The Trouble Competing with Tesla
Consider a world where traditional carmakers make good electric cars. Would that be enough, or have competitive moats weakened?
How disruptive is Tesla to legacy automakers? That depends on what specifically makes Tesla competitive, and which advantages extend into a future in which legacy carmakers learn to manufacture good electric vehicles.
Today, Tesla’s differentiators include the electric drivetrain, the dashboard, over-the-air software updates, “Autopilot,” and a dealer-free, app-based buying experience. Which of these will remain uniquely theirs, and which will continue to matter?
Legacy carmakers are trying to challenge Tesla’s dominance of the EV space. Notably, Ford recently announced a fully electric version of the Mustang, called the Mach-E [0]. A newly-designed EV christened with a storied brand, the crossover represents a natural experiment for understanding what challenges lie ahead in commercializing EVs.
Failure Modes among EV Launches
There are several classes of questions for legacy automakers to address in making and selling a successful EV model. Failure modes can include:
- EV manufacturing questions, focused mainly on the drive train. Batteries, motors and drives replace the gas engine, fuel injection system, transmission, etc.
- Questions relating to user experience, increasingly software-mediated, such as dashboard and over-the-air software updates. It is easy to underestimate the amount of organizational and cultural retooling legacy carmakers might need to undergo to compete on these.
- EV supply chain questions, focused mainly on securing battery packs. Daimler denied recently-circulated rumors that it slashed production targets for its Mercedes EQC [1].
- Sales network incentives questions, focused on legacy carmakers’ reliance on their dealer networks and new approaches to selling and servicing EVs. For a dealer, much of a customer’s lifetime value is tied up in service revenue. An EV, with its electric drivetrain, has fewer moving parts and requires far less service. Can legacy carmakers induce dealers to push EV models?
Possible Lessons from Mach-E’s Launch
There are three possible outcomes of the Mach-E experiment, laid out from best news to worst possible news for legacy carmakers.
Scenario A: Ford’s Mach-E is a Good Car and a commercial success. This suggests that legacy carmakers have nailed problems 1–4 above. Tesla no longer owns the EV game. This is very good news for legacy carmakers.
Scenario B: the Mach-E is a Bad Car. This suggests gaps somewhere in 1 and 2, above. It does not necessarily point to problems with the legacy carmaker’s business model, but rather their ability to innovate products. Retooling a production line and hiring a new design team is easier than blowing up a dealer network needed to sell models accounting for 75%+ of the company’s revenue over the next decade. Depending on specifics, this is bad news for legacy carmakers.
Scenario C: the Mach-E is a Good Car but a commercial failure. Problems here sit in either 3 or 4, above. Legacy carmakers cannot secure the necessary supplies (e.g., battery packs) at the right price and scale, or they cannot work out how to sell these through their existing dealer networks, because the dealers make less downstream service revenue on EVs than on traditional ICE models. This is true disruption as envisioned by the late Clay Christensen [2], and is the worst case for legacy carmakers with extensive dealer networks.
Ford’s many mouths to feed
Scenario C (above), of product development success but business model failure, would indicate significant legacy carmaker blood in the water. Large dealer networks, necessary to sell and service traditional cars, also functioned as competitive moats to keep new carmakers at bay. If dealers resist selling EVs because of lower service requirements, then these networks will instead become disadvantages to legacy automakers.
Depending on how this plays out, new entrants will see opportunities to enter legacy carmakers’ established markets without having to invest in extensive dealer networks.
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