Tesla: Analysis of the company through the product
Let’s first start with what this publication is and is not. I’m starting this publication as a way to put my analysis and opinions in a structured format for everyone to view. What good are thoughts if they can not be properly communicated to others? All opinions (unless otherwise cited and stated) are my own. I encourage readers to refute and contradict my opinions and analysis, as it helps me learn and grow too.
I do not intend for this publication to be used for investing purposes. There are too many factors into what goes into a “good” investment and a “bad” investment, from management to financials to strategy. I specifically want to focus on a narrow aspect of business and product strategy with respect to technology companies. What constitutes a technology company? Good question. Which leads me to my first ever analysis: Tesla.
Tesla. Electric Cars. Powerwall. Solar panels. Which one doesn’t belong? On one side, you can say none of them belong. On the other, you could argue that all of them belong. Tesla has a surprising number of products and for the purposes of this piece, I’d like to focus on the electric cars it produces. Why? Because these are the most interesting to me and I believe holds the most immediate realized potential for Tesla (Powerwall and battery tech I think is just not there yet and the Solar City acquisition didn’t bring much besides an interesting financing model for industry standard solar panels).
Before we begin to analyze the actual product, design, and strategy of the Tesla cars (Model S, Model X, Model 3), we need to first look at consumer desires, the history of the electric car, and how Tesla is iterating on the current electric car to achieve consumer goals.
First looking at a car in general, what does a consumer want? Well, first and foremost, transportation. A reliable way to get from point A to point B without breaking down. Next is speed. How fast you get somewhere if you’re in a rush is crucial. But also for non-utilitarian purposes, such as racing. But there’s a difference between a theoretical speed limit and legal speed limit, which is interesting to note (that’s a conversation for another day). Then you start to get into amenities, such as storage space, entertainment system, seat material, remote unlock, etc. One interesting thing to note is I never mentioned fuel source. At the end of the day, unless you are an environmentalist, who cares if you are burning gas or consuming electricity or something in between. As long as it’s relatively cheap and is convenient to get, why would a consumer really care?
So then that comes into the history of the electric car. Electric and hybrid cars have historically been marketed as a way to “save the planet” while saving money. Are you really saving the money (or the planet)? There are environmental risks to not recycling batteries properly. And, depending on your driving habits, you’re saving on average a few hundred dollars after paying a relatively large upfront cost. I believe there are cost savings long term with a hybrid but it’s not as much as people would expect. Which then leads me to Tesla’s products: it was never about the fuel economy or cost savings but about a great product.
Historically, Tesla started off with the Roadster. You might not remember this car but it was Tesla’s first production car that was more sports car than anything. It had cool, convertible stylings. It wasn’t subdued or practical like a Toyota Prius Hybrid. The Roadster was a marketing stunt for sure. But it was not a marketing stunt for an electric powered car. It was a marketing stunt for a sports car that happened to be powered by an electric motor and battery.
Next was the Model S and Model X. These were the classy, practical sisters to the Roadster. These were designed to compete with high end BMWs and Mercedes. They hit all the checkpoints of a fast and comfortable ride with extra amenities focussing on the experience, such as semi-autonomous driving (more on this “feature” later). Again, note how they focused on the customer experience. Going back to my previous point: who cares that this car could be powered for 200 miles by electricity? What people actually cared about was 0 to 60 time. People cared about the storage space (a regular trunk AND a frunk!). People cared about the infotainment system and how GOOD it actually was. People cared about the amazing safety features. It was genuinely a great car, regardless of the battery or not. People saw past the “boring and slow” stereotype of electric cars and saw this high end, elegant, and functional car.
Now, what’s the one caveat that I mentioned earlier about fuel sources? Cheap and convenient. Electricity in general has gasoline beat in price, that’s pretty clear to see. But convenience? That’s where I think Tesla is sorely lacking. They have a Supercharger network but it‘s not built out (yet). (Interestingly enough, there are no super chargers within 10 miles of me in Seattle) Which means charging is actually inconvenient because you can really only charge at home reliably. Or you must plan your roadtrip around Superchargers. I think this is where Tesla’s strategy (or lack thereof) is pretty abysmal. Long roadtrips? You probably need a second car.
See, Tesla’s strategy was never to sell a regular car with a battery in it. That would lead to the same product as a regular car but with a different fuel source. Tesla knew no one wanted to spend a lot of money upfront to save pennies on the dollar with electricity all while being inconvenienced. They knew they had to redesign a car from the ground up that was desirable, that people would suffer through all the inconveniences of the electric car for what they saw as an amazing machine.
This then leads me to Tesla’s strategy: the long con. They aren’t looking to build a Toyota Camry without a gas tank. The only thing they are truly taking inspiration from is the shape. Everything else under the hood, from the motor to the technology to the driving experience to the manufacturing is all changing. Have you ever noticed that they don’t release “years” anymore? You don’t hear about the 2016 Tesla Model S with features X, Y, Z. No, as soon as they complete a feature, they add it onto every new Tesla being produced. No need to wait a year cycle to get the newest car.
The Model 3 then becomes an interesting dynamic. On one hand, the starting price is $35,000, still out of reach for most average Americans. At that price point, it’s competing with the BMW 3 Series or the Mercedes C class. But is it really? On the surface, the base Model 3 is pretty barebones. But there are so many packages, like the enhanced autopilot. The Model 3 isn’t made to look like luxury. Which, when you think about it, doesn’t really make sense at the price point or for the inconveniences. Tesla also doesn’t market the heck out of low maintenance costs or fuel savings. So what’s the reason for the high price? (Pricing in general is all speculative and very hard to deconstruct but reveals a lot about strategy when you compare to competitor pricing)
I believe two. One is how unprofitable Tesla currently is. The initial estimates were break even cost of each Model 3 was about $40,000. I bet the break even cost is currently less due to economies of scale and the north star metric of 5000 units produced per week. But I think the price point is still at an “early adopter” price point. Both the car and battery manufacturing techniques are still very much under development and an integral part of Tesla’s competitive moat. It’s not easy to produce batteries let alone a well made car with batteries. Either way, there’s a bigger reason for a high price.
The car owning experience.
Just like Apple, the sum of the parts don’t really tell the whole story. It’s about the seamless experience, from the buying at the retail store to the software and hardware development to updates and maintenance. Tesla is taking a page out of Apple’s book and doesn’t prioritize marketing of the pure technical specs (although it does for cars like the Roadster or the performance package). Tesla markets the brand. Tesla markets the seamless experience. Tesla markets the whole package, from the lifestyle to the panoramic sunroofs to the advanced technology. Tesla markets the simplicity of everything working for the Model 3.
Do I think the strategy is working? We’ll just have to wait and see.
