Tesla Has the Intangibles: Is There Such a Thing as Too Many Ferraris?

The rich are getting richer. And they are getting spoiled, jaded and, maybe, just a tad bored with the same old, same old, even if it costs north of $100,000, looks totally hot and turns heads wherever it goes.

The downside of the growing wealth of the superluxury category is that it means the market for such vehicles is shrinking because there are too many brands attempting to sell too much product to a declining number of potential buyers. Those that can afford them probably already have the Italian or German high performance model of their choice, and quite possibly more than one.

So the only way to differentiate is with intangibles like amazing environmental performance, a high tech attributes and an attention-grabbing provenance through founder Elon Musk's Silicon Valley heritage. Others are trying to copy this ephemeral brand strategy, as Cadillac has tried by moving its headquarters to lower Manhattan.

Auto companies have long made their profits from the services like finance that are wrapped around the core product. That even the core product sales proposition are now intangibles is a sign that the auto market may be truly disrupted. JL

Edward Niedermeyer reports in Bloomberg:

Tesla's ability to cut through the premium-market clutter proves that new luxury brands must build reputations on values that transcend traditional "luxury" attributes such as comfort and performance. For Tesla, it took a remarkable cocktail of intangibles.
In many ways, this is a fantastic time to sell luxury cars. With a bull market boosting household wealth and easy auto credit enabling buyers to upgrade to more expensive vehicles, it's never been easier for automakers to expand profit margins on the back of brand status. But this also raises fundamental challenge: how to stand out in an increasingly crowded field.
On the one hand, strong demand for premium and luxury cars has lured automakers into flooding a market that is, of course, intrinsically limited. Every brand, from Ferrari on down, now plans on expanding its offerings -- trading the segment's key differentiator, exclusivity, for short- or medium-term profits. Whether it is well-established brands such as Mercedes or Porsche offering more attainable products (the CLA sedan and Macan crossover, respectively) or less-elite brands such as Jaguar, Infiniti, Volvo and Cadillac attempting to boost their status with major investments in new premium products, every automaker has high hopes for volume and profit growth. There are simply too many new products to allow everyone's growth plans to succeed. Something has to give.
On the other hand, automotive technology is so universally excellent today that it's increasingly difficult for brands to "move the needle" with consumers. The traditional unique selling points of premium cars -- high performance, dashboard gizmos, awesome sound systems and seats -- are increasingly available in mass-market models. From Nissan's GTR supercar to Hyundai's Equus sedans, full-line carmakers can sell you an experience that was once considered "luxury."
The result of this double bind has been extreme pressure on the more marginal premium and luxury brands, and a mad scramble to find new ways of increasing prestige. Because consumers cannot possibly keep track of all the products available in the premium space, emphasis has shifted to more abstract brand values, a typical occurrence in any low-information market. This dynamic greatly benefits the players who have rock-solid images built on decades of consistent quality and exclusivity -- think Mercedes, BMW and Audi in the premium space, along with most true "luxury" brands such as Ferrari and Lamborghini -- at the expense of bit players and would-be up-and-comers. The recent inability of British sports-car makers Aston-Martin and Lotus to keep their vehicles compliant with U.S. regulatory standards shows how vulnerable companies can be if they lack bulletproof brand power or the backing of a major automaker to subsidize losses in order to build a reputation.
The exception that proves the rule appears to be Tesla, the first new high-end car brand to break into the public consciousness since Lexus 25 years ago, and the most successful new independent luxury brand in living memory. Though its long-term viability is far from assured, Tesla's ability to cut through the premium-market clutter proves that new luxury brands must build reputations on values that transcend traditional "luxury" attributes such as comfort and performance.
For Tesla, it took a remarkable cocktail of intangibles: a strong association with environmental values, technological and political innovation, Silicon Valley culture and the compelling personality of founder Elon Musk. Other brands are trying to replicate Tesla's cultural clout, whether by relocating their headquarters to luxury markets such as Manhattan and Hong Kong (Cadillac and Infiniti, respectively), backing social and environmental causes, or emphasizing new technologies developed at Silicon Valley research labs -- but none seems likely to achieve the kind of runaway brand growth that Tesla enjoys.

Even with the rich getting richer these days, luxury and premium automakers are locked in a competition for a limited consumer base that has become spoiled by quality and comfort. The one real opportunity to separate from the pack is clear: fully embrace the possibilities of the self-driving car. Though a human chauffeur is likely to remain the gold standard of automotive luxury, the first company to achieve a fundamental break with the century-old automotive paradigm and build a luxury brand around rolling living rooms that pilot themselves has an opportunity to replicate Tesla's breakout success.  

 

1. In the parlance of auto-industry professionals these days, "luxury" is a term reserved for the highest-end cars: think Bentley, Rolls-Royce, Ferrari and Bugatti. Everything else, from the "G3 brands" (Mercedes, BMW, Audi) on down are considered "premium."  Basically, if you offer a vehicle for less than six figures, you aren't a "luxury" brand. You can thank growing global wealth disparities for this bit of marketing sophistry.
   
2. This subsidy largely comes in the form of cost amortization across the kind of scale that no luxury brand enjoys on its own. Even at Porsche, which reaps healthy margins on its core products, the bulk of profits comes from products such as the Cayenne and Macan SUVs, whose development costs have been spread across mass-market brands across the Volkswagen empire. The platform is shared with the Volkswagen Touareg and Audi Q7, and VW will soon add Bentley and Lamborghini-branded versions of the same basic vehicle.