Two days ago, I sat in the passenger seat of a Tesla Model S. The most surprising insight was that there were no surprises while driving this car. In the below blog, I will compare the smartphone market in 2007 and today with the market for electric cars, in order to make predictions for the latter going forward.
When Steve Jobs introduced the iPhone at Macworld in January 2007, the reception in the media was enormous. In the next six months, the iPhone has been the subject of 11,000 printed articles.1 Of course the executives of the big players at that time – Nokia, RIM and Palm – heard about the product but apparently did not take it seriously – their answer to the challenge posed that night launched not earlier than five years later. Building a smartphone is incredibly difficult. The competitors must have been sure, that Apple – having no knowledge base in this areas – would be doomed to fail. When the iPhone was released in June 2007, David Pogue found a few standard features of smartphones missing: “There’s no memory-card slot, no chat program, no voice dialing.” You could not take videos, or send MMS, and not install software made by others than Apple2. The iPhone – despite being away from being perfect – fascinated the people.
Seven years later, the smartphone market is vastly different. Market leaders have been either acquired, are bankrupt, or both. Two players – Apple and Samsung – make more than 100% of the profits of the market, which means that their competitors are bleeding cash.3 Recently, low cost products from Asia have put more and more pressure on the lower end of the market. “Huawei, LG and Lenovo each grew their smartphone shipments around two times faster than the global industry average”.4 As smartphones are becoming commodity products, differentiation that is rewarded by customers paying a premium is key to make profits. As Apple is a fully vertically integrated company, they are in a comfortable position to do so. They “just” have to incrementally improve hardware and software and support its proprietary leading app ecosystem. Samsung, on the other hand, tries to get there, by adding new features5 and self-developped apps. Google and Facebook seemingly have shifted their hardware dreams to the next hardware breakthrough.
We are witnessing textbook disruptive innovation. A new product, initially inferior in many ways and superior in others, improved over time and eventually turned a market upside down. Only companies that initiated that change or adapted quickly were able to stay in the smartphone market.6 I wonder if the same might happen in the car manufacturing market. The electric engine (+ lithium batteries) is a disruptive technology, inferior in range and weight, but superior in acceleration, maintenance costs and in energy consumption, that can be produced eco-friendly and potentially without limit.
When Elon Musk introduced the Tesla Roadster in 2006, the car was seen either as the future of automobile7 or as a toy for the rich. A valid conclusion: low volume means low impact. Other car manufactures started to work on electric cars as well, but only half hearted. However, the ergonomics and the quality of the Tesla Roadster were good reasons for critique. Not only in these regards, Tesla’s second car named Model S, that has been shipped in the U.S. from June 2012 on, was a big step forward. It proved, what most car manufactures said to be impossible: building an electric car with a range of more than 300 km. And this car was not a unique proof of concept but is produced on a higher volume – 22.400 units in 2013 – and due to its price skimming strategy even sold with profits. They were not the only company launching an electric car, but they created the biggest buzz and positioned themselves as the most innovative car manufacturer.
I think it is safe to say, that electric motors will supplant combustion engines. The incumbent car manufacturers probably think that they still can catch up with Tesla once consumers widely adopt EVs. Yet, I am not sure, if this will work out, considering what happened in the smartphone market. Once car manufactures are on the same level technology-wise, it will get even more interesting. Electric drives are not rocket science. It will be more difficult to differentiate from competitors than it is today. The brand (for example based on being the first company that built a desired electric car), or superior design will be important factors. With the smartphone business in mind, there is a probably even more relevant area: Software and services. It is fascinating to see that Tesla obviously has these topics high up on their agenda. Software-wise: A massive touchscreen consequently replaces all other ways of input and internet services are deeply integrated (Google maps, browsing, apps). Charging stations all over the world could become an important service differentiator – and Tesla is already building them. I think that these capabilities will be crucial in the future and Tesla is building them up ahead of everyone else.8
Coming back to the drive with the Tesla Model S, the most stunning fact for me was that this car does not feel like the second car built by a startup. Incumbents were convinced that they were safe from new entrants because building gasoline-driven cars is very complicated. It turns out that with electric vehicles that is no longer true. The quality of the interior is not quite comparable with a BMW, but it is amazingly close. Incumbent car manufacturers should be scared of what is coming next.
The first serious competitor to the Model S in my opinion is BMW’s born-electric i3. While sharing the same drive technology, they differ in key aspects that have major implications:
- i3 is meant to look noticeable novel, S like a classic limousine
- i3 is made for cities, S is not optimized for a specific terrain and offers more space for luggage and passengers
- i3 is meant to complement to a 5er BMW, S is meant to replace a 5er BMW
- http://www.nytimes.com/2007/06/27/technology/circuits/27pogue.html [↩]
- the app store was released one year later, in July 2008 [↩]
- http://daringfireball.net/linked/2014/02/12/phone-profit-share [↩]
- http://stratechery.com/2014/two-bears-revisited/ [↩]
- e.g. automatic scrolling [↩]
- Documents show, that Android reacted to it immediately and moved from a Blackberry clone to an iOS clone http://www.theatlantic.com/technology/archive/2013/12/the-day-google-had-to-start-over-on-android/282479/ [↩]
- http://www.washingtonpost.com/wp-dyn/content/article/2009/01/23/AR2009012301591.html [↩]
- Not to forget their upcoming battery factory. Supply of these is the only thing limiting production right now. [↩]