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.
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?
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.
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