In 1885, Karl Benz mounted a gasoline motor to a purpose-built three-wheel chassis and received a patent for the first automobile, the "Motorwagen." A number of other entrepreneurs and inventors came up with their own designs, but most were pretty primitive and few were produced in enough volume to be considered as more than prototypes. The exception was the "Curved-Dash Oldsmobile" introduced in 1901 by Ransom Olds and generally considered the first mass-produced automobile - built on an assembly line using interchangeable parts. By the time production ended in 1907, approximately 19,000 of Curved-Dash Oldsmobiles had been produced.
As you can imagine, early automobiles were scarce, unreliable, and expensive. But this would change when Henry Ford introduced the Model T in 1908. Utilizing innovations in design and manufacturing, the Model T was both more reliable and more affordable than other cars of its time. It would go on to sell 15 Million units before production ended in 1927 to make way for the similarly successful Model A.
(FYI: While Olds was the first to build a car on an assembly line, Henry Ford invented themovingassembly line, where the vehicle moved via conveyor as each worker performed their assigned task.)
During this same time period, William Durant began assembling what would become General Motors. Having founded General Motors in 1908 as a holding company for Buick, Durant would go on to acquire more than 20 automobile companies by 1910, including Oldsmobile and Cadillac, before his bankers seized control of the holding company. Durant then partnered with Louis Chevrolet to found Chevrolet Motor Car Company in 1911 and regained control of General Motors in 1916 through a reverse merger. Durant was again forced out in 1921. He was succeeded by Alfred P. Sloan, who is generally seen as both a key architect in assembling the modern General Motors and as an early adopter of what would later become known as the m-form (multi-divisional, conglomerate) organizational design.
As the industry grew in the United States, there were cycles of boom and bust as the automobile industry dealt with the economic depression of the 1930's, World-War 2, post-war economic expansion, unionization and labor conflicts, the oil embargo and gas shortages of the 1970's, environmental and safety regulation, competition from imports, and the 2007 economic collapse. Some of these past events have led to significant changes in the industry, but the dominant business model for the automobile manufacturer has remained essentially unchanged: manufacture a vehicle (car, truck, SUV, etc.) and use your dealer network to sell it to an individual (or company) who drives it for work or pleasure.
Recently, however, there have been a number of technological, demographic, and environmental developments that threaten to disrupt the dominant business model:
- Although we aren't there yet, autonomous vehicle technologies offer the potential for driverless vehicles, whether occupied or not.
- Hybrid or pure electric power trains are displacing the internal combustion engine as the dominant design due to environmental concerns about burning fossil fuels coupled with advancements in battery and electric motor technologies.
- It may be hard to see in Nebraska, but the general trend in both the United States and globally is towards increased urbanization. More people living in cities - and the accompanying increase in population density -- means more traffic congestion, increased use of mass transportation and/or ride-sharing. Coupled with generally higher costs for parking, insurance and registration, individual vehicle ownership is less attractive.
- Technology is changing how and where people work. Not only are more people working from home (or the nearest coffee shop), but technology is being used to augment or supplant on-site, face-to-face client visits and team meetings.
- Technologies like 3-D printing, computer-aided design, and robotics are changing the economics of designing and producing automobiles.
- Automobiles are becoming more "digital" and less "analog." This doesn't just apply to navigation, communication and entertainment systems; computer and servo technologies such as "drive-by-wire" are replacing mechanical systems, computers monitor and control everything from engines to transmissions, and these systems are accessible remotely for monitoring, updates, and external control.
These societal and technological trends not only impact the design and manufacture of the vehicle; they have the potential to change the automobile's role in our daily lives. For example, when you consider that the typical individual uses their car only a small percentage of the time while its value is constantly depreciating and fixed costs are being incurred, you can see why the basic concept of individual ownership is being re-examined.
For those involved in the industry, none of this is really news. All of the incumbent automobile companies have begun preparing for industry disruption. Ford has opened a design facility in Silicon Valley and General Motors has undertaken a number of initiatives in launching hybrid and battery-electric vehicles, rolling out level 2 autonomous vehicle technologies, implementing vehicle connectivity technologies, and beginning the restructuring of both its design and production capabilities. BMW, Mercedes, Toyota, Honda, Volkswagen (which includes Audi and Porsche) and others are all spending big bucks on research and development as well as partnering up in a number of joint ventures. And over the past few years, there have been a number of start-ups entering the industry. These new businesses aren't necessarily producing cars for sale to individuals (e.g. Tesla); in many cases they are re-thinking the whole concept of personal mobility and its associated business model.
And before this devolves into just a discussion about Tesla, let me point out a few facts that may help explain why they are only one part of the puzzle and why so many smart investors are shorting Tesla stock:
- Tesla did NOT invent - nor have they perfected - the electric car. In fact, the electric car predates Karl Benz's patent for the gasoline-powered Motorwagen. Thomas Parker built the first production electric car in 1884 and electric-powered taxis were common in London in the late 1890's. At the turn of the century (ca. 1900, that is), 40 percent of the cars in the United States were powered by steam (yes, steam!), 38 percent were electric, and only 22 percent were powered by gasoline. The factors that shifted this balance in favor of gasoline were the improvement of roads, which allowed easier travel over longer distances, and the declining cost of gasoline. City transportation still favored electric vehicles, but range limitations favored internal combustion (still somewhat true today, although EV range is higher and recharging time is lower). Some of the factors driving us back the other way today are improvements in batteries (size, cost, energy density, recharging time); improvements in electric motor and control technologies, many of which were pioneered in hybrid vehicles; and concerns about the environmental and health effects of producing and burning petroleum.
- Tesla is doing okay, but it is actually NOT the largest producer of electric vehicles. True, the Model 3 was the best-selling pure electric vehicle in 2018 (approximately 140,000 delivered world-wide), but the Nissan Leaf still holds the title for the most total units sold (approximately 400,000). The Model 3 outsold the Leaf last year, for the first time, but Nissan introduced a new model for 2019 which is selling well while Tesla Model 3 sales in the U.S. are being impacted by having used up all of the available tax credits that made the Model 3 more affordable. And there are a number of other notable competitive products either already on the market or soon to enter from major players like General Motors, BMW, Mercedes, Jaguar, Audi, Volkswagen, and Toyota.
- While growing, pure electric (battery-electric, or BEV, versus Plug-in Hybrids, or PHEV) vehicles still comprised less than 2% of all vehicles sold in the U.S. last year. There will be a LOT of competition for market share as market demand grows. But there are a number of obstacles to overcome before electric vehicles totally kill off the internal combustion engine. Most notable is range, refueling time, and availability of recharging stations. And, while gasoline is pretty much universal, BEV charging technology is not yet standardized.
- As for autonomous driving technologies, there are a number of automakers with the same level of self-driving technology (level 2, out of 5 levels defined by the Society of Automotive Engineers) and Audi is the first automaker to achieve level 3 certification, although it won't currently offer the level 3 technology in the U.S. due to liability concerns. As in the BEV market, Tesla is a strong player, but it is a competitive field with other strong - and better resourced - competitors.
- Finally, while Elon Musk deserves acknowledgement as a visionary and entrepreneur, Tesla is no longer a start-up and hasn't grown into a particularly well-run company. It has repeatedly missed production milestones, has suffered product quality problems, hasn't achieved profitability targets, and continues to bleed cash. Elon has been in trouble with the SEC and there has been far too much instability and turnover in top management.
- While product design is important, so is quality and production efficiency. Tesla entered as a niche player with an low-volume, expensive model (the Roadster) and experienced success in the low-volume luxury market (Model S). But they are no longer just a niche player, and the competition is a lot more intense in the mass market.
Has Tesla impacted the industry? Yes. But there are other trends and other players that deserve our attention.
You are this industry's future consumers. So, when you look into your personal "crystal ball," what do you see as the future for the automobile industry? Who do you think will be some of the future winners and losers?
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