August 5, 2017    6 minute read

How Model 3 Could Set Up Tesla’s Automotive Dominance

Charging Ahead    August 5, 2017    6 minute read

How Model 3 Could Set Up Tesla’s Automotive Dominance

Elon Musk and his ambitious adventures appear in every other headline these days. With Tesla’s Model 3 being unveiled in the past week with rave reviews such as ‘the Model 3 changes everything’, the sky seems to be the limit for the electric vehicle company who can offer a sporty car with a luxurious interior that can be charged at home, on the road and travel up to 310 miles with a performance that rivals conventional cars. Musk has achieved his goal of producing a mass market battery electric vehicle (BEV). However, the larger picture is that there is a standards war in the car industry, a war in which Tesla and other BEVs have only

Musk has achieved his goal of producing a mass market battery electric vehicle (BEV). However, the larger picture is that there is a standards war in the car industry, a war in which Tesla and other BEVs have only begun to battle inconsistently for market dominance against conventional, hybrid and possibly hydrogen vehicles in the future.

In order to limit global warming below 2 degrees Celsius, the target set by the landmark Paris Agreement, there will need to be 600 million electric vehicles by 2040, according to the International Energy Agency (IEA). Global EV car sales (excluding full hybrids) surpassed 2 million in 2016 having been nearly non-existent 5 years ago (see below), yet despite this rapid growth, EVs still represent just 0.2 percent of total light-duty vehicles and of this tiny percentage, Tesla only contributed 83,922 vehicles to a significantly smaller BEV market in 2016. The battle here is not only to produce enough EVs, but for Musk, to ensure BEVs contribute largely to this growth. However, can Tesla drive this alone?

Musk’s Unparalleled Commitment

Musk’s commitment can only be admired as he ploughs all free cash flow back into R&D to drive down costs and bring follow on products to market as fast as possible. Using Tesla’s recent $2.6bn acquisition of SolarCity and their new $5bn lithium ion Gigafactory designed to supply enough batteries for the 500,000 cars they hope to produce per year by 2018, he’s beginning to show consumers that BEVs can truly compete on performance and price without compromise. Having recently won battery innovator of the year, they are now able to offer a Model 3 that uses a battery with 50% more energy density than other BEVs, has the cheapest price-range ratio on the market (see below), and which can be used on their extensive SuperCharger network with over 5000 Superchargers globally (that can provide half a charge in 20 minutes) or any of their 15,000 ‘destination chargers’ with partner properties .

Unfortunately, the quality of other BEVs doesn’t consistently rival a Tesla. Hardman, Shiu and Steinberger-Wilckens argue that cars such as the Nissan Leaf and Peugeot iOn are indeed available on the mass market but have poor core attributes. Others like BMW and Nissan have developed BEVs, but no one has invested in the technology, performance and infrastructure like Tesla has. Even then, at a price of $35,000, and with regularly missed production deadlines and already a year wait for the new Model 3 in what Musk calls “production hell”, there are concerns for what seems to be the poster boy for sustainable energy.

What Came First, the Chicken or the Egg?

A range of reports has found that consumers have negative perceptions towards EVs due to their high cost, low resale value, limited choice of models, limited range of BEVs, uncertainty about charging possibility and speed. Tesla are directly addressing these issues, but for 600 million EVs to be produced by 2040 and for the BEV market to contribute largely to this, a consistent market-wide improvement on these perceptions is needed. The reality is that without a larger, coordinated effort to improve the offerings of the BEV market, Musk’s vision of an integrated and sustainable energy world starting with harnessing solar power at home, storing it and then using it for transportation, might not fully materialise. The visionary Musk recognises this, conceding that there’s a chicken and egg problem where the car companies are not committing to the market yet because they’re not sure they can sell enough cars.

Unfortunately for Musk, there is a ready made infrastructure for hybrids and conventional cars. The costs of entering are high and the problem is that the industry is characterised by strategic alliances, limiting the sharing and diffusion of specialist knowledge that could help the industry develop. Musk’s response to this was the removal of all his patents, allowing others to benefit from the knowledge his firm has gained, claiming that he “will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.” However, with their relatively limited manufacturing capacity (still only 500,000 per year in 2018) and hybrid cars more readily available (Toyota has sold more than 8 million of them to date, mostly Priuses) they need help in changing the landscape of the market.

Without the development of a ‘bandwagon’ by a number of organisations (car companies, energy providers and governments included) that is used to improve compliments (infrastructure and strategic bundles with solar panels) and directly address the concerns listed above, it’s likely that hybrids will prevail as the driver of EV market growth. The standards war literature shows that to win a war, it’s imperative to pre-empt the market, manage consumer expectations, learn as organisations, innovate and share the value created with other players. Without further commitment to developing industry complimentary goods, the installed base is likely to remain limited based on a re-enforcement argument, whereby a limited installed base limits the development of complementary goods in a self-reinforcing virtuous cycle. Musk needs help flying the flag for BEVs.

Here Comes the Calvary

Fortunately, however, Ford, Volkswagen, Mercedes, and BMW have just partnered to develop a fast-charging network in Europe, aiming to establish ‘thousands’ of stations along European highways by 2020. In addition, Volkswagen aims to sell more than 2 million BEVs a year by 2025 and Volvo have committed to producing three fully electric cars between 2019 and 2021. Provided that these vehicles can rival a Tesla and alongside the new infrastructure convinces consumers that the price, performance, range and infrastructure switching costs are worth their while, Musk’s vision may still have some fight left in it yet.

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