As part of my course at HBS, I had to write a paper discussing the disruptive innovation in electric cars ecosystem. The focus of the paper was on two players, Tesla and GEM, and see where these two companies have been successful/failed in formulating and implementing their strategies. Another aspect of the paper was to evaluate the competitive landscape that has forced these two companies to compete with each and what could be in play in the future. Let’s start with a brief overview of the two companies:
Tesla Motors (TSLA) was founded in 2003 in Silicon Valley to bring out an evolution in electric cars as opposed to gasoline-powered cars. They eventually started design and manufacturing electric vehicle train components, and battery products as well. Tesla became famous in 2008 with the launch of Tesla Roadster. Their models primarily target high-end consumers but have now developed an electric car that can be afforded by middle-income households as well. Tesla owners charge their cars at home and have access to Tesla Supercharger network to get free charging across the United. They have reinvested themselves as not just an automaker, but also a technology company with a focus on energy innovation.
Global Electric Motorcars (GEM)
GEM is a subsidiary of Polaris Industries and is a US based manufacturer of low-speed electric vehicles. The company was founded in 1992 by a team of ex-General Motors engineers. They have been producing close range vehicles (NEV) since 1998, and low-speed vehicles since 2001. It was formerly owned by Chrysler. As of 2015, GEM is the market leader in short-range vehicles with over 50000 units sold since 1998.
I’d like to analyze each of these companies through the Disruptive lens to see where they stand at this point. Let’s start with Tesla.
In my opinion, Tesla is a “sustaining innovation”. While it is a new technology, it is not intrinsically disruptive. Tesla targets high-end customers in mainstream markets who are willing to pay a premium for high-performance electric cars. However, the entire company is not built on sustaining innovation as the new Model 3 is a low-end disruption targeting middle-income customers who couldn’t really afford electric cars before and no company was targeting them. They’ve also released battery systems that are high-performance but are expensive right now and therefore, a sustaining innovation.
There is a huge performance surplus for Tesla cars at this moment as it goes above customer requirements. The company has identified the job to be done as “help me buy a sustainable car that is a high-performance and long-range vehicle. The vehicle shouldn’t compromise on any features or capability compared to the gasoline-powered vehicles”. These models are comparative to BMW or Mercedes in features and capabilities and given the price point, the only difference is the sustaining innovation in electrically driven vehicles.
What is attractive about Tesla is the integrated strategy that Tesla employs in-car manufacturing. The auto-industry is a highly modular ecosystem. The architecture of Tesla is interdependent on each other, but Tesla has had a firm understanding of these interdependencies and build and marketing and brand presence around it. This is similar to what Apple did with its products. While Tesla capitalized on consumer preferences for sustainable cars, it has always kept an eye on the emergent strategies that can be employed using their current capabilities in new areas like energy innovation through PowerWall.
The company has strategically positioned itself as a leader in electric cars by not patenting its product, but rather making them a standard. This is similar to what made MediaTek extremely popular and viable. Therefore, Tesla is a sustaining innovation and has developed low-end disruptions as well.
Global Electric Motorcars (GEM)
GEM primarily produces Neighbourhood Electric Vehicles (NEVs), which are essentially high-performance gold cart EVs that people use for traveling short distances. Its e2 NEV costs just $8,000 and can carry two passengers up to 35 miles. The $11,000 E4 can carry four passengers up to 30 miles. They have low-performance levels and -price points, making it a low-end disruption to target low-to-middle income households. They are slow but cost a lot less than normal gasoline-powered cars. Taking a global perspective, GEM has the potential to reach millions of customers in developing countries who couldn’t afford a regular car at this moment. This is similar to Tata Nano that was released in India.
These cars have found a unique purpose for watchmen and facilities staff to travel on large properties like universities, manufacturing plants, and movie studios. They have also been popular in the tourism industry focusing on hospitality in hotels, as well shuttles and tours. Therefore, these cars are not just low-end disruptions, but also new-market disruptions as they can be used in markets that were particularly targeted by car companies. They hope to continually improve their NEVs and compete with Tesla cars in the future.
The business model behind these cars is modular. GEM uses the cheapest materials to make their cars by partnering with various vendors in contrast to Tesla. They have an online sales process, but also deal through limited dealer partnership to sell their cars. This allows them to be profitable.
Therefore looking into both these companies through the disruptive lens, it has become evident that Tesla has more characteristics of sustaining innovation whereas GEM is a low-end disruptor. Elon Musk, CEO of Tesla, should focus on targeting more towards the low-end customers that are the major customer base in the car market. It would also help to build electric batteries that would become a standard for car companies and potentially other areas requiring high energy. Scott Wine, CEO of Polaris and GEM, should focus on continuing the disruption trend to long-range vehicles that can compete directly with the gasoline-powered cars that are currently in the market.
Recommendations and strategic plan
Market research depicts high competition in the electric car industry in the near future. Auto-car manufacturers like Toyota, BMW, etc. have poured massive capital to develop electric vehicles of their own to compete with Tesla. Furthermore, there is a growing push from non-OEMs as well who are trying to build autonomous cars. These are companies like Uber, Google, etc. Based on the analysis, I would recommend the following to Tesla:
- Low-end disruption:
- Tesla should focus on middle-income customers who are increasingly become more environment focused and wanted sustainable solutions. These customers represent the majority of the market. Tesla has already built their first such car, but more development in this space will help the company increase its presence.
- Another approach would be acquiring GEM from Polaris Industries. Tesla and GEM should share synergies that would allow both the companies to serve every level of the customer base and become profitable by controlling the majority of the electric car market. Tesla could also look into making NEVs in developing countries where is a huge potential for such a car. GEM hasn’t had made a move there, and Tesla could have a first-mover advantage.
- New market disruption:
- Tesla has exploited the emergence of sustainable batteries and developed the PowerWall. This component, at this point, is extremely expensive but further innovation could significantly drive the cost and become a standard for energy solutions. With SolarCity, Tesla has a huge market opportunity that it can tap into. This market has low competition at the moment, and can allow Tesla to become a market leader in energy solutions.
- Another potential option would be driving the cost of solar panels. This could be done by leveraging SolarCity. Solar panels that are currently in the market are expensive and have high installation costs. Reducing these costs could make solar energy a more versatile option.
A lot of these recommendations are focused on Tesla maintaining an adequate balance between its emergent and deliberate strategy. The company needs to have a strong focus in each direction it undertakes and it is important to maintain a distinction between these units. The business units should end up disrupting each other or cannibalizing sales from one other.
Another important fact that Tesla should also keep in mind is that their strategy can always be improved. A strategy can also be improved based on the ever-changing market trends and it is important to keep an open mind about new ways for profitability.
Global Electric Motorcars (GEM)
GEM has a strong strategy as it intends to become a low-end disruptor and eventually starts developing cars that can compare to the gasoline-powered vehicles. The company doesn’t really need to be an innovator in this space in terms of technological advancement since the technology already exists (thanks to Tesla), and therefore, the company needs to focus on the best business model and strategy. For future growth, there are few potential options that GEM can undertake:
- Ensure that GEM targets the same customers it has set its initial strategy on. The deliberate strategy is still relevant. The company shouldn’t increase the cost or price per unit. Their current strategy should help them be profitable.
- The company should use the electric car standards that Tesla has created, to build faster and long-range electric vehicles. Partnership with Tesla for batteries would go a long way in accomplishing this.
- Since GEM is only an electric-car assembler, it needs to ensure that its vendor relationships are intact. It should make sure that the vendors have a focus on innovation and building better products on an ongoing basis.
GEM is only an assembler. This puts them in a precarious position as they are only innovating in strategy and car design. They are highly dependent on the suppliers so consolidating them might be a good option. Second, they don’t have a strong brand presence in the consumer market. They have only target institutions, but not made a dent in the personal car market. The brand position will define how relevant the company will be in the future.
Both the companies have their advantages and disadvantages. The paper highlights the potential gaps that each company faces and recommends a potential solution to address them. The market is constantly evolving and the companies need to keep their eyes peeled on emergent strategy while doing a good job of maintaining their initial strategy as well.