April 14th, 2019 by Alex Voigt
Demand is a mystery that can only be measured once supply is provided, and at that point, it’s not demand anymore. You only know what demand you really had after its gone. Supply is a fact you can easily measure, while demand is never really known or completely understood. Even worse, the supply you measure is usually only a part of the demand you once had, and the closer you get to the moment of supply, the more you know how real the demand is.
A simple definition of demand is: “what people want.”
This polarizing sentence is an expression of consumer imagination limitation with a touch of arrogance. If you ask consumers, they tend to request better existing features instead of a new kind of vehicle or product that did not exist before. The very same that has been true for the transition from horses to cars is today true for the transition from gas combustion engines to electric cars.
You can rightfully state what Henry Ford really said is that consumers are dumb and he as a visionary knows better what they want than they do themselves. Admittedly, he was more polite, and admittedly, his success probably proved he was right. Once people had experienced the superiority of the Model T versus their horse, they suddenly knew that they wanted one, and they knew it with certainty.
Photo by paulbr75 on pixabay
Consumers know what they want once they touch, feel and experience a product and service that is much better, but they usually are not very good at imagining a new form of transportation with a different drivetrain and a new innovative energy concept that did not exist before.
For 10 years, I have followed consumer behavior concerning electric vehicles, and if one part of it is obvious, it is that Henry Ford did dare to express what many visionaries feel, which is that they know something before you do. Early on, in most cases as children, they learn it the hard way — that you better not try to explain or try to convince with words, but rather convince with reality and experience.
During the last 10 years and through today, the vast majority of people claim that electric vehicles are not what consumers want. All incumbent automakers for decades declared that consumers would like a faster, bigger, heavier, and prettier internal combustion engine (ICE) car (a gas or diesel car). That sentence is true for almost all ICE drivers until the very moment they drive a Tesla for the first time.
Photo by Tesla Shuttle
Henry Ford faced the very same challenge 100 years ago. He believed in an affordable way of transportation that was in every aspect better than a horse and accessible for the normal consumer. In those days, some 100 years ago, cars were only for the rich, and he revolutionized an entire industry by listening stubbornly to his own conviction, avoiding and disregarding all who told him it was impossible.
Elon Musk faces the very same challenge Henry Ford had. Nothing has changed. Most consumers cannot imagine how much better it feels to drive an electric vehicle like a Tesla, and the total cost of ownership and safety benefits, and the auto industry does not believe (or does not want to admit) that the consumer wants to buy them.
Here we are now in the year 2019, in which history has been written from a small car company in California that produced and sold 245,000 BEVs in 2018 and is about to sell between 370,000 and 420,000 in 2019. All of those are pure electric vehicles that the auto industry, the majority of the media, business analysts, and executives of the largest automakers have explained to us year over year the consumer doesn’t want. I ask myself who is the one arrogant enough and pretending to know what buyers wanted back in 2018. The best way to determine what a consumer really wants is to look at what a consumer spends his money on.
Numbers are facts and facts have no alternative — they are undeniable truths. If a consumer buys an electric vehicle instead of an ICE car, she or he has created a fact that can be measured. It shows what people really want.
If those purchasing choices cumulate to larger numbers, you have a strongly confirmed fact that has societal implications, and if they repeat over time and grow, you have a positive trend. It is as simple as that. Cars sold or cars delivered cannot be questioned or called “not real” or “vaporware.” They show us simply what a consumer wants and is willing to pay money for. Cars sold are an expression of demand.
Analysts have questioned the demand for Tesla cars since the company was founded. If analysts could analyze, they would not be analysts. A good example of that fundamental truth is billionaire Ron Baron, who was an analyst once and realized he was a good one, making his clients rich. Consequently, he quit his job and is now filthy rich. He is one of the largest shareholders of Tesla today. Would you trust an analyst that is rich following his own recommendations or one that does not trust his own recommendations and is still employed?
Almost all professional analysts you read or listen to in the media have been wrong about what are now the largest, most valuable, and fastest growing stocks ever seen — like Apple, Amazon, and Microsoft. People who did the opposite from what those analysts said are wealthy now. Still, they did not learn from the past and today use the wrong metrics to assess companies like Tesla, and seem not to see the forest because of all the trees. They actually show you a single tree while disregarding the large forest in front of them.
When the media writes about low Tesla deliveries in Q1 2019 compared to last quarter — negative 31% quarter over quarter while the company actually grew 110% compared to the same quarter a year ago — they actually point to a smaller tree not growing that fast in 3 months and do not look right and left and recognize that the forest has actually more than doubled its size. For clarity, to point to one month or quarter and call it an issue is like looking at one tree in a large forest and calling it small.
When the media talks about Model S and Model X deliveries, which were smaller in Q1 versus Q4, it is again looking at a tree while overlooking that Tesla had its third best quarter in history for all models combined and all of these three best quarters happened to be in the last 9 months (the last three quarters). The forest has grown significantly in that short period. To look at just a month or even a quarter is too short a time to evaluate the company, but if you want to pick that period, you have to at least take that month a year ago or that quarter a year ago to compare and assess — as the auto industry is a seasonal business that goes up and down like the weather does through the four seasons. What these analysts are doing is akin to comparing the average temperature in summer with the one in winter and calling the winter a big miss.
Growth matters if the cost per vehicle produced is significantly reduced while growing faster. That is the case with Tesla. It’s growing at an unprecedented rate for the auto industry and reducing costs at a similar rate. All one-time costs for robots and factories are paid off from more cars sold and delivered, something happening every day.
This growth is happening because a Tesla vehicle is actually a shell that is filled over time and improves with software updates. It surprises you with what it learned lately, like your kid that surprises you by walking and speaking all of a sudden, somehow magically out of nowhere. In that sense, there is simply not one other single car, be it electric or not, that is available today and has this impressive promise to improve over time (and perhaps even appreciate in value).
It also can metamorphose into a different car — like, for instance, the Model 3 Standard Range that after an update suddenly becomes a Model 3 Standard Range Plus. This ability is an underestimated factor in flexibility, the flexibility to turn demand into supply at no additional cost. Tesla has a 100% margin on it and makes consumers very loyal to the shell they bought. The consumer is aware that it can be something else over time if they decide to spend money on it.
Anybody who has worked in sales knows that demand is volatile, comes and goes, but if you make the right offer at the right time, you get the deal. The hurdle to overcome for all other automakers trying to convince consumers to sell their old cars and buy new one in order to get more range is massive versus a quick software update for a relatively small amount of money from Tesla, and you keep what you had but it’s now just better. Battery capacity is one thing consumers can upgrade, while autonomous driving features is another. And even without upgrades, all Tesla cars sold today are finished in terms of hardware but never really finished, since the software just gets better and better.
If I told you that one of my best and easiest decisions in life was selling my Porsche and buying a Performance Model 3, the best car I have ever driven, that may not make you change your mind about Tesla. You may call me a fanboy living in a bubble, in an echo chamber listening to people like myself. Maybe that’s true, but it does not matter because I did spend €75,000 for the car and that’s a fact. My euros I worked for are now Tesla’s euros, and the number of consumers buying Tesla’s cars is growing every day — that’s a fact. The forest is growing every day.
All of what I have written in this article so far can be debated, called right or wrong, and won’t necessarily help you to get a clearer picture of whether Tesla will succeed or not. Success means for everyone something different, and Wall Street tends to express its definition of the car industry on production count and deliveries. From my point of view, Tesla is not a car company, but an energy transformation enterprise that happens also to produce cars.
I’ve always thought that the fundamental good of Tesla should be measured by the number of years by which it accelerates the transition to sustainable transport & energy
— Elon Musk (@elonmusk) April 14, 2019
Some parts of that transformation, like autonomous software, will be valued orders of magnitude higher than the entire car production of Tesla. Elon Musk: “It became obvious to me that in the future any car that does not have autonomy would be as useful as a horse.” The real part to focus on is therefore the trillion-dollar industry, autonomous driving, even though all those analysts decided that deliveries and production — or to use Elon Musk’s words, the usefulness of a horse in an autonomous driving world — is more important. Well, for the sake of the argument, let’s talk about production and deliveries for a moment.
Living in Europe — to be more precise, in Germany — we’ve experienced modest growth of fully electric vehicles in recent years. In just 6 weeks of the 13 weeks of Q1 2019, deliveries of the Model 3 in Europe made it a best seller, and it did grow the electric car share overall quite significantly.
Delivery numbers prove that in March 2019, the first full month it was delivered, it was the best selling electric vehicle in Norway, Netherlands, Spain, Germany, Austria, and Switzerland, as well as other markets, and it was the best selling car of all types in Switzerland, the Netherlands, and Norway.
These results are for the most expensive version of the Model 3, and the only one that has been available in Europe.
In Switzerland, the Model 3 has been delivered since the middle of February, and in the first 6 weeks of delivery, it has proven its appeal to consumers by being documented the most sold vehicle of all fuel sources or types. You heard it right — no other car sold better.
The Model 3 Standard Range Plus (SR+), available for about €42,000–47,000, has been available to order since the middle of April 2019, and therefore is not a part of the graphs you find in this article. The SR+ is a variant of the Model 3 Long Range.
To offer a variant of an already successful vehicle for 41% lower cost drives more demand.
To offer the ability for owners to put their cars in a ride-hailing network drives more demand.
To offer a car that has embedded self-driving capability drives more demand.
To offer leasing as an option that is now available drives more demand
All leasing vehicles returned will be part of Tesla’s ride-hailing network. Returned leased cars are for Tesla a present because they are either already fully paid or will be paid off soon with the profits they generate from autonomous ride-hailing service. Imagine, these cars, which consumers have bought already, are given back to Tesla for free to create another round of revenue. This is another underestimated and overlooked beauty of Tesla’s business model: a second round of revenue on its vehicles.
An often expressed thought is that autonomous ride-hailing is not yet a reality, as autonomous driving isn’t yet permitted. Further, regarding the sales records above, Norway, the Netherlands, and Switzerland are relatively small countries with a lot of EV incentives — in larger European countries, like Germany and France, Tesla won’t succeed due to the loyalty of Germans and the French to their own well loved brands and protective measures from the government.
That’s a fair remark, but who would have imagined that the Model 3 in the first full month of deliveries in my country will be the 8th most delivered and sold vehicle in the small and midsize luxury segment, selling more than Audi 5 series vehicle, more than the BMW 4 Series, more than the Mercedes CLA and CLS?!
The next objection expressed is often so-called pent up demand, that all of those are just cumulated reservations from 2+ years of customers waiting, and that demand will fall after those have been delivered. It is a fact that reservations have been delivered in Europe up to the middle of March and new orders from 2019 were already being delivered in February. So, even in those graphs above, a large part of those orders are just a few weeks old and therefore not pent-up demand.
As announced by Tesla, a big portion of Model 3s could not be delivered in March but will be or have been in April. The excitement people express about the Performance Model 3 will and does attract new buyers, and the SR+ orders that are coming in while I write this sentence are also largely new. It is fair to assume that April will not have as many deliveries as March had, but to compare the last month of a quarter with the first one was never a meaningful comparison to draw conclusions in Europe. Remember, forest and trees.
With 98% of all vehicles in Germany sold in March still having a combustion engine, the market opportunity for all companies producing electric vehicles is 98%. The constant talk in the media about competition for Tesla lacks the imagination that in a fast growing market, usually, all who have a decent offer grow their business. Some may grow slow and others fast, but they all grow. To call cars like the e-tron, I-PACE, ID, and EQC “Tesla Killers” disregards their underwhelming specifications first of all, and also seems to fully overlook that its 98% more likely that you sell those vehicles to owners of ICE cars than to people who already have a BEV. If you have driven the Model 3 once, experiencing the entire concept — including over the air updates and the Supercharger network, to name just two thing — makes you feel like the VWs, BMWs, Daimlers, Porsches, and Audis are like knives in a gun fight.
What is happening in Germany as I write this sentence is nothing other than a fundamental change in society. Germany, Europe, and the world will not remain like they have been, and our children and grandchildren will live in an environment where they will ask us how it was in these old days when cars actually released emissions on streets that was dangerous and could kill us.
Just a few years ago, people were allowed to emit everywhere while smoking, and we accepted it and did not even question it. Now, after smoking has been banned in most buildings and considered uncool, society has changed so quickly that even for me it is hard to imagine how it was and how we possibly could have taken it for granted and allowed it. In some years from now, we will look back and ask ourselves how we could allow combustion engines on our streets, how we could allow all these human drivers to drive while a well trained neural net in an autonomous car is so much safer? It will take longer than it took to ban smoking indoors, but we will all look back one day with the same disbelief.
But, unfortunately, the change from the combustion engine to electric vehicles will not happen simply because society understood the danger of emissions to humans or humanity as a while, or understand autonomous driving was much safer than a human could ever drive, but it will be because an electric car is in every aspect simply better and safer. The case for ICE cars is shrinking dramatically.
Every metric you name, be it costs, torque, range, acceleration, looks, and other things, there is not a reason anymore in the year 2019 to prefer an ICE car. On the contrary, there are many reasons against it. That is true and proven by facts, because otherwise the Model 3 would never be the #1 bestseller in Switzerland, the Netherlands, and Norway — beating all combustion engine cars. It does not matter if people claim they have too short of range or are too expensive, because the consumers in Switzerland have already given their remarks. This is not a one-time effect triggered by pent-up demand — the lower costs Model 3 Standard Range is still to be delivered, and will open another much bigger segment of consumers who are urgently waiting to get their cars. This is not the end, but the beginning, for consumers to realize that some electric vehicles are vastly superior to any car they have ever driven before.
Dear Auto Industry, get used to it that Tesla is competing with your gas cars and not with other BEVs. Tesla does play in a league of its own for a variety of reasons. Look at the charts and realize that Tesla sells in many countries more cars than all other manufacturers, like in Norway, where the Model 3 achieved in March a market share of 31% — that is more than the total share of all remaining gas cars combined.
If you still don’t believe this to be the truth, then ask yourself why Fiat Chrysler Automobiles (FCA) negotiated and signed a pooling agreement with Tesla to reduce its average carbon emissions and thus avoid high fines from the European regulators. FCA has accepted paying Tesla in exchange a few hundred million euros — for actually nothing else than producing cars that don’t emit and that compete with FCA vehicles.
This is like a present for having chosen the right strategy. You can rightfully say that Fiat Chrysler decided to give a good portion of the new Gigafactory 3 in China to Tesla for free, which, once it is finished in about 8 months, will produce even more BEVs — that will bring Fiat Chrysler under more financial pressure due to lower car sales and less profits to finance BEV R&D, resulting in either paying the European Commission fines in 2020 or again paying a little less to Tesla. What an irony of history!
Think about it for a second: You pay your competitor hundreds of millions of euros for a piece of paper and goodwill which will make them stronger and you weaker. What does that mean for VW, Audi, BMW, Porsche, and Daimler, considering the billions of euros that they will need to pay if they don’t sell enough of their BEVs. Next year, Tesla will have the ability to pool the equivalent of a mind-blowing $40 billion every year. Every car sold by Tesla has, therefore, an equivalent value of $9,000 that Tesla can materialize on. Those are environmental costs that the auto industry has put on all citizens for 100 years and which are now visible and redirected to the ones who are causing them. The costs of damaging nature that will now be paid by the auto industry will help to end the era of the combustion engine. BEVs are without a doubt looking at total cost of ownership today that is cheaper than ICE cars.
While Tesla has the longest range vehicles that get more range with over-the-air updates, Audi’s e-tron got an embarrassing 204-mile range confirmed, way less than what it promised, while Tesla promised less and delivered more. The consumer will remember that. And credibility and reputation are the last things Audi wants to lose, because with those, everything is gone.
From now on, with every day passing, car industry giants will have less ability to define their own destinies and futures, but they will move more into a dependency on pure BEV producers like Tesla. If you believe to have heard this sentence before, this is because I wrote it in an article half a year ago. The payment to Tesla from FCA is first proof that this prediction is coming true. The world is not going to be better for the incumbent ICE producers, but every day a little worse.
This is a vicious cycle the auto industry has chosen to go into, and it did so with free will. If you enter a vicious cycle, there is a point of no return, and I believe its already too late for some of the large automakers to stay independent, solvent, and profitable in the future. Some of the German automakers will first cooperate, which is happening already today between, for instance, BMW and Daimler. Later, they may build more merged departments while shrinking in business and laying off people. Eventually, they will move fully together with one management keeping the different brands.
All German automakers without exception are between 3 and 10 years behind Tesla in core areas of BEV research and development, and their latest strategic decisions don’t make me confident that they have seen it coming or that their ability to assess the current situation and conclude on the right step forward has improved. Panic should be swirling around, but, and this is the bad news, it isn’t. Feel free to call me a fatalist — I prefer to call myself a realist.
The time is over when an electric vehicle’s growth should be compared to the growth of other electric vehicles. It does not matter and never did if one BEV sells better than another. Those graphs become pretty boring anyway, as the Model 3 dominates the statistics by a large margin. Everybody believing that this is a one-time effect should remember that not even all markets have received the Model 3 yet, the Model Y is likely going to be more successful, the Tesla Pickup is coming, and Tesla will not ever stop engineering, building, and innovating. It’s a demonstration of superiority and technical lead above all others, but also a demonstration of how the company conquers emotions.
Most people believe they make decisions regarding their second largest investments in life due to specifications, requirements, and pure rationality, but the truth is they do it because of feelings and emotions.
Describing how it feels to drive the Performance Model 3 is like trying to explain to a virgin how it is to have sex — there are simply no words for it.
… but that is a separate story for another point in time.
Stay tuned for my next article.