Why Tesla Could Become the Next Apple
Tesla (TSLA) CEO Elon Musk’s bold prediction that his $53 billion company could one day be as valuable as Apple (AAPL), the most valuable company in the world with an $800 billion market cap, is based on his logic that Tesla will disrupt manufacturing with automation by going after the “machine that makes the machine.” While it may seem just pie in the sky, there is a case for Tesla to become the next Apple.
Tesla is betting that it can create a fully automated manufacturing process that will be as revolutionary as Henry Ford’s continuous assembly line. Ford revolutionized manufacturing in 1913 by creating a process that broke the assembly of the Ford Model T into 84 distinct steps as the car moved down the line on a conveyer belt. The process revolutionized production and dropped the assembly time for a single vehicle from 12 hours to 90 minutes. Ford was able to reduce the cost of the Model T from $850 to $300 and produce a car every 24 seconds. Ford ended up selling 15 million Model T cars by 1927, and the continuous assembly line remains the foundation of automobile manufacturing to this day. Although automation with robots has dramatically improved the efficiency of automotive manufacturing, the final assembly is still a manual process.
Tesla aims to combine its capabilities in advanced software and artificial intelligence (AI) with advanced automated manufacturing capabilities it acquired in November 2016 by buying Grohmann Automation to create a factory that will produce very high volumes at much lower costs than today’s auto factories. A fascinating insight from Tesla’s blog: The “factory becomes more of a product than the product itself.” Tesla believes that it can usher in the next manufacturing revolution by dramatically increasing production volumes and reducing labor costs in manufacturing.
So why won’t other auto manufacturers follow suit and overtake Tesla? First, their products, as well as their factories, are bogged down by legacy. Tesla’s electric cars are significantly easier to manufacture than internal combustion (IC) vehicles. Tesla’s Model S has fewer than 20 moving parts, compared with almost 1,500 moving parts in an IC-engine car. This means that there are fewer steps in the assembly process, fewer suppliers to deal with, and lower inventory of components and parts. Further, Tesla doesn’t have to deal with a unionized workforce, a complex supply chain, or a legacy dealer network. Free from this legacy, Tesla can embrace disruptive innovation without worrying about the backlash from workers, suppliers, and dealers.
To become as big as Apple one day, Tesla will need more than the “Henry Ford” approach to manufacturing. It will also need the “Steve Jobs” approach to marketing by creating a vast global appetite for its products. The Apple iPhone is a global product that can be sold from New York to Mumbai to Beijing with very little incremental investment. However, Tesla’s cars require the creation of infrastructure for charging and a distribution network from scratch—a very expensive and time-consuming process. Tesla will need to build out its charging network and distribution reach, country by country. China is an important overseas market for Tesla, as is Scandinavia; it also has a rollout plan for India with its Model 3.
There are many bumps in the road in Tesla’s ambitious journey. Skeptics point out that Tesla may run out of cash in the pursuit of its lofty ambitions: The investments that Tesla will need to make in manufacturing, battery production, charging infrastructure, and distribution networks will be too large and will take too long to pay off for Tesla to reach the scale that it needs. Tesla’s acquisition of Grohmann also hit a bump when the founder and former CEO Klaus Grohmann exited the company last month after a disagreement with Musk.
Tesla isn’t without competitors, either, beyond the traditional automakers. Technology companies such as Google (GOOG), Uber, and Baidu of China are all involved in autonomous driving technology. However, these competitors can potentially also become customers for Tesla, as they’re more interested in technology and services than automotive manufacturing.
While only time will tell if Tesla can reach the global scale and profitability of Apple, there are three reasons to be optimistic. First, Tesla’s advanced automated manufacturing may allow it to reduce costs to the point that its mass-market models, such as the Model 3, can be highly profitable—a combination of high demand and high profits that was the formula for the Apple iPhone. Second, Tesla has the purity of purpose and a charismatic founder intent on global domination—just as Jeff Bezos has done at Amazon (AMZN) and Steve Jobs did at Apple. In a race between entrepreneurs and managers, entrepreneurs usually win.
Finally, history suggests that disruption rarely comes from incumbents. Tesla is disrupting the product as well as the factory that makes the product—something that incumbent automakers will find very difficult to do. If Tesla can reinvent the car and also reinvent the car factory, it stands a good chance of becoming the next Apple.
Mohanbir Sawhney is the McCormick Tribune Foundation professor of technology at the Kellogg School of Management at Northwestern University.