Updated Dec. 15, 2016 7:33 a.m. ET
The car of the future will be electric, connected and, eventually, self-driving. But where does that leave the car industry of the future? In a series of articles this month, Heard on the Street takes a look at how investors should approach the biggest technological disruption the car industry has faced in decades.
It is always tempting to frame competition in the car industry as a race. But making a killer product matters more than crossing the finishing line first.
Tesla’s Model 3, due to be released late next year, has been hyped as the Model T of the electric age. The Model T—considered the world’s first affordable car—gave Ford a three-fifths share of the U.S. car market in the early 1920s.
Certainly Mr. Musk has done an impressive job popularizing electric cars. Despite their expense, the existing Tesla Models S and X bagged a dominant 31% share of the roughly 130,000 electric vehicles sold in the U.S. for the year through November. The company also persuaded some 400,000 people to put down a refundable $1,000 deposit to reserve a Model 3.
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But the comparison with Ford cuts the other way, too. By the end of the 1920s the first-mover had been overtaken by fast-follower General Motors, which remains the larger company even today.
This month GM is releasing its all-electric Chevrolet Bolt at a price point similar to the Model 3. By 2020, after electric-product launches from most other global car brands, the choice facing car buyers will be bewildering. In a booming market place, Tesla could lose its early magic just as Ford did.
Another popular comparison sees Tesla as the Apple of electric cars: The automobile is, after all, the ultimate mobile device. But again the parallel is double-edged.
Famously, Apple’s iPhone wasn’t the first smartphone, but the company has absorbed more than 90% of the industry’s profits, estimates UBS. It came up with a killer product and, thanks to its retailing footprint and existing reputation for computers and iPods, exploited it.
Similarly, the race to produce the world’s first affordable electric car was arguably won six years ago when Nissan launched its Leaf. It remains the best-selling electric car model over its history, but sales have undershot initial expectations, probably because the car’s limited battery life gave consumers so-called “range anxiety.”
Could the Model 3 be the product that finally shifts the gear? Possibly. Mr. Musk enjoys an Apple-like marketing halo that will give the Model 3 an advantage over rival products from Detroit and beyond. Consumers also seem to love Tesla’s design, which rejects the modest environmentalism of the Leaf in favor of sleek futurism.
But there are crucial differences between cars and phones. People replace cars less frequently than they buy new phones, giving competitors more time to react to innovation. And car crashes matter more than phone crashes, so practicality can win out over style. Above all, phones are far cheaper to make. Apple could pitch its iPhone as a luxury product, with luxurious margins, that was nonetheless affordable. Tesla can’t make an underlying profit selling cars for upwards of $70,000. The Model 3 is evidence it knows it needs to halve the price to stay in the game.
One thing that won’t change as the auto industry electrifies is the importance of product. As before, the car manufacturers that succeed will be those that can profitably make a range of desirable cars.
BMW has heeded this lesson. Another early pioneer of electric cars, the Munich-based manufacturer probably spent more than €5 billion developing its boxy all-electric i3 model, estimates Morgan Stanley’s Harald Hendrikse, only to face slow sales following the 2013 launch. In November, the company laid out plans to electrify its conventional product range, but unlike German peers Volkswagen and Daimler didn’t set itself a punchy sales target. Instead it has stressed the importance of profitable production and maintaining its brand.
Tesla’s early lead in the luxury market is impressive. But experienced manufacturers from the auto industry’s existing hubs are mastering the new technology. They seem more likely to carry the electric torch into a more affordable era.
Write to Stephen Wilmot at [email protected]