Why the Traditional Automotive Industry Is Running Out of Road

The car industry’s historic leaders are now beginning to realize that having delayed the inevitable evolution towards electric vehicles, some of them now face financial problems that are threatening their very future.

For the first time in its 88-year history, the United Auto Workers is bringing out the combined workforce of Ford, GM and Stellantis on strike in pursuit of wage demands. It is estimated that a ten-day stoppage would generate losses of $5 billion, although the walkout could last several weeks, which will surely force the big three to raise the price of their vehicles.

What’s going on? It’s called disruption. Tesla is having the same effect on the automotive industry that Apple had on Nokia two decades ago. No matter how hard they try, traditional players cannot compete with a company that has broken all the rules and that is now a market leader in half the world, pulling steadily ahead of diesel and petrol models.

The phenomenon has three extremely interesting components:

1. Internal combustion engines may be a feat of engineering, but they are expensive to make and maintain. In contrast, Tesla’s are cheaper to make thanks to having fewer parts, and offer better performance in all respects — greater acceleration and brilliance, lower weight, much lower maintenance requirements and much lower running costs. What’s more, the company is constantly upgrading its production linesto further reduce costs. The company has practically reinvented how cars are made, and aims to reduce its costs by an unprecedented 50%, something completely beyond the reach of traditional companies. Toyota took a Tesla apart and described it as “a work of art”.
2. A highly intermediated commercial structure, with dealers who take a hefty commission. Traditional companies cannot do without these dealers, because they need this network to service cars that need regular servicing and that break down frequently. Tesla not only cuts out the middle man, but its vehicles require virtually no maintenance and, when they do, it is extremely simple. This, among other things, results in the highest brand loyalty in the entire industry.
3. Traditional brands spend huge amounts on advertising, some in excess of $1,000 per vehicle. However, their investment in R&D is low, averaging around $500 per vehicle, reflecting the age of its technology. Tesla, on the other hand, invests nothing in advertising and spends almost three thousand dollars per vehicle on R&D. The result is that traditional brands are spending more and more every day in a declining market saturated by their own advertising. On the other, Tesla manages to improve its efficiency and costs as it manufactures more vehicles thanks to its high investment in R&D, and the resulting economies of scale.

As much as the traditional brands might try, when it is clearly too late, to get their act together in the race to manufacture electric vehicles, the advantage Tesla has acquired is so great that catching up will take years, and even longer, if these manufacturers continue seeing petrol and diesel vehicles as the core of their business and EVs as some kind of specialist product.

Which is why Ford has making a loss and loses even more with every EV it sells, and why Tesla can not only lower its prices, but still has plenty of room to do so and will have more in the future, while generating significant profits.

The transition to EVs is a central issue in the whole UAW strike. Traditional manufacturers face strikes because they can’t pay their workforce more (a cost structure burdened with dealer margins and advertising expenses), while Tesla can remain reasonably calm with non-unionized workers and a technological advantage that allows it to bring products to market that for the competition is a pipe dream, or build a huge and hegemonic network of chargers spanning three continents.

It’s called disruption. Although a lot of people still haven’t realized quite how disruptive it will be.

(En español, aquí)

—

This post was previously published on MEDIUM.COM.

***

You may also like these posts on The Good Men Project:

Escape the Act Like a Man Box

What We Talk About When We Talk About Men

Why I Don’t Want to Talk About Race

The First Myth of the Patriarchy: The Acorn on the Pillow

—

Photo credit: iStock.com