Over the past five years, the major auto companies have invested massively in electric vehicles (EVs). The Volkswagen Group in 2017 announced that they would offer 80 new electric vehicles across their brands by 2025 and electric versions of every one of its models by 2030. In the same year GM went public with plans to put at least 20 new electric models on the road by 2023. They are not alone; Bloomberg New Energy Finance predicts that 500 different EV models will be available globally by 2022.
Yet, despite investments that add up to many billions of dollars, none of the major incumbent automakers seems to pose much of a threat to market leader Tesla, which has become nearly synonymous with EVs. This is surprising since one might reasonably have expected that once firms with annual revenues in excess of $100B, deep manufacturing expertise, and large market shares turned their attention to the electric vehicle market, the game would be up.
The reason why consumers still choose Teslas over products like Audi’s eTron or attractive EVs from GM’s Buick, Cadillac, GMC, and Chevy brands is perhaps surprisingly simple. They can drive their Teslas for long distances in full confidence that they will find convenient locations at which to recharge their vehicle. While the incumbent automakers are still focused narrowly on perfecting their electric cars, Tesla has been thinking about the entire vehicle system, with the aim of solving consumers’ core driving needs.
The car as platform
A car creates value to its owner when it is driven, which requires refueling. Automakers of gasoline cars or trucks do not have to worry about this, as refueling stations are abundant — over 160,000 stations are in the United States alone — and easily accessible. They have therefore built their strategies around standard marketing variables: product, price, placement, promotion. Build a great car (or truck), advertise it heavily, offer it in the right markets at a good price, and the product will sell.
An electric car, however, requires a different value analysis. “Refueling stations” — i.e., rapid charging facilities — for electric vehicles are in their infancy, with only about 4,000 available in the United States. Moreover, the network of available charging stations is highly fractured across ownership and technology. The next largest network, compared to Tesla, is only 10% as large. Unless you buy a Tesla, you have few options for reliable route planning, guaranteed access, and rapid public charging.
An electric car, therefore, is a two-sided platform good, the two sides being an installed base of car buyers and a large network of geographically dispersed multi-stall rapid-charging stations. Selling electric cars requires a robust charging network. But, investments in building a massive charging network make sense only if there is a large enough user base and demand for these chargers. Tesla has such a network, and everyone else’s is laughable. How did this happen and what can Tesla’s history teach us?
Platforms need networks
Nissan, with the zippy and relatively affordable Leaf, stole an early lead in the EV market, and was the best-selling electric car from 2011 to 2014. Despite this lead, Nissan failed to provide a robust fast-charging network which left buyers relying on a small number of third-party stations available to all brands.
Tesla’s approach was strikingly different. They began with a vanity product, the Roadster, that got them off the ground and generated some early sales. They then moved on to release the Model S in 2012, which for its few years (2013–15) had roughly a one-year waiting period. To support the cars, however, Tesla rolled out a coast-to-coast proprietary network. So, although Tesla sold only a few thousand cars in its early years, it had built out a huge network. This addressed the buyer’s “range anxiety” problem — no one who considered buying a Tesla needed to worry much about charging.
Most automakers have followed Nissan’s approach and are focusing investments on making better electric cars. But imagine if, instead of investing tens of billions of dollars in producing cars with no way to drive long distances individually, Audi, GM, Ford, and the rest each spent just a billion dollars to build a network of supercharging stations. In North America, that amount would finance approximately 1,000 locations with 10 charging stalls each. If the stations were correctly placed, a network of that size should give buyers enough confidence to choose a car based on its features instead of on the features and the charging network. Then firms could begin the work of reaching viable volumes, bringing costs down, and eventually becoming serious competitors to Tesla.
The platform advantage
Employing a proprietary platform strategy, as Tesla did, enables the platform owner to coordinate the two sides of the market: the installed base of cars and the network of charging stations. Because it owns the charging network, Tesla can choose how to price (whether to make charging free and monetize only the car), the number of stations, rollout timing, and location.
These choices can reflect Tesla’s overall business strategy and detailed knowledge of where the buyers are and where they drive. Interestingly, another newcomer, Rivian (which has yet to sell a single vehicle) is also building a proprietary charging network, like Tesla’s. Rivian is splitting its stations between major highways and campgrounds, a perfect fit given its focus on electric adventure vehicles.
Automakers would be well advised to take a leaf out of Tesla’s playbook and focus on the network before heavily investing in designing and manufacturing new EVs, or at least do so in parallel. They may not actually have to build the network — they could instead partner with firms that have networks that could accommodate recharging stations. Many existing fossil fuel energy firms, for example, have gas station assets that will eventually become stranded and could be repurposed for electric vehicles.
Focusing on the network, of course, is not without its risks. Rolling out a network from scratch isn’t a trivial challenge, nor is it clear that potential partners would be willing to commit to an exclusive relationship with any one automaker, which the latter would need, at least to begin with, in order to get a head start on the other automakers. But investing in a network will certainly increase the odds of winning a dominant position in EVs, which a focus on the cars alone is unlikely to deliver — at least according to the evidence so far.
Looking ahead
It’s clear that Tesla itself is doubling down on its Big Tech platform strategy. At present, its business model for its new automated driving capability is classic product pricing; levy a one-time upcharge of $10,000. However, it plans to switch to selling automated driving as a service for a monthly fee. This strategy implicitly defines the car itself as a platform on top of which services can be delivered.
Such a business model offers the additional benefit of enabling Tesla to gather the training data that the machine learning algorithms for true self-driving cars will need, which will confer a critical advantage in the next stage of motor vehicle competition. As for the competition around charging networks, should other firms get serious about building out alternatives, then we would expect Tesla to open its own network since the advantage to remaining closed would start to fade. Indeed, we are beginning to see initial signs of openness as Tesla hints at allowing a new partner to connect.
Firms that dream of being the next Tesla should carefully examine why they are so far behind. It’s not for lack of knowledge about how to build cars; many of the incumbent firms have been doing that for over a hundred years. Instead, they should focus on the critical infrastructure, in this case the charging networks, that have made customers willing to take a chance on a newcomer. And, once they’ve done that, they can begin to address the next battleground: control over the vehicle data that will enable self-driving cars and the transition to vehicle as a service instead of vehicle as a product.
