcalfe’s Law and the Power Law. However despite their best efforts, General Motors has failed to retain their position as market frontrunner. Tesla has exceeded expectations this month by officially overtaking General Motors as America’s most valuable car manufacturer and distributer. At the start of the year, the market cap of the Californian enterprise was a mere $3 billion short of reaching parity with the Detroit giants– which they have now exceeded.
Tesla was founded in 2003 by renowned entrepreneur Elon Musk, they employ over 30,000+ staff and they hold the record for the fastest 0–60MPH record for any production car; the Model S P100D at a blistering 2.28 seconds.
Their first-quarter announcement confirms the expected record-breaking sales numbers; more than 25,000 cars have been ordered in the last three months alone, as of April 2017.
The company’s gargantuan leaps in technological development combined with their emerging market success does not only foreshadow a paradigm shift amongst automotive the competitors of the day– it confirms the beginning of an industry-wide transformation that will change the face of transportation as we have known it.
Firstly, we are all aware that electric cars are expected to overtake (quite literally) traditional vehicles with combustion engines. As Hackerbay discussed in the Competitor Analysis Report on Uber earlier this month, on-demand transport services like Uber and Lyft are becoming today’s preference, over both public transportation and even owning vehicles altogether.
The topic of autonomous driving is also getting a lot of coverage at the moment, with market leaders all over the world investing in the development of self-driving cars, further confirming the radical transformation we are about to experience– regarding the internal structuring of transportation-focused companies, as well as on the public consumer market.
Ultimately, it goes without saying that the traditional model of the self-owned, combustion-powered car is on the verge of extinction, and will be relegated to the history books alongside horse-drawn carriages. A new age of transportation is upon us, and Tesla seems to satisfy all thinkable requirements to become the first beneficiary of this transition– or rather, the pioneers of it.
Back in 2007, Tesla was a hot topic amongst skeptics and market experts, and few were the ones who believed in Tesla’s ability to come through. Now it is universally apparent on a global scale that Elon Musk is on a mission to monopolize not only the automotive industry, but the transportation industry as a whole, stretching as far as outer space. Tesla is unanimously predicted to become the most powerful transportation entity in existence, and perhaps, in history altogether.
Tesla has cemented its status as ‘Category King’, a phrase coined by PlayBigger, co-founded by Al Ramadan and Christopher Lochhead. Tesla has been using the science and strategy that innovators use to create and dominate product markets. In other words, Tesla’s on-going tsunami of success in the industry is relatable to a specific and existing strategic theory– it perfectly first the model of PlayBigger’s category king. But how, exactly? By leveraging Moore’s Law, Metcalfe’s Law and the Power Law (– that of the category king), the company is perpetually capturing a significant portion of the automotive industry’s market share that is specifically dedicated to electric vehicles– the first company to possess such a monopoly both fiscally and mentally. As they themselves created it, they have established themselves as the first category king of this niche. Now that Tesla is making advancements in autopilot technology, it is expected that they are on the brink of repeating this strategy of success in order to also become the category king for smart cars as well.
1. MOORE’S LAW
First articulated by Intel co-founder Gordon Moore in 1965, Moore’s Law states that the concentration of transistors in a chip doubles every 18 to 24 months, whilst costs fall proportionally and simultaneously by half. In other words, Moore’s Law guarantees exponential growth in the tech sphere, promising limitless expansion and an infinite resource of new innovations. This scale of exponential growth might be difficult to grapple with on a rational, human and perhaps even impossible to believe. However in practice, Moore’s Law has proven itself via consistent doubling in growth every 18 months, every month for the past 60 years. More tangibly, this is how we went from computers larger than rooms in the 1960s, to the pocket-sized smartphone of the 2010s, with at least an equal amount of power. The beauty of Moore’s Law is that it reduces cost and augments product capability simultaneously, which benefits our societal infrastructure both internally and on the mass-market, year in, year out.
There has been some controversial opinion in the most recent years surrounding the pace at which Moore’s Law is supposedly operating. It has been argued that the Law no longer applies to chip processors as the pace of progress is slowing down. Today, computers become more powerful without dramatically improving their hardware. Chips still get better, but at a slower pace (number-crunching power is now doubling only every 2.5 years, according to Intel). This change of speed is currently incentivizing companies to develop more intelligent, self-sufficient software and investing in smart areas such as Cloud development and new computing architectures.
For years, the automotive industry was shaped and governed by two factors: price and performance, with performance being a value relative, and linear to that of price.
For example, you can have a Honda Civic for a low price, but you’ll have only a fraction of the performance of a Porsche 911 GT3 RS– which obviously comes with a monumentally higher price-tag. Now, Moore’s Law is disrupting the fundamentals of competition in the car industry in a way that throws this interrelation between price and performance off kilter. Why? Because the concept behind the exponential growth potential in technology is now being applied to battery performance in automotive vehicles. Tesla now offers their premium Model 3 sedan– which combines real world range, performance, optimum safety and spaciousness– for $35,000.
Although Moore’s law had been coined initially for the development and growth of chip technology, the constant can be extracted and applied to parallel technologies fairly simply; those where consistent innovation is involved. In a conference in Oslo, « Clean Disruption- Why Energy & Transportation will be Obsolete by 2030 », Tony Seba demonstrates precisely this, and specifically how Moore’s Law applies to the technology and development of the Ion battery, it’s development rate, current and projected capabilities and lastly, overall cost.
In this demonstration, Stanford Academics stated that when the demand for battery power increased, the improvement of the technology simultaneously increased: overall, the general improvement rate has been recorded at approximately a 16% growth per year, and is apparently still accelerating. So what does that say? Even the most intelligent and sophisticated engineers of the traditional combustion engine cannot compete against the power of Moore’s Law. And if no engineer can fight, stall or even identify the reasons for this hidden force of 16% improvement, then the future of the automotive industry is no longer in the ages of fuel and combustion. The future of transportation is transitioning officially into a new age.
The Giga Factory in Reno, Nevada, is dedicated to building the necessary supply of batteries to satisfy the influx of orders that Tesla receives daily. The total cost of this investment is estimated to approximately $5 billion. Tesla as an independent entity is ambitiously aiming to double the world’s battery production, and through this surge in production coupled with waste minimization, they aim to reduce the cost of a battery pack by 30–50% over the coming years.
Tesla’s investors and legendary founder Elon Musk have certainly been aware of Moore’s Law since establishing the company and developing its road-map, but in order to not to stir up competition from market participants (who might have been financially and technologically equipped enough at the time to thwart their ambitious growth projection), they kept this a secret for as long as possible. As a consequence, potential competitors only became aware of Tesla’s quest for market domination and superiority in technological innovation in the year of 2014, when they announced their first fully-functional product for the consumer market. The Model S, a fully functional Sedan, is now the world’s fastest series-production car, which can be pre-ordered as easily as online groceries, and all for a price of a limousine. The Tesla Model S goes from 0–60 Miles in 2.28 seconds; double the speed of a Porsche 911. Of course, the automotive market– and the rest of the world– was shocked. Although it comes as no surprise that the premium car industries are trying to hide fear, intimidation or disorganization of any sort, by introducing new KPI strategies to demonstrate their view to the future of automotive. For example, introducing a speed KPI of 200 miles per hour or battery guarantees of over 20 years, neither of which are remotely useful to the consumer. Rather these new KPI strategies are a way for automotive behemoths to look like they’re keeping their cool in the wake of Tesla’s all-encompassing market domination. Tesla as a company has arguably leveraged Moore’s Law to the greatest advantage ever recorded.
2. METCALFE’S LAW
Robert Metcalfe, American electrical engineer and co-founder of the Ethernet, formulated Metcalfe’s Law, otherwise known as ‘Network Effects’. Network effects state that with the addition of each new ‘node’, or participant, in a network, the power of that network increases proportionally to the square number of total nodes. More simply: the more connections are made within a network, the more powerful and capable that network becomes. This notion is applicable to social networking, for example. With every new connection a user makes on Facebook, the more enabled each of the users in the network become due to the increased access to other users, information and opportunities. This is because every new ‘node’ or user has the potential to connect to all the existing nodes to the network. The more users your product has, the more value it holds. Prime examples of this proportional size to power relationship is exemplary in products such as Uber, which Hackerbay discussed earlier this month, and other ride-sharing apps such as Lyft.
Metcalfe’s Law is a straightforward, economical precept that the value of a product or service increases as more people use it. A network effect (also called network externality or demand-side economies of scale) is the influence potential that any one user has on the value of that product to other people.
The law was developed in the context for computer networks, but it stands as a concept applicable to systems both within and without the technological sphere– where any network of any sort can be created. Tesla embodies Metcalfe’s Law and leverages it perfectly to spur on their expansion and success with their autonomous driving technology. The more cars are connected to the cloud, the more data Tesla receives from those vehicles. Therefore, the more well-informed the service becomes with the capability to provide more information, a better service and a much higher level of reliability.
To provide context and scale for how thoroughly Tesla is putting network effects into practice, it has been recorded that the company has collected more than 1.3BN miles of data from autopilot-equipped vehicles operating under diverse road and weather conditions around the world. In terms of data volume, one single Tesla autonomous vehicle generates an astounding 2,000 TB of data. They have over 100,000 live vehicles on the road, which means they are generating 200,000,000 TB of accumulated data per day, covering a distance of 1 million autonomous miles each 10 hours. Tesla is living proof that the power of big data is getting very, very real.
3. POWER LAW
Lastly, there is the Power Law, which relates to PlayBigger’s concept regarding category kings. The Power Law was coined by Mike Maples, founder of the Venture Capitalist Firm Floodgate, and an early investor in both Twitter and Lyft– (two highly instrumental examples of how powerful network effects can be).
The Power Law occurs when you combine Moore’s Law and Metcalfe’s Law. In other words, the value of the best outcome exceeds all other outcomes combined; the second best outcome exceeds the value of subsequent outcomes and so-on. In Silicon Valley, the vast majority of post-IPO value creation comes from companies known as “category kings”, which we have previously discussed. The most well-known category kings with the most prolific mind-share within and without the industry, are those which are carving out entirely new niches, such as Facebook, LinkedIn or Apple. All the companies who fit into this category have a common denominator, and that is the leveraging of the Power Law. Those niches are largely “winner takes it all”, as category kings capture 76% of the market. As a result, the financial and production outcome of the largest company within a set exceeds the outcome of every other companies in that set combined. A concrete example of this law can be found in the Silicon Valley method of funding. Each year, venture capitalists fund more than 1000 companies. Out of that 1000, it is a mere 10 of them which create 97% of all the exit value. These are the contenders for the position of category king.
Category kings have managed to leverage the mind-share of their relevant consumer market– to the point that there is no immediate alternative that springs to mind in the eyes of a consumer. This is a type of mental-process, where the consumer in questions associates certain markets or products in their mind with a single brand-name, alongside which the competition is unclear. This process is used in order to make faster, and not necessary better, decisions. So category kings are the set of companies that live in people’s minds as the soundest choice to be made using ingrained biases (for example, think of McDonalds, Google, Coca-Cola). So in terms of this mental labeling and association, clearly Tesla fits all the criteria; they have certainly managed to establish itself as the category king for electric cars. As a matter of fact, its name purposely evokes the company’s vocation for electric as it is named after Nikola Tesla, who was a brilliant electric engineer from the last century. It is now on it’s way to becoming the category king for autonomous vehicles as well, and ultimately, the smart car company in general according to the consumer market. This positioning establishes Tesla as the dominant company and pioneering entity of the automotive industry as a whole, entering undiscovered territory at rate both exciting and alarming.
Tesla has several strategic advantages that cannot be disputed. They might not have killed off every other competitor, but they have ignited a competition so fierce that the most powerful automotive giants, established for hundreds of years, are re-assessing their whole production, distribution and technological strategies. Tesla has successfully lit the fire of competition under the feet of every other car-related company, and soon, every transportation company universally.
No other company is currently well-equipped enough to hold a candle to Tesla, and it would take unthinkable innovation in order to over-take them at the pace they’re developing; there are already 400,000 pre-orders for their Model 3 release.
Elon Musk, the company’s charismatic CEO and founder, has become a visionary icon and national, entrepreneurial hero. Musk is one of the most influential CEOs– and people– on the planet, with several millions of followers on social networking sights. As a founder at Paypal, Solar City, Tesla and SpaceX, Musk arguably owns the title of the most respected, well-known and admired businessman alive in America today. His personal success enforces the global sentiment that Tesla is the number one company. His vision sparked the company’s direction of growth, perpetuated the lean towards eco-friendly attitudes (which were failing to amass traction on a global scale), and has an instantaneous reach throughout society. His involvement with the US Election of November 2016 is another example of how highly respected and influential he is amongst the most powerful people on the planet.
Alongside Musk’s personal entity, Tesla has also shown the world that they can create what was previously deemed impossible. For decades, car companies have remained to focus on combustion engines with oil motors– but why, when we live in an supposedly eco-friendly modern world? The thought of eliminating the oil industry and combustion engines in general was intangible, scary and deemed a feat too large and ingrained in the infrastructure of society to grapple with. The result of this was a continual and harsh increase of damage to the earth, all it’s living inhabitants and environmental shifts in weather, rate of natural disasters and air quality. The automotive industry, whether they admitted it, liked it or faced up to it, were predominantly responsible for this extreme damage that was occurring, and also responsible for not trying to do something about it.
Tesla rode in as the antidote to a seemingly insurmountable issue, and by carving their own niche, they managed to overturn an environmental monstrosity into a topic of forward-thinking innovation and potential. Automotive competitors and industry giants have all failed at solving the problems that Tesla is on the path to completely obliterating.
