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Can Tesla emulate the Apple iPhone?

dmitry-novikov-49gi04Retc4-unsplash-2 Credit:Dmitry Novikov on Unsplash

 In June 2007 Apple launched the iPhone. Despite initial criticism, the iPhone changed the way we communicate, and Apple still leads the smartphone market today. Tesla is changing the way we drive, but the question is, will Tesla still be in the driver's seat in 10 years' time? And were the recent price cuts a good move? 

Is trading margin for market share a good idea?
This question came up when a buddy and I were driving back from the local ski mountain in my Hyundai Ioniq 5 (sorry, Elon, I just could not bring myself to buy a Tesla). Do the recently announced price cuts for Tesla cars signal that the company believes there is trouble ahead?

Certainly, legacy and new automotive manufacturers are intent on taking a big share of the burgeoning EV market. So, are the price cuts simply a matter of heading off the competition? And if so, is it a good strategy to trade margin for market share?

Apple cut the price of the early iPhone
In discussing the issue, my mind was drawn to make a comparison with the Apple iPhone. When Apple cut the price of the original iPhone in 2007, it caused a furor with early adopters who had paid the launch price, but it did stimulate more sales. Today, the iPhone accounts for over 50% of mobile phones in the USA and is market leader globally. Could the success of the iPhone help shed light on what the future might hold for Tesla?

Different but similarly transformational
First, let's get the obvious objection to comparing the iPhone and Tesla out of the way.

Yes, the iPhone is a product and Tesla is a company. Apple had over 30 years business experience of designing and selling computers and iPods before it launched the iPhone. Tesla will have been in business 20 years come July 1st of this year. In that time, it has gone from unproven startup to automotive titan, dominating the emerging EV market.

Unlike Apple, Tesla assembles its own products and struggles to maintain a consistent quality. And the cost differential is huge, with a Model 3 now costing around 40 times the price of a top end iPhone. Finally, the purchase cycle for phones and cars is very different: in the US, most users upgrade their phones every two to three years, but most new car buyers keep their vehicles much longer. If nothing else, this means penetration gains will likely be quicker for a new smartphone than a new car. 

However, I would argue that the iPhone and Tesla vehicles have had a similar transformational effect on their respective markets. Tesla has forced the legacy automakers to respond, just as the iPhone did its competitors. True, today many car buyers still will not consider an EV, but they likely will do so once the charging networks are built out, the cost of buying an EV comes down, and the running costs are proven lower than an ICE vehicle.

First mover advantage?
In discussing whether Tesla would retain its market share, by friend bought up the idea of first mover advantage to support his case that the company was too well-established to lose out to new competitors. In return, I had to point out that first mover advantage is a myth. Nearly half of first movers fail. If such a thing as a first mover did exist, then Robert Anderson, William Morrison, or one of their peers would be as well-known as Henry Ford, and the world would not have taken a massive wrong turn in the 1920s.

For the record, EVs had about a 5% share of the new US car market in 2022. In 1910 or thereabouts EVs has a share more like 33%. It was our subsequent reliance on cheap energy from oil that eventually led Silicon Valley engineers Martin Eberhard and Marc Tarpenning to found Tesla Motors to overcome that addiction and mitigate climate change. Now, thanks to Elon Musk, the market for EVs is booming, in spite of inflation putting the brakes on sales of gas-powered cars (no pun intended – OK, maybe it was).

What are the odds for a pioneering company?
The original proof that 47% of pioneer companies fail comes from an analysis by Golder and Tellis published in the Journal of Market Research in 1993. That paper is still widely quoted, and the history of startups since 1993 only serves to prove its findings. Google was not the first search engine. Facebook was not the first social media platform. Amazon was not the first e-commerce platform. The list goes on. Notably, Golder and Tellis found that among the surviving pioneers, the average market share was 19% in 1990 and only 1 in 10 retained market leadership. The median time frame for a pioneer to retain market leadership was only 5 years.

Can Tesla buck the odds?
To some degree, the answer to this question depends on how you classify Tesla. Is it a pioneer or an early leader (sometimes referred to as a fast follower)? In my opinion, Tesla must be regarded as an early leader, not a pioneer. Never mind the Golden Age of electric vehicles at the turn of the last century, GM's EV1 and others predated Tesla's founding (even though GM appear to have done their best to ensure it was a commercial failure and stopped production in 2002).

Not being a pioneer could be good news for Tesla. Early leaders have a much better success rate than pioneers. In fact, what Golder and Tellis describe as early leaders enter the market an average of 13 years after the pioneer, have a failure rate of 8%, and an average market share of 28%. If we accept that Tesla is an early market leader, then the odds of retaining leadership are more like 1 in 2 than 1 in 10.

Does a rising tide lift all boats equally?
There seems little doubt that EVs are here to stay now legacy auto makers have entered the market for real. Even a laggard market like the US saw EV registrations increase 60% in 2022 and is likely to see EVs to account for 50% of new vehicle sales by 2030.
Given that scenario, there seems plenty of room for all players to grow. However, I cannot help but remember what a VP at Motorola in China once said to me, growing your sales slower than the market still means you are losing to the competition. Tesla may still take pole position in terms of overall US sales in 2022, but the Ford's Mustang Mach-E took the third position, beating out the Model S, with the Chevy Bolt in fifth place.

What do share of sales and search suggest?
There seems little doubt that Tesla is going to lose market share. The brand held a 70% share of new US vehicle registrations in 2021 and that dropped to 65% in the first 9 months of 2022. A report by S&P Global Mobility claims Tesla's share could drop to 20% by 2025 in the face of new and often lower priced competition. Extreme though that might sound, a linear projection of share of search suggests a similar outcome. But then, who on earth would assume a linear trend when there are so many different variables in play? Still, given the rapid increase in the competitive line up, a 30% market share does not seem that unlikely by 2025. After that, who can tell?

Finally, were price cuts the right move?
One finding that stood out to me from the S&P Global Mobility analysis was the fact that Tesla dominates the luxury EV market but is not represented in the non-luxury market (although it was not clear how that distinction was made). So, perhaps the price cuts were an attempt to emulate Apple and make the brand more accessible in the face of cheaper competition? Or was it more force of circumstance? Tesla has proven but aging products, and the model lineup will likely be similar in 2025 given Tesla's ability to bring new models to market. Yes, Cybertruck, but that was originally due to begin production in 2021.

Personally, I think the price cuts are a bad move. Yes, Tesla has previously made a nice profit on the sale of its cars (reportedly 8 times that of Toyota), but if Apple has taught us anything, you do not sell your brand cheap. Following the initial price cut, Apple has been steadfast in not discounting their phones until a new model was launched. To my mind, this strategy has ensured strong profitability and the capability to continue building share over the long-term. For Tesla, sales will continue to grow as the market grows, and when it comes to a battle for share, it is good to have the cash on hand to fund new initiatives. Goodness, Tesla may even have to pay for some good, old fashioned brand advertising before too long!

So, that's my take. What is yours? What am I missing, apart from assuming rational behavior from the CEO? Please share your thoughts.
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June 24, 2024