Catching Up to Tesla: Big Auto’s Biggest Challenge
Until Tesla’s success was proven, auto giants took it easy, even poking fun at the crazy CEO who dared to compete in a space they had owned for over a century. They no longer can, but the gap is already tremendously wide. Can they catch up?
It is an often-cited fact that having the first-mover advantage in any industry sets you up for a leadership position in the long run. While that’s partially true, that’s not the full story. You also need the fast-mover advantage.
The Amazon Analogy
One need only look at Amazon to know the truth of this. Although Amazon was not necessarily the first mover in electronic commerce, it did have the fast-mover advantage. Quickly transitioning from selling books to becoming a reseller and then a marketplace, it rattled the traditional retail world like nothing else.
At one point, Amazon grew to become so big that even the world’s largest retailer, Walmart, had to do something about it. Walmart has turned things around nicely after its acquisition of Jet.com; but, for a long time, even that was a touch-and-go move that’s not easy for others to replicate. Walmart has found the sweet spot with omnichannel, but most retail giants continue to struggle with shipping costs, delivery logistics, and inventory management as they attempt to stem the bleeding from customers opting for online versus offline shopping.
Big Auto’s Big Headache
The auto industry is going through a similar phase now. All the major players have billions of dollars laid out for R&D, powertrain systems integration, battery procurement, factory retooling, and everything else that goes with shifting from Internal Combustion Engine (ICE) vehicles to Electric Vehicles (EVs). Many of them have phase-in-phase-out plans in place to ensure that their EV portfolios enjoy the benefits of whatever brand recognition and loyalty that their ICE counterparts have helped build over the past century.
Despite the feverish activity that is spurring ICE-makers toward a pure EV future, Tesla remains virtually unbeatable in the space. And it’s not because of their cars. Yes, Tesla’s line-up of EVs is one of the most impressive around, but the real strength comes from how far into the future the company was able to look, and how it has charted its strategy to fit that long-term vision.
One great example of that is that they own most of the IP behind whatever batteries they use, whether from Panasonic, LG Chem, or CATL. In a sense, these companies are merely fabricators for Tesla’s battery cells. That could change with plans afoot for CATL to jointly manufacture batteries with Tesla, but it will not affect Tesla’s plans to make its own battery cells. The Maxwell acquisition earlier this year was a solid move in that direction.
There’s a reason that the world’s largest lithium-ion and lithium-iron battery makers are all lining up for Tesla’s business: it’s because they understand the sustainability and growth potential of the company better than any investor or analyst.
And that’s more than can be said of any of the European, U.S., or Japanese automakers that own the bulk of ICE market share today. These companies now have to fight each other for battery capacity and/or invest in battery chemistry research to find the Holy Grail that will give them a long-term advantage over the others. And they have to do it with their ICE hands tied behind their backs and a mandate to keep their companies profitable through this seismic transition.
The battery example is just one of many factors that have created this chasm between Tesla and Big Auto. Connectivity and autonomy are two other areas where Tesla is creating a gap between itself and other auto companies.
Some EV players like XPeng, Inc. have taken a cue and jumped straight into the Smart EV bandwagon. And it should see the same kind of success that Tesla witnessed over the past decade because it owns the whole technology stack; the only thing it lacks is the battery tech but it is exploring innovative avenues such as battery leasing and rentals to bring down the cost of its EVs. Even NIO’s battery-swapping is an innovative initiative that will help it get ahead of its competitors. But neither will replace Tesla at the number one spot in the foreseeable future.
Even the mighty Volkswagen has admitted that “Tesla is ten years ahead of the 83-year-old German carmaker in terms of electric car production and software.”
The challenge for Big Auto now is a strenuous and sustained uphill journey just to get to where Tesla is today. Yes, they have billions invested in their respective EV futures but they were largely asleep at the wheel while Tesla was doing all its grunt work, struggling to be cash flow positive and brushing up against potential bankruptcy every now and then — not to mention putting up with the predictably regular negative press coverage that has been a thorn in Elon Musk’s side for several years now. But the success of Tesla speaks for itself and, by the time the auto giants can match Tesla’s current EV output, the figurative goal post will have been moved.
In order for Big Auto to compete on an even level with Tesla, they first have to level the playing field, and that’s a tall order.
They’d have to make tremendous leaps in battery technology, start manufacturing and selling EVs at scale, sign battery acquisition deals to support their sales projections and manufacturing capacities, carefully manage the transition in terms of customer perception, and all the while continuing to show a profit to their investors so their stocks won’t tank.
It’s a massive challenge for any large auto company to pivot on a dime, but that’s exactly what’s required. It’ll take a Walmart-Jet initiative to compete against Tesla in the long run, and that’s something none of the auto giants have been able to do thus far.
The width of that gap is embodied in the YTD sales figures for plug-in electric vehicles in the chart above. Moreover, Tesla has now thrown down the gauntlet with these claims:
Tesla’s ultimate goal is still a $25,000 EV for the mass market, and it won’t be long before they breach that and start moving into the mid-market and low-cost segments with future models.
All these factors serve to further expand the chasm that auto giants will need to cross before any of them can viably compete against Tesla — and that’s Big Auto’s Biggest Challenge for the decade ahead.
