Why Did Better Place Fail and Tesla Succeed?

Executive Summary

Despite much initial fanfare, Better Place (BP) failed to create a sustainable business, filing for bankruptcy two years after raising more than $850M in venture capital. Ultimately, five key challenges caused BP to fail, with the lack of partners willing to manufacture vehicles with its technology serving as the foremost factor. To avoid this failure, BP should have signed-on more manufacturing partners before launching, slowed its aggressive geographic expansion, better managed its cash flow, and learned from its initial pilot. Conversely, Tesla achieved success because it chose to manufacture its own electric vehicles (EVs), reducing Tesla’s dependence on other manufacturers, and to “learn by doing” along the entirety of its value chain. Thus, three most important lessons emerge for new entrants to this field: (1) Crossing the chasm is hard; (2) Creating sustainable partnerships is vital; and (3) Going slow to learn remains fundamental. Even with these lessons in mind, Tesla’s future remains uncertain.

Better Place Overview

Founded by Shai Agassi in 2007, Project Better Place sought to end the global auto industry’s reliance on oil through the development of EVs. Agassi leveraged this vision to secure $850M in venture capital, substantial tax breaks, and an agreement form Nissan-Renault to manufacture 100K Renault Fluence ZE vehicles that utilized BP’s swappable battery technology. To deliver on Agassi’s vision, BP offered a radically different business model: Rather than selling vehicles, BP sold “transportation,” charging drivers monthly subscription and mileage fees.

Renault Fluence ZE

Key Insight: BP believed that it needed to separate the battery from the vehicle. Doing so allowed two major product innovations:

1. EVs became more affordable. As part of its business model, BP retained ownership of the batteries, which could add up to $10K to the vehicle’s MSRP. Thus, “By retaining ownership of the battery, BP [was] able to reduce the sticker price…”
2. BP could better address range concerns. “Range anxiety” remained a key barrier that prevented customers from purchasing an EV. Thus, BP opened a series of automated battery swap stations where a robot would replace a vehicle’s depleted battery with a charged one in two minutes.

BP piloted its model in Israel, which epitomized a perfect pilot market for several reasons. First, Israel remains relatively isolated, limiting driving ranges. Second, reduced oil consumption would decrease Israel’s financial support of its oil-producing neighbors. Finally, with gas averaging $7.50 per gallon, EVs offered a meaningful economic incentive. To pilot, BP built thirty-seven swap stations across Israel.

However, BP encountered numerous challenges: The five most significant challenges are summarized below.

1. Overly Optimistic Forecasts: BP forecasted that enough “demand in the Israeli market to drive sales of between 300 and 500 vehicles a month in the first year:” In total, Agassi predicted 100,000 EV sales in 2010; instead, the actual sales totaled closer to 1,000 as many presales never materialized. Likewise, at $33,000 after tax breaks, the vehicle remained expensive relative to other options. Furthermore, Agassi made matters worse with his hubristic rhetoric, stating that BP could give cars away and still turn a profit.
2. Overly Ambitious Expansion: Before proving the viability of its business model via its pilot, BP had already set its sights on geographic expansion. BP announced that it would enter Denmark, where the country’s geography and aggressive climate and energy policies seemingly made the market a natural fit. Despite BP sinking massive investment into market development, Renault sold less than 400 compatible EVs. As a result, BP postponed and then canceled expansions into Australia and Hawaii.
3. Lack of Partners: By choosing not to manufacture its own vehicles and instead license its technology, BP remained dependent on adoption by manufacturers. As its battery technology remained incompatible with other systems and initial vehicle sales stumbled, manufacturers had little incentive to design cars to leverage the interchangeable battery technology. Thus, BP faced the ominous task of enticing these manufacturers to adopt its technology; however, BP failed to do so, as Renault remained the only manufacturer. Arguably, this insurmountable challenge ultimately killed BP.
4. The Ecosystem Problem: Without drivers, building a vast network of charging stations remained economically unfeasible. Yet, without charging stations, customers had limited incentives to purchase the vehicle. As a result, BP’s value proposition remained unclear given the EVs limited range, lack of stations, and uncertain resale value. Consequently, customers remained unwilling to internalize the risks that resulted from purchasing the vehicle.
5. High Fixed / Investment Costs: BP dramatically underestimated the cost to build the charging stations. Originally, BP projected that each station would cost $500,000 to build, but — in actuality — each station cost $2M. These extremely capital intensive costs strained BP’s cash flow, limiting its growth.

Ultimately, BP failed to “cross the chasm” and move from “early adopters” to “the early majority.” Coupled with its high burn-rate, the BP board removed Agassi as CEO in Q4 2012. Failing to raise additional financing, BP filed for bankruptcy in Q2 2013.

Tesla Overview

Founded in 2003, Tesla sought to develop fully electric, high-performance vehicles. However, Tesla notably differed from BP in a few regards. First, Tesla manufactured its own vehicles. Rather than relying on a partner to manufacture vehicles with its technology, Tesla chose to manufacture its own vehicles from start-to-finish. By vertically integrating, Tesla avoided the “lack of partners” challenge that crippled BP. Further, its vertical integration throughout the manufacturing process allowed Tesla to “learn by doing” along the entirety of its value chain.

Second, Tesla chose to focus on creating batteries that could last longer (increasing the vehicle’s range) and at-home charging. To complement this system, Tesla built 1604 Supercharger Stations, billing $0.26 per kWh to quickly charge one’s vehicle. However, Tesla did not fully abandon the concept of swappable batteries. Instead, Tesla silently integrated “swappable batteries” into its vehicles. By making its batteries modular, Tesla could replace existing batteries with improved versions.

Tesla’s Supercharger Stations in North America

Success / Failure Conclusions

Tesla successfully brought its product to market and sustained its success while BP failed. Ultimately, BP must hold itself accountable for its failure and not blame other factors, such as “luck.” The analysis below offers three important lessons regarding innovation success and failure.

1. Crossing the chasm is hard. For any new product, moving from “early adopters” to “the early majority” remains the most important moment in a product’s lifecycle. To achieve greater adoption, a clear value proposition must exist and switching costs must be minimal. BP failed to deliver in both regards by failing to build-out its swap station network. Tesla successfully made the transition as it offered a wider range of vehicles, longer battery life, and minimal switching costs.
2. Creating sustainable partnerships is vital. Lacking adoption by other manufacturers, the potential of BP remained limited, illustrating the importance of developing partnerships that will promote the success of the product. This lack of technological adoption ultimately killed BP. As such, BP should have proactively entered into more partnerships with manufacturers before piloting. In contrast, Tesla chose to vertically integrate, reducing its dependency risk but increasing manufacturing risk. While inherently risky, this decision paid off.
3. Going slow to learn remains fundamental. BP’s over-eager expansion to other markets and poor cash flow management crippled the firm’s growth. Future firms should go only as fast as the market allows while learning from their pilots and adjusting their business models accordingly. As spending increased, BP only accelerated its demise. Tesla, on-the-other-hand, moved more slowly, relying heavily on pre-orders, allowing Tesla to better manage its cash flow and growth.

Tesla Today

Despite its initial success, the last four years have been mixed for Tesla. Most notably, Tesla has struggled to scale its production processes, routinely missing expectations. However, Tesla has shown progress recently by focusing less on automation and more on skilled labor, allowing Tesla to meet its production goals and sending its stock soaring (and falling) at various points.

Tesla’s Stock Price and Trading Volume over the Last 5 Years

Likewise, Tesla has been burning through cash to fund scaling-up production, the R&D of its Gigafactory, and its (questionable) acquisition of SolarCity. As such, Tesla has routinely sought debt financing. Today, Tesla remains highly-levered, and its corporate bonds trade with a non-investment grade rating. This rating signals that some investors have lost faith in Tesla’s ability to cover its short-term debts.

Also during this time, CEO Elon Musk has been particularly controversial. During an earnings call, Musk routinely spoke-over Tesla’s CFO and referred to manufacturing as “production hell.” Then, Musk tweeted that he had “funding secured” to take Tesla private at $420 a share. Ultimately, this unsubstantiated boast got Musk in trouble with the SEC, which fined Tesla $20M, mandated that Musk step-down as Chairman, and required Musk to “obtain pre-approval from an ‘experienced securities lawyer’” before tweeting.

Despite effectively “crossing the chasm,” Tesla’s future remains highly uncertain. While its vehicles remain popular, Tesla must successfully complete its transition from a tech company to an automotive manufacturing company. Given its debt overhang, history of production problems, and the questionable behavior of Musk, legitimate concerns about the long-term viability of Tesla remain.