Innovation Lessons from the Rise of Tesla Motors

How to make gradual change look like a big jump:

One of the big privileges in my job is that I get to travel a fair bit. As part of this, I’ve been coming to Palo Alto about once a year for the past five years. This is interesting because that is infrequent enough that the changes that look gradual to those that live here look like jumps to me when I’m here so irregularly.

The big jump I’ve noticed on this current trip is that electric cars are finally taking off.

On previous trips, I saw lots of Tesla cars – all in showrooms. This trip, they’re on the road:

And it’s not just Teslas. The place I usually stay has had reserved parking spaces for electric cars since 2009. Previously, I haven’t seen any cars in them. On this trip, they’re taken, and they’re using the charging stations:

Observing the Lead Users

Jean-Louis Gassée wrote a really interesting post on Tesla this week. In it, he talks about how Palo Alto has always been a leading indicator of where green vehicles are heading:

“Walking Palo Alto’s leafy streets in the early 2000?s, I witnessed the rise of the Prius. Rather than grafting “green” organs onto a Camry or a disinterred Tercel, Toyota’s engineers had designed a hybrid from the tires up…and they gave the car a distinctive, sui generis look. It was a stroke of genius, and it tickled us green. What better way to flaunt our concern for the environment while showing off our discerning tech taste than to be spotted behind the wheel of a Prius? (I write “us” without irony: I owned a Gen I and a Gen II Prius, and drive a Prius V in France.) Palo Alto was Prius City years before the rest of the world caught on. (Prius is now the third best-selling car worldwide; more than a million were sold in 2012.)”

The Prius case is interesting, because when they first came out, the response was very similar to what we’re hearing about Tesla now.  The car was too expensive, it was elitist, it would only sell to radical greenies, and so on.  And now it’s the third best-selling car in the world.

I don’t know if Tesla will ever get to that point, but it is definitely moving electric cars along the innovation diffusion curve.

Innovation Diffusion Lessons from Tesla

This diagram shows how innovation diffusion usually works. New ideas spread along an S-Curve – the solid line in the diagram – or if they fail they follow the curve marked B. But when there’s a lot of hype around an idea, we expect it to follow the curve marked A. Incumbents that think they have a lot of time to respond expect the new idea to follow the curve marked C.

But new ideas that succeed don’t follow any of these curves – the follow the S Curve.

We can see why by looking at Tesla and the other electric cars that are just starting to take off.  Here are some of the lessons:

• New ideas spread much more slowly than we expect. The first electric car was made back in the 19th century, before there was a dominant design for cars. GM introduced the EV1 in 1996 – seventeen years ago. That made everyone expect electric vehicles to take off – it’s where the hype really started.  But new ideas spread slowly – the time value for X is always longer than we expect it to be.

• Disruptions start in niches. When the Prius came out, it was relatively expensive. Gassée’s recounting is pretty accurate – it first took hold with people that were willing to pay a bit more to show off their greenness. But it eventually spread from that niche. He thinks that Tesla will do the same:
  
  “The numbers point to a future where Tesla can leave its niche and become a leading manufacturer in a too-often stodgy automotive industry. And, of course, we Silicon Valley geeks take great pleasure in a car that updates it software over the air, like a smartphone; that has a 17? touchscreen; and that’s designed and built right here (the Tesla factory is across the Bay in the NUMMI plant that was previously occupied by Toyota and GM).”

• It takes time to work out the business model. One of the reasons that the value for X is longer than we expect is that it takes time to learn how to make the new idea work. A big part of this is building a good business model around it. Farhad Manjoo compares Tesla to Apple, and he explains how their business model is evolving:
  
  “But even though its prices were competitive, Apple was able to keep its profits high, thanks to amazing manufacturing efficiencies. Now Tesla seems to be following the same path. At $70,000 the Model S, its family sedan, is still a very expensive car, but it’s far cheaper than the $109,000 Roadster that Tesla launched in 2009. This week, the company announced that in the first quarter of 2013, it earned its first-ever corporate profit. It sold 5,000 cars in Q1, and its list of orders is growing by 20,000 per year. Part of the reason Tesla has turned profitable, Musk explained in a shareholder letter, is by making its production processes more efficient. Among other things, the company reduced the amount of time it takes to build a car by 40 percent. Over the long run, Musk aims to keep lowering the price of its cars—he’s hoping to release a $30,000 car in the next three or four years—while keeping the company’s gross profit margin at 25 percent, which is very high for the car industry.”

• Slow diffusion makes it easy to mock new ideas. All of this comes together to show how it is pretty easy to mock a new idea – the first stage of responding to a disruptive innovation, followed by aggression, bargaining and getting smashed like a but.

• Steven Johnson made the Apple-Tesla comparison first, and this quote from him pulls all of these issues together:
  
  “The question is whether Tesla is the Apple of 1985 or the Apple of 2005. Tesla critics tend to see it as the former: a luxury car maker for people who have the spare change to experiment with ultimately impractical electric cars. The Roadster and the Model S, in this scenario, are the automotive equivalent of the original Macintosh: an expensive experiment that will never capture a mass audience. The believers see Tesla as closer to Apple right before the launch of the iPhone: a company about to help propel (and profit from) a massive sea change in consumer behavior.In large part, those two alternatives ultimately come down to a single, crucial question: how close are we to the obsolescence point for combustion engines? Most scenarios assume that we are not very near indeed. Warren Buffett apparently thinks all cars on the road will be electric by 2030, but most analysts assume it will take us that long just to get to 50% EV penetration. But what if Buffet is correct, and the EV tipping point is right in front of us? What if Buffet is underestimating the rate of change?”

  I think Buffett is right.  It looks to me like we’re starting to hit the tipping point. The analysts are assuming that electric vehicles are going to follow curve C. But students of innovation know that they will follow the S-Curve.Time to get ready for your electric car. And I guess we can start planning for flying cars next – maybe that’s how I’ll do my traveling in the future!

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Tim Kastelle is a Lecturer in Innovation Management in the University of Queensland Business School. He blogs about innovation at the Innovation Leadership Network.