Disruption for Millionaires: A Tough Road

  Tesla Motors is attracting attention with its new $100,000-sports car. Reason: 0-60 in 4 seconds on an electric vehicle. That kind of performance outclasses Corvettes, Vipers, BMWs and Porsches.

And the Tesla Roadster looks great, which you would expect from a Lotus design. The car is being prepared for sale in mid-2007 and is getting rave previews from auto journalists and tech people including Wired because of its unique technology, adopted from laptop batteries.

(AutoblogGreen's editor, Sebastian Blanco, shot video at the unveiling of the Tesla Roadster in Santa Monica, CA.)

The company is funded by a crowd of Silicon Valley celebrities including execs from Google, Paypal and Ebay. As a the MIT Technology Review said:

Silicon Valley thinks it can do what Detroit could not -- create a thriving business selling electric cars.

The electric car business has been a substantial failure to date. For example, GM sank $2B into its EV1 car and lost money on every one sold, according to a former engineer. And at risk of inviting some conspiracy theorists into the discussion, we can observe that very few electric cars are in use today (around 1,000 in California), compared to, say the Toyota Prius hybrid, which doubled sales to about 100,000 units in 2005, dwarfing all other hybrids and electric vehicles. Even then, hybrids account for 1.2%  of total car sales.

So is the Tesla a disruptive innovation?  Or put another way, is this company likely to create a new growth market where others have failed? Can it eventually move into the mainstream successfully?

Tesla Motors was founded by smart, successful business people and they have created a tremendous car. But, the success of their enterprise seems to depend on three factors:

• Initial success at the very high-end of the market;
• Sales volume sufficient to support an expensive business model;
• A breakthrough in battery technology performance and lower costs for future lower-cost mainstream models;

This is the approach that worked for years in Silicon Valley: Follow the early adopters and count on Moore's law of improving technology to enter the mainstream. But they are starting at the very high end of the market with an electric car that beats conventional cars in terms of sports car performance.

Wired quotes Tesla CEO Martin Eberhard's plans to get into the mass market:

...He's already preparing a sedan, codenamed White Star, which could hit streets as early as 2008. Of course, the sedan won't be as lightweight or aerodynamic as the Roadster, so its range is likely to drop significantly. Eberhard's response: maybe with today's tech. But battery power is improving steadily, and several companies say they may soon double battery life. By the time the sedan comes out, he says, batteries will be ready to deliver: "We're going to ride that technology curve all the way home."

To draw a parallel, it is something like a Cray supercomputer intitiative. But seemingly with the goal of eventually getting into the PC business when component prices fall, chips improve sufficiently, or when the market is ready for a Cray-style PC.

You will note that no supercomputer maker managed to move downstream into the larger market. Among mainframe makers, only IBM did (using a skunkworks team in Boca Raton, far away from HQ) and it exited the PC business last year after never making money. Not a single minicomputer maker managed the transition to the PC business.

This is not a perfect analogy because Tesla is a startup (not an established player like GM) but I wonder if there is some merit. In Tesla's case, the company can rely on a lower-cost business model than conventional auto makers by outsourcing manufacturing and relying mainly on standard technology. Clearly Tesla's focus is on sexy design and battery technology (1,000 lb of Lithion Ion batteries and a liquid cooling circuit.)

Typically disruptive innovations have some of these characteristics, which often cause mainstream competitors to underestimate the newcomers:

• Inferior product in terms of attributes valued by the mainstream market. (Think about how DEC and its minicomputer customers underestimated the role of the PC, an underpowered toy  back in 1981;)
• Superior attributes valued initially by a fringe market which is neglected by mainstream suppliers. (Early adopters the Sony transistor radio in 1956 were rock-and-roll teenagers who valued mobility and privacy above sound quality, reliability and power consumption;)
• In established markets, disruptors typically expand a market by enabling non-consumers to buy in. They are thrilled with the new product, despite its shortcomings. Disruptors do so by making products simpler, more convenient, less costly, or by reducing the expertise required to consume. (Think of Apple's iPod and iTunes, which were the first easy way to convert and pack all your music;)
• Successful disruptive innovations initially seek the toehold market, establish profitability in that niche quickly and maintain a low-cost business model as they grow the niche slowly. This is the exact opposite of most dot-com style business plans which aim high and are based on a high cost structure. Patient for growth/impatient for profit, as Harvard Prof. Clayton Christensen writes.

One could argue that millionaire sports-car buyers represents a fringe market, but I am not sure it is a neglected market. To me, this looks like a tough road ahead for breaking into the mainstream.

Is there a disruptive approach possible for electric cars? 

A few months ago, we wrote about an electric car company with a disruptive approach, Feel Good Cars, a startup pursuing a neglected niche market of seniors in gated communities. With limited speed and range, the ZENN can be seen as inferior to conventional cars. But it is a nice low-cost upgrade from electric golf carts that some seniors are using. Its low-cost business model allows it to be profitable from the start.

There is a risk in that over the longer term Feel Good is counting on a battery breakthrough from EEStor, a secretive Kleiner Perkins startup.  Feel Good has an exclusive on EEStor technology for small cars.

Update: Since we last wrote about the ZENN, Feel Good has recruited a few auto industry execs, has unveiled its ZENN car for shipments to start shortly and won a gold medal from the Michelin challenge for urban vehicles.

** Other Points of View **

Clayton Christensen looks at high-end disruption with a warning:  "Be careful not to apply the label high-end disruption too quickly," he says, because it may be that the innovator is competing on a different set of performance attributes. For example, although Whole Foods Market appears to be a "high-end" disruptor, it is actually offering greater convenience and greater variety than other healthy-food suppliers.

The Disruption Group lists the results from disruption, including new revenue streams and sustainable, high return on equity.  The website also has a CEO Guide to the Benefits of Disruption (pdf)

Tesla Motors' blog by CEO Martin Eberhard talks about the company's three-year history and design decisions along the way, such as working with Lotus.

Anti-marketer Paul Paetz has an alternate take on disruption from the high-end of the market, saying I have underestimated Tesla Motors: "What isn't important for disruption is whether the initial price point is high or low, but that the revenue required to support a startup is far less than what Detroit needs. This is where your point that they need a high volume to support an expensive business model is flawed."

Zack at the OpenForce software blog gives the Tesla a thumbs-up rating for Silicon Valley entrepreneurs and VCs: "I expect these will be more common than Toyota Prius's on Sand Hill road in 2007.  The Tesla Roadster is undeniably cool and I hope it will influence car makers world wide.  This could be the shape of things to come."

Red Herring Interview with Tesla CEO Martin Eberhard including his views on why the electric car has failed so far: "...For the most part, it requires the buyer of such a car to change his or her nature. You’re buying a car that is not as good as an equivalent gas car at all—slower, uglier, with not as much range—and they’re trying to compete essentially on price, where they can’t win. None of those cars were built for people who really like to drive."

Green Car Congress has a posting and online discussion on Feel Good's ZENN car, including detractors as well as supporters.

Clean energy blogger Tyler Hamilton hosted a webcast with Ian Clifford, CEO of Feel Good Cars, which discusses the EEStor battery technology.

...And of course, the feature film Who Killed the Electric Car? offers a point of view. YouTube has a preview online.

Comments

[kt]

They are in no-mistake land for this biz model to work. And when in a niche market, tastes change fast. And if they do change, I can't see much return.

[Paul Paetz]

Perhaps we should look at the reasons it is disruptive and likely to be successful, rather than measure it against an arbitrary set of attributes which don't always apply.

1. Detroit (or Korea or Japan or Stuttgart) all have cost models (even on flexible manufacturing lines) that require mass market sales. For this reason alone, they cannot afford to switch to any alternative fuel vehicle until the infrastructure exists to support it and the componentry and technology involved are priced low enough that joe sixpack can afford to buy it. Even a relatively successful hybrid like the Prius is still too pricey for the mass market, but its success points to a buyer who is more concerned about the environment and making a statement than about price. That cost model, and the need to have a reasonable prospect of profit potential in the $Bs means there is no way they can compete in the electric car market.

2. Electric car technology has advanced sufficiently that as with the Tesla car, it has incredible acceleration, and decent, although not outstanding range. This means it is suitable for a market that values performance, doesn't care about range, and can afford a high price tag because the technology is still in the early stages. A decidely small niche market, not worthy of the big players' attention. But it does suggest that Tesla has the right strategy. High end sports car buyers are looking for excitement and prestige and uniqueness, and tend not to care much about the price (actually, I think you could argue that paying a high price is one of their needs to assist in the showing off). Because the big guys can't afford to go there, but it is a high visibility market niche, it is a perfect market to target to establish a foothold from which to grow.

3. By building a brand identity for electric cars in this exotic niche, they will a) establish that electric is cool, b) it can work in a production car, c) start softening the general market based on the appeal and visibility of the high end marque, d) work the bugs out of the technology and start bringing the price down through both volume and maturity curves, e) establish a big lead in know-how, consumer awareness, cost structure, and market leadership that will be very difficult to catch up to later.

4. It satisfies an increasingly pressing set of needs that include compliance with environmental regulations, the desire to live "green", California's demand for an electric vehicle, Silicon Valley's need for one upmanship (both in entrepreneurialism and in the kind of car that a successful young stud needs to be driving), freedom from dependence on international oil supplies most often found in troubled parts of the world, etc.

What isn't important for disruption is whether the initial price point is high or low, but that the revenue required to support a startup is far less than what Detroit needs. This is where your point that they need a high volume to support an expensive business model is flawed. They only need to sell a few thousand cars to make money. They may wish to break into the mainstream, but they don't need to, and they aren't constrained by the cost of running a massive assembly plant that supports entrenched unions, lacks flexibility, and has enormous tooling, marketing, administration and support costs. Moreover, the fact that usually disruption filters from the bottom up doesn't mean that it doesn't sometimes trickle from the top down.

For example, I think you miss the point with your computer analogy. Computing technology was very disruptive from the first ENIAC. Yet that machine cost billions in today's dollars to build and maintain, and all it could really do was speed the calculation of missile trajectories. However, by starting at the highest end, but tiny niche market needs, computing became established and demand for the capabilities and new features and functionality grew with each generation of price drop and miniaturization and power increase. The PC isn't really a different machine from a mainframe - it just fits in a smaller box at a lower price point. Computer technology indeed trickled down from the high end to a point where you can now buy a greeting card with a disposable voice chip embedded that sings you happy birthday -- about as trivial a low-end application as one could imagine.

It isn't the company that's disruptive, it's the technology and the business models that it enables. The purveyors of disruption, most often startups because they aren't inhibited by their baggage and cost-stuctures and existing business frame of reference, is the carrier, but it is the technology and the individuals who believe against all reasonable evidence to the contrary that if they build it, the market will come.

Sorry to say to Pip Coburn, but that is how these things always start. Market evolution and paying attention to customer needs comes later, but it is almost never the way true invention happens. The entrepreneurial engineer only needs satisfy a market of one -- namely himself. (And that's why disruption is so subversive, counter-culture and niche-oriented.)