Tesla is not the next Apple – The Verge

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The century-old car business received a shocking jolt last week, when Tesla fans lined up outside the electric automaker’s stores to order its Model 3 sedan, hours — or in some cases, days — before its March 31st unveiling. Seven days and 325,000 preorders later, the most common point of comparison for this massive demonstration of brand strength comes not from the auto industry, but from the biggest name in consumer technology.

Given Tesla’s Silicon Valley roots, its design-forward, high-tech products, and the Steve Jobs-like cult of personality that’s emerged around CEO Elon Musk, it’s tempting to draw broader comparisons between Tesla and Apple and to infer an Apple-like future for the upstart automaker: every Model S, Model X, and Model 3 that rolls off the line is like a hot new iPhone, the theory goes. But there are major differences between the car business and the consumer electronics business that Apple dominates, and Tesla’s ability to collect preorders hand over fist is no guarantee that it will survive, let alone generate the kinds of profits that have made Apple one of the world’s most profitable companies.

Apple’s success arises from its ability to build a powerful brand by designing and engineering attractive products which provide a uniquely intuitive user experience. Thus far, the keys to Tesla’s success are remarkably similar: its Model S and Model X sedans are beautiful, lightning-fast vehicles supported by a unique retail environment and a proprietary (and free) rapid-charging network. In a vehicle market dominated by utilitarian “mobility appliances,” Teslas look and feel like nothing else on the road. If the layperson had to identify a vehicle that most resembled an Apple product, they would almost certainly give that honor to a Tesla.

There’s a fundamental difference between Apple and any automaker

But there’s a fundamental difference between Apple and any automaker, including Tesla: while Apple’s products are famously “designed in California,” the vast majority are not built by Apple itself but are contract-manufactured by firms like Foxconn. This arrangement is possible in part because consumer electronics are relatively simple to manufacture compared to modern automobiles, and in part because high-quality electronics manufacturing has become a high-volume commodity in China. Though the quality of smartphones and laptops can vary greatly between brands, the majority of that quality is determined by design, materials, and software rather than the manufacturing process itself.

Design and materials go a long way toward determining the quality of an automobile as well — but because a car is orders of magnitude more physically complex than any electronic device, the quality of assembly is dramatically more important and difficult to master at scale. Not only is auto assembly the toughest quality challenge in the modern economy, the consequences of quality problems can range from ruining a customer’s day to ending their life. These factors explain why Toyota, a company whose quality-obsessed corporate culture and production philosophy (rather than its racy design or exhilarating performance), has come closer to “disrupting” the global car business than any other firm in the last half-century. Sexy, speedy cars may capture the public’s attention but when it comes down to spending tens of thousands of dollars, we just want them to get to work every day without drama.

This, unfortunately, is where Tesla has consistently come up short. The Model S received nearly universal praise when it first launched, “breaking” the Consumer Reports scoring system with the strength of its design and performance, but as time has gone on it has fallen to “not recommended” status and was even named one of its “worst of the worst” used cars. Tesla forums have been flooded with a wide variety of quality and reliability issues, including defective drivetrains, cracking windshields, leaky sunroofs, malfunctioning door handles, and countless other problems. These issues are already affecting the launch of Tesla’s Model X, as the administrator of a website that tracks reservations, orders, and production of the electric SUV reports, “Even though all invitation are out, it is estimated there are 30-40 percent of the reservation holders have not ordered. Some have indicating they prefer to wait until more cars go through the production line to ensure they get a car with no problems.”

If Tesla’s quality problems are preventing a full third of Model X reservation holders from converting $5,000 preorders to actual sales, the impact on Model 3 reservations is likely to be much higher. Increasing the company’s total production volume from 50,000 units last year to 500,000 units by 2020 — as Musk has stated he plans to do — will dramatically increase the likelihood of defects in the Model 3. Consumers in the mass market are far more reliant on their cars than luxury buyers (for whom a Model S or X might be a second or third car), and thus far more sensitive to quality problems.

Consumers in the mass market are far more reliant on their cars than luxury buyers

For customers who lined up to order Model 3 last week, the decision probably seemed easy: Tesla makes expensive, desirable cars, so an affordable Tesla must be just as desirable. But the cars they saw at the launch event were hand-built prototype, Musk has said its design will change by the time it actually starts being built on an assembly line, and the company has released no information about pricing beyond the targeted $35,000 base price and an expected “average option mix” of $42,000. What’s more, Tesla has a consistent history of missing ship dates and estimated prices. Meanwhile, existing automakers are rushing a flood of electric vehicles to market, at mass-market and luxury price points, and it will be far easier for them to improve their design and performance than it will be for Tesla to make the profound improvements in manufacturing speed and quality it needs to be competitive in the mass market.

When Tesla actually shows a production version — when it tells customers exactly how much car they will get at each price point, when it will actually be delivered, and what Tesla’s long-term reliability really looks like — there’s a good chance that many depositors will decide they’d rather have their $1,000 back than spend tens of thousands more on a vehicle that doesn’t live up to their hype-fueled dreams. Add in the possibility that people who are willing to put money down on a car they know next to nothing about might face some form of financial challenge in the next two years — or simply can’t afford a $35,000 car as it is — and there’s a real risk that Tesla could have far fewer than 300,000 actual orders by the time Model 3 goes into production.

Nissan Leaf
Nissan Leaf

The electric Leaf, a car that did not live up to Nissan’s sales expectations. (Nissan)

If Tesla does ultimately have to refund a significant number of deposits, it won’t have been the first time a mass-market electric car failed to live up to deafening hype. The 2011 Nissan Leaf attracted more than 115,000 “hand raisers”, and Nissan invested $5.6 billion in plants that could build half a million of the cars around the world each year. About six years later, Nissan has sold fewer than 300,000 Leafs cumulatively, as actual demand for electric cars proved to be far weaker than electric car enthusiasts had led Nissan to believe. Unlike Tesla, however, Nissan sells nearly five million automobiles per year, allowing it to survive its dramatic miscalculation.

The stakes for Tesla are much higher

Granted, the market for electric cars has evolved a bit since then. But the stakes for Tesla are much higher, and by collecting refundable deposits from people who still have not seen the final car they are reserving the right to buy, they are actively courting disappointment — and even disaster — down the road. Just because Apple can sell hundreds of thousands of $500 phones on faith, purely on the strength of the firm’s design credentials, is not an indicator that Tesla or any other automaker can. Tesla has proven it can create massive hype, but it has yet to show it can embrace the unsexy and extremely challenging task of building complex cars at mainstream scale with competitive quality. Instead of trying to be Apple, Tesla should be focused on developing the skills that will allow it to thrive in the brutally competitive, 90 million car-per-year market for boring, reliable transportation.

Edward Niedermeyer is a founder and editor of DailyKanban.com and an independent auto industry analyst and consultant. He is the former Editor-in-Chief of The Truth About Cars and has written about automotive topics for The New York Times, Wall Street Journal, Bloomberg View, and elsewhere. You can follow him on Twitter @Tweetermeyer.

    Tesla is not the next Apple – The Verge