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Why Tesla could become the Microsoft of the auto industry

Why Tesla could become the Microsoft of the auto industry

Microsoft got into the computing business so early that they were able to establish their operating system as the de facto OS for all PC’s. As a result, they command very large profits to this day. Tesla has a similar opportunity with battery electric vehicles. Their drivetrain is so far ahead of everyone else’s. I think it’s possible that they will maintain their technological lead in batteries for a very long time. If so, it’s conceivable that the other automakers will have to license Tesla’s technology for their own cars in order to compete. Also, Tesla’s supercharging network has a chance to become the de facto fast-charge network for long distance travel. Setting the standard by which others may need to adopt their technology.

Let’s start by agreeing that a BEV drivetrain is the best drivetrain design available for a car. The skateboard design by Tesla yields so many advantages over ICE platforms and even more so over hybrid drivetrains. The drivetrain makes the Model S:
- The safest car on the road – front crumple zone, solid battery pack chassis does not crumple on side-impact crashes
- Lowest maintenance needs of any car – 1,000 fewer moving parts = no oil changes, filters or belts to replace. Brake pads last twice as long due to regenerative braking
- Cheapest to operate – electricity is far cheaper than gasoline
- Most spacious sedan money can buy – front and rear trunks, 7 passengers
- Most aerodynamic car in production – no front grill, smooth underbody
- Superior handling characteristics – low center of gravity, torsional rigidity
- Better driving experience - instant torque, no shifting and quieter ride. Battery pack is a shield under the cabin deflecting road noise

Eventually the world will wake up and realize these advantages and thus consumers will demand skateboard BEV drivetrains. The other automakers will be able to put a battery in the chassis and emulate most of these characteristics in their cars. However, I would argue that they may not be able to match Tesla’s range and cost for the batteries and possibly not the efficiencies of the electric motor/AC inductor.

Battery pack cost is measured as cost per kilo-watt hour or $/kWh. Tesla executives and Tesla’s investor presentation state that their $/kWh is about 1/3 of their competitors. That is a major difference. Given how slow battery advancement happens it would take the rest of the industry a very long time to catch Tesla. The reason for this is that their competitors use purpose-built lithium ion batteries that are built from scratch at very expensive costs. Tesla instead uses a commodity battery. It’s the 18650 lithium ion battery that is used mainly for laptop computers. Billions of these batteries are made every year. They are very cheap. Tesla uses up to 7,000 of them in each Model S battery pack. Further, Tesla has spent over 10 years refining the 18650 battery to make it more efficient and cheaper for use in a battery pack for an electric vehicle. And Tesla has patented the changes they have made to the 18650. They have also taken out defensive patents on designs that were good but not quite as good as their final solutions. So Tesla’s competitors are years behind in $/kWh. Tesla is likely to keep its battery technology lead because it’s the main focus of the company. Additionally, Tesla is collecting data from all of its cars on the road to enhance their performance and this data is proprietary.

This leads to the main point of my argument: The other automakers can copy the 18650 skateboard design but they won’t be nearly as efficient as the Tesla. It’s my belief that they will likely be forced to license Tesla’s designs for use in their own cars in order to match Tesla’s performance. This will happen because consumers will not buy their cars if they can’t match Tesla’s range and cost. The scenario could play out as follows:

Currently both Mercedes Benz and Toyota buy battery packs and electric motors from Tesla to put into their own electric cars. However, this is done in small production numbers. The success of the Tesla Gen III car dubbed the Model E will drive someone to sell a car that can compete with Tesla. The Model E should be in production in 2017. It will have a range of over 200 miles and will start in the $35,000 range. It will have all of the superior attributes of the skateboard chassis. My guess is Mercedes, who owns 5% of Tesla’s outstanding shares, will be the first automaker to design a mass market car using Tesla’s 18650 battery packs. BMW will be forced to offer a competing product but due to their higher $/kWh their car will have less range or cost more than the Mercedes/Tesla. The BMW will fail miserably. If the Mercedes/Tesla vehicle can go 250 miles for $35k and the BMW can only go 150 miles (just a random guess) for $35k then who is going to buy the BMW? They will eventually have to emulate Mercedes and purchase Tesla’s battery designs for use in their own BEV’s. These cars will prove to be wildly successful and eventually they will have to use Tesla’s drivetrain for their entire line-up of cars. This process will occur with the Japanese and U.S. automakers as well. 1 manufacturer will start with 1 car while their competitors scoff and then offer an inferior product. They will eventually come around and expand the Tesla drivetrain to their entire lineup. This could possibly happen within 5 years of the Model E introduction.

Another supporting point is the Tesla Supercharger network. In 2018 if someone wants to sell a car to compete with Tesla they will need a Supercharger network. Will they have the technology for Supercharging? Will they create their own network? I don’t believe that is likely. First of all it will take them a few years to actually build it out. Secondly the best locations will already be taken by Tesla. So it’s likely they pay Tesla so that their customers can charge at the Tesla station.

What about battery supply? Let’s say a carmaker figures out how to match Tesla’s $/kWh using 18650 batteries. In 2018 they decide to start selling a Tesla competitor. Where are they going to get the batteries? Elon Musk has already stated that the number of batteries needed to supply the Model E far exceeds the current global production of 18650 batteries. So they will need to build a giga-factory like Tesla to supply their own production. Yet another barrier to entry.

So how big is the auto market? In 2012 80 million new cars were sold worldwide. Let’s imagine that Tesla could get Microsoft-like market share of 90% of all new autos sold. I’m pulling a number out of the air but let’s say average sales price for a Tesla drivetrain is $10,000 and let’s say it has 20% margin. That equates to $720 billion in revenue and $144 billion in profit. Wow! That doesn’t include Supercharger revenue or revenue from selling their own cars. Even if Tesla only gets 50% market share the numbers are still out of this world.

For those of you who believe the other auto makers can match Tesla’s battery prowess, consider where they are now. Mercedes has been working on BEV’s for quite a while. This year they begin selling the SLS EV. It’s a BEV version of their top-of-the-line SLS super car. It only has a range of 120 miles and it will cost $550,000. The regular gas powered SLS sells for $200,000! That’s right, the BEV version of the same car is $350,000 more expensive and will only go 120 miles on a full charge. This is the state of Mercedes’ current battery technology. BMW has spent a billion dollars developing their new electric cars and all they could come up with is the i3 and the i8. These cars have very limited range of about 100 miles. The rest of the world is so far behind Tesla and Tesla is making improvements every year. I believe they will keep their lead for 10 years or more. If so, almost every car sold will have Tesla inside.

tes-s | 15 janvier 2014

I think it is a larger space with room for many competitors. They do have great technology and car, but technology will change.

The action now is in a market not yet served by Tesla - $30k to $40k cars. Prius, Leaf, Fusion, C-Max, Volt. What is Tesla's worldwide market share on grid-charged electric miles driven in a month - 20%?

MS is the only plug-in I own. I'm a believer, and can afford the car. There are a lot of semi-believers that love the plug-in hybrids they can afford, brag about going to the gas station every three months, and never have range anxiety.

NKYTA | 15 janvier 2014

@JZ

I agree with a ton of what you say and suggest.

I'm more pessimistic of this statement "Let’s imagine that Tesla could get Microsoft-like market share of 90% of all new autos sold."

The lifecycle of software (operating system) is so much shorter than hardware (car factory) that I don't think this is really conceivable in a near future timeframe (but I'd really love it if it happened). The cost of R&D for a new car is magnitudes greater than the R&D for a new OS.

In 20 years I think it would be great (and more realistic?) if worldwide we have 50% all-EV and plugin-EV and 50% gas/diesel cars.

All that said, you and I are livin' the dream - I don't want to wake up!
:-)

david.baird | 16 janvier 2014

I sure as hell hope Tesla don't end up like Microsoft ;-) There would have been a time when I would have compared them to Apple, but Apple have lost the plot in the last year and Tesla are well ahead IMO. But I digress...

It's a very optimistic picture thats painted. Personally I do not believe that the other big manufacturers will licence Tesla battery and chassis - they will want to go their own way with that.

I do think it would make sense though for other manufacturers to adopt the super charger, actually I'd like to see Tesla licence that for free, just with the agreement that the other manufacturers roll out more infrastructure to build a network compatable to the current gas stations. If Elon's really committed to rolling out EV rather than raking in a load of cash then this would facilitate the updtake.

lolachampcar | 16 janvier 2014

The IPhone was Apple's bite at the apple. I expect them to return to their pre-IPhone self over the years to come.

I see Tesla differently, MS is not a one hit wonder; it is the product of an ongoing march towards G3. The Roadster was ok (Please do not flame me Roadster owners. I had an Elise Sport 190 for a few years and that was a truly great car.), the MS is spectacular and I have complete faith the G3 will only improve over both of these cars.

hamer | 16 janvier 2014

Do you mean that Microsoft that makes overpriced, overly complicated software that everyone hates? The Microsoft who unnecessarily changes the interface with every new release making it harder to transition and no backward compatibility? The Microsoft that makes really stupid decisions such as hiding email addresses behind a name so that if you have two different John Smiths, and you print out an email from one you can't tell which one it came from? That Microsoft?

Benz | 16 janvier 2014

@JZ13

Wow, what can I say? I hope that your are right. It sure would be great for Tesla Motors and Elon Musk.

First of all it's hard to make predictions for this year, let alone for the next decade.

Because "almost every day" the focus on improving battery technology is getting more and more intensified. And because the amount of money that is being spent on research on battery technology is going up as well. I think that it is not unthinkable that someone actually will be able to realise a breakthrough and come up with some technology that will be much better than the current Lithium-Ion battery technology. When that will happen (in the next decade?), then that will be the decisive energy storage system for (almost) all the worlds production of EV's of all car manufacturers. The question is who will realise that breakthrough? Could well be Tesla Motors (Elon Musk, JB Straubel, and others). We just don't know that yet.

jai9001 | 16 janvier 2014

I think the better comparison is to Amazon.

Tesla is to cars what Amazon was to books.

JZ13 | 16 janvier 2014

@hamer - You are either using this as an excuse to bash Microsoft or you missed my point. The comparison to Microsoft is that Tesla could be a key component in most automobiles 10 years from now. That being said, I don't disagree with your complaints about Microsoft.

tes-s | 16 janvier 2014

@JZ - Tesla is the key component in one production automobile. There are many ICE, hybrid, and electric automobiles out there - hard to see the leap to Tesla becoming a key component.

When they get to two production automobiles, and get just one other manufacturer to adopt their technology, it would be an interesting discussion to have.

achilles992000 | 16 janvier 2014

I'd say Tesla cars are the hardware and the supercharger network is the software.

once the software (superchargers) are there, there will be more hardware (Tesla cars) sold.

hamer | 16 janvier 2014

@jz13: I was using it as an excuse to bash Microsoft. Couldn't resist.

myprius | 16 janvier 2014

PLEASE, NO, Tesla, don't be Micro$oft! Can you imagine having to buy expensive, performance-robbing third-party options in order to disinfect your Model S of viruses?

JZ13 | 16 janvier 2014

@ tes-s: Well then the time is now because both Mercedes and Toyota have already adopted Tesla's technology. The RAV4 EV has Tesla battery and motor in it. So does the Mercedes Smart EV and the B-Class EV coming to market this year.

Haeze | 16 janvier 2014

The only problem with the long post about Tesla being so insanely successful is that one simple thing could ruin every argument made... What if a new, better battery technology comes out ?

Once that happens, every vehicle manufacturer is instantly on a fairly level playing field again.

Car t man | 16 janvier 2014

JZ13

Tesla's battery tech. Not the drive train tech itself. But finished products. Haeze is right, if new independent battery tech comes out, more powerful players might actually overpay for it, just to push Tesla out. But this is
a scenario which is just as unlikely as the long OPs post I don't agree with anyway. It is kind of in the style, what if we all buy everything Tesla, including toilet paper and only wear Tesla garments, etc.. :)

AtlantaCourier | 16 janvier 2014

Haeze, that eventuality is covered by Tesla's defensive patents. Hooray for long posts!

tes-s | 16 janvier 2014

@JZ - you are correct, I forgot about the Rav4. It will be interesting to see how many sell - personlly, I'm with Elon on this one. I don't see many people buying a 100-mile range EV.

JZ13 | 16 janvier 2014

You guys got me on the long post - guilty as charged. I wish I could figure out how to condense it while still including details that pre-empt some challenges and critique.

As to new battery tech, I agree. If someone comes up with a better solution than Tesla then my argument fails. However, battery advancement has moved extremely slowly and I am betting that will continue to be the case. If so, Tesla wins.

Benz | 16 janvier 2014

@JZ13

As long as Tesla Motors remain to have the superior battery technology, there will be hope that your view may turn to reality someday.

Brian H | 17 janvier 2014

The RAV4-EV is a CA-only compliance car, being pushed with a feather by Toyota. We'll see what MB does with the B-series.

dglauz | 17 janvier 2014

Where can I get the Tesla toilet paper?

AmpedRealtor | 17 janvier 2014

I certainly hope Tesla does not become anything like Microsoft, an aged and outdated behemoth of a company that cannot innovate its way out of a storage closet.

wcalvin | 17 janvier 2014

Despite 30 years of using mostly Microsoft (and having a $0.09 cost basis for my MSFT shares), I must reluctantly agree about the Ballmer version of Microsoft. I've gotten rid of 95% of my original 1986 shares.

carlk | 18 janvier 2014

People who say that established companies will not stand still can only look at what happened to Best Buy, Blackberry, Blockbuster...and tons of other companies dominating the market they were in suddenly found themself facing challenge from the new disruptive product. You would think it's easy for Best Buy, Blackberry, Blockbuster to do their own version of online selling, iPhone like smart phone, DVD by mail/streaming video, to fend off threats from Amazon, Apple, Netflix but the fact is it's never so easy to fight the disruptive product in the new game. Everything you know or own may not help you but instead will just be extra bags you carry against the fast moving opponent that is going all out to get ahead.

Using history as a guide I have no doubt that Tesla has a good chance of defeating or even wiping out GM, Ford and Toyota. The other thing you can go by is Tesla, the same as Amazon, Apple, Netflix all have/had the smartest CEO in the industry by a large margin.

AmpedRealtor | 18 janvier 2014
Captain_Zap | 18 janvier 2014

We saw the writing on the wall when Ballmer made the proclamation that they were a software company and not a hardware company. They lost some their best and brightest around that time. They cut of the golden handcuffs because they actually wanted to go build stuff and do exciting things. Software needs a good host to flourish. You need a big picture visionary person at the top, like Elon Musk.

Also they had a bad HR system that pushed individual contributions for reward and it made it so that there was competition within teams instead of teams working together to build a better mousetrap.

I do miss the Personal Computer concept though. It looks like they are losing their way with Windows too. We are afraid to update our computers because of a loss of control over the programs and our data.

It is really bad when someone spends decades learning how to master programs and then a new version comes along and they can't even find the program on the new software! Then, they can't figure out how to operate it once they find it. I sure miss the bound paper manuals. Hopping back and forth between screens and internet searching takes too much time. I wish Tesla would update their paper manuals.

I do worry that Tesla does face some similar challenges since they are first on the scene. The gov't regulators took decades to wrap their heads around the impacts of the internet, computer documents and privacy. Now they are trying to compare electric motors, inverters and batteries to gas tanks, transmissions and and engines. You just can't. Odometer rules are based on the life of an ICE. Electric motors that are built well have an extremely long working life. They either stop working right away or the work flawlessly for decades. The value and cost in an EV is in the battery at this point. A gas tank is cheap but what you put in it is expensive. All the regulators are going to struggle with this for a very long time to come unless they realize what they are dealing with in short order. The over the air update "reca11" issue is just the tip of the iceburg. No pun intended, but it fits!

Grey Model S85 | 18 janvier 2014

I would say the comparison is more akin to Apple.
Microsoft is a dying company whereas Apple still has life, although it has begun to wane of late with no major breakthroughs.
Tesla is not waning but improving all the time, however, Apple would be a more precise analogy to compare it to.

The Tesla store in the Yorkdale Mall in Toronto is opposite the Apple Store! Go figure!