Everyone is familiar with Tesla these days. In its early years, though, Tesla was just another aspiring automaker with big dreams and enormous challenges, and at times, seemingly insurmountable financial hurdles. That’s all changed and Tesla is now viewed as a serious competitor by the world’s legacy automakers. Today there’s the Tesla Model 3, Model S, Model X, Model Y, and Tesla Semi. Coming up will be a second-generation Tesla Roadster and Tesla's highly-anticipated Cybertruck. Sixteen years ago, Green Car Journal featured the company’s original electric Roadster and shared the emergence of Tesla as a potential competitor in the electric vehicle field. We present this article just as it ran in Green Car Journal’s Fall 2006 issue to lend context to the ever-unfolding Tesla story.
Excerpted from Fall 2006 issue: Only giant corporations have the resources to develop competent, competitive automobiles, and only internal combustion-powered cars offer the performance and practicality required by today’s drivers. The team at Tesla Motors is tasked with turning these conventions onto their respective heads…and they’re doing it.
From its founding in 2003, most of the company’s efforts have gone into developing the heart of the car, the Energy Storage System (ESS). Some 6,831 lithium-ion cells – each slightly larger than a typical AA battery – are contained inside a large enclosure that fits neatly behind the Roadster’s two seats. The batteries are liquid cooled and attached to an elaborate array of sensors and microprocessors that maintain charge balance between the cells. Tesla chose a commonly used lithium-ion cell so that battery development will continue to drive down the cost and improve performance.
Also developed internally is the motor, which features remarkably high output for its small size: 248 hp and 180 lbs-ft of torque. The motor acts as a generator whenever the driver lifts off the throttle, providing an ‘engine braking’ effect similar to conventional cars, while also recharging the batteries.
The Roadster’s chassis is based on that of the Lotus Elise sports car, but lengthened and beefed up to handle the Roadster’s roughly 350 pounds of extra weight, largely attributable to the battery pack. The body design was penned by the Lotus Design Studio, and final assembly is completed at the Lotus manufacturing facility in England.
Along with a top speed of 130 mph, the company claims a zero to 60 mph time of four seconds, on par with some of the world’s top supercars. But the real test for an electric car is range. Tesla says the batteries will last for 250 miles of pure highway driving, and can be recharged using Tesla’s home-based charging system in under four hours. The batteries are expected to last five years or 100,000 miles, after which time they’ll have 80 percent of their original capacity. In terms of real-world practicality, these are some of the most impressive numbers we’ve seen from an electric car.
There’s one more crucial number: price. The Tesla Roadster starts at $89,000 and tops out at $100,000. That’s steep, but not wholly unrealistic given the level of performance the car achieves.
Tesla Motors thinks there’s plenty of demand for their car, and early signs look good: the first 100 Roadsters were snapped up right away. It will be interesting to see if that kind of buying fervor continues as Tesla opens its direct sales and service centers, first in Northern and Southern California, followed by Chicago, New York, and Miami. The company begins the first production run of 600 to 800 cars next spring, maxing out at 2500 per year after three years if demand holds.
Plans are already in the works for the next model, a 4-door sedan in the vein of Toyota’s Prius. Tesla’s Mike Harrigan thinks that in five to six years, the cost of batteries will have been cut in half – the Roadster’s pack costs about $25,000 today – and will be capable of providing a family sedan with a range of 500 miles, double that of the Roadster.
The Tesla Roadster may be the perfect weapon to launch the Tesla brand. It’s eye-catching and fast and targeted at a segment that can realistically command high prices, thereby helping to absorb the high cost of the batteries and high-tech control system. The next step, and perhaps the greater challenge, is to drive this high concept down to the mainstream. We’ll be watching intently.
Among owners and fans, it’s a foregone conclusion that Tesla will remain the dominant producer of electric vehicles (EVs) as the automotive world increasingly adopts this technology. And why shouldn’t it? Tesla produces the best EVs, and perhaps the best cars made, has developed an incredible brand, and fills waitlists years before a new car is delivered. This all seems to indicate that Tesla has developed a world-beating business model, but is it actually a signal of future trouble?
Tesla’s strategy has always been to build EVs that are better than their internal combustion competitors and sell them for premium prices. In the language of innovation theory, strategies that offer existing consumers better products at higher prices are called sustaining innovations. Sustaining strategies tempt entrepreneurs because they appear so logical: build a better product and customers will come. But research shows that it is a losing strategy for new businesses. In sustaining competition, the industry incumbents nearly always win.
Incumbents are favored because sustaining strategies build on capabilities that they have developed over the course of their rise to dominance. Worse still, a sustaining strategy presents the entrant as a clear and direct threat to the incumbents. The combination of these two factors creates a response that often proves overwhelming for the entrant. Incumbents respond ferociously and deploy so many resources to the battle that the entrant is overcome.
Consider the situation for Tesla: It would be difficult enough for a company that sells 50,000 units per year to fight even one major automaker head-on. But Tesla has attacked not just the automakers but also every incumbent in the value network that produces automobiles, including the entire base of suppliers and dealers. The resources that these aligned interests can bring to bear are vast. Collectively, these firms spend more on R&D every year than Tesla has invested in its lifetime.
Many have argued that the move away from internal combustion is simply too technologically painful for automakers, but the technology underpinning EVs is largely a modular combination of standard components purchased from independent suppliers. The technology simply isn’t a constraining factor, and with every new auto show the automakers demonstrate this with new concept cars, such as the Porsche Mission E, squarely targeting Tesla. With its fantastic design and beloved product, Tesla might have written the playbook that the incumbent automakers will follow to dethrone it.
If better products and technological barriers aren’t enough to defeat incumbents, is there any hope for entrepreneurs? We’re believers in disruptive innovation strategy, which allows entrants to beat even the most-powerful incumbents. Disruptive innovation begins at the bottom of existing markets or by creating new markets where people don’t currently consume. They target the least-attractive customers and produce worse products for less money with lower-cost business models than conventional offerings. In doing so, they create the phenomenon of asymmetric motivation, which causes incumbents to ignore or flee them. But disruptive strategies don’t remain at the bottom of the market – they possess a technological core that allows them to improve their performance over time, capturing more of the market and pushing incumbents into ever-smaller segments at the high-end.
Many observers say this approach could never work in EVs, but we’re seeing it happen today. It takes the form of low-speed EVs driven by security guards on college campuses, retirees in the Sunbelt, and middle class families in China. The manufacturers are largely unknown and that’s the point. Each year they grow bigger and improve their products without any resistance from incumbents. Soon they will be good enough to lure the least-demanding customers away from traditional automakers and the disruption will have begun. While these companies improve their performance to capture more customers, Tesla’s only option is to reduce its performance. Which position would you rather be in?
Thomas Bartman is a Senior Research Fellow at the Forum for Growth and Innovation at Harvard Business School