Why Tesla will be the only tech company succeeding in making cars

The idea of having companies, in the world’s most innovative geography, trying to reinvent an old industry, seems very alluring. Theoretically, it makes sense. Traditional companies in the century-old auto industry seem to have become crystallized, without the necessary nimbleness to bring about revolutions.

Consequently, during the last couple years, tech companies started flocking into the auto field. They’ve made obvious contributions that have already left a mark in the industry. Electric cars are a reality that forced the traditional players to adapt and bring their own offers to market. Additionally, automatic driving will be a reality much sooner than previously thought and car sharing will revolutionize the way people buy cars. However, there is one point that most tech players have missed: mass production.

Companies like Apple have all the legitimacy to aspire designing a revolutionary car in terms of user experience, that’s their core competence. However, Apple (AAPL) has never been very successful with mass production. Actually, Apple’s brightest times coincided with the change of paradigm from in-house production to contracting third parties like Foxconn.

Google (GOOG) is another example. It’s brief flirting with mass production ended quickly, when the company sold Motorola to Lenovo. Tech companies seem to abhor the complexity of mass production, but this is a fundamental part of the process of bringing a car to market. If they can’t get a grip on it, they won’t be able to bring a car to market.

The only tech company that it is really making an effort to dominate the intricacies of mass producing cars, is Tesla (TSLA). This company is realizing how hard it is to produce 50.000 cars per year, now compare it with the almost 17 million cars produced by Toyota during 2015. It must be really hard to set up the logistics right.

One of the key aspect is design. Traditional companies are used to design to produce, in other words, their cars are design bearing in mind the restrictions of mass production. Auto behemoths like Ford (F) and General Motors (GM), know their limits and possibilities regarding the design of parts and components that must be produced in-house or outsourced and must come together in a reliable and functional end product.

The problem, as Tesla has find out the hard way, lies on the difficulties imposed by this process. Tesla has faced several problems regarding availability of parts and components. Several suppliers have limited production capacity. Traditional manufactures have known, for a long time, that long term relationships are key in the auto industry. Any producer must offer long term visibility in terms of long term demand. Many suppliers are small companies that need assurance that demand will come or else they won’t be able to commit to investments in adding capacity.

However hard and painful this process might seem, the truth is any company with real intentions to bring a car to market cannot expect to just design it and outsource its production. It won’t work. That’s why Tesla is going through lots of troubles but this experience will serve them well in the future. Google and Apple seem to be suffering at getting production plans and this is most likely stalling their progress in the development process. At this stage, Google has millions of miles of self-driving miles under its belt, but it has no significant production mileage. The same goes for Apple.

In the end, the majority of the tech companies will end up supplying software to traditional car manufacturers. It will be a relation like the one Microsoft has with computer manufacturers. The only company that may be able to replicate, in the auto market, what Apple did in the electronic devices arena, is Tesla. However, for that to happen, Tesla will need to create a competitive advantage at setting up factories around their products. They’ll need to re-engineer and re-design century old practices brought about by Henry Ford and refined through lean management. Can they do it?

Disclosure: As of the publication of this article I do not own any of the mentioned stocks. I do not intend to acquire any during the next 72 hours.

Photo credit: benjie castillo


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s