🥇How Tesla Could Become The World's #1 Automotive Co.🥇 Summary
Over the next decade, the automotive industry will be turned on its head. Individual ownership of gasoline cars will give way to autonomous ride-hailing of electric cars.
Tesla is better positioned than any other company to thrive under this new model. It has a lead in all three components: electric cars, self-driving cars, and autonomous ride-hailing.
Tesla is the leading manufacturer of electric cars. Other car manufacturers will struggle to make the transition to selling electric cars due to their distribution model.
Tesla has the lead in driving data, which is critical to the development of self-driving cars. Unlike other car manufacturers, it also has a software culture.
Tesla is already stealthily deploying its autonomous ride-hailing fleet in the form of customer cars. These cars are designed with autonomous ride-hailing in mind.
Change is a comin’ to the automotive industry.
Independent technology think tank RethinkX predicts that self-driving electric cars will account for 95% of miles driven in the United States by 2030. The Rethinking Transportation report authors argue that a “Big Bang disruption” starting in 2021 will rapidly overturn the automotive industry’s current business model of selling gasoline cars to human drivers.
A new model will emerge wherein passengers use a smartphone app to hail rides from shared fleets of self-driving cars. All of these cars will be electric because electric cars last longer, require less maintenance, and cost less to power than gasoline cars. The new model, then, has three components:
- Electric cars
- Self-driving cars
- Ride-hailing
Tesla (TSLA) is better positioned than any other company in the world to take advantage of this transition. Tesla is building the full stack: 1) it’s the leading manufacturer of electric cars, 2) it collects more data for the development of self-driving than any other company, and 3) it has announced plans for an autonomous ride-hailing service called the Tesla Network.
RethinkX forecasts the rapid adoption of transport-as-a-service (TaaS), i.e. ride-hailing with self-driving electric cars. Source: Rethinking Transportation.
Importantly, Tesla has a clear, viable path from its current business model to a business model centred around the Tesla Network.
- First, Tesla can continue to develop and build up production capacity for electric cars by selling those vehicles to customers.
- Second, Tesla can train and test its self-driving software en masse using customers’ cars.
- Third, Tesla can launch the Tesla Network at an instantly large scale by turning customers’ cars into fleet cars (and sharing revenue with customers).
Electric cars: No clear path forward for incumbents
Competitors get tripped up at step one. Technology companies like the Alphabet (GOOG, GOOGL) subsidiary Waymo are completely dependent on incumbent car manufacturers like its partner Fiat Chrysler (FCAU). And incumbent car manufacturers, for their part, are locked-in to a car dealership model of distribution. This distribution model is antithetical to the sale of electric cars.
Only 28% of car dealership’s gross profit comes from selling new cars. 47% comes from servicing those cars after they’re sold. One of the same factors that makes electric cars well-suited to the autonomous ride-hailing model — low maintenance costs — makes them ill-suited to the car dealership model.
Tesla has avoided this problem by using a direct sales model. It operates its own stores, inspired partly by Apple’s (NASDAQ:AAPL) stores, and you can order a car directly from Tesla’s website. Moreover, CEO Elon Musk says, “Our aspiration would be we make zero service revenue because the car never breaks.” This means that Tesla can continue to develop and sell electric cars like the Model 3 and the forthcoming Model Y at high volume without worrying about its distribution model.
Credit: Michael J. Coren, Quartz.
Incumbent automakers, on the other hand, don’t have any clear or easy path to selling electric cars at high volume. Transitioning to a direct sales model would not only anger and alienate dealers, it would require changing laws in many U.S. states. Alternatively, incumbents could attempt to reform the business model of car dealerships. This sounds like it could be a slow and difficult process that may be met with resistance from dealers.
It’s worth noting that incumbent automakers don’t seem all that committed to making electric cars in any case. Incumbents have announced relatively modest plans to produce them. At Volkswagen (OTCPK:VLKAY), one such plan has reportedly been met with internal resistance from executives.
Self-driving cars: Tesla has advantages in data and culture
Tesla has vastly more driving data than any other company. While the test fleets of Waymo or GM’s (GM) Cruise Automation number in the hundreds, Tesla has both internal test vehicles and approximately 70,000 customer vehicles equipped with the sensors and computing hardware that Tesla believes is sufficient for full self-driving. Every new car produced by Tesla since October 19, 2016 comes with the hardware as standard.
Since 2012, all of Tesla’s cars have received over-the-air software updates, like a laptop or smartphone, and are constantly connected to the Internet. This makes Tesla’s fleet of customer vehicles “like a large, distributed, mobile data center,” in the words of Tesla’s Director of AI.
The upshot is that Tesla collects tens of millions of miles of driving data per week with which to train and validate its self-driving software. Since the development of machine learning software is largely a function of the quantity of data collected, Tesla has the capacity to develop self-driving software faster than anyone else.
In theory, another automaker could make the same move as Tesla — perhaps in partnership with a tech company like Waymo or Intel’s (INTC) Mobileye — and equip millions of new vehicles with full self-driving hardware. I consider this to be one of the major risks to Tesla’s competitive positioning. If I were advising the CEO of an incumbent automaker, this is what I would tell them to do. There is no structural reason preventing them from doing so.
However, incumbent automakers seem surprisingly reluctant to move forward with new technology in their cars. For instance, to this day no company besides Tesla offers over-the-air software updates — possibly because this would reduce customer trips to dealerships. Advanced driver assistance systems lag behind Tesla’s Autopilot.
Perhaps this discrepancy is cultural. Unlike any other competitor, Tesla is both a software company and a car manufacturer. According to a 2015 report by Morgan Stanley (MS), 60% of Tesla employees are software engineers, compared to 2% at other car companies. Tesla is headquartered in Silicon Valley and its CEO Elon Musk previously started two successful software companies, Zip2 and X.com, which merged with PayPal (PYPL).
Other car companies have no particular competence in software. For this reason, it may be hard for incumbents to keep up with Tesla in an industry that is becoming increasingly software-focused.
Ride-hailing: Tesla is already building out its fleet
Competing in the autonomous ride-hailing market requires that companies deploy fleets of electric cars running self-driving software. Among companies that fulfill both of those requirements, there will likely be advantages of scale and first mover advantages.
Scale means ensuring an empty car is always available and reducing wait times. Customers will prefer a service with better reliability and convenience. Scale also means spreading the fixed costs of fleet management assets and labour over a larger number of cars.
The first entrant in a locality will potentially benefit from a network effect. As customers use a service, its cars will get better at driving in the local area. This improved performance will encourage more customers to use the service, making it better still. A new entrant may have difficulty breaking into the market if its cars are not yet accustomed to the local driving environment and provide a more wonky riding experience.
There is also the simple advantage of brand recognition and forming a habit among riders. Trying a new service comes with a small switching cost in terms of time, effort, and decision fatigue. If there is no discernible advantage to the new service, customers are unlikely to switch.
Both RethinkX and ARK Invest forecast that autonomous ride-hailing will add trillions of dollars U.S. GDP. Source: ARK Invest.
Scale advantages and first mover advantages overlap somewhat. Larger scale means more miles driven and the quicker establishment of a noticeable network effect. Conversely, the earlier a company moves into a local market the sooner it can build up scale there.
In light of these competitive advantages, Tesla’s decision to enable customers’ cars to become fleet cars is quite clever. At the flip of a switch, it can have millions of cars in thousands of locations ready to pick up rides on the Tesla Network. Competitors who take a different approach will have to build up their fleets slowly, losing out both on scale and being first.
This is also an unforeseen advantage of Tesla’s Supercharger network, which recently began to include charging stations within cities rather than just along highways. With rapid charging infrastructure already in place on day one, Tesla will be able to efficiently power its fleets and keep its cars moving with a short turnaround time. Accelerated battery degradation, which may turn out to be modest anyway, will be offset by ride-hailing revenue.
Ride-hailing: user experience influences consumer choices
Tesla designs its cars with autonomous ride-hailing in mind. Take a look at the Model 3 interior, reimagined for driverless transport by The Tesla Show. With the steering wheel and pedals removed, nothing is left that doesn’t make sense for self-driving.
The Model 3 interior, reimagined for driverless transport. Credit: The Tesla Show. With a simple over-the-air software update, the centre display can be used to play movies, TV shows, and YouTube videos, using the car’s speaker system for audio output. The screen is 15 inches, bigger than the largest iPad Pro. It’s approximately the optimal size for watching TV at that distance.
Tesla’s software expertise comes in handy here. When drivers become passengers, the in-car experience matters all the more. Tesla is obsessed with curating the user experience, to the point that it is reportedly working on its own music streaming service.
Traditional automakers really struggle with this part. For instance, the built-in navigation systems in new cars are so bad that most people end up just fumbling around with their phone to get directions.
User experience therefore provides an additional means for Tesla to differentiate the Tesla Network from competing services. What it’s like being inside a car won’t matter less because of autonomous ride-hailing. It will matter more. Tesla’s reputation for providing a user experience better than other automakers will be an asset.
Conclusion
Over the next decade, the automotive industry will be turned on its head. Incumbent automakers are saddled with a distribution model and a culture that won’t work anymore. Tesla has precisely the distribution model and culture it needs to thrive in the new landscape, and it has made the right investments to prepare for the future.
Barring an unexpected change in course for Tesla or incumbents, Tesla has a good chance to emerge as the world’s dominant automotive company by 2030. However, this is by no means assured. In a future article, I'll explore the risks Tesla faces. Chief among them: a radical change in strategy by the large auto companies.
My recommendation: Buy and hold TSLA, ideally until 2030 or later.
Disclosure: I am/we are long TSLA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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