25 April 2016

Stratechery: “It’s a Tesla”

Let’s start with the caveats: no, Tesla did not sell 276,000 Model 3’s in three days;1 that is the number of fully refundable pre-orders that required a deposit of “only” $1,000.2 And yes, Tesla has a history of delivering cars late and with a higher price than expected. Moreover, given the fact that Tesla only delivered just over 50,000 cars last year, no matter how quickly Tesla scales it will almost certainly be years before this first week of reservations is fulfilled, and even then Tesla will only control a fraction of the car market.

With that out of the way, can we marvel at what Tesla and CEO Elon Musk have accomplished? Nearly 300,000 people have willingly parted with $1,000 despite the fact they will not have a chance to purchase a car for years; an astounding 115,000 of them sent in their deposit before they even knew what the car looked like. A friend got in line to make his reservation at 6:45am and there were 123 people in front of him. This is, no matter how you measure it, a phenomenon that is nearly unprecedented; the only possible comparison is Apple and its iPhone.

Ben Thompson

Hmm… If I marvel at something, it’s at the consumers’ unlimited capacity for irrational behavior. Looking at the comparison with Apple’s iPhone from another angle, think about it this way: if you preorder a smartphone and it breaks, what’s the worst it can happen? You may lose a couple of phone calls or messages, you apologize to people, complain for a couple of days and end up buying another one. What happens if your car malfunctions? Worst case scenario: you die, together with everyone in it.

I personally don’t think very highly of Elon Musk, probably the single most important reason why Tesla enjoys such a fervent following. As Ben Thompson discusses in the podcast accompanying this article, the challenges Tesla will face in the coming years are numerous and complicated: scaling up production (the biggest selling automobiles in the US ship around 300,000 units yearly, so even at that scale Tesla will barely be able to fulfill a week’s preorders in a year of production), scaling the supercharger network required for the electric cars and, maybe the most challenging of all, the erosion of trust if the company fails to deliver on it’s promises. Unlike the launch of the iPhone in a market dominated by ‘dumb’ phones, Tesla doesn’t offer a comparable leap in the ability to fulfill consumers’ needs: it gets you from point A to B, just like an old-fashioned car.

I would certainly add some more future threats: competition from traditional car manufacturers, some of which are ready to launch electric vehicles during 2016, at least a year earlier than Tesla’s Model 3; and the recent trend among young people towards less driving and reduced car ownership – a movement best exemplified by the success of Uber and other ride-sharing platforms. Tesla wants to revolutionize the fossil-fuel-burning automobile, but it may be that, by the time that happens, the car itself may play a much reduced (or changed) role in our lives. As a final point, the massive interest in Tesla (albeit only potential for now) hints at how Apple could be equally successful if it manages to launch a car of its own: through its core fans who buy everything Apple offers with little rational restraint.

Tesla Model 3

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