Innovator's Dilemma

Innovator's Dilemma

I am in the process of listening to the audio book "Innovator's Dilemma". A lot of the contents apply to Tesla:
1. MS has significant cost advantages in maintenance, energy and environment. So far, the cost of the MS is higher than comparable ICE autos is some cases (BMW5, Audi 7), but in other cases it is close. Economies of manufacturing scale, gigafactory, etc will drop the price steeply. Competition is not really committed.
2. Initially range has constraints because of lack of Supercharger networks. ICE autos have gas stations all over the place, so they have advantages for now. However, the cost of SCs, HPWC are a fraction of a gasoline station.
3. ICE competition - Big companies make a lot of money from their ICE autos. A few more incremental dollars and they can launch a new model and make a ton of money like Porsche is doing with the Macan. GM adds some extra chrome on the front grill and it is a big $$$. They are not about to bet the farm on battery gigafactory. Even BMW with the i3, i8 are just protecting their ICE investment. BMW is not about making a huge commitment in $$$Bs, to secure battery supply, develop long range BEVs, deploy Supercharger Networks. The came with a half pregnant solution of strapping a lawn mower engine to the i3 golf cart. Nothing but hybrids.

The key enabling tech is the improving battery performance and supply... both of which Tesla is securing. I think that with a design effort, Tesla could design a light weight small Model E and use the existing battery tech and sell the car for $45k. 18-20k for a 40-50 KW-hr skateboard. Glider for $18k made of steel. Outsource the glider from Hyundai or Kia. Tons of options. Heck, I would even let the Koreans market, service the auto. Just add 30-40% profit to the skateboard. Supercharger per use after initial fee.

Brian H | March 2, 2014

Not sure about some of the data. DoL sez auto makers stopped making net margin on the cars about 2007, and now depend on maintenance, e.g. High-end models are different, but much lower in volume.

Homebrook | March 2, 2014

Bubba2K, I've read your topic description, but I'm not at all clear what it is you think worthy of discussion. It would help me, and perhaps others, if you could rephrase your last paragraph into a clearly stated proposal broken up into several bullet points stated in complete sentences.

If you are suggesting Tesla should change their business plan, which is the product of years of careful thought and research, to what you state above, I respectfully disagree.

The value and aesthetic beauty of a Tesla is in the complete integrated package. That is its strength and a key aspect to Tesla's success. Separating it into components and farming out sub-assemblies of the car to competitors would result in an inferior product not remotely approaching the level of automobile Tesla is already delivering. If you think it is a superior approach, then consider it a business opportunity for a new company in which you can invest or start. That is the beauty of competition. May the best plan win! I could not be more pleased with the approach Tesla is already taking.

What is 'MS'?

Brian H | March 2, 2014

"MS" = Model S

Timo | March 2, 2014

MS = Model S.

Bubba2000 | March 2, 2014

Tesla has done quite well with Model S and will do even better with Model X. These are hi end autos and provide good gross margins. The company could produce and sell at least 200,000 autos and sell them in the US/Canada, Europe, Greater China, Japan, Australia. Provide support including Supercharger Network. With economies of scale, it could make 30-35% gross margins and $2+B net profit after taxes. That is the Apple model. Can be very profitable.

However, Model E at $35+k will attract 500,000 to 1,000,000 sales/year. Tesla will need huge service support operation. Capex will be huge. Profit margins may come down with a mass market product. Why not follow the Microsoft/Intel model? Mass produce the skateboard... that is where the Tesla has the proprietary tech. Make 40-50% profit margin. Let the "box makers" make, service the gliders? Elon has take this approach with Mercedes and Toyota, but seems a little half hearted on both sides. Neither of the models can use the superchargers.

I am listening to that book to figure out the odds of Tesla disrupting the ICE auto economy in a major way. This has huge implications as an investor. The company market cap could then exceed $200B as major disruptor. A lot of ICE automakers could go belly up. The oil industry would suffer. Major dislocation of the economy in the US, especially in states like Texas! OIl at $40/Barrel and a lot of regimes in the Middle East could fall... Russia would be sucking wind.

I have been around long enough to see these kinds of changes take place in the computer industry. Univac? DEC? Control Data? Wang anybody? Same thing with record business, VHS, DVD rental. Companies that disrupt like MSFT, INTC, Apple became megacaps.

Personally, I am not complaining. My investment mostly in the $35 range did really well and I have been taking profits. Never thought the stock would get this hi so fast. Love my 85P/Pano, wife thinks I love the car more than her. Just wondering how far Tesla will go. I bet the farm on the stock, but I have sold some so I can sleep better.

Brian H | March 2, 2014

Trying to use the Lotus "skateboard" to make the Roadster was a mistake, per Elon. Almost everything had to be changed.

Going the other way -- is the RAV4EV a success? Toyota won't do more than compliance requires. I doubt any maker can vault the gap.

Bubba2000 | March 3, 2014

@Brian H: You are right. Explains why Elon chose the vertically integrated manufacturing model.

Homebrook | March 3, 2014

Bubba2000, thanks for the explanation. "Innovator's Dilemma" looks like a fascinating book. I know it is a fascinating and important topic and once understood explains a lot.

Bubba2000 | March 4, 2014

Also, I would recommend "Gorilla Game" and "Crossing the Chasm" by Jeffrey Moore. It made huge difference in my investing strategy. The hard part? Exit strategy. Companies like MSFT, INTC, CSCO, QCOM, AAPL and may be TSLA have proprietary tech with high barriers to entry, networks that add value, etc. At some point they reach critical mass and cross the chasm. Sales, profits growth become explosive. PE, valuations go sky hi. Like S-curve growth. A some point the addressable market will show signs of saturation. Got to start exit way before then.

In my case, I may be a little late getting in. The hard part is figuring when to exit. Sometime, the gains make me anxious and I do exit a chunk too early, with big tax liabilities. However, nothing worse than being too late and stupid about getting out. Starting in Oct-17-1998 after the Fed dropped rates by the 3rd time, I went in the market with all savings, and added margin. Invested in critical tech like QCOM, fiberoptics, DISH, and some other cat and dogs. Cut out the /laggards/losers and fed the winners with margin. By March-2000, my portfolio was up 100 bagger!!! I had been going to tech conferences, including telecom conferences... and people were mumbling about the market saturations and I knew valuations were hi. Did I exit? Not fast enough... just cashed some and bought real estate. Ended up loosing 85% after 9-11. I was ok, but that was stupid.

Tesla has tremendous opportunities, if it can disrupt the ICE and even the electricity markets. I think the combination of battery cost dropping to $100-150/KW-hr, plus supercharger networks will lead to huge success and the company could become a megacap like Apple. The tech would have to be proprietary, with hi barriers to entry to give Tesla pricing power. Meanwhile, it does not look like the other auto makers are serious about BEVs.

In the short term, I would like to see huge worldwide demand for Model S+X... especially from China. China sales are 20M autos/year. Tesla just needs 1%. The ICE model is causing serious problems in Asia due to air pollution. I think that worldwide, Tesla could sell 200,000 Model S+X like Porsche projected volumes.

Brian H | March 4, 2014

losing loosing

Tesla is playing a different kind of game. It only creates 'barriers to entry' to make sure it can license any tech another co. wants to use, but is strongly in favour of sharing that tech. Unlike any other competitor in any field, it is not hoping/trying to displace or overwhelm the others. Shareholders have a different set of priorities, of course!

Bubba2000 | March 4, 2014

Licensing is good too! 7.5% of ASP of the auto, $3,000 for SC license + $20/hr for SC use.

Brian H | March 4, 2014

Nothing even close to those fees. Enough to cover costs, low enough to encourage use.