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Tesla Musings

The Dude thinks outside the product management box occasionally, and naturally has opinions on many things. Last weekend while walking, before an un-forecast rainstorm drenched him, the Dude was thinkng about the upstart auto maker, Tesla.

A Silicon Valley darling, and apparent success, it has had a wild 15 years, that has seen the original roadster, a platform car built around a Lotus Elise chassis, but real success with the introduction of the Model S sedan. A mid range sedan, originally priced comparable to the luxury marques, but providing an attractive all-electric vehicle. That, coupled with their superchargert network, and a rabid fan base, made an IPO an exciting event, and an investors favorite.

Leading off with an enthusiast car, and faollwoing with something that has mass (or much wider at least) market appeal is de riguer in the realm of technology companies. In 2017, they shipped their 200,000th car, marking an impressive and important milestone. (as a reference, GM produces more than 10 million cars, per year)

But, throughout it's public time, they have been plagued with production issues, glitches, and a surprising rate of cash burn. While the burn rate is not unexpected, especially in a transformative market, it is getting somewhat worrysome, and hence the reason for this post. Building the battery factory in Nevada is a good thing, as unlike with an ICE auto, the bulk of the cost is in the battery pack, and there economies of scale are crucial.

Likewise, the constantly expanding supercharger network is an ongoing expense that is needed to reduce the infrastructure gap with the petro fueled vehicle world. As is their change in tactics of beginning to charge later customer to recharge (an early perk was the ability to use the supercharger network for free).

Adding the Model X "SUV" was a savvy, must introduction, especially for the US market, as the popularity for the SUV form-factor can't be discounted.

Of course, there were some early bobbles, some quality issues on the Model S, and some surprising complaints about leaky windows, and door issues on the Model X. Still, the owners are happy, enthusiastic, and fiercely loyal.

Then comes their mass market entry, the Model 3. THe product that is designed to be the electric car for those who can't spend $80K to well over $100K depending on the model and configuration of the car (battery capacity, primarily). Proced at about $35K, it is entering a market that is getting crowded. The VW eGolf, in the $30-$35K, the Nissan Leaf in the same price range. Both of these are range deficient, but the Chevrolet Bolt all electric has a greater range, and, you guessed it, a price that is about the same as the base Model 3.

Tesla will not be the king maker in this space, and one can expect the major players to aggressively pursue this segment.

But the real problem is that more and more potential Model S and Model X buyers will opt for the lower price Model 3. This sounds good, but like many full-range portfolio products, the upper tier customers are where the profits derive from. If even 20% of the potential customers for the S and X hold out for the 3, (and the numbers seem to indicate that this is so), Tesla is in for a world of hurt. As credible competitors, who have nearly a century of putting together supply chains, deep engineering resources, and are profitable today, Tesla is on dangerous ground. They are carrying a ton of debt, and delays in ramping production volume, pretty much a given in any hardware operation, product mix shifts to lower profit products, and an erosion at the top end, the investment community will begin to ask for a better return, or to reduce risks.

And I didn't even bring in the insane combination of Solar World and Tesla, a combination that should have made Wall Street pump the brakes.

Summary

Tesla has had an impressive history. Although the self described "manufacturing hell" is something that many product managers have dealt with, and the overly optimistic ramps in production that the CEO has promised (and repeatedly failed to deliver on) are worrysome. But, with the subsidies that encourage the purchase of electric vehicles sunsetting, massive credible product launches in the mass consumer space ($35K price point), a major gamble on a segment and pricepoint that will be difficult to maintain margins, and no end to the buring of capital Tesla is likely to have some near death events in the next few quarters.

Will the financial markets keep the money taps flowing? Will the game of musical chairs end, and leave Tesla out? Too soon to tell. They have disrupted the automobile market, for the better, but the leader is not always (or even usually) the long term survivor.


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Tesla Musings
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