Tesla’s Superpower

The best form of competitive advantage lies in radical innovation at warp speed on all fronts. For instance, Tesla earns plum profits while the old-line vendors lose money on electric cars. More generally, the firebrand succeeds in diverse fields where failure is the norm.

The keenest form of competitive advantage lies in radical innovation at warp speed on all fronts. The sweeping strategy finds its foremost champion in Tesla the pioneer as it blazes new trails in diverse domains ranging from electric cars and solar roofs to software agents and power grids.

For this purpose, a ground rule prescribes the buildup of products and processes starting from first principles. Another pillar lies in full-spectrum dominance in the marketplace. The wholesome factors explain, for instance, how Tesla earns a plump profit on every car it sells while the old-line vendors suffer dire losses on their electric models. From a larger stance, the pacesetter succeeds in disparate fields where so many have failed before.

Introduction

The purest form of competitive advantage lies in vaulting innovation at warp speed across the board. The leapfrog approach is showcased by Tesla in diverse forms including advanced materials and global logistics, manufacturing systems and marketing channels. The sweeping strategy gives rise to vanguard products ranging from electric cars and solar panels to virtual robots and power grids.

The crux of the wholesome approach lies in problem solving from the ground up. The precept of first principles draws on disparate fields ranging from physics and engineering to logistics and marketing.

An example involves a revamp of the battery that forms the heart of an electric vehicle. In the traditional design, a big snag lies in a small tip at one end of the battery. The nodule acts as a bottleneck during the transfer of electricity both in and out of the storage cell. For this reason, charging an electric car equipped with a battery pack of average capacity is wont to take half an hour or more.

Granted, the battery could be charged more quickly by boosting the current. Unfortunately, the inrush of energy would roast the runty tip and damage the storage cell.

To fix this problem, Tesla drummed up a novel design sporting scores of tabs through which electric current can flow in parallel. In fact, the tabs are so numerous and contiguous that the ensemble looks more like a smooth surface rather than a jagged pile of stubbles; hence the sobriquet of a tabless design.

Given the concurrent layout of the flaps, the battery may be charged in a small fraction of the time required for the traditional approach. Moreover the vanguard device features greater robustness and simpler production thanks in part to manufacturing breakthroughs that assure higher throughput at lower cost.

The buildup of products and processes from scratch applies to every node across the chains of production and distribution, from the procurement of supplies and fabrication of parts to the assembly of products and delivery to customers. To bring up an example, we note that the auto industry round the world is hampered by a shortage of batteries due to the groundswell of demand for electric vehicles: a shortfall brought forth by none other than Tesla itself. The dearth of supply afflicts all vendors and hamstrings their efforts to crank up the output of electric vehicles.

Unlike its competitors, though, Tesla did not sit around and twiddle its thumbs throughout the 2010s. To confront the shortage of batteries looming on the horizon, the dynamo fixed up crafty ways to build potent cells in high volume at low cost.

In addition to erecting its own factories to build the novel widgets en masse, Tesla licensed the technology to the leading vendors of batteries on the planet; namely, Panasonic of Japan, CATL of China, and LG Chem of Korea. In these and other ways, the pathfinder had the foresight to secure multiple lines of supply in addition to expanding its own plants to churn out the newborn batteries by the truckload.

To cite another aspect of the methodic strategy, Tesla struck deals with the leading suppliers of crucial elements needed to fabricate the new-fangled devices; namely, nickel and lithium. Better yet, the beatnik crafted a sleek way to extract lithium from the ground in high volume at low cost in an eco-friendly fashion.

The systematic approach to tackling the entire meshwork of production and distribution resembles the military doctrine of full-spectrum dominance on the battlefield. In the modern era, the spheres of control in warfare range from the land and sea to air and cyberspace. In the business world, the pertinent turf covers every niche and aspect of a given market on a global basis.

The maxim of first principles goes hand in hand with a lucid grasp of means and ends along with their distinctions. For starters, the decision maker has to focus on the primal goals rather than obsess over secondary targets or fixate on outworn methods. A showcase at Tesla involves the design of a giant machine to stamp out a welter of parts as a single unified piece. An early example concerns a casting machine that forges the entire rear underbody of a car as an integrated unit in one fell swoop.

To fulfill this objective, Tesla also had to invent a new type of aluminum alloy that flaunts the properties needed to serve as the fodder for the casting machines. An example concerns the smooth flow of the compound in the molten state, or the resistance to warpage upon the extraction and cooling of the ensuing structure. By early 2021, each of the molded units came to replace a jumble of 70 parts that previously had to be positioned precisely then bolted or welded together (Lambert, 2021; Merano, 2021).

One turnout is an uprise in the strength and precision of the final assembly. Another outcome involves a cutdown of the cost of materials. Moreover the reduced weight of the chassis enables the vehicle to run farther at less cost on a smaller battery. Another payoff involves the riddance of operations performed in the past by hundreds of robots and humans.

To cite an indirect boon, the cutout of numerous procedures frees up large swaths of the factory floor. The cleared spaces may then accommodate additional lines of production in order to ramp up the throughput without building brand-new plants.

The elimination of materials, equipment and operations spotlights another pervasive tonic at Tesla. The head of the company, Elon Musk, promotes the mantra that “the best part is no part, the best process is no process”.

To sum up, the corporate culture calls for vaulting progress at full speed across the board. As a corollary, the entirety of products and processes is fathomed and reworked on an ongoing basis. At a fundamental level, the leader of the firm enjoins the troops to “assume that everything we do is wrong, and make it better”. The motto of wholesale innovation without pause goes a long way in explaining how Tesla succeeds where so many have failed before.

Against All Odds

As we have seen, the trailblazer pursues a tireless policy of building the meshwork of production and distribution from the ground up. The relentless drive to innovate and improve is showcased by a lean system of marketing and distribution based on offbeat techniques.

An exemplar involves the direct sale of cars from the manufacturer to the customer without any middlemen getting in the way. Chief among the latter is the dealership that cumbers distribution channels and retards vehicle shipments even as it cuts into a carmaker’s profits and torments prospective buyers. Thanks to a shortcut introduced by Tesla, any Netizen may purchase a car within a minute or two by using a cellphone or computer rather than waste copious amounts of time and energy at a dealership for the privilege of grappling with pushy salesmen and pointless paperwork.

Another sample of business innovation involves a passive approach to marketing based on the endorsements of existing customers who spread the word. The grassroots form of publicity stands in stark contrast to the racket of old-line carmakers that burn up billions of dollars each year on mounds of advertising in order to coax gullible souls into buying obsolete clunkers.

After clinching a sale, Tesla may also offer an insurance policy to the newfound owner depending on their locality. From a different slant, the role of a smart car as a computer on wheels enables the company to collect an endless stream of data on the vehicle along with its driver. The resulting trove of information may upbear a schedule of insurance premiums tailored to the driving habits and risk profiles of singular customers rather than the blunt statistics of millions of clients in the aggregate. In these and other ways, the brainwaves at Tesla reflect a zeal for creativity and productivity at the frontiers of technology and business.

From a larger stance, the mission of the pilgrim is to accelerate the transition to clean energy throughout the society at large. In the modern culture, the energy sector comprises a far bigger chunk of the global economy than the auto industry. For this reason, the nascent lines of business such as solar roofs and power grids will drive Tesla’s growth downrange even more stoutly than the auto market in terms of relative figures as well as absolute dollars.

The bulk of investors and analysts, however, have a long-standing custom of glossing over the sprouting markets and instead treating Tesla merely as a carmaker (Kim, 2020, 2021). This botch-up represents one of umpteen ways of failing to appraise the maverick in a cogent fashion.

Tesla’s Superpower

At the dawn of the millennium, a popular form of hybrid car runs on a combo of the internal combustion engine (ICE) lashed to an electric battery. This type of vehicle was first put into mass production at the end of the previous century.

For a hybrid rig of this sort, the ICE unit acts as the main source of power. Since the battery plays only a trifling role, the vehicle can make do with an energy pack of low capacity, ho-hum quality, and scrimpy cost. For instance, a full charge of the battery might on its own enable the car to cruise for half an hour along the highway.

On the other hand, an electric car powered solely by a battery pack is a different kind of beast altogether. Due to the hulking demand for energy storage, a raft of advances in technology are required in order to field a battery-electric vehicle (BEV) that displays a decent level of performance at a price tag that the mass of carbuyers can stomach.

The immensity of the challenge shows up in a counterexample involving James Dyson, an engineer and entrepreneur of world-class stature. By crafting a newborn breed of vacuum cleaner as well as other dandy products in his younger years, the inventor became the richest person in Britain by the dawn of the millennium.

In 2017, Dyson took up the daunting task of building a fully electric vehicle. After shelling out US$612 million on the project over a span of two years, however, the entrepreneur finally threw in the towel. As Dyson explained afterward, the vehicle under development was not commercially viable (Phelan, 2020):

Electric cars are very expensive to make. The battery, battery management, electronics and cooling are much more expensive than an internal combustion engine.

Despite the stacks of money and effort lavished on the project, the billionaire had to abandon the venture and lay off the staff of 500 workers. Among the latter was the project leader, a seasoned veteran who had served in executive roles at a couple of olden firms in the auto industry; namely, BMW of Germany and Nissan of Japan (Campbell and Pooler, 2019).

In looking back on the ill-fated venture, Dyson opined at one point that each car would have to sell for $300,000 just for the company to break even. Clearly, then, snagging a profit would require an even bigger price tag.

From a different angle, though, the stodgy firms in the auto industry do sell a smattering of electric vehicles at lower prices. The carmakers of this stripe run the gamut from Ford and General Motors to Toyota and BMW. In that case, how do the hoary vendors pull off the doubtful trick of making money by selling electric wheels?

The short answer is: they don’t. To dispel the myth, Dyson explained that the fossil firms suffer “huge losses on every electric car they sell” (Enright, 2020).

To cite a second and related factor, the economies of scale due to ICE cars provide the old fogies with indirect ways to subsidize their BEV models. The crippling burden of building and selling electric rigs is relieved in motley ways throughout the networks of production and distribution. An example involves the pruning of costs through the bulk procurement of raw materials, or the mass production of overlapping components amongst the ICE and BEV models. Another sample concerns the sharing of distribution channels, or the amortization of administrative overhead.

To recap, the relics in the auto industry use the profits and facilities due to their ICE cars in order to subsidize the deficits from their electric rigs. The purpose of the rigmarole is to tone down the penalties they pay to the government for churning out scads of fossil-fuel cars. By selling a dribble of electric models, the dodgers lower the average level of pollution emitted per vehicle. The toxic gases of this sort include the carbon dioxide that stokes global warming and the nitrogen dioxide that causes lung diseases.

Shattering Records

The Dyson venture was merely one example of the splutter of failed attempts to build an electric car for the mass market in the modern era. If we take a longer view, a ragtag of startups over the past century have tried and failed in their attempts to compete against the incumbents in the auto industry. For one thing, the economies of scale have enabled the entrenched players to wield a massive advantage over the strapped newbies. This truism has long applied to ICE vehicles in general and electric cars in particular.

Remarkably, though, Tesla has prevailed where all others have flopped before. The prime example concerns the Model 3 sedan, the first vehicle designed by the maverick for the mass market. At the time of research, the standard version of the Model bore a price tag of $30,690 in the U.S. market.

Although the nominal price was moderate, the effective cost for the consumer was even lower due to a clutch of incentives from the authorities. The savings amounted to thousands of dollars per car thanks to bonuses offered by state and federal agencies in their efforts to promote the uptake of clean vehicles.

The base price for the Model 3 noted above was remarkable for a couple of reasons. Firstly, the price tag was roughly one-tenth of the tab that Dyson reckoned to be the minimal level needed for a carmaker just to break even on a BEV.

Secondly, Tesla is so productive that it can sell every car it makes at an affordable price and still bag a gross profit of some 25% on average. Better yet, the profit margin will continue to increase over the years to come.

For instance, the brand-new factories currently under construction in Germany and Texas will be even more efficient than the duo of existing plants in California and China. To pile on the good news, the levels of productivity and throughput will continue to burgeon at peppy rates in subsequent factories to be built down the line.

Falling Dinos, Rising Dragons

If we look at the big picture, the ICE age is rapidly coming to an end. Sadly, though, the fusty carmakers make only tepid efforts at best to face the specter despite the clear signs of impending doom. Given their stupor and languor, the dinosaurs are fated to perish en masse.

A fine example is found in Daimler, the proud owner of the Mercedes-Benz marque. As late as September 2019, the head of product development declared that “there are no new plans for further ICE development” (Enright, 2020). In other words, the last stand of the once-mighty firm came down to this: “Let the deluge begin . . . we’re fully prepared to go under”.

The knockout of the dinos has been augured by Sandy Munro, an engineer widely regarded as the world’s foremost authority in auto manufacturing. In his view, only a couple of vendors of global stature in the market today will earn any profits worth noting in the years to come. To be precise, the standouts will be Tesla and Volkswagen (E, 2021).

At this juncture, China represents the biggest market for vehicles in general and electrics in particular. In addition to a melange of joint ventures with foreign brands, scores of carmakers within the country vie for a slice of the local market for electric wheels. As the 2020s wear on, however, most of the entrants will conk out and leave only a small band of survivors.

The hardy firms that emerge from the melee will then sally forth into the world at large. Sad to say, but Munro expects the Chinese juggernauts to steamroll the plodding totems in the auto industry. The first wave of invasion by the Chinese battlers will resemble the conquest of Western markets by Japanese forces during the 1980s. Within a decade or two, however, the onslaught will wipe out most of the mossbacks in spite of — and due to — their feckless custom of whistling in the dark and praying for salvation.

Given the rising tide of green technologies and eco-friendly products in the modern era, electric vehicles should comprise the bulk of sales in the auto industry by the second half of the 2020s. In the absence of Tesla, the U.S. would have no champion at that stage to defend any portion of the local market for vehicles — let alone foreign theaters — to any meaningful extent. With a bit of luck, Volkswagen for its part will play a similar role in enabling Europe to maintain a toehold in the global battlefield.

Yet even Volkswagen, for all its belated plans to plunge headlong into the electric wave, flails around and makes moves that are too little and too late. To bring up an obvious example, the incumbent is no match for the newcomer at this late stage in the game. When asked about the competition in the auto industry, Munro declared in spring 2021 that “There are no competitors to Tesla. But when they do come they’ll be Chinese” (Munro, 2021).

As the 2020s unfold, the mass of investors and gurus will come to recognize Tesla as the king of the realm, attended only by a gaggle of rising stars in China. In due course, a small band of homegrown firms will survive the shakeout currently under way in the Middle Kingdom. The strongest of the bunch will then burst forth, backed by the full weight of the Chinese state, and sweep across the planet.

The breakout of the Chinese marauders will spell disaster for the doddering firms in the auto industry. Granted, the attackers might leave a few scrappy niches for the vanquished firms to fight over. An example of a dinky market lies in exotic cars or specialized trucks. On the whole, though, the future will belong to Tesla and its Chinese counterparts.

To sum up, a bevy of Chinese hulks will come to dominate the auto industry. If Tesla continues to innovate and advance at full throttle, then it should maintain its lead and even act as a beacon for the Chinese contingent. In the absence of the American spearhead, though, the Middle Kingdom will for all intents and purposes come to own the global market for vehicles.

King of Batteries

In line with earlier remarks, the auto industry round the world faces an acute shortage of batteries for use in electric cars. To compound the problem, the conventional cells for energy storage suffer from low performance and high cost. For these and other reasons, the mass of carmakers can squeeze out only a trickle of electric buggies.

To worsen their plight, the dotards in the industry lose money on the electric models they sell. As we saw earlier, the main reason for peddling any electrics at all is to pare down the hefty penalties they pay to the government for their excessive reliance on primitive cars that poison the atmosphere, ravage the environs, and foment human ailments.

For its part, Tesla is erecting a pair of brand-new factories in Germany and Texas to complement its existing plants in California and China. The newborn factories will spew out gobs of batteries in high volume at low cost.

To complement its own production, Tesla has struck long-term deals with the trio of bigwigs in the battery business. These accords are bolstered by other initiatives such as securing the raw materials needed to churn out the batteries in the first place. As a result, the go-getter is the only company in the world that commands the resources needed to crank out millions of electric vehicles each year.

To recap, the dodos in the auto industry can produce only a dribble of electric vehicles for a variety of reasons including the shortage of batteries. To worsen the bind, the litter of electric buggies they do sell eat into the profits from their ICE models.

By contrast, Tesla makes advanced batteries of superior performance in huge numbers with great gusto. In tandem with other breakthroughs such as novel materials and streamlined processes, the pacer builds plenty of cars of high quality at snug prices. Moreover the agile player — unlike its stumbling rivals — earns a juicy profit on each car it sells.

From a larger stance, the vast majority of investors and gurus entertain the far-fetched notion that the mossbacks in the auto industry will soon shake off their torpor and get serious about electrics, then catch up to Tesla and overtake the vanguard. If truth be told, the dreamers of this breed have made the same old claims year after year.

Sadly for the deniers, Tesla has not merely maintained its lead but instead pulled further ahead with each passing year. Moreover, the advantage of the spearhead over its rivals is slated to increase until at least the second half of the 2020s. The competitive edge takes diverse forms such as materials sourcing, manufacturing savvy, and production capacity in addition to product quality, marketing prowess, and customer devotion.

Conclusion

Against all odds, Tesla has single-handedly created a brand-new branch of the economy; namely, a mass market for electric vehicles. Moreover, the upstart earns a plum profit on each car it sells while the old-line vendors suffer dire losses on their electric models.

As a follow-up, the pioneer is now in the early stages of unleashing another revolution. A smart robot on wheels has begun to surpass the performance of human drivers under diverse conditions whether by night or day, in rain or shine, through fog or snow. Before long, the self-driving machine will navigate all manner of roads ranging from busy streets and cramped alleys to crowded highways and wide-open spaces. In other words, the nimble vehicle will deftly traverse cluttered roads in built-up locales as well as uncharted tracts in virgin terrain.

By contrast to the versatile approach to navigation embraced by Tesla, the mass of competitors rely on facile and brittle schemes. For instance, rival firms such as Waymo and Mobileye operate unmanned jalopies that scurry around walled gardens mapped out in advance. More precisely, the contrived rigs rely on external crutches such as landmarks identified beforehand in tandem with constant updates on road conditions as reported by other vehicles in the vicinity. Not surprisingly, the kludgy contraptions run into problems as soon as the external environment differs from the internal representation. This type of discrepancy poses a chronic hazard for the vehicle and its occupants as well as innocent targets such as pedestrians and properties.

While a pre-mapped playpen is easy to navigate, the applications are few and far between. For this reason, the benefits of the stilted approach are meager in comparison to a flexile method that can handle unfamiliar roads and even trackless tracts with ease. An example of the latter involves the bypass of a ditch in a meadow or a detour around a sand dune in the desert.

If we look at the big picture, the mass of investors and pundits entertain the fanciful notion that the mossbacks in the auto industry will catch up to Tesla and overtake the leader in short order. The taunters of this breed make the same claims year after year. Sadly for the scoffers, though, the trailblazer has not merely maintained its lead but instead pulled further ahead with each passing year.

If we look downstream, the advantage of Tesla over its rivals is slated to increase rather than decrease till at least the second half of the 2020s. The modes of outperformance run the gamut from battery performance and production capacity to manufacturing efficiency and product functionality.

At a fundamental level, a key enabler at Tesla lies in the credo of building products and processes starting from first principles. Another elixir deals with full-spectrum dominance of the marketplace ranging from the procurement of raw materials to the distribution of final products. For these and other reasons, the dynamo succeeds in multiplex domains where so many have failed in the past.

To wrap up, the promise of Tesla extends far beyond the narrow markets in the auto industry as reckoned by the mass of investors and observers. The diversity of business ventures and product lines provides the pioneer with plenty of opportunities for lusty growth over the years and decades to come. As a result, the firebrand will continue to blaze trails toward a sustainable economy along with a vibrant society driven by zesty levels of innovation and enterprise.

References

Campbell, P., and M. Pooler. Why Dyson pulled the plug on its ‘fantastic’ electric car. 2019/10/11. https://www.ft.com/content/1e032472-ec34-11e9-85f4-d00e5018f061 — tapped 2021/4/21.

E for Electric. Sandy Munro on Tesla alternatives in 2021. 2021/1/21. Video, mark 12:50. https://www.youtube.com/watch?v=ctv1w3T0sGk — tapped 2021/4/21.

Enright, A. Why can’t anyone make money selling an electric car? 2020/7/19. https://www.whichcar.com.au/news/no-one-is-making-money-building-electric-cars — tapped 2021/4/21.

Kim, S. Outlook for Tesla: Prospects till early 2021 and beyond. 2020/9/20. https://w.mintkit.com/2020/09/outlook-for-tesla.html — tapped 2021/4/20.

Kim, S. Why the price-earnings ratio is a hoax: Tesla spotlights the curse and cure. 2021/1/16. https://w.mintkit.com/2021/01 — tapped 2021/4/20.

Lambert, F. Tesla starts production of Model Y with massive single-piece rear casting. 2021/1/11. https://electrek.co/2021/01/11/tesla-starts-production-model-y-massive-single-piece-rear-casting — tapped 2021/4/21.

Merano, M. Tesla Model Y single-piece rear ‘Megacast’ spotted in production vehicle. 2021/1/19. https://www.teslarati.com/tesla-model-y-single-piece-mega-cast-images — tapped 2021/5/14.

Munro, S. Exclusive Q&A with Sandy Munro — SAE Detroit. 2021/4/28. Video, mark 1:01:41. https://www.youtube.com/watch?v=HtY1gcgy5N4 — tapped 2021/5/3.

Phelan, D. Why James Dyson’s $600 million scrapped electric car wasn’t a waste. 2020/5/19. https://www.forbes.com/sites/davidphelan/2020/05/19/why-james-dysons-600-million-scrapped-electric-car-wasnt-a-waste/?sh=40e5a67960a3 — tapped 2021/4/21.

Disclaimer

This report presents personal views which should not be construed as recommendations to anyone in particular. Each investor has to conduct due diligence and design an agenda tailored to individual circumstances ranging from asset diversification to risk tolerance.

Full Disclosure

I own some shares of Tesla. The holdings began with a small stake in January 2020 but are now less small than they used to be. In the absence of a bombshell in the marketplace, I plan to buy more shares for years to come by allotting a portion of the profits from other stocks along the way.