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Case study: How Tesla changed the auto industry

Published Feb. 20, 2018
By Kate Patrick Macri

By Steve Jurvetson
Moving parts: How the automotive industry is transforming

Tesla is experiencing growing pains, but has willingly invited more criticism than other young companies because the
automaker is brazen enough to pronounce ambitious goals and, most boldly, insist that its vision of the future of the
automotive industry is the definitive one.

But Tesla is forcing the auto industry to rapidly change. Large, established automakers now are making fully electric and
hybrid electric cars. Automakers are starting to explore and include artificial intelligence (AI) in their cars, and now major
automakers and U.S. Congressmen are discussing autonomous vehicles (AVs) and how best to innovate and regulate
them.

Not only that, but Tesla’s software design is state-of-the-art: the fact that Tesla can update vehicle software over-the-air
(OTA) as if it were Apple updating an iPhone is unprecedented. As cars become more tech-savvy, Tesla is in the lead. But
Tesla struggles to meet deadlines and frequently delivers flawed vehicles, and profitability remains elusive. Many use
Tesla’s failings to argue that the company shouldn’t be followed as an innovator or even as a true automaker.

It turns out Tesla’s story is far more complicated and nuanced than often portrayed, but the roots of its challenges come
down to the company’s finances and supply chain.

Tesla is forcing the auto industry to change rapidly

Tesla didn’t invent the electric car (Scottish inventor Robert Anderson did, in 1832), but it was Tesla who popularized,
pioneered and promoted the electric car ever since the company’s founding in 2003. None of the major automotive
manufacturers were making electric cars until Tesla made it cool in 2008 with its bombastic announcement of the first
luxury electric car: the Tesla Roadster.
Since then, big automakers with lots of capital, solid supplier bases and seasoned supply chains went to work in rapidly
developing and churning out their own electric cars, as consumers and governments pursue eco-friendly, low-emissions
transit options. The next electric car, released in 2010, was made by Mitsubishi Motors.

According to the Bureau of Transportation Statistics data, the number of hybrid EVs sold in the U.S. didn’t break 100,000
until 2005. The bureau doesn’t have data on the number of EVs sold until 2011, which was 9,750.

Since then, the EV market has exploded. By 2015, 71,044 EVs were sold in the U.S., and 384,404 hybrid EVs. Between
January and September 2017, Tesla led the pack by selling 73,227 EVs, followed by Chinese automaker BYD, selling
69,094.

Brian Loh, a partner at McKinsey & Company, said innovation is at an “all-time high” in the auto industry right now,
which is significant because historically, the auto industry is very slow to evolve.

“There’s so much change happening that the automakers are trying to make sure they’re as successful in the next era as
they were in the past,” Loh said.

The auto industry is not resistant to innovation and change, but does tend to adapt slowly. Lately however, that’s changed
dramatically, and largely because of Tesla’s disruption in the market. Tesla has that “cool factor,” something established
automakers do not have, and has created hype around Tesla’s EVs that other brands — like the Nissan Leaf, for example
— do not get.

“The electronics innovation trend with the industry has been going on for a while, but I think it’s accelerating,” Loh said.
“The mega trends we read about in the papers every day of automotive driving, electrification, connectivity, shared
mobility — these are huge industry sharping trends and they are really having a big impact in the industry at the OEM
level and the supplier level, and it’s leading to a lot of big investment.”

Then there’s the AV discussion. Tesla’s Autopilot, which uses AI to drive a Tesla vehicle for you with some minor
assistance, has been the subject of hot debate, with some consumers misusing the technology and crashing the cars while
using Autopilot. Other automakers are following Tesla’s lead and looking to create semi-autonomous or fully AVs, and
that has sparked contention in Washington as lawmakers try to reconcile safety concerns with innovation-hungry
automakers.

U.S. senators and industry leaders — including automakers, manufacturers, 3PLs and supply chain leaders — now believe
AVs are the definitive future of the auto industry, largely because Tesla is driving the conversation.

Tesla is one of the key drivers of innovation as the auto industry is forced to evolve, but Tesla also shows how difficult it
is to succeed in the auto industry at all, and how there is still room for improvement within the hotly competitive, tight
margin business. In fact, Tesla is a good example of how critical stable supply chains are to the success of an automotive
company.