Tesla Is The New Apple
Sure, it’s an obvious comparison, one that’s been made many times in the past year or two. But it’s a comparison that’s worth pondering in some detail -- not just for what it tells us about Tesla, the company, but also for what it tells us about the near-term outlook for the automobile industry in general. The parallels between the two companies are easy enough to spot: Tesla has a rapidly accelerating (if still unproven) business driven by a radical new philosophy of transit, a business that has as its core product a sleek machine capable of its own, more literal, version of rapid acceleration. It has a small but intensely devoted customer base. In Elon Musk, Tesla has a charismatic and combative CEO simultaneously running three pathbreaking companies in different industries. (Steve Jobs, mind you, only managed two at one time.) You could plausibly make the argument that Tesla, much like Apple at various points in its history, is the most interesting company in the world right now.
The question is whether Tesla is the Apple of 1985 or the Apple of 2005.
Tesla critics tend to see it as the former: a luxury car maker for people who have the spare change to experiment with ultimately impractical electric cars. The Roadster and the Model S, in this scenario, are the automotive equivalent of the original Macintosh: an expensive experiment that will never capture a mass audience. The believers see Tesla as closer to Apple right before the launch of the iPhone: a company about to help propel (and profit from) a massive sea change in consumer behavior.
In large part, those two alternatives ultimately come down to a single, crucial question: how close are we to the obsolescence point for combustion engines? Most scenarios assume that we are not very near indeed. Warren Buffett apparently thinks all cars on the road will be electric by 2030, but most analysts assume it will take us that long just to get to 50% EV penetration. But what if Buffet is correct, and the EV tipping point is right in front of us? What if Buffet is underestimating the rate of change?
The slower timeline would be certifiably insane were we talking about software or hardware platforms. Palm had 35% of the smartphone market in 2005. Today it does not exist. There were zero Android phones for sale in 2005; today Android owns roughly half the smartphone market. Creative destruction; all that is solid melts into air. The old homilies ring truer and truer in the digital realm.
But somehow cars are supposed to be immune from all that. Radical change is not in the nature of the automobile business. After all, the “platform” of fossil fuels has persisted for more than a century.
But Tesla is really a battery and technology company that happens to use batteries and computers and software to control a drive train. As such they are not subject to the same physical and economic constraints.
The Model T introduced in 1908 got roughly 25 miles to the gallon of gasoline. One hundred years later, the average new American vehicle got 20.8 MPG. Where fuel efficiency is concerned, we managed to go backwards over that century. The automobile business simply hasn’t had to confront radical innovation (or it has deliberately suppressed it.) And so the old model continues, unchallenged.
But EVs are reaching escape velocity. Just five years ago, you couldn’t drive 100 miles with an electric motor without re-charging. Today you can drive 300 miles, and you can do it for free, if you plug into Tesla’s solar-powered Supercharger network. Zero carbon emissions; zero cost. The controversy over the New York Times test drive basically revolved around whether the mid-priced Model S could travel 180 miles without recharging in cold weather. That may be a reasonable concern for today’s buyers in northern climates, but from the vantage point of five or ten years into the future, those limitations will seem as quaint as dial-up modems.
Lithium ion battery technology is not likely to advance at Moore’s Law speed, but its current rate of improvement is about 7-8% per year. So the case for an imminent EV revolution is really just about the math. In five or six years, electric vehicles are going to offer 500 miles of range. Assuming solar charging becomes more mainstream over that same period, the proposition for new car buyers will be simple: EVs will have longer range than gas-powered cars, effectively zero lifetime fuel cost, and zero emissions. And if the Model S is any indication, they will likely outperform their gas-based competitors. (The Model S, for instance, does 0-60 MPH in under six seconds.) All of this assumes purely linear improvements in the technology -- with no radical breakthrough in battery storage.
If that is the consumer proposition in five years, there is a real question why anyone would choose a gas-powered car over an EV at that point--assuming the network of plug-in stations grows to accommodate the demand. (The Model S is a luxury car, but Tesla is already working on a low-cost version.) Skeptics talk about the “learning curve” for ordinary consumers driving EVs. But really what you’re learning is that you have to plug your battery-powered device into an outlet overnight. Haven’t we already learned that one by now? Skeptics made the same arguments about the learning curve for Internet adoption too. (Even Jeff Bezos, in his original Amazon business plan, wildly underestimated how quickly online shopping would become a mass consumer behavior.) We live in an age of what Columbia’s Amar Bhidé calls “venturesome consumption”: consumers that are remarkably quick at integrating new technologies and usage patterns into their lives. Besides, most of us are probably willing to scale a moderate learning curve if reaching the summit means never paying another dime for gasoline.
And if that’s the case, then the automobile industry will go through exactly what the computer and software world went through with the rise of the PC, the Web, and the mobile revolutions. Smaller companies that bet heavily on the new paradigm will become dominant in an amazingly short amount of time; behemoths who cling to the old models will swiftly become afterthoughts. The EV revolution will be like Hemingway’s classic line about going broke: it will happen gradually, then all of a sudden.
Tesla is a young company carving out space in a new market, so there are any number of ways it could fail over the next decade. But the convergence of battery technology, climate change, and a “venturesome” consumer market makes me confident that the Apple of electric vehicles is going to emerge from somewhere in the next few years, and right now Tesla is by a wide margin the leading contender. Yes, people have been predicting the EV revolution for decades now. They predicted the “handheld personal communicator” revolution for decades as well. That didn’t make the revolution any less significant when it eventually arrived.
Full disclosure: I write this as, obviously, a big fan of Tesla who owns a small bit of stock in the company, and who would someday love to figure out a way to justify buying one of their cars.