A view on the future of Automobile Manufacturing and the impact of Tesla

A view on the future of Automobile Manufacturing and the impact of Tesla

Tesla's eventual success will cause its doom and likely the doom of most other passenger vehicle manufacturers. The advent of cost effective electric vehicle (“EV”) manufacture might mean hundreds of vehicle manufacturers rather than dozens. Maybe even thousands!

Automobile Manufacture Will Move Away From Current Mega Corps And Become Fragmented

There are two characteristics of electric vehicles that will drive fragmentation of manufacture:

[1] EV’s are very simple when compared to internal combustion engine (“ICE”) vehicle construction. An EV very simple electric motor drawing power from a battery package with some straightforward control electronics. The EV might have a couple dozen unique parts in the core motor / drivetrain / power components and only a few of which actually ‘move’. The ICE vehicle will have many thousands that require much complicated engineering and most of them move or are subject to extremes of vibration. Product simplicity makes it easier to become an EV manufacturer.

[2] The power (battery), frame, engine and drivetrain equivalents of an EV are individually simple to manufacture in volume. For the most part, EVs will essentially be the same ‘under the covers’. The small EV, the crossover EV, the SUV EV, the taxi, the large sedan and virtually every other EV platform type will be similar in the core structure. Some vehicles might have two or more electric motors and many will have different amounts of battery storage but the core motor, battery, drivetrain and frame will be substantially the same. And each of these core EV components can be manufactured by independent third parties in vast volumes. Simple assembly of a few standard purchased components makes it even easier to become an EV manufacturer.

The Future of Automobile Manufacturing

The future is a handful of huge wholesale component manufacturers that make vast quantities at low cost (and price) and provide these components to a host of vehicle ‘manufacturers’ that do little more than simple assembly of finished subsystems. The future suppliers of electric motors might be Siemens or Toshiba or even Baldor (Top 20 Electric Motor Companies) but not likely to be GM or Renault or Tata. Batteries from Panasonic makes more sense than batteries from Ford. And the number of companies that can bend metal into a frame might be in the tens of thousands. Nothing about the EV future uses strengths of existing ICE manufacturers like Fiat or Toyota.

Today, it takes a lot of money and a long time to become an automobile manufacturer. Lots of money, lots of engineering talent, lots of skilled labor and, of course, lots of time. Today, the process of becoming an automobile manufacturer might take a decade to get started and multiple decades to become a ‘success’. It’s what we saw in all of the post WW2 developing countries … decades for the Germans, other European countries, and Japanese manufacturers. The Koreans are well along in this multi decade process and the Chinese as well.

The future EV manufacture environment is quite different. Find a million square foot building on a rail siding. Buy all the core components and have them delivered. Simple assembly by a small and moderately skilled workforce quickly gives the small EV manufacturer a working vehicle that just needs a skin and interior.

Consumers will quickly understand that the core EV from any manufacturer is the same reliable platform that every other manufacturer sells. And consumers will purchase their EV based on just a few characteristics of personalization:

[1] Function: Sedan, van, SUV, taxi, crossover, etc.

[2] Style: A look that reflects their view and desire.

[3] Interior: A level of function and comfort that meets needs and pocketbook.

[4] Brand: A name plate that provides a desired social reference and status.

The EV manufacturer will stamp out a EV body that reflects a certain style and function and hang it on the frame. The same EV manufacturer will build or buy interior components and add them in. Perhaps a license from a company that gives the EV cachet. Or maybe placing a CarMax or Target label on the EV as part of a wholesale order.

Bottom Line: Any company with a billion or two (or less) will be able to quickly become an EV manufacturer.

And existing vehicle manufacturers might not be able to compete. They will be saddled with existing debt, falling ICE vehicle sales, a too large workforce, huge pension & health care obligations, huge administrative and engineering overheads and a skill set that that adds no value. Existing ICE manufacturers might not be able to afford the transition to EV and may not be able to move quickly enough. They might simply fail.

When Will This Happen?

The EV market development is really nothing more than a function of the cost of electricity storage expressed as $ per KWH. In 2010 the cost per KWH was around $1,000 and dropped to around $250 in 2016 (see: EV battery cost). With government subsidy, these prices allow the development of EVs for specialty uses and for high end vehicles. When prices drop to $100/KWH most EVs can be produced at a cost lower than ICE vehicles. Based on what we see today, ewe can reasonably expect the $100/KWH battery in the next 5 years and the possibility of the $50/KWH battery in the next 10 years.

Based on this, most ICE vehicle production will begin to shift to EV at an accelerating pace beginning in the early 2020s. And by mid decade (2025+), there will be no economic case for ICE passenger vehicles. Because ICE vehicles will be hard to sell because of a limited perceived lifespan and very limited resale value, the ICE to EV transition will be quick as soon as the needed $/KWH price point is deemed ‘certain’.

What About Tesla?

At best Tesla becomes a niche EV manufacturer. It will have supplier relationships in place, assembly facilities, and a very desirable brand name. It’s not clear that the ‘brand’ is so dominant that it could outsell the Apple EV or the WalMart EV or even the Amazon branded EV.

At worst, it fails completely. New companies with lean cost structures might be able to sell at lower prices than Tesla a decade into this EV revolution. Big brands like Google, Facebook and other non auto companies can easily outspend Tesla on marketing. And a few manufacturers like BMW and Mercedes will have a ‘brand name’ that could be sold to financial entities like Berkshire Hathaway.

Eventually, the Tesla name might be the only surviving piece of the company. A brand name purchased by a financial company or distribution entity (like AutoNation or Penske).

Conclusion: Tesla’s success is a forecast of doom for traditional auto manufacturers, an indicator of widely available EV alternatives and maybe even of the eventual failure of Tesla.

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Note: This originally appeared as an answer on Quora.com on 2017 09 03.  The question answered was "Why do we call any other electric vehicle company to be a Tesla competitor/killer? Is there not going to be room for various electric car companies in the future?"