17 Sep. 2015 | Comments (0)
These days, Tesla is the darling of the automotive world. But many of its strategic moves — A factory in Nevada that will crank out many times more batteries than the company can use? Turning over its patents to competitors? — can still seem quixotic, if not self-destructive.
As a former owner of the Tesla Roadster and now an owner of the Model S (and the former chairman/CEO of a large semiconductor company) I have enjoyed the cars but wondered at some of these major “moves” the company has made. But recently I had an epiphany – or at least, got an email. A message sent out by the company suddenly made Tesla’s long-term strategy clear to me. And that strategy is so stunning that it may revolutionize ground transportation and, if the company can pull it off, make Tesla one of the most valuable corporations in the world.
Let me explain. From the start, the mass-market acceptance of battery-powered cars has faced four great obstacles:
- The limited range of the batteries;
- The time it takes to charge the battery packs;
- The need to emplace a sufficient number of battery stations;
- The requirement for owners to replace the battery pack, at huge cost, after several years of use and corresponding degradation.
These four challenges have seemed insurmountable — at least in the near term — and consigned electric cars to the status of a boutique industry selling to local commuters.
The email I received from Tesla couldn’t have been more unassuming. It simply invited me and my Model S to participate in a “pilot” battery swap program at Harris Ranch, Calif. The cost? “Less than a full tank of gas for a large sedan.” The time for the swap? “Three minutes.” But as I considered the offer I realized, with a lightning bolt of clarity, how everything could now unfold to Tesla’s great advantage.
Let’s review a few of Tesla’s strategic moves:
Rolling out thousands of “Supercharging” stations around the world. A major complaint about Tesla and its competitors was “range” and the inability to get from San Francisco to Los Angeles without stopping for a 20-hour lunch while recharging at a 110-volt outlet. By deploying “Superchargers” at strategically and geographically spaced locations, Tesla owners could find one of these stations, plug in for free, and enjoy another 270 kilometers with just 30 minutes of charging. But two unsolved problems lingered for owners: first, finding that next station and, then, spending 30 minutes killing time, while watching others fill up with gas in five minutes and speed off on their journey. That half-hour kept Tesla and others from selling much beyond the early adopters and true believers.
Investing in a giant battery plant in Reno, Nevada. Five billion dollars and 10 million square feet? Come on. Tesla could roll out new cars faster than Ford rolls out F-150s and it still couldn’t justify a battery factory that gigantic. Tesla even calls it a “gigafactory.” Maybe that would make sense if the company had managed to create a new, low-cost industry standard around its battery pack form-factor and power, by making them sufficiently attractive to all other electric car makers. Imagine a single, interchangeable battery for every electric car on the road. But could Tesla get others on board for that? In fact, it has a plan for that …
Opening its patents to the competition. In June, 2014, Elon Musk turned over all of Tesla patents to the company’s competitors. Why? Because he knew that the International Electrotechnical Commission (IEC) and American National Standards Institute (ANSI) would never standardize on a single company’s proprietary designs. It was a lesson the industry was taught 40 years ago by Hewlett-Packard when it turned over its Interface Bus design to the IEEE. The resulting IEEE-488 standard — which enable you to, say, connect your computer to your printer, kicked off the PC revolution, which allowed HP to become very rich.
With the action taken by Tesla last year, standardizing on the open Tesla specifications seems a standards committee no-brainer. Likewise, state and Federal governments will likely enact legislation supporting the “Clean Air Act” to adopt these battery standards to encourage the transition of gas-powered to electric-powered vehicles. Presto: the Tesla gigafactory finds its volumes.
Battery swap. That still leaves one last problem, one that has been asked since the introduction of the Toyota Prius: “After 10 years, do I really have to replace the battery pack for $10,000?” Now the genius of Tesla’s strategy becomes clear — and it all comes together with the battery swap program to which I received that invitation. Anything being done in this “pilot” battery swap could be done at every Exxon, Shell, and Valero station in the world. Its batteries and robotically automated swapper stations will quickly become the global standard because the patents are open to anybody, competitors will want to be part of the service from the start, and swapping will be an important new revenue source for service stations. Most of all, electric car owners will demand it not just for the speed, but to escape that $10k replacement cost.
Some people believe that the battery swap program is DOA. (See, for example, this Fortune article from June.) Personally, I suspect that Musk’s remark on its lack of immediate uptake — “People don’t care about pack swap” — was casually offered, if not a smoke screen. The problem with the “failed” battery swap program in Harris Ranch had nothing to do with the idea of a swap and everything to do with the location. Reality is that you cannot make it to Harris Ranch from any densely populated California City like San Francisco, San Jose, or Los Angeles unless you are willing to make the trip, in the summer, with no other electrical draw on the battery pack such as radio or air conditioner. Additionally, most Tesla owners have figured out how to live their lives by driving between their own chargers and the Tesla supercharging stations. Yet, all Tesla owners know that over time the battery pack will degrade and need to be replaced at their cost of several thousand dollars. Ask these owners if they would like a low-cost battery swap program and my guess is that 100% would agree to have their cars towed to Harris Ranch if necessary.
So the idea is right on, even if the pilot location was not. Once the swap progam is ubiquitously deployed, everybody wins, but Tesla wins most of all. Because for Elon Musk and Co., this will be like owning the gasoline franchise for America. Only this time, the “gas” won’t come from largely inaccessible corners of the world, but from one very large building outside Reno, Nevada.
Oh yeah, did I mention that Tesla also makes cars?
This blog first appeared on Harvard Business Review on 09/16/2015.