The Experience So Many Will Go Through… That Will Disrupt The Auto Industry

One of our writers, Sandy Dechert, recently sent me an excellent GMO Quarterly Letter—in particular, she sent along a part of it written by Jeremy Grantham regarding the Tesla Model S. I’ll first share this segment of the letter before adding my own commentary:

I recently took a drive in a GMO colleague’s Tesla from New York to Boston. Now, I am about as far from a car freak as you will easily find. I just turned in a 12-year-old Volvo that unfortunately had been sideswiped, for otherwise it was good for years more. But I have to say that my recent Tesla journey was my #1 car experience ever. Three years ago I test drove a Tesla in Boston and it was a tinny, rattly, super-expensive toy. Its battery alone cost $50,000! Last month, its chief engineers suggested its cost today is $22,000. In three years they and other experts are confident that the battery will be less than $15,000 and probably its weight will have fallen also. The Tesla feels like the $75,000 vehicle it is and not simply adjusting for the fact that it is electric, but on its own merit. Many of you will know that this vehicle has a range of 150 to 270 miles depending on battery size and that it received two prestigious car of the year awards2 along with being given the highest crash ratings of any vehicle ever! Consumer Reports gave it the co-equal highest ratings  in the magazine’s 77 years! Even more importantly for me, there was this series of what I can only describe as my first iPad moment: “Wow, that’s cool!” And cool it was as the extreme acceleration pushed me back into the passenger seat for the first time in my life, aided, it must be said, by an exuberant new owner at the wheel. We had enough charge to reach Boston easily, but out of curiosity and in need of a coffee break, we stopped to charge the battery at the one and only charging station halfway home. Twenty-five minutes later, we were back on the road, fully charged up. And for free! (Full disclosure: I regrettably have owned no shares in Tesla.)

Okay, “Enough!” you say. But at $10,000 to $15,000 per battery in three years plus some economies of scale, there will probably be a $40,000 vehicle that even die-hard cheapskates like me will have to buy. (Our stop-gap Jetta diesel, which gets an honest 41 miles to the gallon, was $24,000.) One can easily see that in 10 years there could be a new world order in cars…. The idea of “peak oil demand” as opposed to peak oil supply has gone, in my opinion, from being a joke to an idea worth beginning to think about in a single year. Some changes seem to be always around the corner and then at long last they move faster than you expected and you are caught flat-footed.

So, that was a stellar write-up of this Tesla/EV story—perhaps the best I’ve seen outside of what we’ve published on EV Obsession and CleanTechnica. But there are a few key points here that I want to talk about in my own way.

1. Tesla is in a league of its own. As Grantham notes, the Model S in 2012 and 2013 got a Consumer Reports score of 99/100, the best rating the magazine has ever given. That was a full 4 points above 2013’s runner-up. The car is not cheap, but it is the best car on the market. Furthermore, it’s only the second model Tesla has developed, and the first that it has fully designed to take advantage of its electric power source. Tesla is moving down the ladder from super expensive to affordable. It’s not going to make big compromises on quality as it moves down—the downward steps are essentially based on the falling prices of batteries… as well as improvements in Tesla’s manufacturing skills and economies of scale. All of this is why Tesla’s stock is sky high. Many, like me, even think it’s too high for the time being, but if you look at what Tesla is actually aiming to do, maybe not.

2. However, in many respects, Tesla’s secret sauce is available to all the other auto companies out there. An electric car is simply a much better drive, a much more efficient drive, and also a more convenient car. Grantham complained about the Tesla Roadster, but he also noted that he was “about as far from a car freak as you will easily find.” Furthermore, as implied above, the Roadster was Tesla’s first model, and the company wasn’t yet able to build a car completely around the benefits of an electric drive as it did with the Model S. What’s my point with all of this? I have two points, actually. My first point is that, despite its higher value, a sports car isn’t everyone’s cup of tea. However, as Tesla and electric cars as a whole make it into other market segments, more and more customers will have their “iPad moment” and jump into the electric car era. Furthermore, other auto companies can also create excellent electric cars, if they really try to. GM put a fair amount of effort into the Chevy Volt and also had amazing results in terms of customer satisfaction and product reviews. Nissan aimed for a lower segment of the market right off the bat, sacrificing range for a lower price in order to capture those early adopters who are ready for the electric thrill but don’t have the money for a Model S. The Nissan Leaf is the best-selling electric car in the world and recently passed 100,000 sales—much faster than the highly popular Toyota Prius passed that marker when it was getting started (and with good right, because not only is the Leaf super efficient—much more efficient than the Prius—it’s also a ton of fun to drive). As batteries improve and come down in price, more segments of the market will open up, the Leaf will come with greater range, Tesla will have a more affordable product on the market, and more and more people will come to think, “How did I ever put up with driving a gasmobile?” It’s not Tesla vs everyone, but Tesla + everyone. It’s just a matter of time.

3. “Disruptive technologies” get that name for a reason. When a superior product hits a certain price-point, more consumers start buying it. That leads to greater awareness, lower costs, and greater growth. Once that cycle starts, there’s no stopping it. The key here, though, is that the product be superior. And one of the key reasons disruptive technologies are so disruptive is that certain industry insiders and experts don’t realize the technology is so superior or coming down in cost so fast until it’s too late. Electric cars are far superior to gasmobiles. Many people experience that simply from driving one, or even driving in one! Owning one brings the awareness of superiority to an even greater degree. I don’t doubt that customers are finding electric cars as far superior products—I’ve driven my fair share of both types of cars and have experience the difference, and I’ve also followed the consumer response to electric cars very closely for the past few years. The economically disruptive cycle has begun. But many still don’t realize it. Consider this: only about 31% of Americans are aware of the Nissan Leaf, and only about 22% are aware of the Tesla Model S. For most of those who are aware, their awareness is likely very low, and most of them certainly haven’t driven one. But the number who own these vehicles is growing fast, which means that the number of people who are exposed to them is also growing fast, as well as the number who will be able to take their friend’s or family member’s electric car for a test drive. The absurd idea that a Chevy Volt can’t drive in the snow will quickly fade away. Grantham’s last line on this matter was spot on, a perfect way of describing a disruptive technology as it quickly takes over: “The idea of ‘peak oil demand’ as opposed to peak oil supply has gone, in my opinion, from being a joke to an idea worth beginning to think about in a single year. Some changes seem to be always around the corner and then at long last they move faster than you expected and you are caught flat-footed.”

That’s my story, and I’m sticking to it.