Auto Industry Structural Barriers to Innovation and Adaptation

A commenter questioned my claim that Tesla has proven to have vastly superior engineering and innovation than other companies. He claimed that Tesla just has a first-mover advantage. He had the claim that legacy auto can just spend the money, hire better people and catchup. Auto companies have a very, very bad history for innovating.…
Auto Industry Structural Barriers to Innovation and Adaptation

A commenter questioned my claim that Tesla has proven to have vastly superior engineering and innovation than other companies. He claimed that Tesla just has a first-mover advantage. He had the claim that legacy auto can just spend the money, hire better people and catchup.

Auto companies have a very, very bad history for innovating. Auto companies have an industry and supply chain that is not set up for rapid change. The industry is setup for very slow change.

When did first movers lose in the auto industry? Ford had the dominate car market share for about twenty years from 1910 to 1930. GM overtook this first-mover advantage in 1931.

Toyota made the hybrid Prius and none of the “innovative” other car companies could make a Prius killer. Toyota dominates that category for decades. Ford makes the F150 and no car company can beat the top truck for decades. The first effective mover in large pickup trucks, first effective mover with hybrid cars were all able to hold this advantage for decades. The top selling models in any catogory stay stable for many years.

GM had 50% market share of the US auto market in 1960s. The Big Three (GM, Ford and Chrysler) had a combined market share above 85% through the 1960s and above 90% in one year (1965). GM was down to 46% in 1980.

In 2021, GM is down to 15% market share in the US and Ford is at about 11%. SAIC-GM-Wuling (SGMW) makes a lot of cheap $4000 cars with about $14 of profit for GM per car. GM did not have the innovation or adaption to stop the rise of the Japanese cars, the European cars or the South Korean cars. One-third of the GM cars are made in joint ventures in China.

The US luxury cars (Cadillac, Lincoln) got beaten by the European and then the Japanese luxury cars. Tesla’s model 3 has outsold the Audi A4, BMW 3 series and Mercedes C-class combined in September in Germany. This is before Tesla opens up the German plant so that Tesla’s made there do not have $10,000 in import duties and $2000 in shipping costs.

Tesla introduced software and firmware over-the-air updates back in 2012. Volkswagen is still working to solve problems with its over-the-air update. Volkswagen introduced over-the-air update for the ID-3 and ID-4 last year. Other car companies either still do not have over-the air updates or have very crude and limited versions.

Universumglobal surveys engineering graduates from the top universities. 23% of top US engineering students rate Tesla as a top 5 place they want to work, 26% rate SpaceX as a top 5 place. Tesla and SpaceX are ahead of Google, Apple and all other companies for attracting top engineering talent.

These are slow-changing lists. The top companies for attracting the best engineers or business people stay relatively static for a decade.

A great programmer is 20-100 times more productive than the average programmer. Being able to attract the best programmers is a massive advantage. This advantage played out with the semiconductor chip shortage.

Structure of the Car Industry

Regular car companies assemble parts coming up from a pyramid of suppliers. Car companies are integrating systems. Systems are assembled from components. There is a global web of suppliers.

Tesla can change and improve air conditioning and heating dozens of times a year. Tesla has multiple teams working on all of the different parts and systems. The teams are competing to make better parts and systems and working to scale them up to become the dominant system used. All of the systems are automatically tested to ensure high standard of quality and scored on functionality.

Legacy car companies have to try to get a supplier to make a different part. They send specs around the world with rare and expensive design changes.

Car companies have model years. Vehicles typically only get major upgrades every four to six years, and minor updates every three years. This time period is what’s known as an “automotive model cycle,” and it corresponds to the generations of a vehicle.

Stellantis CEO Carlos Tavares said that the costs of speeding up the transition to EVs are “beyond the limits” of what the auto industry can sustain. Tavares said governments and investors want automakers to speed up the transition to electricity. He described the problems.

What has been decided is to impose on the automotive industry electrification that brings 50% additional costs against a conventional vehicle.

“There is no way we can transfer 50% of additional costs to the final consumer because most parts of the middle class will not be able to pay.”

Tesla makes 30% operating margin on electric cars because they have been perfecting them for over 12 years.

* Over the next five years we have to digest 10% productivity a year … in an industry which is used to delivering 2 to 3% productivity.

Herbert Diess, CEO of Volkswagen Group, told his top managers in October, 2021 Volkswagen needs to dismantle its old factories and replace them with new, more efficient production facilities if it wants to remain competitive with Tesla going forward.

Tesla can make its cars in under 10 hours. Volkswagen’s main Zwickau plant requires 30 hours per vehicle. Diess hopes to reduce that to 20 hours per vehicle by next year. Diess is being pushed out of Volkswagen.

European CEOs are admitting that they are dinosaur companies and they have to change. The CEO of the fourth largest global car company is begging for bailouts and admitting that they cannot multiply productivity gains from 2% to 10%.

GM CEO is choosing to lie. GM backed Nikola Motors and Nikola was caught rolling a truck down a hill and implying it was a working truck.

In November, 2021, Ford CEO Farley, told Ford employees Tesla does electric vehicles better than anyone, and that Ford needs to respect that.

* Farley acknowledged Tesla’s direct-sale model as an advantage. Ford has big problems with its dealer partners price gouging, sometimes charging upwards of $15,000 over MSRP on Ford advertised prices.

* Farley admits that Tesla’s electric powertrain expertise is far better.

* Farley said, the [Tesla] product itself is highly differentiated from the rest of the ICE field and complexity is tiny, compared to OEMs. That allows them to have enormous reuse. Reuse that we’ve never seen in our ICE business. Tesla can scale quickly because of that complexity reduction. They can drive cost down, which they have. They can keep processes simple.

Sandy Munro tears down cars with his team to give detailed reports and advice to carmakers on how to improve factories and designs. Sandy forecasts what will happen to the car companies. He expects most car companies to not survive the transition to EVs. He expects Tesla and China carmakers to each have 20-50% of the total 2030 EV car market. Sandy expects the Tier 1 suppliers to shrink and gobble up tier 2 and tier 3 suppliers.

Where are the Factories?

Tesla is opening two large factories and is expanding existing factory capacity by 50% or more.

GM is targeting annual global EV sales of more than 1 million by 2025. Tesla made 936,000 cars in 2021 and grew 87% over 500,000 cars in 2020. Tesla should be making 6-9 million cars and possibly 20 million cars in 2025.

GM, Volkswagen, Ford, Toyota do not have plans, financing for that many car factories or battery factories. The semiconductor problem is reducing their car production out into 2023. They are not reacting fast to anything.

Tesla has been securing supplies of lithium and nickel. The legacy car makers do not have good supplies of batteries or chips or many other key parts and they do not have the factories.

It is not just about making a nice and desirable car. Ford can sell some Ford F-150 lightning. But not all regular Ford F150 buyers will move to the electric version just because they made it. Ford is trying to scale to making 150,000 Ford Lightnings in 2025. Ford, GM, VW have been losing money on the electric cars that they make.

Legacy auto will catchup? Without the best engineers? With the wrong corporate structure and supply chain? Without existing factories and with very few factories coming online by 2025? Without battery supply? Without profitable EVs?

The Stellantis CEO admitted to a 2% per year innovation, productivity improvement rate versus the need to get to at least 10% per year.

If Tesla makes 2 million cars in 2022 then Tesla will have $115 billion of revenue and $20+ billion in profit. Tesla could already be beating Ford and GM in profits from Q4 2021. Tesla could pass Toyota for profits in 2022 and be in the range of Amazon profitability. How will Legacy auto catchup if they have less money, slower growth, and vastly lower profitability.

They also have a dealer network. Car dealers upsell 8% and 13% of the price.

Most of legacy auto has unionized employees.

Car makers spend billions on advertising. Tesla sells all of their cars without advertising.

Tesla makes their own driving chips and AI training supercomputer.

SOURCES – knoema, universumglobal, Munro Live, Reuters, Elektrek

Written by Brian Wang,

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