2013-08-26

Last week, Shai Agassi wrote and we shared two articles regarding how electric vehicles (and Tesla, in particular) are disrupting the automotive world, and will do so much more in the future. In his third article in this series, Shai makes some very interesting points about how new sales channels generally come with disruptive new technologies, why EV sales channels need to be separate from gasmobile sales channels, some excellent options for that, and much more. Have a read!

Operators Wanted: Who Wins When the Electric Car Wins, Part III

By Shai Agassi

My last two posts on the subject have dealt with the 4 lessons to be learned from Tesla and how the “high volume” auto makers must respond. But this goes beyond just manufacturing.

When electric cars go mainstream, we will see the emergence of electric mile operators. More than anyone else in the car industry, GM’s CEO, Dan Akerson, knows that model well – since he used to run MCI and Nextel who were cell phone operators. His companies bought bandwidth (usually from the government in a massive contract) and sold it through its operator’s infrastructure to consumers paying monthly contracts for minutes and bytes.

An EV “mileage operator” will buy massive amounts of batteries and electricity, keeping their cost of ownership away from the customer at the dealership and off the car companies’ balance sheet. By setting up the right infrastructure and offering a simple monthly mileage contracts to consumers an operator helps complete the EV experience and grow the mass-market appeal.

Imagine how many people would love buy an insanely great car, pay less than $10,000 for it, and sign up to a weekly contract that effectively costs the same as what you pay the gas stations to refill your car once a week. That new EV will not only offer superior performance, it will also allow you to drive as many miles as you want per month – all at a fixed fee. While an “all-you-can-drive contract” may not fit the short distance urban driver, who barely moves their car in fear of losing their parking spot, it sure fits the needs of millions of suburban commuters who drive an hour each way to work and back in traffic and fuel up twice a week.

Those new operators will be the car industry’s best friends – in fact, unlike the gas stations today, these operators will eventually subsidize the cost of buying an electric car, and replace government’s incentive with subsidies. They can do so once they repay the original cost of setting up infrastructure, since the cost of batteries continues to decline. It will feel much like AT&T subsidizing the cost of a new iPhone for their subscribers every three years. That operator subsidy will allow the government to eventually back away from the support it has to provide this nascent EV market once volumes turn higher.

Changing Distribution

When you look at big market disruption, they tend to happen when sales channels get disrupted. See the effect Amazon had on the book industry, NetFlix on video rental, Apple on music sales, Apple Stores on computer sales. The combination of new product category offered at a disruptive price through a new sales channel is a real game changer.

Getting EV prices below $10,000 allows industry leaders to build a whole new direct sales channel. This channel has to be dedicated to EV sales. It can sit side-by-side with its current dealers. It can even leverage the same service infrastructure. Yet it has to differentiate both the sales people and storefront space. A person walking into an EV dealership cannot be persuaded to change their mind and pick up a gasoline car. As GM and Nissan experienced with their Volt and Leaf launches, most buyers were more interested in the drive train under the hood than the emblem on top of it.

Other alternative channels may even be current mass volume distributors of electric appliance: channels like Best Buy. At the extreme it could be a channel that is primarily web based. At a price point that is at parity with used cars, it could compete for consumers who do not enter dealerships today – used car buyers on eBay. There is no reason why those new sub $10,000 EVs shouldn’t be offered on eBay as a very viable alternative to used cars. eBay sells hundreds of thousand if not millions of cars at that price point every year.

Even though Tesla does not need to contend with past dealer contracts and an existing dealer channel, it still has a legal battle on its hand in in some US states. Franchise law in the US protects dealerships from car companies wishing to cut their dealers off after the dealers have made massive investments and set expensive dealerships. The industry should work with the dealers, not against them, as the transition to EV rolls out. Some dealers will want to take part, and will be willing to invest, others may want to keep just the service passing the demand development investment back to HQ.

Finally, another option all carmakers can investigate is the creation of a completely separate brand. GM could revive a brand such as Saturn, much like Ford and Chrysler can revive or create brands they no longer use. Such a channel could be owned, like Apple Stores, or a partnership with automotive services networks like Jiffy Lube or even Penske’s.

First Mover Advantage?

The first mover to cross the mass volume EV threshold will be the company that makes a car that captures more than 1% of the new sales mark in any given year. Globally that threshold is set at approximately 1 million cars per year; US only, that threshold is close to 200,000 cars. That first car and its platform, supporting many variants, will become a category-defining car. Think of the Prius and you understand what a category-defining car means to the market and carmaker alike.

Historically, we have seen similar categories emerge seemingly overnight without prior proof of market demand. Think back to Chrysler’s SUV and Minivans, cars that defined categories. At Chrysler it was Bob Lutz who defied the odds and delivered insanely great cars to seemingly non-existent demand that materialized around soccer moms and suburban SUV drivers. Go back a century and remember that Henry Ford didn’t run market surveys to cut the price tag on his Ford Model-T. The result of this disruptive mass produced car, priced at 1/3 of that time’s average market price, defined not just the category but the entire industry.

So follow the lessons from the Model-S: Produce a base version of an electric cross over. Make it beautiful and benefit from great electric performance. Then take a page from Ford’s Model-T game plan: price that new car at a disruptive price of $9,999, “batteries not included” (after operator subsidies and government incentives). At high volume, even at that price, this car will be making great profit for the carmaker.

Support the car with an operator that deploys infrastructure making this EV more convenient to use than a gasoline car. The operator will own the batteries, and offer electric miles at weekly cost which is at parity what the average driver pays for gasoline today. Only this service contract will come with unlimited miles. Then offer various luxury versions of the car, with many “options” offered at higher price points. Consumers who are offered an insanely great car for $9,999 will buy a ton of add-ons, generating even better margin for the carmaker.

The first mover will get the benefit of volume. In the car industry, high volume production usually translates into lower discounts and cheaper bill of material – in other words, high margin sales. If the case of Model-T, or Toyota Prius, teaches us anything it is following: the brand that defines a category carries the volume and profits from that category for a long while.

The opportunity to define the market will not be there for too long, once the “rules” are set it gets immensely harder to disrupt the new leader. Ask any computer maker who tried to build “a better iPad.” While the market can definitely support more than one carmaker in any category, it is simply the reality that leaders who define a market segment take higher margin, while fast followers spend margin money attempting to catch up.

Carmakers – Bring the game back to you

The point of this strategy is to bring back the EV category into the incumbents’ playing field: Target the mass market producing high volume at a lower price point. That is what made Chevrolet America’s car; That is the foundation that created Ford at the time of Model-T; That is the strategy underlying the Japanese car penetration of the US market – “Offer more of a car at a lower price point”.

If you are sailing on a “massive boat,” one that knows how to deal with global supply chains, quality, production scales, distributed service centers and even recalls, make sure you design a strategy that leverages all those functions. Build a playbook that takes advantage of the strong EV winds and undercurrents – the same ones that pushed Tesla so far. But as you plan for those new currents, pick a course that is right for your boat’s size and power, don’t try and launch small boats off your deck – you lose your inherent advantage and with them you will lose the talented sailors you put on those “satellite projects”.

For the mass-market carmakers, this new car category defined here will be a natural offering. On the other hand, Tesla shouldn’t try to run this playbook, as it is not one that plays into its inherent strengths. These currents that GM, Ford and Toyota can easily ride into high volume are too strong for Tesla’s tender mast, sail and body. If Tesla tries to target such a segment without years of scaling experience, it will most likely end up being a value destructor for them. That is not good for Tesla or for the auto industry as a whole. We all need an agile and innovative Tesla to run ahead on these EV currents.

For more about the magic price point of $9,999 – wait for Part IV on Wednesday

Shai Agassi’s Third Article On The EV Revolution was originally published on: CleanTechnica. To read more from CleanTechnica, join over 30,000 others and subscribe to our RSS feed, follow us on Facebook, follow us on Twitter, or visit our homepage .

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