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.

About the author

Craig Bonthron is an investment manager in the Equities team, responsible for actively co-managing high conviction global equities portfolios. He focuses on analysing disruptive and sustainable investment trends within the technology, healthcare, industrial and consumer sectors in order to identify high conviction stock specific investment ideas.

He joined us in 2014 from SWIP, where he was an investment director in global equities. Prior to SWIP, he was a portfolio manager at Kleinwort Benson Investors. Craig has a 1st Class honours degree in Building Surveying and an MSc with Distinction in Business Information Technology Systems from Strathclyde Business School. He has 18 years’ industry experience. *As at 30 April 2019.

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