Netflix was a pioneer in the online streaming industry. This year, it became clear that the incumbents had finally caught up. What’s more, Netflix is not poised — as it was in 2007 — to enjoy rapid upward growth by creating a new industry that builds on its strengths.
Now — after reporting a drop in subscribers — its stock trades 74% below its October 2021 peak.
Could the same thing happen to Tesla? An MIT professor and a J.D. Power & Associates executive told me that Tesla — whose stock sits 43% below its high — will face considerable challenges from incumbents.
However, by improving its vehicle design, offering a broader product selection, boosting manufacturing quality, and upgrading its customer service, they could envision Tesla sustaining its rapid growth by capturing more mainstream customers.
For years, Netflix defied analysts who said that the likes of Disney, HBO, and the rest of the video entertainment industry would eventually catch up to the streaming pioneer.
Last month, right before Netflix reported much worse than expected first quarter results — a loss of 200,000 subscribers and a forecast of two million fewer by the end of June.
Since then, its stock has dropped 48% from $349 to $183. The core argument I made before Tesla reported was as follows:
The biggest problem I see for Netflix is that the online streaming market that it created is mature. To resume the 27% average annual revenue growth it enjoyed in the previous decade, Netflix must create a new industry which grows very rapidly — as online streaming did back then.
While the same outcome does not appear imminent for Tesla, Tesla has pioneered the EV industry and its success has attracted a response from Internal Combustion Engine (ICE)-focused incumbents.
In the hybrid and EV industry — which IBISWorld estimates reached $17.5 billion in 2021 — Tesla controlled 15.7%. However, ICE-focused rivals also had a considerable share — including Ford (18.8%), Honda (16.6%), and Toyota (10%).
To be sure, most of these incumbents sold hybrids — with some EVs. However, Ford said last month that it had 200,000 orders for its F-150 Lightning and Morgan Stanley forecasts that by 2030, a third of Ford’s revenue — representing some 1.2 million EVs. Toyota, VW, Mercedes, BMW and GM also have plans for adding more EVs.
Nevertheless, Tesla is clearly the winner among EV early adopters who have the money to pay over $100,000 to buy a rapidly accelerating, sporty-looking, EV that can be a second or third car to drive for fun on weekends.
Mass market customers may not be as easily turned into Tesla fans. After all, according to CNBC, the average EV — priced at $56,437 — is about $10,000 more expensive than the average ICE-vehicle. To be sure, it costs less — between $10 and $45 —to recharge an EV battery than to fill up your gas tank.
Sadly, it can take half an hour to recharge your battery at a charging station — or as long as 40 hours at home. What’s more there are only about 46,000 recharging stations — compared to some 150,000 gas stations. So the risk of running out of battery power remains high enough to push many mass market consumers who don’t like paying $120 to fill their gas tanks to a hybrid rather than an EV.
Will Tesla — which grew nearly 81% in the first quarter to Ford’s 5% revenue decline — be able to sustain that growth by winning over mass market customers?
Tesla brings considerable strengths to this challenge. According to CleanTechnica, ahead of its rivals, Tesla realized that controlling its own supply of batteries and operating a large charging network would be essential capabilities. Moreover, its ability to improve its vehicle capabilities and its emotionally compelling branding are powerful advantages — particularly for tech-savvy early-adopters.
In 2020, Tesla produced four all-electric vehicles — the Tesla Models S, X, 3, and Y, all of which required significant battery capacity. In June 2014, Tesla broke ground on its first battery Gigafactory outside Sparks, Nevada and in 2020 it produced more batteries in terms of kWh than all other carmakers combined.
As Tesla added more battery manufacturing capacity, its cost of battery cells continued to decline through economies of scale, innovative manufacturing, reduction of waste, and the simple optimization of locating most manufacturing processes under one roof.
Tesla’s batteries outperform the industry due to a number of factors. These include the quality of battery partner Panasonic’s cells, Tesla’s continual improvement of the packs and the battery chemistry, and its Tesla Powerwall 2, a DC energy storage system with a usable capacity of 13.5 kilowatt-hours per Powerwall.
Battery production — despite supply chain constraints and rising prices of raw materials — remains essential for Tesla’s growth.
As David Keith, Assistant Professor System Dynamics at MIT’s Sloan School of Management, told me in a May 12 interview, “Despite the high demand, the battery supply chain is the critical path. New Gigafactory capacity is needed to build batteries. Costs must come down with scale, and Tesla must keep mining precious metals like lithium whose price is going up and rare earth elements.”
Tesla’s charging stations — Superchargers that range in power from 72 kW for Tesla’s Urban Superchargers up to 250 kW — create efficient recharging opportunities for Tesla’s EV drivers. Compared to rival networks, in 2020, Tesla’s pay-as-you go Supercharger network was more widespread, better integrated for road trips and easier to use.
For consumers, Tesla’s charging network is so important that an MIT researcher thinks the government should step in to gradually expand the EV charging network over decades.
As Bryan Reimer, Research Scientist, MIT AgeLab, told me in a May 13 interview, “The Supercharger network is a huge competitive advantage for Tesla. To encourage widespread EV adoption, the charging network should slowly and steadily increase to adapt to market needs. Tesla competitors will not do this because they do not [see this as a high return investment] so the government should invest $100 billion over the next five to 20 years.”
Tesla’s provides continuous over-the-air updates for its EVs. For example, in June 2020, Tesla provided seven new software updates to improve traffic light and stop sign control, backup camera functions, dashcam viewing capabilities, walkaway door-lock functions, TuneIn operations, language support, and cabin camera performance.
Tesla transformed the image of all-electric cars from small, slow vehicles to fast vehicles that buyers crave. The performance/price ratio of the Tesla Model 3 and its permanent magnet synchronous reluctance motor contributed to its high unit sales – about three times that of the second bestselling EV in 2019.
Along with its strengths, Tesla faces significant challenges – most notably vehicle quality and stronger competition. According to the New York Times, in December 2021, Tesla told regulators it would recall at least 475,000 cars for defects that could cause a rearview camera to fail and a front hood to open unexpectedly. Moreover, regulators were investigating the safety of its Autopilot system.
Tesla has a big opportunity to improve in manufacturing quality at scale. As Keith said, “Building cars at high scale with high quality is hard. Does a new technology — electric-powered vehicles — make it easier? No. GM first offered the Chevy Volt in 2008 during the financial crisis when auto sales fell 40% and the company was bailed out.”
While the move fast and break things approach can be effective for software development, it is more challenging to apply to the auto industry. Keith said, “Musk came at it with a hacker mentality — the key would be the software with an electric engine as its beating heart. But he still needed to build a 4,000 pound metal vehicle. You still needed to hire and manage skilled craftsmen and build a vehicle that could accelerate. Can a single organization bang metal, make great software, and integrate all the parts — such as the batteries and motor? Has an electric powertrain changed the car?”
Perhaps Tesla will improve over time. “Tesla has not mastered quality — it makes cars with panel gaps. Its customers are early adopters who see themselves as part of a revolution that is crafting something new. If there is a problem with the car they are proud to report it to the company. It is not the same as a Series 5 BMW. Tesla is constantly changing things,” he told me.
In addition, as Stephen Beck, managing partner at cg42, told the Times, Tesla would keep growing yet it faced competition that was getting stronger.
The nature of that competition will follow a pattern of proliferation and shakeout. As Keith explained, “EV has followed the pattern Jim Utterback wrote about: proliferation and then a shakeout as the industry converges around the companies that will lead the new thing forward. $5 to $6 a gallon gas will create demand for EV. Incumbents like Jaguar, McLaren, Hyundai have EVs. There are over 60 EV and hybrid makers and 400 ICE companies. In late 2010, the Chevy Volt was the first generation of EVs, Tesla is the second generation, and the third generation is more affordable, longer-range.”
To respond to these challenges, Tesla needs to broaden and improve its product line and provide better customer service.
As Dave Sargent, VP, Global Automotive at J.D. Power & Associates, explained in a May 18 interview, “As rivals introduce new products over the next few years, Tesla needs to improve its styling and broaden its product line. While Tesla has won many early adopters as customers, when it moves to the rest of the market, it will have to show that its vehicles are better. In addition, many customers have told me that when they have a problem with their vehicle, Tesla makes it a pain to get it fixed.”
Can Tesla win over the mass market? To appeal to people who want a car — not a Tesla — the product has to be “objectively better than everyone else’s” said Sargent.
If Tesla can’t do that, its growth — like Netflix’s did — could slow way down in the future.