We see electric vehicles differently because of Elon Musk and Tesla. Kids point and shout their praises as a Model X quietly hums by the schoolyard. Middle age men in white shorts gather around the front trunk of a Model S, as tennis bags magically emerge from where an oily engine is expected to be.
These visions contrast starkly from the 1990’s when Chevrolet’s foray into electric cars failed with the Impact EV1 and the S10 EV Pickup. Honda also had trouble with the EV Plus. Questions of their demise, would certainly be answered with words like ‘branding’, ‘timing’, ‘technology’.
Musk’s formula to change public impressions of electric cars with shock and awe was certainly effective. Creating a luxury brand and delivering the Model S, an all electric car that could run circles around most of its petroleum fuelled counterparts has truly caused us all to take notice.
“Going after whales not guppies” has traditionally made a lot of sense, especially when making physical goods. High-end clothing and luxury watch companies seem to do this best. The secondary and tertiary benefits are numerous as well. Briefly naming a few, less raw material to purchase for instance, fewer logistical challenges, fewer customers to service and often less infrastructure required to manage it all.
Tesla’s need for massive industry disruption and the cost of producing new technologies, upscaling really was the only way to effectively deliver this type of product to the world.
The automotive industry, however, holds something unexpected. Many premium brands are owned by companies that started out as high volume / low margin manufacturers. For example, Bentley and Lamborghini, are owned and profitably run by Volkswagen. Ferrari was owned and now generates more profit than Fiat itself. Geely owns and profitably runs Volvo, the list certainly goes on.
Enter the Model 3
The Model S and Model X are reported to have never returned a profit by using conventional industry accounting practices. Tesla use their own system that show otherwise.
Observing all of this, it would be logical to think that cars are actually a high volume / low margin game, and to survive, it would be prudent to be involved on this side of the business.
This is exactly what The Model 3 is intending to achieve, highlighted by Elon and Tesla here,
“If we execute according to our plans, we will at least achieve positive net income excluding non-cash stock based compensation in Q3 and Q4,”
Meaning, with regards to the Model 3, going from a low volume product-focused company to a high volume process-oriented one, will finally create profit for Tesla.
Sounds easy enough, but from a manufacturing standpoint this is a huge and difficult transition as Tesla is finding out. At the time of writing, Musk currently spends his time moving from bottleneck to bottleneck in the factory looking for solutions to reduce delays and minimize quality issues.
The Model 3 Is Probably Not The Solution
Thinking in more detail however, could the premise that automobiles are a high volume / low margin business be wrong? It certainly might be. The key being Bentley and Lamborghini, under Volkswagen’s stewardship, are hugely profitable with comparatively low volume. How is this possible when The Model S and Model X are not?
Volkswagen uses what they call an MQB Platform (Modularer Querbaukasten) for their mass-market models. It’s basically a modular chassis design, and various modular component packages that can be added to suit many different models and engine options. It is the current king of Design For Manufacture and Assembly (DFMA).
A major example would be a platform called PQ35. It was used prior to the more advanced MQB, and is the underpinning of the following automotive models;
Audi A3 (8P),
Audi Q3 (8U),
Volkswagen Golf Mk5 (1K),
Volkswagen Jetta Mk5 (1K),
Volkswagen Golf Mk6 (5K),
Volkswagen Jetta Mk6 (5K),
Volkswagen Scirocco Mk3,
SEAT León (1P),
SEAT Toledo (1P),
Škoda Octavia (1Z),
That's 14 vehicles on one platform. It is this type of mass production that facilitates efficiencies, allowing production tooling and infrastructure to reach break-even much faster creating more profit.
Applying this manner of thinking to premium brands has clearly shown its fruit in the cases mentioned above.
Tesla does not need a mass market vehicle like The Model 3 to become a profitable company, but does need a massive rethink on its Design For Manufacture and Assembly Systems.
Here are steps Tesla should be taking,
Step 1 – The Single Unified Platform
Create a single unified platform that would be the core of all Tesla models for the next 5 model years. The Model S and Model X currently only share 30% of their parts. This could much higher. By creating a unified platform like Volkswagen does, The Model S could have many variants based on this.
Step 2 – Launch Models Based on this Platform
The Roadster and a Convertible could be based on this new unified platform.
Reintroduce The Model X Crossover with higher component sharing.
Add a Super Luxury Model with a focus on how quiet and comfortable it is, given the near silent electric power.
A value oriented Model S with less power, features and a lower price point to reach as close to mass market as possible. (most people don’t need “Ludicrous Mode”). This will be achievable as fixed production costs become paid for sooner.
Step 3 – Sell Electric Vehicle Starter Kits to Other Manufacturers
With a strong focus on refining the software, battery pack and electric motor system, Tesla could sell its core technology as a complete package to other manufacturers, which would also help utilize their supercharging station infrastructure.
Whatever Tesla decides to do, drastic measures should to be taken to stay relevant in the far and near future. I applaud Elon and Tesla for what they have achieved thus far, but I fear the Model 3 and next-in-line Model Y may be long and expensive distractions from what truly needs to be done.