Tesla — Disruption at work
Disruption is the theory of competitive response
How do you know an industry is being disrupted? Look at how incumbents are acting. Tesla is a great example of disruption at work. In numerous conversations with market participants in the auto sector I gathered impressions of how the incumbents feel about Tesla. The conclusion is; this market is in the midst of a massive disruption.
There is one key element of a disruptor. They come up with a new kind of product which either enters a market in the low end or creates a whole new kind of demand which is not covered by the incumbents. Apple for example came to market with an internet connected phone. While incumbents like Nokia or Blackberry were selling phones with some sort of online access, Apple came to market with a fully internet capable mini computer with a phone, camera and map attached to it. Demand for this product didn’t exist before 2007 since there was no such thing. Hence the incumbents didn’t protect that turf. They kept protecting their turf. They kept talking about how bad the Iphone was as a phone, how inferior the sound quality of voice conversations etc. As a consequence Apple had the whole market, today we call it smartphone market, to themselves. Later Samsung and others came but all the incumbents disappeared. This is a classic type of disruption.
Tesla follows the same trajectory. Tesla is not in the car market. It sells electric hardware and software that happens to fulfill functions that cars fulfill today. Hence lots of people particularly Wall Street analysts look at Tesla as a car company. But it’s not. Tesla is creating a whole new market with a whole new demand. It’s the demand for electric transportation and software driven services such as autonomy, summon and other Tesla only services. Demand for this didn’t exist before ,so incumbents didn’t respond. In fact, they still are not responding. More importantly, the narrative around Tesla is that the cars are not of the same quality, that the range is not the same, that the sound is not as mussley as real sports cars etc. These are typical responses by incumbents who are in midst of a disruption.
The Tesla disruption is already being felt in the numbers of competing brands, above all the German brands. BMW, Daimler and to a lesser extent Audi are suffering market share. Another interesting behavioral fact is that none of them admit that they are loosing share to Tesla. While their numbers are down in the US (where Tesla’s Model 3 is penetrating rapidly) they all have different excuses. Audi is referring to the Diesel scandal that its parent company VW is suffering from. BMW is talking about the shift to SUVs which is hurting their passenger car segment and Daimler is talking about supply issues, whatever that means. Daimler has issued 4 profit warnings in one year. None of them are specific about Tesla’s impact on the market. BMW has replaced their CEO in 2019 and no mention of Tesla, either.
Disruption is a powerful investment thesis. If you are right and invest in a disrupting entity you can reap huge profits. Look at Apple, Amazon, Walmart or Coca Cola. No matter how far back you go, disruptors always make it big. Tesla is even more extreme, since the market they are disrupting is gigantic. The global transportation market alone is in the trillions. But we don’t even know what a software centric transportation services market will look like. Think of autonomous driving, intelligent path planning, scheduling, optimizing for energy consumption, on board entertainment. The list goes on and on. It’s a multi trillion dollar market. As a disruptor Tesla should eventually end up with a large market share of the total market. But more important, in the beginning they will have almost all of the market.
As a consequence the top line of Tesla will grow in line with the growth of the market for electric and software centric transportation. If that market reaches 500 Bio. $ by 2025 Tesla might reap most of the sales. Let’s assume 400 Bio. $. So, similar to Amazon or Apple, who are still by far the largest benefactors of the market they created, Tesla will be the benefactor for a long time. Eventually competition and diversification will kick in. Coca Cola created the market for branded consumer goods. Of course, today this market is huge and Coke only has a fraction of that. But for a long time Coke was the only game in town.
The risk with Tesla is execution. If they can’t grow the market for electric software centric transportation, then their sales will not grow, either. They are in the drivers’ seat.