Why Tesla is not ahead of rivals GM, Waymo, and car makers

Tesla CEO Elon
Musk.
AP

• Tesla has
  mastered electric cars, but the technology is nothing that the
  rest of the auto industry can’t easily replicate.
• Traditional carmakers know that vehicles can be a
  low-margin business, so it’s pushing toward mobility-as-service
  undertakings. 
• Tesla
  has no meaningful mobility business and might struggle to catch
  up in this area.

By the numbers, Tesla is getting bigger in a hurry. The company
should deliver more than twice as many vehicles as it did last
year, and its financials are showing one stunning area of
improvement, as revenue swells to historic levels.

But, also by the numbers, Tesla continues to punch far above its
weight in terms of its actual physical presence in the global
auto industry. It has one car factory and one partially completed
battery factory, in California and Nevada, respectively. Its
total manufacturing capacity is roughly 500,000 annually, while
the rest of the industry in the US alone can do 14 million. Its
market capitalization is higher than Ford or Fiat Chrysler
Automobiles.

This outsized impression of success has led numerous Tesla
boosters to attribute a massive first-mover advantage to the
company, arguing that Tesla somehow has a huge lead and that
everybody else will need to play catch-up. 

There are two major problems with that case. The first is that
the market for electric vehicles is currently rather tiny. Tesla
has established itself as a force to be reckoned with in the
automotive equivalent of the solid-gold fluegelhorn market.
Solid-gold flugelhorns could become really, really big in the
next few decades. But for now, well … they’re sold-gold
flugelhorns, and the auto industry is far from sure that they
constitute a true mass market anytime soon.

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The second is that Tesla will somehow get a pass on spending to
remain competitive. My view is that Tesla has the potential to
fill a large role in the middle of the US market, sales-wise. But
to get there, it will require new factories, and it will have to
build them at 21st-century prices.

Addicted to reinventing the wheel

The Model X
SUV.
Justin Sullivan/Getty
Images

Beyond that, Tesla and CEO Elon Musk are sort of addicted to
reinventing the wheel. A massive investment in automated assembly
at its Fremont plant failed in 2017-2018. Meanwhile, GM upgraded
its Orion factory in Michigan to build the Chevy Bolt electric
car by reinforcing an existing assembly line to handle the
heavier weight of vehicles with electric batteries and by adding
a battery pack entry point and installation process. That was
about it. And the same line still builds cars with gas
tanks. 

Another factor to consider is that the traditional car
business doesn’t consider electrification to be that big a deal.
Electric vehicles have been around, in one form or another, for a
century. Tesla under Musk rebranded the electric car, making it
sexy and fast rather than virtuous and underpowered. But swapping
gas-engines for electric propulsion isn’t a heavy lift. Up to
this point, the industry has avoided it because EVs cost a lot
more than gas vehicles, achieving long-range with EVs is
challenging, and the recharging infrastructure is skimpy. Also,
consumer demand has been slight.

Regulatory pressures and a rapidly expanding auto market in China
are forcing carmakers to rethink EVs, but the economics are
anything but worked out. No one is really sure if EV net profit
margins will materialize, even though Tesla often touts its
20%-ish gross margins.

For this reason, two big pivots have occurred in the more
futuristic area of automobility. Number one is the shift to
self-driving cars. This is the electric car of the moment, as
compelling as EVs were ten years ago. Billions of dollars in
value are now being attached to serious autonomous efforts from
GM’s Cruise division and Alphabet’s Waymo.

Mobility-as-a-service is driving business activity

A Chevy
Bolt outfitted with Cruise self-driving
technology.
GM

Number two is mobility as a service. Much of the M&A activity
in the industry is now around alternatives to the automobile and
is focused on the highly urbanized environments of the future,
which could be highly car-unfriendly. Ford
just bought a San Francisco scooter startup, Spin, and has
already acquired a ride-sharing service in Chariot. GM has
developed a ride-hailing/sharing service, Maven. And various
other car companies are doubtlessly planning to use the massive
amount of cash they’ve raked in selling big SUVs for the past few
years to make their own moves.

Tesla has been talking about a networked transportation service,
but it doesn’t yet have anything. Additionally, its very
traditional own-lease model for its cars is somewhat incompatible
with the notion that customers will want to allow strangers to
borrow vehicles that go for $50,000-$150,000. There’s nothing
quite like getting your Model 3 back with a back seat full of
In-N-Out wrappers to turn you off sharing.

Make no mistake, Tesla is an impressive car company, the first
new player to come along in decades. But it doesn’t have an
infinitely flexible business model, and if anybody is going to
play catch-up on mobility-as-a-service, it’s probably going to be
Tesla. The company might not succeed. And guess what? That
wouldn’t be a bad thing. Tesla has upped its electric-car game
considerably since 2014. That should be good enough. It’s simply
the flighty attention spans of Silicon Valley that are endlessly
scoping out the shiny new thing.