E Tesla's Competitive Advantages: Direct Sales, Data, And Software

Even the old, large car companies that were initially reluctant are now acknowledging that the future of automotive transport is electric and autonomous. Research reports by RethinkX and ARK Invest agree that by 2030 the overwhelming majority of miles travelled in passenger vehicles will be autonomous. If these forecasts are even approximately accurate, the landscape of the automotive market will be completely transformed over the next 13 years.

What makes companies successful in the current automotive market is not what will make them successful in the new automotive market. I find that many industry analysts extrapolate future success from past success far too linearly, not accounting for how the competitive dynamics of the market will change. Incumbent car companies are well-designed for the market that existed up until about 2010, but not for the market that will exist in 2030 and onward.

Source: ARK Invest.

Tesla (TSLA), on the other hand, is designed almost perfectly for the market to come. As a pure electric car company, its incentives and distribution model are aligned toward making electric cars. So is its experience, competence, and intellectual property. As a Silicon Valley-based software company, it has the talent and culture for developing software for self-driving cars. That culture also leads it to push forward on new technology faster than auto industry incumbents, and to prize frequent iterations of hardware and software.

1. Tesla has unique, structural advantages in the electric car market thanks to its exclusive focus on electric cars.

These two advantages are 1) asymmetric motivation and 2) a direct sales model.

By asymmetric motivation, I mean that Tesla is incentivized to allocate 100% of its resources to electric cars. Incumbent car companies, on the other hand, are torn between profitable and familiar gasoline cars and capital-intensive, initially lower-margin electric cars that they have to learn how to make.

Tesla’s direct sales model is an advantage due to an intrinsic feature of electric powertrain technology. With 1% of the moving parts of an internal combustion engine according to one estimate, electric cars require much less maintenance than gasoline cars. Car dealerships are highly reliant on maintenance revenue. It accounts for 47% of their gross profit, compared to just 28% for new car sales.

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Disclaimer: I am long TSLA.

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Trent Eady 2 months ago Author's comment

Note: it should say "Disclosure: I am long TSLA", not "Disclaimer".