Tesla’s market capitalization (value) is greater than the combined value of General Motors, Ford, Fiat Chrysler, Toyota, Honda, Volkswagen, Nissan, Daimler (Mercedes Benz), Hyundai, Kia, BMW and Renault as of January 2022.
Battery electric vehicles (BEVs) market share among passenger vehicle sales globally has soared during the pandemic:
Traditional gas-powered car sales slumped. General Motors was the largest car company globally (until 2008) and sold the most cars in the US (until 2021):
Factors Driving the Shift
Supply Chain Paralysis
The drivetrain of a traditional gas car has more than 2,000 moving parts. During the pandemic, supply chain challenges have bedeviled auto makers. Missing a single part means, the vehicle can’t be produced.
“Lean manufacturing” was introduced in 1991 as a management philosophy. Since then, companies have consistently reduced inventory on-hand instead opting for just-in-time delivery. The theory works perfectly unless of course, the entire supply chain is paralyzed.
Most traditional auto makers have outsourced production to key suppliers. Traditional car companies have simply become assembly plants.
Tesla has two advantages over traditional car companies: i) an EV has only 20 moving parts not 2,000 so the vehicle design is significantly simpler. With fewer parts, production is not as vulnerable to supply chain disruption and ii) Tesla is vertically integrated, meaning it produces the vast majority of the parts required itself.
Critical Semiconductor Shortage
There are up to 1,400 semi conductor chips in a new gas-powered car. These control everything from windshield wipers to brakes. If you’re missing a single chip, you can’t complete the car. In 2021, global car production was cut by 11.3 million vehicles as a result of semiconductor shortages, costing the industry more than $110 billion.
As a result, the average new US car price hit $47,000, the highest ever, according to Kelley Blue Book and TrueCar (up from $40,000 in 2020). Used car prices surged almost 50% in 2021 to $30,595, according to BNEF.
Perfect Tsunami: Multiple Drivers
i) At the start of the pandemic in 2020 auto makers cut semiconductor orders in line with lean thinking. Chip makers allocated product capacity to other industries.
Semi conductors are used in thousands of modern products. Some have high value, and some can cost less than $1. Many of the 1,400 semi conductors in cars are cheap, and low margin for semi conductor companies.
ii) The pandemic drove an increase in PC, notebooks, and electronics sale because of remote working. These products contain high-value chips, so get production priority.
iii) Two companies control 70% of the market: TSMC (Taiwan, 53%) and Samsung (South Korea, 17%). The next three firms bring that to 90%. New fabrication (fab) plants cost billions of dollars and take years to bring online. So, the crisis will continue.
iv) Huawei and other Chinese companies began stockpiling semiconductors once the US announced banning them from using US designed chips. This reaction increased demand and cut supply. The unintended consequence has boomeranged back, crippling US car companies.
v) A factory fire in a Japanese semiconductor foundry in March 2021 that was a major supply to the US auto industry further constrained supply.
Some analysts look at Tesla’s future product predictions with incredulity: 20 million cars a year by 2030.
I wouldn’t bet against Tesla. It’s the old car companies that are in trouble. Auto firms traditionally took six years to bring out a new model: that’s from research to concept, then design, engineering, manufacturing to launch.
They are now being challenged to change not just their products, but their key processes: from gas to electric vehicles, from traditional manufacturing methods to robotics to keep up with Tesla (creating conflict with unions), from old suppliers to new ones (i.e., batteries). They’re being challenged to change everything. And all this at twice the speed. They’re being asked to build new planes, while flying and designing them.
Electrification of the $10 trillion a year transportation market is highly disruptive. I predict that at least two of the top twelve traditional car companies will cease to exist in the next five years. They will either go bankrupt, be bought, or merged.
In this episode, JIm joins host Adam Markel in conversation to break down the cycle of disruption and innovation in the speaking industry and why businesses must equip themselves for change.Continue reading