Thinking about Tesla: Second-mover advantages, their benefits and their costs

Recent news reports leave little doubt that Tesla is doing great in its (core?) car business. Unless you have a heart of stone when it comes to Elon Musk (yes, such people exist), you have to be very happy that innovation and entrepreneurship still pay off. But something rubs, and here are some of the things that cause the intellectual blister.

Lone runner

First of all, the immediate issue at hand. Tesla was doing well when everyone else in the car business, particularly the electric car sector, was doing badly. True, but not necessarily because of competitive advantages that Tesla has built up. Remember that the Tesla factory in California was actually open during the Covid-19 lockdown, while the others had pretty much closed theirs. VW produced exactly zero electric cars during the lockdown, because it produced basically zero cars. If the rest of the runners don’t leave the starting line, even I can win an Olympic sprint. More importantly Tesla was not only producing cars but also externalities in the shape of severe health risks for its employees and local communities, while other car manufacturers adopted social and physical distancing rules that preserved public health. Free-riding is the technical term for this and it is usually frowned upon.

Profits or hype?

Tesla has never made a profit in the past and is unlikely to do so any time soon. It is not entirely clear why investors are so happy with the company; it relies on a combination of positively spinning a deeply underwhelming performance that only looks good in light of Tesla’s even worse performance the previous few years, and the idiocy of bets on companies in financial markets with, apparently, very short memories. Remember the internet boom and bust and the subprime crisis, folks?

To put things in a useful perspective: selling 30,000 cars is something that Yugo managed per month early in its history. In fact, Porsche, which sells its cheapest car (the Boxster) for twice the price of Tesla’s best-selling C3 model, has sold three times more cars almost every year since 2000 – and made a handsome profit along the way.

Second-mover advantage

Looking ahead, then, it is obvious by now that established brands are in the game. Electric vehicles is almost certainly a sector where a second-mover advantage exists – and where the first-mover advantage touted by some observers (again, the NYT piece) can quickly turn into cul-de-sac. As a second mover, you learn from the mistakes of others, including Tesla. They will show you the bottlenecks in technology and production long before you go careening in. They will blaze the regulatory trail, after a few generations of adjustment and possibly expensive blunders. And they will effectively produce a supplier network for you, or slim down design to such an extent that all relevant parts can be bought patent-free and/or off the shelf.

But most importantly, the classic car companies have an established name to build on, usually excellent sales and after-sales services that produce brand loyalty, a vast network of dealerships across the globe, and strategic links with sophisticated suppliers to weather technical surprises.

Conservative producer coalitions and industrial restructuring

This does not mean that there are no problems with the traditional producers. Refitting factories that are built on dedicated capital, specific workforce skills, and rusty technology and design legacies is not easy, especially since you cannot ease your way into the new cars one at a time. Making electric cars must mean not building traditional cars; you cannot add one electric car to an existing assembly line that makes 500 standard cars.

Conservative capitalists and unionised workers may thus end up in a coalition, able to influence regulators to go slowly. But those problems existed in the steel and textile sectors 40 years ago as well; restructuring became a collective responsibility, through social plans, retraining and regional development. If the Tesla story tells you anything, it is that the automobile sector is likely to be the next.

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