In 2016 Tesla continued to march fearlessly where the established car makers once feared to tread.
Yes, driving a Tesla still feels a little like stepping into the next decade.
Of course, the world is a better place for Tesla having existed. It’s also been refreshing to see Silicon Valley start-up tech company philosophies swung into play in the car industry, which is an evolutionary beast that shuns revolution.
But Tesla’s window to smash out enough profit to build itself an unassailable brand position is rapidly snapping shut. And it is going backwards, losing money hand over fist, rather than solidifying its base.
It is not just losing money. That was not enough. It is losing credibility with those who aren’t cult members, with one exaggerated, hype-driven statement, prediction or missed target following another.
It is losing credibility by beta testing sometimes dangerously unproven technology (Auto Pilot, anybody?) on the paying customers. It is losing credibility with one product delay after another, then leaning on warranty provisions that are more than double Mercedes-Benz’s, despite battery-electric vehicles (BEV) having far fewer moving parts.
This year it said it was making a big leap forward in autonomous driving. In reality, it was "sacked" by its supplier, MobilEye, after the Israeli company chided Elon Musk for claiming more than the sensor technology could deliver. In reality, Tesla actually took away any semi-autonomous capability its cars already had and replaced it with a bunch of sensors it didn’t have any programming for and, again, claimed more capability than the new sensors were designed for. Far from adding autonomy, the move actually took away commonly accepted stuff like active cruise control. So that’s the sort of hype I’m talking about.
Engineers, software developers, ethicists and senior managers from car makers often just shake their heads at what they see as Tesla’s shenanigans. One Italian engineer asked me why Tesla hasn’t had any criminal proceedings over Auto Pilot deaths but Volkswagen’s nonfatal cheating cost it tens of billions of dollars.
Mercedes-Benz’s parent company, Daimler, owned 20% of Tesla a few years ago and officially sold up because the technical agreement reached its conclusion. The unofficial reason was that Daimler, the world’s oldest car company, couldn’t reconcile its own thinking on validation, development and responsibility with Tesla’s more cavalier, seat-of-the-pants philosophy.
And Tesla’s problems do not just stem from having no proven track record of making consistent profits from building and selling cars. It is not a profitable company, yet it has taken on another unprofitable sister company, saddling itself with an extra couple of billion in debt and justifying it by insisting the rest of us do not understand the business model of vertical clean-power integration.
Its accounting practices seem driven more by the timing of its publicity needs than by anybody else’s generally accepted accounting practices, as the company banks its zero-emission subsidies and then puts them on the books to offset losses or boost quarterly statements, as the demand arises.
It says it does not discount, yet the surge in sales in Q3 this year looked suspiciously discount driven, especially when sales fell off a cliff in Q4. It just so happened to need a strong Q3 to push through the absorption of Solar City (Musk’s troubled solar roof panel operation), then showed off its new solar roof panels without a single detail of pricing or an explanation of how they would be fitted by ordinary tradesmen.
Tesla’s entire business model is built around the absorption of public money, in discounts for its buyers from government zero-emission vehicle (ZEV) subsidies and in the direct attraction of the same thing for building factories and BEV cars. When those subsidies are withdrawn or modified, Tesla sues, because it has based its business model around those subsidies.
When the German government finally joined the ZEV world this year, it announced that its subsidies would cut off just before the starting price for Tesla’s model range. Coincidence? Of course not, not when BMW, Volkswagen, Ford, Opel, Audi and Mercedes-Benz all have BEVs or plug-in hybrids on sale beneath that number.
And where other car makers are reaping profits in China, Tesla has refused to bend to the government’s demands that it set up a joint venture with a local company. In the world’s biggest car market, there is no Tesla and no likelihood of Tesla. Ask a local and they have never heard of it.
And then there is the Gigafactory, which seems unlikely to ever deliver the cost efficiencies Musk insisted it would. The vision for the Gigafactory was to bring all parts of battery production together under one roof to give Tesla an unassailable position, but it was a naive vision.
Making lithium-ion batteries is not a big money spinner in profit terms, but cathode-, anode-and electrolyte-making are. And the companies making the big money on that stuff are not, surprisingly, very willing to hand it over to Tesla. So the Gigafactory will go into production with the least profitable six pieces of the original 11-piece proposal.
What’s worse, there are at least 17 similar gigafactories either on the drawing board or under construction around the world and Tesla is in bed with Panasonic, which isn’t one of the world’s top five battery makers.
Instead of giving Tesla an edge over everybody else, the limitations of its Gigafactory seem to leave it exposed to losses and sudden changes in battery technology.
Without going into detail on its reliability and customer service issues, it all seems like a wide array of missteps for Tesla, but that is not the gathering storm.
The real story is that we all thought the finish line for Tesla’s race to establish itself as a profit-making car company with an innovative brand image would end in 2020 or 2021, when the European Union’s new 95g/km CO2 limit kicks in.
That law, which means new car fleets from each company will have to average less than 95g/km, means BEV and plug-ins will become absolutely vital for every car manufacturer in Europe. And it means that Tesla’s unique place will no longer be unique.
Except that plenty of car makers have found out that they’re already ready to go. And that they would rather make small volume mistakes than big volume mistakes.
Benz has been toying with it for generations, so have Volkswagen, BMW and Audi. But there has been no profit potential in building pure battery-electric cars, as Tesla has generously demonstrated to the traditional premium car makers, saving them billions in pilot programmes to learn the same thing.
They are almost ready now. Jaguar, a brand whose history with things electrical is not exactly robust, will have the gorgeous I-Pace SUV on the market in 2018, with 500km of range. Benz will have its Generation EQ on sale a year later, as will Porsche with the Mission E. Audi will only need another year or so for its own e-tron SUV to be on the market and Volkswagen will follow with an array of the things over three years.
Then there is BMW, which invested heavily in the i brand, learned a lot from the i3 and is ready to electrify every traditional model by 2020, with an i5 and i6 already on the books before 2021 as well as an all-electric X3 which will be built right here in SA.
Plus the Germans have banded together to make a fast-charging network across Europe’s highways.
And all of the Germans, French and Brits will have economy-of-scale advantages over Tesla. They will all do scalable architectures, of the same philosophy that spawns a 3, 4, 5, 6 and 7 Series for example of essentially the same underbits. And, to make matters worse, Toyota has just decided it will turn electric, too.
And there a host of 300km small BEVs going to hit this year, with the Chevrolet Bolt already winning fans in the US at 200 miles of real-world range.
While the unit costs of batteries and electric motors remain higher than internal combustion engines (ICE), the assembly cost and complexity is a lot lower, so it is likely that the major players will shed jobs (and cost) as BEV sales gather momentum.
There is also the small matter of who will buy all these electric cars. If the answer is pessimistic, the traditional makers will have the profits of tens of millions of ICE motors to fall back on. BMW estimates that even by 2025, ICE motors will still be nearly 80% of the market.
Sure, one or two of the current players will end up going the way of Oki or Ericsson or Nokia, but not all of them.
Tesla is staring up at a tsunami that’s getting bigger every month. We thought it had another four years to move its brand and its products to high ground. We were wrong. It has, at best, two years or, at worst, just one. The next one?