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Beyond electric vehicles: Tesla is disrupting the whole automotive business model
Posted on April 15, 2016 by Matt Pressman
A provocative article in Slate* argues that Tesla Motors [NASDAQ: TSLA] has disrupted the automotive industry more with it's business practices than with its electric vehicle drivetrain. Sure, Tesla has rejected internal combustion engine technology in favor of the electric vehicle, but that's not the whole story. According to Slate's writer Daniel Gross, in addition to superior electric vehicle technology, Tesla's "most meaningful innovation lies in its business practices, which differ significantly from those of other car manufacturers."
Source: Clean Technica
Gross points out, "It’s hard to overstate the economic impact of automobile manufacturing. Autos are both the biggest manufacturing sector and the biggest retail sector. And these sectors spread revenues to a huge number of other parties... auto dealers, gas stations, media. A whole host of business models rest on the traditional avenues of car manufacturing, sales, and ownership." Let's take a look at three examples - gasoline, advertising, and dealers - that represent a seismic paradigm shift by Tesla Motors in the auto sector.
Sure, electric vehicles draw from a wide array of energy sources depending on location. Nevertheless, Gross explains, "Every Tesla vehicle that hits the road will cut into sales of petroleum. The company has already sold 107,000 cars, and none of them use gas. Let’s say, for the sake of argument, that there are 100,000 electric cars on the road, each of which travels 10,000 miles per year. A similar petroleum-fueled car getting 25 miles per gallon would consume 400 gallons annually. For every 100,000 Teslas on the road, that’s 40 million gallons of gasoline not sold—or about $100 million not spent annually at gas stations."
Above: Tesla Supercharger station powered by solar panels (Source: Southern Current)
Tesla spends a total of $0 in their advertising budget. According to Elon Musk, "Tesla does not advertise or pay for endorsements or product placement." And Gross contrasts that with other automakers: "In 2015, three of the top 10 advertisers in the U.S. were car companies: General Motors (No. 3, $3.1 billion), Ford (No. 6, $2.5 billion), and Fiat/Chrysler (No. 8, $2.2 billion). Nor does Tesla engage in much of the expensive marketing efforts that the rest of the industry does, like sponsoring sports teams."
Above: A "make-believe" mock-up print ad created by a Tesla fan (Source: Flickr / Andrew Levin)
We've actually created an infographic to showcase Tesla's unique direct-to-consumer sales model in contrast with franchise dealerships. And, Gross reveals, "The auto companies also spend a lot of time and effort wooing and coddling their vast networks of dealers. These are, in a way, their chief customers, since they actually purchase the cars and are the sole path for reaching retail customers. Tesla doesn’t have dealers and sells directly to consumers through retail stores that it owns. Every sale of a Tesla vehicle, then, represents a loss of margin for a car dealer—and a threat to a century-old structure in which vehicles are sold through dealers who maintain large lots and inventory." Check out this satirical video for some additional background...
Gross also explains how auto dealers tend to: "discount, throw in features, option packages, and cash rewards to help move vehicles off the lot. Last November, for example, the average incentive paid per car sold was $3,108. By contrast, Tesla has constructed a business model in which it generally charges full freight."
In addition, Tesla is disrupting the auto industry in other massive ways as well. It's a leader in self-driving technology, a pioneer in electric vehicle battery development, and a first-mover in over-the-air (OTA) software updates. Previously major automakers were content to write off Tesla as a "niche" automaker, but, with nearly 400,000 pre-orders for its new lower-price Tesla Model 3, that's likely to change. It's possible that Tesla's unique and disruptive business practices might be considered (and adopted) by more of the auto industry's mainstream brands. That said, the longer they wait to catch up, the further ahead Tesla moves out in front of the competition.