Two years before the release of Tesla’s long-awaited $35,000 Model 3, Tesla finds itself at another crossroads that may threaten the company’s welfare.
Things are not looking too good for Tesla these days. One of the most painful developments was Consumer Reports’ decision to remove its “recommended” rating and downgrade it to “worse than expected.” The magazine had once rated Tesla the best ever tested.
The month of September will mark a turning point as to whether Tesla Motors will be just another overhyped technology stock or whether it is truly about to lead a revolution in the auto industry.
The month will mark the introduction of Tesla’s Model X, a $90,000 crossover SUV that will test the company’s ability to compete against the other automobile giants. If it passes this test, Tesla will be in a great position to mass-market the $35,000 Model 3 sedan when it goes on sale in late 2017. If the Model X turns out to be a dud, however, Tesla will face a much tougher climb in trying to break into the mainstream with the Model 3 two years from now. At stake will be Tesla’s market capitalization of $31 billion – higher than Chrysler’s – plus that $1 billion “gigafactory” the company is building in the Nevada desert to supply batteries for the anticipated sales of the mid-range Model 3. Plus the home -energy storage market.
The possible success of Models X and 3 is so unprecedented that it has caused economists to revise one of the most cherished theories of economic change, the idea of “disruptive technology.”
The idea of disruptive technology comes from the 1997 book by Harvard Business School economist Clayton Christensen and has made the phrase one of the most popular buzzwords in the field of economic progress. The title of Christensen’s book, “The Innovator’s Dilemma,” described how well-established companies often miss important transitions when newcomers break into the market with simplified products targeted at the bottom end. Christensen used the success of personal computers and steel mini-mills to illustrate how newcomers entered the field with cheaper and more convenient products targeted well below those segments claimed by leaders such as IBM or U.S. Steel. Eventually the upstarts toppled the giant.
There’s just one problem in positing Tesla as a disruptive technology: It has been overwhelmingly aimed at the richest auto customers, rather than the poorest. This prompted another Harvard B-School professor, Thomas Bartman, to write an article in the May issue of the Harvard Business Review arguing that Tesla is not disruptive but just another high-priced item aimed at biting off a luxury end of the market. Bartman argued that Tesla is too expensive to be disruptive, but that golf carts and those minimalist electric vehicles being produced in China were the true disrupters of automobile technology. They would catch on as courtesy vehicles for motoring around senior citizens’ centers and eventually upgrade to an urban vehicle convenient for making short shopping trips and finding a place to park.
This challenge has prompted other economists to revise the theory of disruptive technology and to create a new category into which Tesla easily fits. This is known as “high-end disruptors.” Jeff Dyer and Hal Gregersen make the elaborate case, in Forbes, that Tesla is only one of many new high-end disruptors whose chances for success are just as likely as those disruptors coming in from the low end of the market:
Unlike classic disruptive innovations such as steel mini-mills, personal computers and, in the car business, cheap Japanese imports, Tesla never pursued the classic route of going after low-end, price-sensitive customers first with cheaper, inferior technology. It doesn’t pursue nonconsumption, or customers who don’t currently drive cars. Tesla automobiles look and drive much like other cars, use established infrastructure like roads and confine much of their product innovation to only one aspect: the power system.
… Tesla has instead proved to be a different kind of disruptor, a high-end version that can be just as troublesome for the incumbents …
High-end disruptors produce innovations that are leapfrog in nature, making them difficult to imitate rapidly. They outperform existing products on critical attributes on their debut; they sell for a premium price rather than a discount; and they target incumbents’ most profitable customers, going after the most discriminating and least price-sensitive buyers before spreading to the mainstream. If you look within some large companies, you can flesh out previous examples: Apple’s iPod outplayed the Sony Walkman; Starbucks’ high-end coffee drinks and atmosphere drowned out local coffee shops; Dyson’s vacuum cleaners now have solid market share; Garmin’s GPS golf watches have taken much of the business from range finders. The incumbents didn’t react fast enough, and the high-end disruptors took over their market.
So it may be with Tesla. The company may not just disrupt the auto market but may force a revision of one of the most cherished new economic theories — that disruptions must always come from the bottom. Once again, Elon Musk may have outfoxed the experts. But it will all depend on how automobile consumers start responding to the new models targeting the mainstream.
By next month we should start to find out.
- Tesla continues to walk the tightrope
- Is this golf cart more disruptive than Teslas?
- Is Elon Musk a welfare king?
- Tesla hits some speed bumps
- Tesla going at full speed, but it has competition
One simple slide in a PowerPoint presentation by a Tesla official at an auto convention in Washington this month did almost as much damage as Elon Musk’s rocket blowing up soon after liftoff.
JB Straubel, chief technological officer and co-founder of Tesla Motors, put up a slide on June 15 indicating that Tesla’s Model 3 would not “begin production until 2018.” This apparent delay set the new vehicle back from the previously announced deadline of 2017 and almost knocked the company for a loop. The website Inside EVs broke the story, as it were, and word of the PPT slide was repeated in countless news stories. The interpretation was clear: Once again, Tesla had been forced to postpone key product rollout.
Within hours, Tesla had assured investors and analysts that it was not changing its schedule. The $35,000 Model 3 will be available in 2017, as previously planned. “Contrary to speculative blogger reports, we still plan to show Model 3 in 2016 and begin production in 2017,” Ricardo Reyes, vice president of communications, tweeted. The statement about production in 2018 was said to refer to “full production,” an attempt at back-filling that many analysts viewed with a grain of salt.
Whether the reference to 2018 was just a typographical error or an inadvertent peek under the kimono, the controversy showed how delicately balanced Tesla’s position is, both in terms of meeting customer expectations and in raising money to continue its projects.
Missing deadlines would certainly be nothing new for Tesla. In February 2012 the company said its crossover Model X would be available by the end of 2013. In February 2013, it said it would be late 2014. In November 2013 the company announced that a small number would be available by the end of 2014, but actual deliveries would not begin until the third quarter of 2015. Everyone is waiting to see if this deadline will be kept. Meanwhile, speculation has increased that any delay in the debut of the Model 3 may be due to the resources that have been spent trying to get the Model X out the door.
The Model 3 is Tesla’s bid for the big time. The car is projected to have a range of 500 miles and would be priced at the aforementioned $35K, less than half of the $79,570 MSRP of the 2015 Tesla Model S. The Model 3 is intended to be a mass-market sedan that’s well within the reach of the average car buyer. Musk, Tesla’s flamboyant co-founder and CEO, hopes to sell 500,000 versions of the Model 3 by 2020, a feat that could put Tesla on a firm financial footing.
But there are pending obstacles. One is the Chevrolet Bolt, a plug-in all-electric that is the successor to the Volt, a plug-in hybrid. GM demonstrated the Bolt in a sample model this month and will also be priced in the $35,000 range. GM promised to have the Bolt on the market by early 2017, which would beat Tesla’s Model 3 out of the gate.
Whether electric-car buyers will be attracted to the Bolt – or whether they will wait for what will almost certainly be a superior product from Tesla – is a hotly debated question. “GM is ramping up to make 20,000 Bolts. Tesla is ramping up to make 500,000,” said one commenter to a Wall Street Journal story. “When a company names its new car the ‘Bolt,’ Tesla has little to worry about,” said another. But other readers cited GM’s superior service network, and the company’s long history of making money, while Tesla has only lost money.
One thing is certain: Tesla is building brand loyalty. A survey of 145 Tesla owners by automotive analyst Dan Dolev of Jeffries found that 85 percent said their next car would also be a Tesla, and 25 percent wouldn’t even consider another brand. Eighty-three percent said they would recommend Tesla to their friends, and a remarkable 89 percent said they would still buy a Tesla without the $7,500 federal government tax break. The owners also turned out to be not nearly as rich as expected. Almost 70 percent had previously owned cars that cost less than $60,000, including ones as modest as a $15,000 Toyota Highlander. They paid an average premium of 80 percent over their previous car when they bought a Tesla. As a result of the survey, Jeffries raised its target price for Tesla stock to $350 from its current $265.
The battery-producing Gigafactory outside Reno is moving ahead on schedule, with the first phase of the structure near completion and machinery is about to be moved in. The current phase represents only 14 percent of the planned layout. Once completed, the Gigafactory will be the largest building in the world, with a footprint of 5.8 million square feet and two stories of manufacturing totaling 10 million square feet. Panasonic, Tesla’s battery partner, is expected to send hundreds of workers to the site this fall to prepare for full-scale production. The factory will also employ hundreds of local workers.
Wall Street Journal columnist Charley Grant threw a wrench into the works recently when he wrote that Tesla is still burning through cash and probably will run out of money if the Model X does not sell as expected. He says the company should sell another issue of stock while the price is still high. He suggested that a price of $200, 25 percent below the current market rate, could raise $750 million and carry the company over to the introduction of the Model 3.
Whether the company will dilute ownership or take a chance that Model X sales will reverse its cash flow is just one of the many decisions Musk will be facing in the near future. One thing is certain: He will be balancing atop that high wire for several years to come.
Elon Musk’s dream of revolutionizing the auto industry seemed to lose some of its luster last week as the fledgling electric car company ran into a few roadblocks in getting its new models into consumer hands.
The $35,000 Model X is scheduled to be leaking out to a few early customers late this year. Then full-scale production will begin in 2016. But already there is talk of delays and missed deadlines, so there might be an asterisk attached to those numbers soon.
The ultimate goal is selling 50,000 Model X’s by 2017, which still seems way over the horizon. A lot of those sales were supposed to come from China, and that’s developing into a problem. Musk was in China last week talking things over with Zhao Kuiming, head of Tesla’s China sales division, but Musk has already decided to “reboot.” It appears that Chinese buyers are still spooked by the lack of recharging stations, even though there have been a few grand openings around Beijing. Tesla was hoping to sell between 4,000 and 8,000 models in China in 2015, but only 120 cars were sold in January. Musk has cut the China staff from 600 to 420 and is recalculating just what can be expected from the Middle Kingdom. The tastes of the few Chinese millionaires who could be counted on to purchase the Tesla as a status symbol aren’t going to get him very far.
All this has spooked investors as well. They’ve driven the price of Tesla stock down nearly 20 percent since the start of the year. Once the highest flyer on the market, Tesla peaked at $293 a share last September, but it’s been a long descent ever since. Prices lingered around $180 per share last week. Even then, Tesla is trading at 232 times its expected earnings for 2015. The average stock on the NASDAQ, where it trades, is 21 times earnings. All this has lifted the short interest on Tesla stock to 27 percent of floating shares. The average on the NASDAQ, once again, is only 5 percent.
Nevertheless, all this could turn around quickly. Tesla already has 20,000 pre-orders on the Model X, and there is every reason to think its release could revolutionize the industry, much as Musk says. As it is emerging, the Tesla is going to be a device much more attuned to electronics and Silicon Valley as it is to Detroit and the auto industry. Musk is already introducing over-the-air (OTA) updates of the car’s software in a model, much more like an iPad than a Ford Focus. All those features you see advertised by the major automakers — rearview cameras, automatic emergency braking — will be standard in the Tesla. Musk is already talking about an automatic driving feature that will allow drivers to guide the car hands-free on Interstate highways. Of course, there are lots of state regulations that will have to be satisfied before this feature can go into effect. California, Nevada, Michigan, Florida and Washington, D.C., already have laws allowing driverless vehicles driving, but it’s unclear how Tesla’s system will be judged under these statutes.
Also decided at the state level is the question of whether Tesla can sell directly to customers or must work through established car dealerships. These laws are generally put into effect at the behest of local dealers to prevent the major auto companies from setting up their own shops. But Tesla has run afoul of the law in many states. The company just won a major victory when New Jersey Gov. Chris Christie came down in favor of Tesla. Georgia has also opened its doors to direct sales at five stores. But West Virginia has gone in the opposite direction, banning sales of Tesla altogether. There probably aren’t that many potential Tesla customers in West Virginia anyway.
Perhaps the unkindest cut came from Wall Street Journal columnist Holman Jenkins, who wrote a piece titled “Tesla: Just Another Car Company.” If you wanted to insult Elon Musk, you could hardly do better. “Elon Musk has proved that a market exists for electric cars, despite their many inconveniences, especially if they come wrapped in taxpayer subsidies,” Jenkins wrote. “But he hasn’t proved he can make a profit.”
Jenkins sees the Tesla operating in a niche market, in which a small percentage of customers are willing to ignore the problems in order to be “green.” Once this niche is filled, however, the market will thin out quickly. “Uber is disruptive,” he writes. “Tesla isn’t. Tesla is disruptive mostly of a driver’s confidence that he’s going to reach his destination without needing a tow.”
Yet this perspective is probably too negative of Tesla, and electric cars in general. There are people whose driving needs it fits perfectly. “I own a Tesla. It is beyond spectacular,” wrote one of the commenters to Jenkins’ piece. “The car has Di Minimus maintenance as there is nothing to break.” “That is why I bought a Tesla,” says another. “At 270 miles to start with, range anxiety is not my problem, yet. I rarely drive over 100 miles in any given day, and if I needed to, my Chevy Tahoe is still in the garage.” I have friends in Baltimore who bought a Nissan Leaf as a second car to tool around the city and love it.
So Tesla may just be filling a niche, but it is still a sizable one. Infrastructures can change a lot faster than we anticipate, especially where there is a demand for it. Tesla’s stock may be overvalued and due for another nosedive. But the company is still making big changes in the way we power our cars.
Morgan Stanley auto analyst Adam Jonas has been bullish on Tesla Motors. But he added to the company’s woes Wednesday when he slashed its sales outlook in the face of falling oil prices.
Jonas predicts that the luxury electric-car maker will only be able to sell 300,000 vehicles by 2020.
Cheap gas prices could be partly responsible, since the narrative at the start of this month was that plunging prices had contributed to consumers returning to their SUV- and pickup-loving habits. (Electric vehicles didn’t sell badly in November either, particularly the Nissan Leaf.)
But this segment in CNN Money’s story presents an other interesting angle:
The biggest drag on Tesla sales will be the lower-priced, mass market Model 3 expected in showrooms in about three years.
Jonas’ doubts that Tesla will be able to price the Model 3 in the $35,000 range as many have been expecting. He’s now thinking the price could be closer to $60,000.
Tesla’s philosophy is that it won’t put out a vehicle that doesn’t meet its own, and founder Elon Musk’s, high expectations. See this post from November, about how the company wasn’t bothered about delaying production of the crossover-utility vehicle Model X, which is now expected in showrooms until the third quarter of 2015.
Tesla’s stock has fallen precipitously since Sept. 4, when it was $286.04. It closed at $197.81 on Tuesday.
Elon Musk announced that Tesla will deliver 100,000 electric vehicles in 2015. This is a big jump up from the 22,000 vehicles Tesla produced in 2013 and the 34,000 projected for this year.
The Energy Information Administration has done us an enormous favor by producing a simple chart to make sense of where the development of energy storage technology is going. Energy storage, as the EIA defines it, includes heat storage, and a quick look at the chart reveals that those forms that involve sheer physical mechanisms – pumped storage, compressed air and heat reservoirs – are much further along than chemical means of storage, particularly batteries.
The EIA divides the development of technologies into three phases – “research and development,” “demonstration and deployment” and “commercialization.” It also ranks them according to a factor that might be called “chances for success,” which is calculated by a multiple of capital requirements times “technological risk.”
As it turns out, only two technologies that could contribute to transportation are in the deployment stage while three more are in early development. The two frontrunners are sodium-sulfur and lithium-based batteries while the three in early stages are flow batteries, supercapacitors and hydrogen. The EIA refers to hydrogen as one of the ways of storing other forms of energy generation, particularly wind and solar. But hydrogen is also being deployed in hydrogen in hydrogen-fuel-cell vehicles that have already been commercialized.
Other than building huge pumped-storage reservoirs or storing compressed air in underground caverns, the chemistry of batteries is the most attractive means of storing electricity, which is the most useful form of energy. Batteries have always had three basic components, the anode, which stores the positive charge, the cathode, which stores the negative charge, and the electrolyte, which carries the charge between them. Alexander Volta designed the first “Voltaic pile” in 1800 by submerging zinc and silver in brine. Since then, battery improvements have involved finding better materials for all three components.
Lead-acid batteries have become the elements of choice in conventional batteries because the elements are cheap and plentiful. But lead is one of the heaviest common elements and becomes impractical when it comes to loading them aboard a vehicle.
The great advantage of lithium-ion batteries has been their light weight. The lithium substitutes for metal in both anode and cathode, mixing with carbon and iron phosphate to create the two charges. Li-ion, of course, is the basis of nearly all consumer electronics and has proved light and powerful enough to power golf carts. The question being posed by Elon Musk is whether they can be ramped up to power a Tesla Model S that can do zero-to-60 with a range of 300 miles.
Tesla is not planning any technological breakthrough, but will use brute force to try to scale up. Enlarging li-ion batteries tends to shorten their life so the Tesla will pack together thousands of small ones no bigger than a AA that will be linked by a management system that coordinates their charge and discharge. Musk is betting that economies of scale at his “Gigafactory” will lower costs so that the Model X can sell for $35,000. According to current plants, the Gigafactory will be producing more lithium-ion batteries than are now produced in the entire world.
In the sodium-sulfur battery, molten sodium serves as the anode while liquid sodium serves as the cathode. An aluminum membrane serves as the electrolyte. This creates a very high energy density and high discharge rate of about 90 percent. The problem is that the battery must be kept at a very high temperature, around 300 degrees Celsius, in order to liquefy its contents. A sodium-sulfur battery was tried in the Ford “Ecostar” demonstration vehicle as far back as 1991, but it proved too difficult to maintain the temperature.
Flow batteries represent a new approach where both the anode and cathode are liquids instead of solids. Recharging takes place by replacing the electrolyte. In this way, flow batteries are often compared to fuel cells, where a steady flow of hydrogen or methane is used to generate a current. The great advantage of flow batteries is that they can be recharged quickly by replacing the electrolyte, rather than taking up to 10 hours to recharge, as with, say, the Chevy Volt. So far flow batteries have relatively low energy density, however, and their use may be limited to stationary sources. A German-made vanadium-flow battery called CellCube was just installed by Con Edison as a grid-enhancement feature in New York City this month.
Supercapacitors use various materials to expand on the storage capacity devices in ordinary electric circuits. They have much shorter charge-and-discharge cycles but only achieve one-tenth of the energy density of conventional batteries. As a result, they cannot yet power vehicles on a stand-alone basis. However, supercapacitors are being used to capture braking energy in electric trams in Europe, in forklifts and hybrid automobiles. The Mazda6 has a supercapacitor that uses braking energy to reduce fuel consumption by 10 percent.
The concept of “storage” can be also be expanded to include hydrogen, since free hydrogen is not a naturally occurring element but can store energy from other sources such as wind and solar. That has always been the dream of renewable energy enthusiasts. The Japanese and Europeans are actually betting that hydrogen will prove to be a better alternative than the electric car. Despite the success of the Prius hybrid, Toyota, Honda and Hyundai (which is Korean) are putting more emphasis on their fuel cell models.
Finally, methanol can be regarded as an “energy storage” mechanism, since it too is not a naturally occurring resource but is a way to transmit the potential of our vast reserves of natural gas. Methanol proved itself as a gasoline substitute in an extensive experiment in California in the 1990s and currently powers a million cars in China. But it has not yet achieved the recognition of EVs and hydrogen – or even compressed natural gas – and still faces regulatory hurdles.
All these technologies offer the potential of severely reducing our dependence on foreign oil. All are making technical advances and all have promise. Let the competition begin.