Tesla’s Game Of Pennies Is A Game Of $Billions$
Credit to Author: Zachary Shahan| Date: Sat, 24 Aug 2019 23:00:54 +0000
Published on August 24th, 2019 | by Zachary Shahan
August 24th, 2019 by Zachary Shahan
Last year, discussing Tesla’s challenge producing a $35,000 Model 3, Tesla CEO Elon Musk used the phrase “game of pennies” to highlight their efforts to bring down costs one step at a time, in every little way possible. Those pennies add up when on the scale of hundreds of thousands or even millions of cars per year.
Along with Elon’s comment about a “game of pennies,” the graphic above references an engineer in the Tesla seat factory telling us, in other words, that it was essentially a game of seconds for them — they have to constantly look for ways to bring down the time it takes to produce a seat. (However, the phrase “game of seconds” could also relate to CleanTechnica, since we have only so many seconds in a day to produce content.)
The phrase “game of pennies” came to my mind again this week as I was thinking about the various ways in which Tesla incessantly brings down the cost of electric vehicles, and thus leads the market in EV cost-competitiveness. I thought the game of pennies offered a new, unique, and useful way of conceptualizing Tesla’s position in the market.
In the end, while a game of pennies may sound small and mundane, the eventual savings and competitiveness result in billions of dollars of sales stolen from other automakers. Let’s take a quick look at some of the ways in which Tesla has obsessively worked to bring down EV costs.
Gigafactories: One of the most important and apparently brilliant approaches Tesla took to bring down costs was building its first gigafactory, an idea rather widely seen as crazy at the time (even by Panasonic executives who partnered with Tesla on the deal). Defying all the naysayers, Tesla has built out a large portion of Gigafactory 1, and it’s even nearing production at Gigafactory 3 (Gigafactory 2 is a solar factory). The economies of scale, the exclusive rights to batteries in a tight market, and the improvements in battery manufacturing processes have kept Tesla well ahead of the curve when it comes to battery prices — based on everything I’ve seen regarding EV battery prices.
While it may have seemed like a wild bet years ago, as Elon explained at the time, it was a critical bet. The Model 3 would not be a top seller in so many countries — well, it wouldn’t even be possible — if it didn’t have the massive battery supply Tesla and Panasonic developed at Gigafactory 1. It would be another low-selling electric vehicle.
Batteries: Okay, batteries are already noted above, but there’s another component to Tesla’s battery leadership. The company has some of the brightest minds in the battery world on its team and it continues to drive down costs through chemical improvements, acquisitions, and more efficient battery pack designs. While other automakers simply outsource this work and rely on external battery companies, Tesla realizes that its growth and survival depend on lowering battery costs. This is possibly priority #1 at Tesla. With thousands of battery cells in each battery pack, and battery packs accounting for a sizable portion of Tesla vehicle costs, Tesla’s “game of pennies” when it comes to bringing down battery costs is a unique and revolutionary game. And, to steal a phrase, Tesla just keeps going and going and going … and going.
Seats: This one may not be as critical, but it stood out to me because of how unusual it is and because Tesla’s in-house production of this part is generally unacknowledged. This is a large, outfacing vehicle component that is in every car out there, yet not much attention is put on the fact that Tesla designs and builds its own. That makes me wonder what else is basically unacknowledged that Tesla does in-house. Of course, we got an exclusive tour of the seat factory this year, so that brings this component to mind as well.
One of the most notable points on this topic is that there are 3–4 seat manufacturers that produce seats for all the major automakers. That’s nearing a monopoly level, and it also doesn’t offer much in the way of consumer choice or flexibility. Low competition = low choice and low flexibility.
I think Tesla’s seats are unmatched in the auto industry, especially the white ones, and these homemade seats are presumably another way Tesla cuts costs.
Electronics: Top auto industry consultants, competing auto execs, top auto journalists, and even stock analysts who have put out negative views on Tesla have all acknowledged that Tesla is in a league of its own on vehicle electronics. Some of them have mentioned military-grade electronics built in-house, space technology, and magic — seriously. Tesla’s ability to put high-value electronics inside its cars in a smoothly integrated way and at a relatively low cost leaves it with the best in-car computer hardware, infotainment, navigation, and more. That doesn’t necessarily “lower Tesla’s costs” relative to its competitors, but what it does is it puts Tesla electronics and certain performance specs on a whole different level from competitors. It adds value that other producers can’t add to their vehicles, certainly not at so low a cost. How do other automakers catch up? When do they catch up? Good questions! I can’t picture the answers.
Autonomy: One of the things those enhanced electronics provide is strong leadership in autonomous driving. That might lead to Tesla robotaxis well ahead of the competition having such vehicles. The potential revenue boost from which is insane. Even if the robotaxi dream ends up being much harder to achieve than Elon Musk envisions, Tesla’s Autopilot and Full Self Driving features already make its vehicles incomparable. Well, top competitors sometimes catch up to the features Tesla is offering, but then Tesla implements something new (via over-the-air software updates, which only it uses at this point) and it’s again in a league of its own. For example, the company currently offers a “Navigate on Autopilot” onramp-to-offramp feature in which the car will pass vehicles on its own and do everything necessary to go from the start of a highway to the end based on the directions in your navigation. The company is now on the verge of implementing the ability for vehicles to recognize stop signs and red lights and carefully navigate themselves through city traffic.
Sales: Less talked about these days, Tesla does benefit from a direct-sales business model that cuts out the middle man. Cutting out the middle man saves pennies, or even thousands of dollars. Rather than selling its cars to auto dealers who then sell them to customers, Tesla sells its cars to customers. That means the Tesla Model 3 would still outcompete the BMW 3 Series Electric if everything else was equal between them (and if such a car existed).
Not only has Tesla cut costs with its more streamlined stores and sales approach, but it also focuses heavily on funneling customers through the car-buying system online. It includes simple, clear design studios for each vehicles, and there’s not much need to go into a store for help along the way. (Though, that’s not to say stores aren’t helpful. More on that coming soon.) Tesla buyers normally initiate and complete the buying process online, rather than having customers and staff spend hours upon hours starting the process and filling out paperwork at a dealership.
I’ve bought and leased cars from dealerships and I’ve bought a Tesla online. The latter is so much quicker and clearer, is totally painless, isn’t super annoying and greasy feeling, and is actually so easy that you feel like you must have missed a step or 50. Surely, this streamlined buying experience both cuts costs and makes customers happier.
Marketing: It is well known that Tesla has never spent a cent on traditional TV or internet advertising. Automakers top the world in TV commercial spending. I don’t like to say Tesla doesn’t spend any money on advertising, but its forms of advertising — customer referral programs, social media fun, product events, and YouTube videos — serve multiple purposes and are seemingly much cheaper than conventional auto advertising approaches. Again, “pennies” here is more like millions.
I’m sure there’s even more, but those are the biggies that stand out to me and that’s enough to make the point clear. When you add up all of these cost savings, you can better see why it is that Tesla can produce and sell the Model 3 while no other automaker can produce and sell a car (electric or gasoline powered) that comes close to competing with the Model 3.
There is absolutely no car that beats the Tesla Model 3 because you get far more from the car than you get from any other car in its price range. It’s been the 9th best selling car in the United States this year, but I’d argue that the only two reasons it’s not #1 are: 1) not nearly enough people know about the Model 3 or understand its advantages (the huge bulk of the reason), 2) even if total cost of ownership is expected to be low, the upfront price of the car (and consumer ability to get loans for that much money) limit who can buy one much more so than others cars in the top 10.
The Model 3 has the lowest probability of injury of any vehicle in the US, is insanely quick, has the most advanced infotainment and navigation system on the market, is clearly stylish, and has a 5 year cost of ownership that is perhaps comparable to a Honda Civic’s or Toyota Corolla’s in many cases. There’s genuinely no other car in its class. The Model 3 is in a class of its own.
That’s what Tesla’s game of pennies has created.
Zachary Shahan Zach is tryin’ to help society help itself (and other species). He spends most of his time here on CleanTechnica as its director and chief editor. He’s also the president of Important Media and the director/founder of EV Obsession and Solar Love. Zach is recognized globally as an electric vehicle, solar energy, and energy storage expert. He has presented about cleantech at conferences in India, the UAE, Ukraine, Poland, Germany, the Netherlands, the USA, and Canada. Zach has long-term investments in TSLA, FSLR, SPWR, SEDG, & ABB — after years of covering solar and EVs, he simply has a lot of faith in these particular companies and feels like they are good cleantech companies to invest in. But he offers no professional investment advice and would rather not be responsible for you losing money, so don’t jump to conclusions.