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Under The Lens Of Disruption: Tesla
Looking for a job
I’m studying for a Master’s degree at Brandeis, in Boston. I’ll be graduating in May of 2024 and looking for a job in a long-only equity fund, in the line of the companies and philosophy I follow here. If you know of anything, I’d really appreciate you letting me know.
Clayton Christensen. For the past 4 months, I have been reading and listening to Clayton, trying to assimilate as many of his insights as possible. It is very rare that an individual is capable of reaching such fundamental yet abstract heights, and more so in the realm of business. After this much dedication, I can confidently state that I still don’t understand what disruption really means and what it implies. To try to take our understanding a bit further, I will try to analyze what I think theory would say about Tesla.
Funny anecdote, when people like Andy Grove asked what was Clayton’s opinion on their business, he always answered:
“I don’t have an opinion on Intel, but the theory has an opinion”
What Type of Technology is Tesla (the EV)?
What I believe is fundamental for understanding whether or not a technology will succeed is to define its nature. Let’s briefly remember what makes up for each of them:
Sustaining technologies are improvements to an already existent product. I’ve been meditating on the fact that even relevant breakthroughs could be seen as sustaining technologies. They allow the company to sell these better products for higher margins, moving upmarket, towards the most profitable sector. Furthermore, such products should be able to compete at the high end of the market, where clients need very specific dimensions of performance.
Disruptive technologies begin at the low-end of a market, where customers are over-served. The latter means that the established product overshot the measurement of performance customers want, making them pay more for something they don’t utilize. This creates a gap for a new company to develop a product that’s “good enough” in terms of performance, but is sold at lower prices. Additionally, disruption involves a new business model, better functionality, and as a consequence of these characteristics, higher accessibility.
The first model Tesla released was the completely electric Tesla Roadster back in 2008. According to Britannica, Roadsters could achieve 390-400km with a single charge and were able to accelerate from 0 to 96 km/h in less than four seconds. Their initial base price was between 80,000 and 120,000 dollars.
If Tesla’s Roadster was a sustaining technology, it should be able to compete with other car manufacturers at the high end of the market. However, this article provides multiple examples of cars that were simply much better than Roadsters at this market level. What I believe is valued here is acceleration and how far they can go with a single charge. Roadsters couldn’t be cataloged as a sustaining technology within the car industry as it was an inferior product in both terms.
If Tesla’s Roadster was a disruptive technology, it should have begun at bottom end of the market, serving customers that car manufacturers overlooked and overshot as of performance. Because of the high base price at which they were released, of course as a consequence of how costly they were to manufacture, Roadsters couldn’t be cataloged as a disruptive technology, even if Tesla counts with a new business model.
My thoughts were on those lines, so what is going on here? Are EVs a technological anomaly?
How industries evolve and what I was missing with disruption
A crucial element was missing from my puzzle. Disruption does not only include beginning at the low-end of a market, serving overlooked and overshot customers, but also in new industries. The latter means serving non-consumption. It is about bringing a product to people that did not consume the mainstream product, due to accessibility on most occasions. I’m not sure whether or not this is the case for Tesla as well, but, regarding whether or not it created an industry, I would like to share the following.
Industries are composed of concentric circles, outer ones encompassing inner ones. The circle to which a product is part of, depends on how accessible it is and the skill that’s needed to operate it. Industries begin at the inner circle, serving customers that have a lot of money and high expertise. As disruption occurs, the product’s accessibility, due to lower costs, and lower skill requirement, due to improved functionality, makes circles expand. Therefore, the role of the process of disruption is to bring these highly expensive and complex products to massive consumption, on the furthest outer circle. A good example that illustrates this is the computing industry.
It first began in the 60s with the emergence of mainframe computers. These costed over a million dollars to manufacture, were sold at 2M and were immensely complex to operate. Consequently, only a handful of companies or labs could have one. The first wave of disruption was minicomputers, which brought down the price to 200k and complexity was reduced, leading to an increase in consumption. Then personal computers arrived, bringing down the price to two thousand dollars and the skill barrier to a point where a great deal of people could operate one. Finally, smartphones came at a cost of 500 dollars and a high ease of use, allowing almost the completeness of population to use one. What the process of disruption did was making computing power more and more accessible.
What would theory say then?
I am not sure but would make my claims point in this direction. Perhaps EVs are a completely new industry. The likelihood of this being the case seems very low because of the purpose for which they are utilized. But I suspect theory would claim such a thing and that the cybertruck will give some signs of this being something new. I expect them, for what I heard management claim, to not even resemble cars.
Tesla perfectly understood The Innovator’s Dilemma
My final thoughts on this company are around the curious trajectory it is taking. As exposed, each suite of technology within the computing industry was made by new products, which were brought to market by new leaders, with Apple’s exception, leading on the last two waves.
At each step of the process, there was the possibility to introduce these new products at much cheaper cost, with a natural tendency towards massive consumption. However, it was new companies who made technology do these jumps. In Tesla’s case, they have been following a clear path towards massive consumption. Roadsters started at a somewhat high-end of the market for the EV industry, but each generation of vehicles has brought down the cost and price by orders of magnitude.
This is not the logical path a wise management would take under normal standards. Normal standards would imply companies to perform sustaining innovations and continue moving upmarket, bringing in more profit. In this line, Tesla could be inaccurately seen as sabotaging itself. However, it is my view that it is the best strategy it could follow. By doing this, Tesla is filling the gaps a potential disruptor could exploit, at least from a price point, following a seemingly esoteric track, as I am not sure this has been done before.
How do you disrupt this?
Clarifying note: As far as I’m concerned, each model is not a disruptive technology.
I think something like this can be done when theory is understood, but in all industries. My ignorance about the theory does not permit me to go much further, nor to utilize the so powerful causality factor. And my ignorance on vehicles in general does not allow me to further dive into technicalities. But I think this is a decent start, hope you enjoyed it!
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