The Harvard Business Review this week published an opinion piece by Lou Shipley, a lecturer in technology sales at Harvard Business School and MIT’s Sloan School of Management, analyzing why Tesla has been able to disrupt the traditional auto industry and become a darling of Wall Street. He argues that Tesla has built a four-way advantage over traditional automakers.
The following is the full text of the article:
Tesla’s recent breakthrough market performance suggests that skeptics may have misjudged. By mid-January, Tesla had a market capitalisation of $107 billion, surpassing German car giant Volkswagen as the world’s second-largest car company after Toyota. Tesla’s valuation now exceeds forford and GM combined. Wall Street sceptics may be shocked, and Tesla’s innovative business model poses a threat to the survival of the entire auto industry. Why is this so? Marc Andreessen, co-founder of Anderson Horowitz, a well-known Silicon Valley venture capital firm, famously asserted in a 2011 article: “Software is eating the world.” “Actually, software is one of Tesla’s great strengths.
In today’s software-centric world, traditional auto makers are not well prepared for competition. Unlike flexible Teslas, they are large, bureaucratic, slow to respond to customer needs, rely on traditional automotive financial services to drive sales growth, and culturally very different from software companies.
They know that, too. Last fall, Volkswagen, still teetering in the wake of the car emissions scandal, declared Tesla a “major competitor.” The biggest challenge for VW and other traditional auto makers is a lack of expertise to compete in the software-based automotive era. Tesla and high-profile innovator Elon Musk have upended a more than century-old industry in just 16 years.
Why did this disruption happen so quickly? We can see how traditional automotive industry leaders have achieved what they are today. In the 1920s, there were about 200 manufacturers in the automotive industry. Subsequently, this fragmented market gradually integrated, forming several industry giants. These giants use huge capital to build industry barriers that they believe are unbreakable.
Tesla’s innovation in the high-end car market is more like Google and Amazon than traditional car companies. Tesla’s soaring market capitalisation sends a clear signal to all automakers that they need to build a more innovative, Tesla-like business model to survive.
Tesla is doing better than conventional automakers in at least four ways:
1, Tesla to similar software products to develop cars
Tesla develops cars by developing software on unique hardware. This is similar to the way Apple developed the iPhone or Microsoft’s use of Intel chips and Dell PCs. As a result, Tesla can optimize software features in cars every few weeks. This is completely different from the traditional model of the automotive industry. In the past, after you buy a car, the car will remain the same for a long time.
With fewer parts, The total cost of ownership of Tesla cars is significantly lower than that of fuel cars. Owners don’t have to pay too much to change oil or spark plugs. Automakers are actually well aware of this and make a handsome profit from the after-sales service of cars.
2, Tesla simplifies the purchase process, lets consumers take control of everything
Instead of advertising in newspapers or on radio, Tesla has adopted a sales model for similar software. Tesla knows that consumers are smart, so they’re just trying to find them. They are well aware of the buyer’s shopping decision-making process.
Buying a Tesla car is easy. All you have to do is go online, pick a model, add features, pay a deposit, and book pick-up times. By contrast, when buying a Japanese-branded car, you need to communicate with the salesperson, who doesn’t give a price directly. He will constantly go to the manager to talk to the new discussion about the right price. When the customer picks up the car, the salesperson will also want the customer to give 10 points of praise so that he can get the bonus.
3, using the power of battery technology, Tesla to minimize the total cost of ownership of the vehicle life cycle
Tesla’s electric car is much simpler than a fuel car. Industry insiders estimate that Tesla electric cars have only about 20 components, compared with about 2,000 in conventional fuel vehicles. This simplification significantly reduces the cost of ownership. Tesla recently acquired several battery manufacturing companies and applied these technologies to its own vehicles, potentially further reducing retention costs. While other automakers are also trying to build on their battery expertise, they will remain in a catch-up position as the market evolves.
4, adhere to environmental protection, to deal with global warming, Tesla occupied the market trend
From a marketing perspective, Tesla already has a big advantage in some areas. Everyone wants to use a car that’s pollution-free, doesn’t need to go to a gas station, and is really green. It will take a long time for other manufacturers to catch up in this area.
In this case, what should the automotive industry do? Traditional carmakers will offer more electric cars in the 1920s, but not necessarily software cars. These products are just conventional cars with electric motors.
To be sure, software cars are a security risk, just like any other connected technology. But by modeling and managing these risks more efficiently, Tesla can consolidate its leadership.
Now, traditional auto makers must think about how to transition to software companies. Yet given the situation of these companies, they are like traditional software companies facing the challenges of start-ups. They can only acquire competitors and drive market consolidation. We should be looking at this activity, because such integration is likely to be imminent.