Should major automakers be concerned about the fact that Tesla's market cap is rapidly approaching the levels of Ford and General Motors? Of course.

Shai Agassi, the founder of bankrupt electric vehicle infrastructure company Better Place, has some advice for them: Don't copy Tesla. Just learn from it.

In a series of three posts on LinkedIn, Agassi expresses his thoughts on what Detroit should be doing to get in on the electric vehicle market, which Tesla currently has cornered.

"There's this whole idea that the industry should copy Tesla or somehow figure out how to copy Tesla when they're making probably a thousand times as many cars as Tesla."

He has four rules to remember: Electric cars are objects of desire. Electric cars are like a modern appliance; Electric cars are Moore's Law on wheels; and Electric cars drive and sell differently.

"If you were able to offer a $10,000 car--one third to one half the price of a new car today--you create a whole new proposition for a whole new market segment."

Agassi argues that automakers shouldn't factor battery prices into EV costs--it's not like gas prices are factored into regular vehicle costs. Instead, they should opt for a subscription model.

Tesla is deploying charging and battery switch stations only after gauging demand.

The company that follows this advice, he says, "will capture not just a portion of the EV market, it will capture a portion of the car market. That's how industries are formed."

2013-08-29

The Lessons That Detroit Automakers Can Learn From Tesla

As the electric car company becomes more and more successful, the Big Three need to respond. But just copying a brash startup won't work. Here is what will.

Earlier this summer, General Motors vice chairman Steve Girsky hinted that the company's CEO, Dan Akerson, was more than a little concerned about the rise of electric vehicle startup Tesla Motors: "He thinks Tesla could be a big disrupter if we’re not careful," Girsky said in an interview with Bloomberg. "History is littered with big companies that ignored innovation that was coming their way because you didn’t know where you could be disrupted."

Should major automakers and their investors be concerned that Tesla's market cap is rapidly approaching the levels of Ford and General Motors? Of course. That's why Shai Agassi, the founder of bankrupt electric vehicle infrastructure company Better Place, has some advice for them: Don't copy Tesla. Just learn from it.

In a series of three posts on LinkedIn, Agassi expresses his thoughts on what Detroit should be doing to get in on the electric vehicle market, which Tesla currently has cornered.

"This was my reaction to a number of posts in the business media that were starting to compare and contrast Tesla with the rest of the industry," says Agassi. "There's this whole idea that the industry should copy Tesla or somehow figure out how to copy Tesla when they're making probably a thousand times as many cars as Tesla." The auto industry, in other words, needs a different strategy.

Agassi's four main takeaways for the industry: Electric cars are objects of desire; Electric cars are like a modern appliance that has software and physical components which need to be constantly updated; Electric cars are on wheels, so automakers need to design vehicles with exponentially improving battery packs in mind; and electric cars drive and sell differently—because car dealers won't invest in marketing a new product category, direct sales may be the way to go.

When I ask Agassi if he thinks it's realistic for big, clunky automakers to switch to an entirely new distribution model, he points to the used car industry. "eBay is selling more than a million cars a year at a price point that's roughly around $10,000," he says. "If you were able to offer a $10,000 car—one third to one half the price of a new car today—you create a whole new proposition for a whole new market segment."

That requires bringing electric vehicles down to that new low price point—a daunting proposition considering the high cost of batteries. But Agassi has an interesting solution: Don't factor battery prices into EV costs; it's not like gas prices are included in vehicle sticker prices. Instead, he says, automakers should follow the cell phone subscription model and ask people to pay a certain amount per month ($300, say) for battery use.

Even though Agassi's now-defunct Better Place also relied on a subscription model for battery use, he still believes the model is valid. Better Place, he says, deployed its "battery switch" stations before testing consumer demand, whereas Tesla is deploying charging and battery switch stations only after gauging demand (Tesla also manufactures its own vehicles, while Better Place did not). He writes:

Produce a base version of an electric cross over. Make it beautiful and benefit from great electric performance. Then take a page from Ford’s Model-T game plan: price that new car at a disruptive price of $9,999, "batteries not included" (after operator subsidies and government incentives). At high volume, even at that price, this car will be making great profit for the carmaker.

Support the car with an operator that deploys infrastructure making this EV more convenient to use than a gasoline car. The operator will own the batteries, and offer electric miles at weekly cost which is at parity what the average driver pays for gasoline today. Only this service contract will come with unlimited miles. Then offer various luxury versions of the car, with many "options" offered at higher price points. Consumers who are offered an insanely great car for $9,999 will buy a ton of add-ons, generating even better margin for the carmaker.

The company that follows this advice, he says, "will capture not just a portion of the EV market, it will capture a portion of the car market. That's how industries are formed."

It's hard to say whether legacy automakers are nimble enough to make such a dramatic shift. The next major EV manufacturer—if there is one—may be a company that doesn't yet exist.

"If you had to guess in the year 2000 who would bring a music device that would capture most of the market, you'd say Sony—they own music labels, they own everything in the industry. If I told you it was Apple, you'd be laughing because they didn't make a music device at the time," he says.

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