What Detroit should learn from Tesla Motors

It's really a rolling mobile phone.
It's really a rolling mobile phone.
Image: AP Photo/Paul Sakuma
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Better Place founder Shai Agassi has kept a low profile since he was ousted as chief executive of the electric car infrastructure company that burned through nearly a billion dollars before filing for bankruptcy this year. But he emerged today to offer his thoughts on the lesson automakers should learn from the runaway success of rival electric carmaker Tesla Motors: Study the business model, not the Model S.

“While most of them most likely already drove and even tore apart a Tesla Model S, they will likely learn more from reading Tesla’s [profit and loss statement] than they would from the car’s engineering,” Agassi wrote in a commentary published on LinkedIn. “Understand the economics underlying Tesla, and design a better mass produced GM, Ford or Hyundai car for the masses. Produce a car that can change the market in 2017 and capture a bigger share of the profits in the competitive car industry.”

“Do so by aiming to beat all other gasoline cars, not by competing with Tesla’s next luxury sedan,” he added.

The big car companies have had a love-hate relationship with Tesla, alternatively praising the Silicon Valley automaker for its light-years-ahead-of-the-battery-pack technology and the stylish Model S sports sedan while scoffing at the notion that the upstart poses any threat to the dominance of Detroit and Tokyo. (Investors disagree; Tesla, which sold 5,150 cars in the second quarter of 2013, has a market cap of $17.6 billion; GM, which sold 234,000 cars in the US in July alone, is valued at $47.7 billion.)

Agassi doesn’t believe Ford, GM and Toyota should emulate Tesla’s business model—that’s bound to fail, he says, as they’re mass-market manufacturers and Tesla for the time being is a speciality automaker. What they should do, though, is embrace the assumptions behind it when it comes to electric cars.

First, design and manufacture a car that exceeds buyers’ expectations, rather than try to mimic a fossil-fuel vehicle at a higher price with fewer features. Tesla gave the Model S a driving range and high-tech features that positioned the car to outsell gasoline-powered luxury sedans like the BMW 7-Series and the Audi A8 in the US. The electric version of the Ford Focus, on the other hand, costs about $10,000 more than the gasoline version and has only a quarter of its range.

Second, think of the car as a mobile phone whose software and some of its hardware—the battery—will be upgraded over its life. Other automakers are doing this but not to the extent that Tesla improves the Model S’s performance and features through software upgrades. That will increase the car’s resale value, Agassi writes.

And third, assume battery range will continue to improve and battery price will continue to decline, and design electric vehicles accordingly. Perhaps that, more than anything else, will give Tesla its long-term competitive edge. As the company continues to ramp up production, technological innovation and economies of scale will allow it to sell cheaper, longer-range cars.

Though not exactly direct competitors, Better Place and Tesla promoted alternative versions of the electric future. Better Place invested hundreds of millions to build battery-switching stations where drivers swapped out used batteries for fresh ones on the assumption that once they were built automakers would make compatible cars and buyers would subscribe to its network. Tesla, on the other hand, waited to see where its customers wanted to drive and then rolled out a network of relatively cheap fast-charging stations along highways where drivers can top off their long-range batteries in about 20 minutes for free.

So what’s Agassi up to these days? A spokeswoman told Quartz he’s working on ” a new stealth project.”