Harvard Business Review Opinion Tesla No Disruptor

Harvard Business Review Opinion Tesla No Disruptor

A few months back, my niece earned her doctorate in physics and I attended her defense of her doctoral thesis (whatever it's called). Talking with one of the physics professors who sat in judgment afterward, the topic of clean energy came up. This particular professor emphatically stated that solar or wind wasn't the answer that it had to be nuclear power. It was the only way because there is no way to harvest enough solar energy to be practical and the sun is gone half the day. This professor, btw, is a specialist in nuclear power. Colliding atomic particles is her thing. Last week, the power company in South Carolina said that it was abandoning building two nuclear power plants because of cost overruns. In Georgia where I live, the nuclear reactor Georgia Power is building at Plant Vogtle is already costing twice the original estimate and Westinghouse, the contractor building it, declared bankruptcy. Despite tangible evidence that nuclear power is horribly expensive to build, costs a lot after the station goes online and is dangerous to boot didn't sway this professor at all because she's personally invested in nuclear power.

Conventional wisdom clouding thought take two: Yesterday, an article appeared authored by Larry Downes and Paul Nunes in the Harvard Business Review titled "Is Tesla Really a Disruptor? (And Why the Answer Matters)." After grudgingly admitting Tesla is "wildly innovative," the authors then chime in with a warning: "But is its automotive business a disruptor, poised to transform the entire transportation sector? That's the question that has dogged the company from the beginning, inspiring heated debate among Wall Street analysts, fanatical customers and tech-related online communities." A note about innovation: the steam engine had already been around for a while when James Watt made it practical and Robert Fulton figured out a way to put it to practical use. Tesla has taken on the shortcomings of EVs and is solving them. What's different from what Tesla is doing to Watt and Fulton two centuries earlier? Nothing.

They cite $10 billion debt warning that Tesla must outright dominate a future that features autonomous vehicles, sustainable energy consumption, and the ability to upgrade easily as both hardware and software is resolved. If not, then the investor money dries up and Tesla goes belly up.

The bulk of the article is then devoted to their definitions of what qualifies a company as disruptive:
1. Offering a more expensive product whose superiority shifts consumer buying patterns that creates a new market space with growing revenue with shrinking profits that lead to industry collapse and reincarnation based on a new value proposition.
2. Big Bang Disruption - rapid evolution of new technologies leads to introduction of substitute products that are both better and cheaper right from the beginning, triggering consumer abandonment of incumbents for new entrants.

They proceed to argue Tesla fits neither model because:
1. Electric cars have been around a long time but the technology is still neither better or cheaper than internal combustion. (They ignore forecasts predicting BEV's will reach cost parity with ICE cars in a few years and then surpass them).
2. Tesla still hasn't solved the autonomous vehicle issue.
3. There is no guarantee Tesla will win the automotive technology arms race.

They finally forecast that the BMW, Mercedes, Volvo and Lexus will beat up Tesla and take its lunch with a gentle chiding of Musk's decision not to defend early patents.

What I see here is the same attitude the physics professor displayed to me: Intellectual and emotional investment in the status quo.

But what if few LIKE the status quo?

I'm taking deliver of a Model X on September 5th. I ordered it for several reasons knowing as an early adopter I'm paying around a $25,000 premium over buying a similar ICE equivalent. I'm doing it knowing that the range on my MX will cause some headaches when I take a trip. I'm buying knowing that range for EVs is likely to increase exponentially over the next few years.

Why am I doing this?
1. I don't like the existing car companies. Does anyone enjoy buying a car from a franchised dealer? I've had more than enough of guys with 10 gold chains around their neck going, "What can I do to put you in this car today?" For one, dress better.
2. I LOATHE the oil companies and want to be shut of them forever. This has been true since I watched them use the OPEC embargoes in the 1970s to gouge us for fuel so that we could go to school (which I was doing in those days) or work. It was so blatant Congress passed several laws to claw back windfall profits from the likes of Exxon and Texaco.
3. I intensely dislike the fact that for decades the oil companies knew they were a big factor in causing climate change and covered it up. They've known since the 1960s and that the fumes from their product were killing people not to mention making life dangerous for dolphins and other living things.
4. I can no longer look a young person in the eye knowing what they're being condemned to if we don't get off fossil fuels fast. I can afford it now, my personal time clock is ticking and the end is a lot closer to the beginning, so I'm doing it to do my part.

Why Tesla? Why not wait for Mercedes or Volvo?
1. They had their chance. They are invested in protecting their existing infrastructure of dealerships and suppliers for ICE vehicles.
2. They would never offer electric cars (or hydrogen or any other alternative fueled vehicle) if Musk hadn't come along. Somebody had to disrupt the status quo or it would never change. Tesla's very existence, tiny little Tesla, is creating a tsunami that is forcing the auto industry to change. Would governments be setting dates to ban ICE vehicles? Would the legacy automakers be scrambling to catch up if Tesla hadn't come along? Of course not.
3. If Musk took a chance on us and our planet, shouldn't he and the dedicated people working to change the world be rewarded? I think so. There would be no EV revolution without Musk and Tesla.
4. It's a damned good car.

The authors conclude by citing that the Model 3 is no iPhone and that the Apple Watch's slow start after an initial rush is reason for caution. They opine that the initial rush will not translate to long term sales stability for the Model 3.

Here we have two guys who learned all the traditional business models and stick to them. Here are some fallacies I see:
1. EV costs will come down. They already are. Tesla just cut the price for the MX by $3,000 for example.
2. Their citation of Apple's existing production fails to take note of the obstacles Musk faced. He had a concept but no production facility so he had to buy and equip one. Apple, in its early days, didn't have an established supply chain and production facilities either. Equating Apple circa 2005 instead of Apple circa 1984 (when the first Mac was released) is intellectually dishonest.
3. They figure that Musk won't change his batteries as technology will improve. Ridiculous. In 10 years, the MX I'm buying will look like a Model T compared to a 1964 Mustang. The speed of technological advance is accelerating not decreasing. Musk will rip out those lithium ion battery making machines as soon as something better comes along. Will the ICE companies newly invested in EVs do the same? Their track record says they won't.

This is what can happen when even intellectuals adhere to conventional wisdom, even when they do so unconsciously. They look but they do not see. Of course, solar is going to leave nuclear power in its wake. It already is as costs continue to fall dramatically. BEVs are here to stay. The batteries will change, the doodads will get better, it's all good. As for autonomous driving -- how many of you are buying a Tesla because you don't want to drive at all any more? Not me. If autonomous driving comes, okay, that's great. If it doesn't -- and that's a ridiculous assertion to make -- so what?

Tesla is wildly popular with a lot of people because it's giving us something we've always wanted even if we didn't know it -- freedom. Freedom from a hidebound industry that tinkered and improved its product incrementally but lost the will and ability to truly innovate decades ago. Thinking outside the box is a slogan not a reality in big corporations. Freedom from what many consider to be evil oil companies willing to kill us all for the almighty dollar. Freedom from a corporate culture that stresses profit over its customers wants and needs, not to mention an entire planet's. The 21st century is going to be substantially different from the 20th and that's a good thing.

Earl and Nagin ... | 17/08/2017

First of all, I agree with you.
I just find it interesting how so many people, like you, seem to continue to get it. When they do, they line up behind Tesla.
Some will be slower to get it but eventually, will get on board by choice.
Those who are extremely comfortable (does it get more comfortable than having tenure at Harvard?) will deny it.
Those who fear change will deny it.
Welcome to the Tesla family!
Then there are a few who never will get it but the world will change around them anyway. | 17/08/2017

@dmm1240: +1

Tesla, small as it is, has already disrupted the auto industry. They lead the luxury car market, displacing MB S class, BMW 700 series, Lexus LS, and Audi. The arrival of just the prospect of the Model 3 overhangs the market for cars like the BMW 3-Series. The goal is to get those companies to build competitive BEVs. Assuming they do, Tesla will have disrupted the oil industry.

The Gigafactory will cut the cost of battery cells in half. The rest of the cost reductions come with scale. As BEV scale goes up, ICEV scale goes down, disrupting the auto industry. BEVs become the cost leaders. It is all happening now.

El Mirio | 17/08/2017

I think it frequently get's forgotten that Tesla has access to Rocket Scientists!

Me thinks real disruption will be actually in how goods will be, designed, tested and produced in the future.

rgrant | 17/08/2017

The fact that ~450,000 people voted to buy an electric car next means those sales are not going to other manufacturers. I think the Bolt has suffered because of this. It's the same price but has no infrastructure to support it. Legacy manufacturers are now caught been a flooded used market and people waiting for electrics. It's not going to be pretty.

Mike83 | 17/08/2017

Harvard may be fossil fuel vested. Yuck.

Stanford Rules.

Rocky_H | 17/08/2017

Wow, nice write-up. Not a lot to add to it; you said all the good stuff.

I think the additional thing I see people forgetting is when they say the big auto makers will come rolling in and fly by Tesla. They don't seem to realize what a ball and chain the dealerships are. They have a vested financial interest in convincing people to NOT buy electric cars. That is always going to be a problem as long as they are selling gas and electric cars on the same lot. The sales staff at a dealership are not going to willingly move themselves toward making less and less money if they can help it. So regardless of how good other makers' electric cars are, the sales people will still steer people away from them. Again, this is mainly a U.S. problem which has those dealership protectionist laws.

fred.cannataro | 18/08/2017

Tesla is not winning friends with their service and attendant insurance rates for body related issues. i just cancelled my s 100D order and surrendered 2500.00 to them because of it. 3100.00 /yr for insurance premiums and poor service history discouraged me from joining "the mission". Caveat Emptor.

Mike83 | 18/08/2017

fred you should post this in the Model S forum for more exposure to show your colors. Not many read this forum.
But our insurance went down with our Teslas using Hartford. Costco also has good insurance. Odd to cancel a car you don't have because of body work? Interesting FUD.

fred.cannataro | 18/08/2017

Sorry, my bad, I meant to post on the S site. BTW, the article is dead wrong about Tesla not being a disruptor. I feel that they are changing the landscape of the automotive industry and the energy business. The authors however make a good point about the potential of the rest of the industry to adjust over time. The question is will Tesla be another Atari or Blueberry? Before we anoint Tesla as the next Apple they need to prove that they can make a profit. Right now it's a 50B science project. An interesting and exciting one but until they make money and back up their promises with results, I am a doubter.

SO | 18/08/2017

Fred - you seem quick to react. That's unfortunate.

rgrant | 18/08/2017

A science project doesn't have future customers lining up around the block, and current customer satisfaction rates through the roof!

The cars make money which is plowed back into the company that is rapidly and massively expanding, or did you miss that bit?

Frank99 | 18/08/2017

I think Fred has a perfectly defendable position; no reason to attack him. His insurance shopping habits may be suspect, but that's on him. But believing that Tesla is a "50B science project" is a perfectly rational view.

My personal belief is based about half on existing results, and half on hope, that Tesla is going to execute on their plans for the next 5 years, and become even more of a driving force in transportation.

Frank99 | 18/08/2017

OK, I'm sorry. I was wrong.
After another 10 minutes of reading the forums, I've found fred's identical comments in 6 different threads, including one where people were posting Insurance quotes that indicated his experience was, well, unique.

Spamming the forums with an unlikely story isn't friendly, Fred.

RedPillSucks | 18/08/2017

Is Tesla an industry disruptor?
Yawn. Tune in form less information...

I personally think it is...
But even if it isn't. Its a game changer (is that different from a disruptor?).
The other car companies were perfectly content to sit on their hands and run ICE and ICE-hybrids to their "logical" conclusions. That being, since they have so much invested, keep milking that ICE cow.
Prior to Tesla, the prevailing "believe" was that BEV was two expensive to market and didn't have the performance, and there was no demand for it.
Even though GM itself had proof that there was demand for their previous attempt at BEV autos.
Tesla proved that BEV had excellent performance, was marketable (did they really need to market it?)
and could be "affordable". Now suddenly every major car manufacturer is planning a (non-compliance) BEV within the next year or so. Even if Tesla goes out of business tomorrow, it has changed the industry, disruptor or not.
I intend to reward Tesla for their risky efforts, irrespective of whether another company starts selling a BEV.

dmm1240 | 18/08/2017

RedPillSucks. I intend to reward Tesla for their risky efforts, irrespective of whether another company starts selling a BEV.

Me too. I've been emailing all afternoon with Tesla folks concerning delivery of my MX on 9/5. If Musk was willing to risk a considerable percentage of his fortune to start the company and all those people are slaving away in Fremont to build cars for us, excellent cars, then the least I can do is to reward them in my small way for changing the world for the better.

Getting a pretty good car, too!

dmm1240 | 18/08/2017

fred.cannataro Tesla is not winning friends with their service and attendant insurance rates for body related issues.

I see comments like yours on forums like this from time to time and wonder if we're dealing with the same company. Your experience has not been mine so far at all. While I can't speak for service because my car's not here yet, I can speak for my buying experience and the interactions I've had with Tesla employees. It's like nothing I've experienced before outside of dealing with the repair shop at the dealership where I purchased my now departed Honda.

They've been great. Friendly, responsive, honest in their advice and generally good people. My insurance company didn't bat an eye when I told them I was buying a Model X. They asked me to send them the VIN and tell them what date to make it effective and that was it. I've been corresponding all afternoon with Tesla employees wanting to answer a couple of questions I raised after I ordered – that came over from the sales staff – and they're answering. I had a problem early on in that I was waffling between ordering an S or an X, order the S but then said, "nope, it needs to be an X" and the guys at the showroom couldn't have been more helpful in getting the deposit switched over.

Maybe my Tesla guys are nicer than the ones in your location, but I doubt it. Are you sure you're not dealing with a spoof Tesla company?

SO | 18/08/2017

Tesla service has been outstanding for me. They fixed my couple cosmetic issues to perfection. | 19/08/2017

@dmm1240 - Nicely stated.

Tesla has created so many disruptions in the industry, many of which you pointed out. Here's a few more disruptions that any one by itself is a huge disruption that traditional car companies have yet to offer:
1) An EV can be a great car, not just a a great EV
2) Sell via online store, No need to sell a dealer intermediary - the most hated of buying experiences
3) Creating the Supercharger infrastructure allowing easy long distance travel in EVs
4) Delivers the best 0-60 performance of ANY production vehicle
5) Service is not a profit center

Tesla-David | 19/08/2017

@dmm1240 + 1000, great analysis! I an an early adopter with first MS delivered on 1/2/13 after waiting for over 3 years with a $5k deposit, I can say that Tesla has met all my expectations and exceeded them. I am on second MS (85D) with M3 on order, so I am firmly committed to Tesla and its EV positive mission. I can't speak about service experiences at other SCs, but my service experience with Seattle SC has been outstanding over last ~5 years, and am currently paying about $1200/year (State Farm) for insurance, but am looking at other insurance options to bring that down.

Tropopause | 19/08/2017

Don't forget about Tesla's energy division which is predicted by some to dwarf the automotive division in time. Tesla's energy plans will disrupt the very folks who claim to be experts in the OP.

In the case of these professors I apply the old saying, "Those who can, do. Those who can't, teach." Please step aside and let Elon save us from the status quo.

brando | 20/08/2017

Must be one of the most informative threads ever! thanks all for thoughtful comments.

Why haven't other OEMs joined in? Some claim R&D expense is too much for auto companies. What BS.

Tesla total R&D from 2010-2016 <$3 billion TOTAL.

The real question, why are OEM so slow to move??

brando | 20/08/2017

PS- in two years, GM did stock buybacks of $16 billion.

joemar10 | 21/08/2017

Perfectly stated. I agree with everything you said. I too am awaiting my Model X, for all the same reasons.