The Silent Disruption: Why traditional car makers and customers will get an Electric Shock! Part III

Part III: Practice makes perfect

In part I and II of my series on the disruptive shift to electric vehicles (EVs), I explained why it is normal for car buyers and traditional internal combustion engine (ICE) car makers to be surprised by it. As I explained, it is mostly about the relative rate of improvement on the key performance vectors (including the all-important affordability factor). But a key consideration when investing is understanding not just if, but when an inflection in demand will happen. So why now? A key factor in my conviction (combined with Christensen’s framework explained in Part I and II) is Wright’s Law. Formulated in 1936 by Theodore P. Wright, it states that progress increases with experience — specifically:

“Each percent increase in cumulative production in each industry results in a fixed percentage improvement in production efficiency.”

This law has successfully explained the cost curve of over 60 products from solar panels to cars, including the Model T Ford. In car production it has translated to 15% improvement for every doubling of cumulative production. Crucially, small numbers double much faster than large ones. Wright’s Law still applies to mature technologies, it just takes longer. What’s fascinating (to me anyway) is that the Tesla Model 3 is already following the path of the Model T Ford. By Q2 2019 Tesla had cumulatively produced 275k Model 3’s and will produce about 600k by the end of 2020. Based on Wright’s Law this should result in a 23% improvement in production efficiency. Translated to finance speak, this means higher gross margins and lower capex per unit of production.

Source: Ark Investment Management LLC, 2019

Tesla has produced more EVs than any other company. Unlike its incumbent competitors who have largely outsourced their innovation to suppliers, Tesla is a vertically integrated technology company. It designs and builds its own electric motors and batteries. It is adding production and battery capacity at a faster rate than any other company (with 44GWh they have almost 50% global EV battery capacity). It has been refining its own drive chain management software for years and it owns the largest and fastest charging network in the world. Does this company remind you of any others?

Source: Bloomberg survey October 2019 (5000 owners)

Range and recharge speeds are probably the two performance vectors on which EVs still lag ICE. However, with range there has long been what Christensen calls “performance oversupply”. Most car journeys are < 50 miles long and now you can refuel while parked, which means the necessity for rapid refuelling falls. Furthermore, Tesla recently announced a 3% range increase for the S and X and a 5% increase for the 3. These were deployed via an over the air software update. And for those who regularly drive further than 300 miles, the most recent generation of Tesla superchargers can deliver up to 75 miles of range in 5 minutes. Teslas are the only cars on the market today that continually add improved features to the car over the air for free. The car improves while on the road.

Source: Tesla Q3 2019 Shareholder presentation and

Tesla are growing units of production and reducing cost per unit of production faster than anyone else, in a market that will grow faster than most expect. Quality is improving every month and the energy and creativity evident in product development meaningfully differentiates it in the design stakes. The recent #CyberTruck (pickup truck) is the most obvious example. Does any other automaker have the courage, creativity or technical ability to replicate it? What this all translates to – in my opinion – is a combination of underappreciated competitive advantage, underappreciated addressable market and an underappreciated inflection in demand.

“They can have it in any colour they want, as long as it’s black.” Henry Ford

In summary, I believe the winner in the transition to electric vehicles will be the company that has the clearest vision of the future, the least historical baggage (in terms of mindset, bureaucracy and source of revenue) and is innovating fastest. That company will never be perfect but at least we can have confidence that they are motivated to improve and move as quickly as possible in the right direction. The recent unveil of the Tesla Cybertruck is – to me – indicative of all of this. Bold and courageous, built from first principles, technically superior to any ICE pickup truck on the market at the same price… but with windows that need work before they can reliably be claimed to be bullet proof. Remember nothing is perfect to begin with!

“We can fix it in post” Elon Musk

Source: Tesla

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The Silent Disruption: Why traditional car makers and customers will get an Electric Shock! Part II

Part II: The incumbent’s perspective

Last week I wrote about why customers don’t appreciate the rate of change in disruptive technology until they experience it.  But it doesn’t stop there. Like their customers, established companies under threat from disruption tend to miss it too. And this feeds into the mainstream media, who are naturally attracted by the fallacious appeal to authority of the established brand names…. Surely if anyone knows, [insert established brand] would know!?

Despite the rapid advance of EVs in relative cost and performance terms, internal combustion engine (ICE) manufacturers still see electric vehicles (EV) as a small market, with negative margins which most of their customers don’t want. Why?

Clayton Christensen observed this behaviour repeatedly in his study of why great businesses with excellent managers fail to adapt to disruptive technologies. And just like their customers, it’s not because they’re idiots!

“It is in disruptive innovations, where we know least about the market, that there are such strong first-mover advantages. This is the innovator’s dilemma. Companies whose investment processes demand quantification of market sizes and financial returns before they can enter a market get paralyzed or make serious mistakes when faced with disruptive technologies. They demand market data when none exists and make judgments based upon financial projections when neither revenues or costs can, in fact, be known…Discovering markets for emerging technologies inherently involves failure, and most individual decision makers [within established bureaucracies] find it very difficult to risk backing a project that might fail because the market is not there.” – Clayton Christensen

Given the news last week that Telsa will build their European manufacturing facility ‘Gigafactory 4’ in Berlin, recent statements from BMW executives are extra ironic. I suspect that those who laugh at EVs and Elon Musk now will look back and laugh at ICE companies and Klaus Frölich in a few years. For now, such comments are usually taken as evidence that EV adoption will be slow. In a disruptive context however, dismissive comments like this are entirely predictable. Indeed, when viewed against the recent EV unit growth in all markets (1) and the fact the Tesla has not spent a single dollar on traditional advertising to date, I think they are a very positive contrarian signal. The quote below was sourced from a Forbes article in June 2019:

“There are no customer requests for [EVs]. None,” BMW’s director of development, Klaus Frölich, told a shocked round-table… “Europeans won’t buy these things… From what we see, [EVs] are for China and California and everywhere else is better off with plug-in Hybrid Electric Vehicles with good EV range.”

I believe the chart below is insightful when assessing the prospects of EVs. It tells me two things. 1) The demand is very high because people are willing to spend more than normal to purchase the item and 2) The addressable market is much bigger than most people think.

So it won’t surprise you to learn that I think Frölich is missing the biggest disruptive shift in automotive history, but I also believe he is overstating the role of hybrids in the transition. Why? Whilst it’s natural to cling onto the technology you know, pure EV costs will inevitably be lower than hybrids over time due to predictable cost reductions. These are reductions which can’t be achieved when combining both technologies, due to the complexity of doing so and the compromises needed. ‘Inevitable!?’ I hear you say ‘That’s a bold statement!’ Perhaps so, but in the context of history, I don’t think it’s that bold.

Source: SS Savannah 1819 (The first hybrid “steam ship” to cross the Atlantic).

Next week I will explain why EV costs will keep falling and performance will keep improving in the part III, the final act in the Trilogy of the Silent Disruption.

Source: European EV growth rates
Tesla surveys


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The Silent Disruption: Why traditional car makers and customers will get an Electric Shock! Part I

Part I: The customer perspective

 “If I’d asked people what they wanted, they’d have said a faster horse”– Henry Ford

 To most people, this quote from Henry Ford is a funny quip. It’s fun to look back and laugh at the silly old people of the past who thought cars would never replace horses.

But if you know how disruptive innovation works Henry Ford’s point is a serious one.

The reality of America in 1900 was that cars just didn’t make sense to most people. There were no gas stations. Roads were mostly mud or gravel tracks. There was no highway system. Cars were unreliable and very complicated pieces of machinery… and whilst black smiths were plentiful, there were no motor mechanics. Cars were too expensive for most consumers and considered ‘vulgar’ by those in high society. They were also noisy and not much faster than the average horse. The Model T Ford only had 20 horse power and a top speed of 40 mph. There were no traffic lights or laws governing how to drive. In fact, such were the barriers to adoption that Ford constructed a highway and gas station network to facilitate demand (1) and the Ford Motor Co. internally produced everything, because there was no established supply chain. How could there be?

As a result of these bold strategic moves, The Ford Motor Co. dominated the market for decades.
Source: Tony Seba, Stanford University

One paradox of disruptive innovation is that the customer is not always right. That’s because the average customer does not closely track the rate of change in disruptive technologies. In fact, it is normal for people to underappreciate the rate of change in a new technology that they do not yet use. Customers certainly can be fickle however, and whilst initially sceptical and resistant to the friction inherent in change, they will quickly flip when the perceived benefits outweigh the barriers to adoption. As Clayton Christensen observed in his seminal book ‘The Innovators Dilemma’, this can be confusing for the incumbent companies who closely track their customer’s desires.

“Most companies with a practiced discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it is too late.” Clayton Christensen

Source:Innovators Dilemma, Clayton Christensen: Sustaining (i.e. incumbent) technology improves slowly vs. disruptive technology

I believe Electric vehicles (EVs) have quietly moved to a place where they outperform internal combustion vehicles (ICE) on almost every performance vector (2) without most people realising. Indeed, on an apples-to-apples comparison today, the only vectors on which they don’t, is fully loaded range and refuelling speed. And I stress today, because as we’ll see in part III, these frictions will be solved too. In this context, Elon Musk has a proverbial ‘walk in the park’ compared to Henry Ford. Furthermore, his conviction to rapidly expand global production, the Tesla charging network and service centres should make a lot more sense to the cynical naysayers and incumbent competitors.

Yet many traditional car makers still don’t see EVs as a meaningful threat to the status quo. Yes they’re improving but they are still a niche market and will be for decades. Next week I will explain why – like they’re customers – they are blind to this disruptive shift. And as you’ll find out, it’s not because they’re stupid.

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[Video] Insulin Prices in America. What the…?!

Insulin prices in the US have gone up by 1171% over the last 20 years. Patients pay half, insurance companies pay half- and they employ a middle man to negotiate the price down and prevent price rises. So, how has this price increase happened? Craig Bonthron tells us why this greed will catch up with companies in the long term, and talks about the sustainable companies disrupting this trend.

For a more in-depth analysis of the insulin situation in the US see our two-part blog here: part 1, part 2

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Today we’re witnessing a global Climate Strike led primarily by children because – according to science – the future of our planet is in peril. So it’s probably a good time to ask why most of us are willing to carry on our daily lives as normal. I don’t mean to be melodramatic here… it’s a genuine question. We are all guilty parties and my behaviours are probably no better than the average developed market human (i.e. bad).

Is it wilful ignorance? Is it political intransigence? Or is it corporate conspiracy and media manipulation that prevents change?  Some studies in behavioural psychology indicate that being able to ignore or suppress the really bad stuff is a helpful evolutionary trait. It helps protect us against hopelessness and depression. Perhaps it’s that!  But what if it’s not about ignorant politicians, propaganda or evolutionary mental health? What if it is just about time? I mean to say, that what if the future just doesn’t cost us very much?

Catastrophic climate breakdown imminent…..

The legendary investor and environmental campaigner Jeremy Grantham calls this “the tyranny of the discount rate”.  What does he mean by this? It’s a way of saying that by systematically discounting the value of each future year, we are making it less important. And this is a tyranny because it engenders a kind of future blindness.  When we are dealing with multi-decade or multi-century problems, our reaction is kind of… ¯\_(ツ)_/¯

We live in a world largely measured on the wrong short-term measures of value. I addressed this in GDP’s Dirty Little Secret, because this measure of human economic prosperity is clearly not fit for purpose. But when measuring the value of human achievement according to this measure you suddenly learn that human achievement is apparently worthless. Worth nothing! Not less than it should be or shockingly little….. N-O-T-H-I-N-G! The arithmetic is very simple, and it plays out in the chart below.

Source: Source: Kames Capital. * World Bank global GDP estimate of $84.8 trillion US dollars in 2018

On this economic basis, the economic value of my future grandchildren is literally inconsequential today. The history of our planet is measured in billions of years, yet the future value of its current economic output is worth zero in the blink of a geographer’s eye.

Climate catastrophe according to economists

Imagine this global protest against climate change shut down air travel for one week. Imagine that it cost airlines $6.5 billion in lost revenue (3 million flights a day x $300 a ticket). Imagine the second order multiplier effect on business and consumers worldwide amounted to 80 times that cost (a wild exaggeration). The lost GDP now with 100% probability and zero discounting applied would be $526.5bn. There would be a lot of angry people out there. Very angry! But ultimately, this is one week of lost air travel and we would survive it.

But then imagine there is a 90% probability of catastrophic climate breakdown in 50 years. And imagine that the estimated cost of that catastrophe is 50% of global GDP. This is “apocalyptic-nightmare-end-of-civilisation-and-perhaps-our-species” type stuff. Yet, discounted at 8%, this future event only costs us $540 billion in today’s terms. The same as the hypothetical air travel strike above. That’s about half the market value of Apple Inc. today or 0.6% of global GDP. And if catastrophic climate breakdown can be pushed out another 50 years by buying electric cars and eating less meat, that particular catastrophic climate breakdown is only worth $8.4bn in 2019 or 0.001% of today’s GDP. Just a few years on from that and the cost of climate breakdown / GDP = #DIV/0!

 In defiance of tyranny

“The market mechanism does not solve for the appropriate allocation of attention when everything is seen through the lens of capital. Human history is littered with misallocation of attention.  From the Aztecs to Easter Island, we have a habit of being distracted and seeing the scale of a problem too late”   Albert Wenger (Investor & Author of World After Capital)

We are guilty as charged. But whilst children strike, we’ll try to do our (tiny) bit by allocating our client’s capital as sustainably as we can and shouting about it from our small soapbox. We will try to back companies which we think have the best chance of disrupting the status quo and pivoting us to a non-catastrophic (and perhaps even wonderful) future beyond the next quarterly reporting season. But let’s be realistic, this tyranny of future blindness that we have built for ourselves needs an overhaul. Our species is having more impact on the world than any other in the last 4.5 billion years. We need a new framework for thinking about the future costs of the damage being done today. One which is measured in geologic rather than socioeconomic timescales. Our current decision making system which is anchored to a flawed concept of economic value and discounted to nothing in a human lifetime is not it. But neither is anarchy. Anyone got any good ideas? I’m thinking they probably need to be radical, collaborative and disruptive.


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