Tesla and auto industry disruption.
John Goreham's picture

Tesla Is Many Things But Not An Auto Industry Market Disruptor

Tesla is a fascinating company with compelling products, but the auto industry disruption Tesla is often credited with is hard to justify.
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Tesla is the child of two Silicon Valley-based founders (Elon Musk is not one of them) and the culture of that technology incubating region is a big part of Tesla’s culture. One aspect of this culture is that of being a “disruptor” to the industry in which a product is marketed. Every company and every tech leader wants to be thought of as a “disruptor.” A person or company that changes the traditional way an industry operates, particularly in a new and effective way.

honda vintage bikes

An easy example to understand of a vehicle market disruption is American Honda. In 1959 American Honda opened for business in a small shop in California. Six years later the company had over 70 percent market share in America’s motorcycle market. Honda’s marketing model became the model.

Another example that is perhaps more timely is that of mobile phones (or smartphones, or smart devices, call them what you like). When Apple dropped the iPhone a decade ago, it almost immediately gained significant market share and the basic iPhone design, though there were already phones that did much of what the iPhone did, became the template going forward. Today, Apple has 40% of the U.S. market for mobile smartphones and about 20% globally. The legacy brands that had the most U.S. market share, Motorola, Blackberry, and Nokia, are now almost insignificant as providers of such devices in the U.S. Market. Only Samsung makes a competitive product that has similar market share in the U.S. And, let’s face it, Samsung’s design is pretty much Apple’s design. Tesla’s impact on its industry is nothing like this level of disruption, as we will illustrate.

Before we begin, since some may consider this story a straw-man argument, here are just a few examples of who specifically is calling Tesla a disruptor of the auto industry:
- Teslarati (and Instinet) "Tesla is disrupting the auto industry just like Salesforce disrupted software: Nomura"
- Inside EVs (And Loup Ventures) "Tesla Is So Much More Than An Automotive Disruptor"

There are also those who have questioned whether Tesla is a disruptor before we took a turn:
- Harvard Business Review "Is Tesla Really a Disruptor? (And Why the Answer Matters)"
- MIT Technology Review "How Disruptive Is Tesla, Really?"
- Business Insider "Tesla Is Not Disrupting The Car Industry"

Tesla History
Tesla’s first product was really not a good example of what we think of today as a Tesla vehicle. The Roadster was a Lotus car with a drivetrain swap. As awesome as it was, it did not disrupt anything, barely sold, and went away without a replacement model. However, Tesla’s next product, the Model S was a big deal. It was the first electric car in the modern age that wasn’t a bummer, or a compromise, or just for a few hard-core EV fanatics. If you don’t like the Model S you have a mental problem that should be addressed. The Model S has now had years of regular sales and is still one of the top-five EVs for sale in America. It has also proven to be a top-seller in its car class. It was a successful new car from a new car company.

Tesla Takes A Lead In One Segment
Tesla continued to refine its products and the newer Model 3 is a down-market, smaller-sized version of the basic idea behind the Model S. Everyone loves the Model 3. It’s a great car and without a doubt, it has had a big impact on the individual segment it sells within. That being the compact/midsize (call it the 3 Series-size) premium/performance market. To say that Tesla now dominates that individual segment is fair. Tesla is the sales leader in that specific segment by a wide margin and that is not debatable. Also, many buyers who may otherwise have purchased some other green vehicle (Prius, Lexus CT, Lexus GS Hybrid, Volt, Bolt, Leaf, etc.) do definitely shop the Model 3. Some buy one. However, the more obvious cross-shopper is the BMW 3 Series, Audi A4, Lexus IS, Mercedes C-Class buyer.

Tesla Fans’ View & The Facts
Tesla fans see the cars they love as being a disruption to the auto industry, but is there objective proof? Arguably not. Tesla is for sure a very strong player in the premium/luxury segment. However, that entire segment of the auto industry overall is very small. Individually, the second-tier of premium/luxury brands which Tesla now is part of, each have minuscule sales compared to any of the larger, more mainstream companies and brands. For example, the Honda Civic is larger in sales than the combined sales of Tesla or of any of the automakers that Tesla is now the same size as. And that is just one Honda model that it sells in high volume. Honda has four high-volume models that are always near the top of their segments in sales. And Honda is arguably the smallest of the “larger” automakers in America and globally. Toyota, Ford, FCA, GM, and Nissan in America are at an entirely different level of sales. Globally, VW is also at this higher level.

Unlike disruptors such as Apple with its 40% phone market share, Tesla’s U.S. new-car market share right now is about 1%. With about 17 million vehicles sold annually in America, Tesla, with its now maxed-out production capacity, makes up less than 200,000 annual vehicle sales in America. Even if Tesla succeeds beyond its wildest dreams, and it dreams big, Tesla may one day in the next decade represent 3% of the U.S. total vehicle market. A 3% market share is not disrupting anything. Particularly if that product is sold at a financial loss.

toyota ghg balance

Tesla Hasn’t Displaced Any Other Product
Although Tesla is indeed doing fantastically well in one small premium/performance segment, Tesla didn’t displace any other company or vehicle. The leading green vehicle manufacturer globally and in America is Toyota. Toyota’s green vehicle sales are solid. In the first half of 2019, its green vehicle sales were about flat, despite having had its top-selling vehicle, the RAV4 Hybrid, off the market for a few months while it introduced a new generation. Toyota North America’s total hybrid sales were up 5% to over 110,000 vehicles in the first half of this year. Toyota is still on track to be the U.S. market leader in green vehicle sales for 2019. Unlike GM and FCA America, Toyota doesn’t need to buy ZEV credits. It has more than enough of its own due to its green vehicle footprint.

prius sales and tesla

Related Topic: Prius Sales Fell Off A Cliff In January - Was It Tesla, Or Could This Be The Real Reason Why?

BMW, Lexus, Mercedes, and other premium car companies are also not being displaced. While some have sales that are slightly down, and others slightly up, that trend existed well before Tesla arrived on the scene. In fact, it was Toyota’s Lexus and Honda’s Acura who shook up the luxury market when they arrived and offered a new type of better-than-mainstream vehicle. Other small premium automakers with a green focus like Volvo are currently growing both in sales and in model offerings, and multiple smaller ICE vehicle automakers are having record sales month after month (Subaru comes to mind). A company like Tesla with 1% overall market share cannot be seriously said to have disrupted the sales in that market. It’s illogical. Tesla just hasn’t pushed any other automaker out of the market or taken a leading role the way Apple phones and Honda’s motorbikes did.

Real Disruption In The U.S. Auto Industry
Fans of Tesla (a group I include myself in), point out that every automaker is now constantly issuing press releases about upcoming battery-electric designs. Executives at automakers have even admitted that Tesla has changed their view on what a luxury/premium/performance EV can be. In that way, Tesla has made an impact. But are automakers creating EVs to chase Tesla? No, because there is a much bigger factor in play.

California, America’s largest car market, along with other key states, now mandate that a percentage of vehicles sold be zero-emission vehicles. For now, the penalty for noncompliance is in the form of a fine, which deliciously, gets paid to Tesla in the form of ZEV Credit purchases by companies like FCA and GM who can’t produce enough of their own EVs to satisfy the mandates. Under the prior political party’s leadership, the EPA, Congress, and the Presidency were getting into lockstep with the idea of green vehicle mandates. That movement was slowed a bit by a change in party control, but even the new guard passed a law keeping EV subsidies. The country is moving to mandate EVs, and that was happening with or without Tesla’s participation. Over the past decade, General Motors has had more EV models for sale in America than Tesla, and in more segments.

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The Chevy Volt EREV was the top-selling EV overall in U.S. auto history until early this year when GM began to phase it out (watch the video above for a cool time-lapse of that). Globally, the Nissan Leaf has been the top-selling EV, not a Tesla model. In America, Tesla does not serve the affordable car, truck, or crossover market at all. In EV target states, the Bolt, Volt, and Leaf have been costing consumers less than half the average cost of Tesla’s least expensive model for years. The only commonality they have with Tesla is a plug. The EV movement is certainly being helped by Tesla’s great products, but it was in play before Tesla arrived and would be in play now if Tesla were not part of the scene.

Let’s remember, Tesla is not a “startup.” The company has been in business 16 years and is now selling its third-generation product line. Its vehicle products have evolved rapidly, and impressively. So have all automaker’s products over this time frame. It has been a period of rapid development in many ways, from infotainment to drivetrains, to automation, to safety systems.

Tesla Innovation
Tesla has challenged the status quo with regard to the automotive industry. One of the most obvious ways is its “promotion.” Promotion in marketing encompasses things like sales methods, advertisement, and the way a company gets its message out. While Tesla has definitely not followed the industry’s norms, nobody else is adopting Tesla’s “zero advertisements” policy. In fact, many fans are pleading with Tesla to advertise on forums. Tesla’s CEO, Elon Musk, also promised passionately to end the industry policy of discounting cars off the sticker price. However, that went out the window last March when Tesla began to discount new, never driven cars (we know because the author was offered exactly that type of Tesla discount). Tesla also seemed to have adopted the old auto industry policy of “bait and switch” when it promoted its car as being priced at “$35,000,” but then tried very hard to upsell interested buyers of Tesla’s cars at that price with cars costing about 20% more. If anything, the auto industry is moving Tesla closer to its model than Tesla is moving them to the Tesla model of promotion.

Tesla is an impressive company that sells vehicles that its owners, and those who would like to be owners, love. It is many things. A disruptor to the auto industry it is not. Yet.

John Goreham tweets at @johngoreham. Please send him news tips and follow us at @TorqueNewsAuto.


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Comments

The biggest shock of this article for me is the statement where you say that you are a "Fan of Tesla". Ha Ha Ha. There is not a single opportunity that you pass up to shout a loudly as you can that Tesla has insurmountable problems. Even their successes you actively present as failures. Not recognizing that Tesla is the single greatest EV disruptor of this decade is..is..I cannot express the magnitude of your misguided reasoning here. You are trying to belittle Tesla's impact on the auto industry by imposing your narrow interpretation of disruption. Sure, one strong example of disruptive innovation is creating a new market or process that replaces the existing one (like Tesla not selling their cars through dealerships) to gain top sales. But gaining a dominant market share is not the only way that companies are disruptive. Another disruptive effect is actually changing the direction of future product development. Do you actually believe that VW/Porsche/Audi, BMW, Mercedes, would be producing electric cars today if it weren't for Tesla's sales successes? Would Maserati or Cadillac EVER have commited to building a whole line up of BEVs over the next 5 years without Tesla opening up the EV market in their performance/luxury sector. Did anybody in the corporate automotive industry ever consider that BEVs could outrun supercars? Never. Before Tesla, corporate interest in EVs were purely economy car experiments. Have you so quickly forgotten the fact that performance/luxury cars were exactly the opposite of economy cars before Tesla? The Lamborghini Countach was rated at 6MPG city/10 hwy, and reached 60MPH in 4.7 secs. One of the most iconic supercars ever was the MacLaren F1 cost $815,000+ in 1994 and offered acceleration of 3.2 sec 0-60. The $60K+ Tesla Model 3 Performance does 0-60 in a matching 3.2 seconds, and the P100DL does it in 2.3 seconds! Getting the world to see that EVs can be real competition for the world's top performance/luxury cars at the $40K-$120K price point and beyond, and yet offer Honda Civic level operating costs is unprecedented in automotive history. And all of Tesla's competitors know this, even if you cannot admit that this is a genuine industry disruption.
Well said Dean. You should have your own column!