Elon Musk, South African-born entrepreneur and noted Mars enthusiast, is a very wealthy man. And the guy, currently worth roughly $10 billion, didn’t make all that money by accident. Musk earned his billions through strategic innovation. Whether through starting one of the first private companies for space exploration with SpaceX or the development of online payment via Paypal, he has continually turned industries on their head. His next venture? The Automotive industry.
If any of you are Tesla stockholders, you know first-hand how well that venture is going. (TSLA has shown 60% growth in 2014!) Tesla’s success, as well as some of its challenges, come from the strategic way Musk is innovating in the automotive space.
Here are three major ways that Elon Musk is changing the automotive industry.
Energy efficiency…for infinite miles!
This one’s no secret: Teslas don’t use gasoline! With the creation of Tesla, Musk set out to accomplish something no company had done before- produce a luxury electric vehicle. As if the idea of a gasoline-free car wasn’t novel enough, he went even further this summer and extended an “Infinite Mile Warranty” to the Tesla Model S. Yes, that’s infinite miles. Infinite! You can drive your Tesla to the moon and back and still have it under warranty. So not only has Tesla redefined the way cars are fueled, it has redefined the promises that car manufacturers make to their customers. In the words of Musk himself:
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“If we truly believe that electric motors are fundamentally more reliable than gasoline engines, with far fewer moving parts and no oily residue or combustion byproducts to gum up the works, then our warranty policy should reflect that.”
But the innovation at Tesla isn’t limited to the cars themselves, Musk is also broadening the industry’s horizons in the design and production of his vehicles as well. For example, earlier this year he shook the business world with surprise by publicly releasing his patents, a previously unheard of move.
*Although it sounds counterintuitive at first, releasing his company’s designs to others should actually increase Tesla’s business. After all, electric cars won’t become mainstream until there are enough of them on the road to merit a comprehensive network of charging stations across the country. If your goal is more electric cars on the road, why not help other companies build more electric cars? They already have a significant advantage as the first mover in the electric car space, so encouraging further electric production should help, not hurt, their brand.
On the production side, Tesla is changing the game by building an enormous battery factory in Nevada. (Driving infinite miles requires a pretty impressive battery, after all.) According to the Motley Fool , “By 2020, the Gigafactory’s production should match the lithium-ion battery manufacturing level of the entire world’s 2013 output.” What’s more, the gigafactory will be largely powered by renewable energy. Hence the location in Nevada, where solar and wind energy are both readily available.
Direct to Consumer Distribution Model
It may not seem like it, because we all purchase cars, but the automotive industry has long been a business to business model. That is, before a car can be sold to a consumer, it has to be sold from a manufacturer to a dealership. You don’t buy your Ford Focus from Ford, you buy it from your local Ford dealership.
Tesla, however, is using a direct business to consumer model, and choosing to sell their cars via company owned stores. There are a couple of reasons why:
- Tesla feels as though there is a “fundamental conflict of interest” for dealers trying to sell both traditional gasoline vehicles and electric cars- they believe the products are just too different to have a salesman fairly selling both.
- Electric cars are so new and unique that the sales cycle is often longer. Customers require a great deal of information and education before making a purchase, and Tesla would rather entrust the responsibilities of “electric car education” to their own employees. Tesla-dedicated salespeople can have the luxury to spend time educating, as opposed to a salesman at a dealership whose main goal is a quick sale and its corresponding commission.
While this innovative distribution model has many benefits for Tesla, it also presents a unique set of challenges. The old business to business model has been around for so long that there is actually government legislation to protect it. Many states enforce laws stating that manufacturers cannot setup shops competing with dealerships, so Tesla has to be extremely careful about where they place their stores (i.e. far away from dealerships). Texas goes even farther, restricting the sale of Tesla’s in the state completely. As explained in Forbes:
“Texas has some of the most restrictive auto dealer franchise laws in the country. Under those laws, companies like Tesla can feature their automobiles in showrooms that are more akin to art galleries — you can look, but you can’t drive. If a Texan wants to buy a Tesla, they must buy it online, register it in California, ship it to Texas, then register it within 90 days of delivery.”
Throughout his history, though, Musk has treated challenges less like roadblocks and more like opportunities to find creative solutions. Why else would the guy be trying to go to Mars? As Tesla continues to grow, it will be interesting to see how this new distribution model scales with the company.
Appreciation vs. Depreciation
Tesla has done an impressive job designing exciting electric cars. It wasn’t so long ago that we collectively assumed that electric cars needed to be small, box-like, and aesthetically unappealing. Today, thanks to Musk, we equate electric cars with Tesla’s sleek luxury. And they are continuing to surprise us! Whether it is the affordable Model III, due in 2017, or the Model X, an SUV with “Back to the Future” inspired doors, Tesla continues to innovate by making cars that are energy efficient AND extremely cool looking. Considering this track record, we are all in for a treat when the details of the latest Tesla, Model D, are eventually released. According to Elon Musk’s tweet announcement earlier this week the Model D will be unveiled on October 9th. (There is speculation in the press that the the “D” stands for “All Wheel Drive.”)
But perhaps the most impressive feature of the Tesla, is the fact that over time it has the ability to appreciate rather than depreciate. We all know the old adage that “a new car loses value as soon as you drive it off the lot,” and in most cases that is true. As most cars age, their performance decreases. Teslas, however, are loaded with software. And because software can be updated frequently and seamlessly, a Tesla’s capabilities could potentially improve over time. Let Elon Musk explain,
“Model S also has the largest automotive touchscreen in the world and the ability to add new features and capabilities over the air, just like your computer or mobile phone. This is a car that will keep getting better the longer you own it”
That’s right, the longer you own your Tesla, the more features and capabilities the car will offer you. A car that improves with age, how’s that for changing the game?
So let’s tally all this up… Musk is selling us his products directly, guaranteeing their performance for more usage than any other model on the market, and has found a way for these products to improve over time. Did you forget for a second that this product was a CAR? Totally understandable- it’s not just Tesla’s cars that are innovative, it’s their approach to the automotive industry as well.
Are you thinking of buying a Tesla? What do you think of Elon Musk’s innovative new strategies? Let us know in the comments.