To the casual observer, it may seem as if Tesla will be the end-all be-all for our future transportation needs. The reveal of the market-priced Model 3 earlier this year has led some to ring the victory bell, announcing Tesla as the unheralded king of electronic transportation. Not only will it be providing your residential vehicles, it will also be tackling the commercial and public transit sectors as well. Of course, there are other options out there; Nissan will be releasing its next-generation Leaf soon, Chevy continues to push its Bolt and Volt lines, and Volkswagen promises to have 30 electric models released as soon as 2025. Even China has its heavyweight in the mix, BYD, short for Build Your Dreams. Yet, you would be hard-pressed to find anyone who wouldn’t think of Tesla first and foremost when asked about electric transportation. However, viewing the playing field through the scope of competitive strategy exposes an entirely different conclusion.
In all industries there is always the initial ‘giant’ on the scene. In the early 2000s it was Zune in MP3 players, Palm in personal digital assistants, Netscape held 90% of the web browser market in the mid-1990s, and Tivo was a behemoth in the DVR space. Yet fast-forward to today, all these manufacturers either claim a tiny fraction of their respective industries or have been discontinued entirely. Conventional business wisdom says these companies should have enjoyed a first-mover advantage, allowing them to get in first with consumers and dominate the market that they themselves had created. Yet, what most forget is that first movers bear the burden of market development.
Tesla has certainly succeeded in drumming up interest in the Electric Vehicle (EV) market; with Chief Architect Elon Musk’s talk of grand ‘master plans’, ‘Gigafactories’ of incomprehensible scale, and a sprinkling of driverless capabilities to boot. All the indicators point towards a future EV industry dominated by Tesla, right?
Maybe not. As Harvard Business Review points out, the first-mover advantage is overwhelmingly helpful only in industries with slow, steady rates of technological innovation. Think of Sony’s Walkman from the early 80s. The technology remained unchanged for the better part of a decade and Sony reaped the rewards of being the first to market. In contrast, think of the aforementioned first-movers from the turn of the millennia. Each of their industries were characterized by rapid, disruptive, technological innovation, and each product was destined to march down the path to ambiguity or extinction.
Undoubtedly, the EV market is marked by rapid technological advances; every year EVs become drastically more capable with longer ranges and quicker charging times, all while battery costs continue to drop. Even given the rapid technological advancement, Tesla will dominate the EV space. Can any of the other EV producers even come close to Tesla? Who has better technical, R&D, manufacturing, and marketing capabilities? Turns out, there is one, and where else but China.
BYD is essentially the Chinese version of Tesla, although they’ve been turning a profit since 2012. Oh, and they’ve sold more EVs than Tesla, and have double the battery capacity. BYD plans to enter the U.S. passenger market within two to three Years. In fact, they have already begun to enter the U.S. commercial market via the public transit channel. BYD currently has electric busses in cities from Hong Kong to London, to LA and Long Beach, CA. In comparison, BYD sold 10,000 electric busses in 2015, Tesla sold zero. But the real question is how long does Tesla’s first-mover advantage in the U.S. market last? Given BYD’s superiority in economies of scale, technological capabilities (BYD has as many employees dedicated to R&D as Tesla has in total), and industry experience, it seems the only thing keeping Tesla king is Elon’s charm, and realistically how long can that last?
A BYD sedan cruising down the street may not command the same aura as a Model S, but I don’t think it has to, at least not yet. If BYD can enter the U.S. auto market through the commercial and public transport sector, it is only a matter of time before the U.S. consumer adjusts to seeing a BYD vehicle on the road rather than a Tesla. This familiarity will have two benefits; it will reduce any unwillingness an American consumer might have towards buying a Chinese-made vehicle, and it will allow BYD to set up shop in the U.S. on a scale that allows it to economically produce vehicles. These benefits could result in a price point reduced below that of Tesla’s, which would directly affect Tesla’s bottom line.
To prevent this from happening, Tesla should be aggressively pursuing the municipal contracts BYD is already winning. Tesla’s tendency to slowly roll-out its passenger vehicles to ensure the utmost quality may be a decent strategy for the passenger market in which consumers buy a new car every few years, but that won’t work in the municipal market in which vehicles can stay on the road for 10, 15, even 20 years. If Tesla can move quick enough to start grabbing these municipal contracts from BYD, it could deny BYD a significant strategic entry point into the U.S. market.
If Tesla can’t, or decides not to, move fast in this sector, then it might not be long until BYD is vying for the Lithium-Ion throne of the EV market.