A Blog by Jonathan Low


Apr 15, 2016

Tesla's Real Innovation Isn't the Electric Car; It's Business Practices

Tesla has captured the public imagination, as the following article explains, without building a dealer network, spending money on advertising, selling stock or bonds to investors: in all of which automobile companies are among the biggest spenders in the world.

This has the potential to transform not just how that industry does business, but how others do as well. It might actually mean more investment flowing to research and development than bankers,' marketers' and other middle men's fees.

We have been conditioned to think of innovation as tied inextricably to products, but the real next new thing may be in processes. Gives new meaning to the phrase 'smart car.' JL

Daniel Gross reports in Slate:

Tesla has managed to score 325,000 orders for a more affordable car without running advertisements or showing up at auto shows, and without building a dealer network. And that’s the real threat it poses to the establishment. It’s creating an alternate business model—and an alternate business ecosystem.
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: suppliers, auto dealers, gas stations, media. A whole host of business models rest on the traditional avenues of car manufacturing, sales, and ownership. Which is why Tesla’s rise and continued success—last week it staged a coup by garnering more than 325,000 reservations for its new Model 3—is so interesting, and so potentially disruptive.
Tesla’s great innovation isn’t the way its cars get around. The concept of using electricity to power cars isn’t exactly a new one, after all, and several other automakers produce electric vehicles. Rather, the company’s most meaningful innovation lies in its business practices, which differ significantly from those of other car manufacturers. As a result, Tesla’s impact will extend far beyond the company’s bottom line. Should its vehicles become commonplace and truly mass-produced, as the company hopes will be the case with the Model 3, and if the company can do it while turning a profit (it lost $717 million on its operations in 2015), it will mean a big shift in revenues throughout the economy—far beyond the $13.4 billion in sales those 325,000 reservations might lead to. For Tesla and its car owners simply don’t spend their money on things that much of the rest of the industry and their customers do.

Let’s count the ways. 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. (Of course, some of that spending is diverted to increased payments for electricity.)


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