Commentary: Tesla and all these Chinese EV makers are onto something worth hundreds of billions
Electric vehicles are penetrating the auto industry and killing it. Howard Yu and Angelo Boutalikakis explain why investors have faith they will be the dominant car of the future.
LAUSANNE, Switzerland: It’s tough to be in the auto industry. Competition can be insane when there’s so much money to be made.
Just look at the market value of the big boys. The world’s most valuable car company, Tesla, has a US$650 billion valuation. It’s also larger than JPMorgan Chase and Alibaba.
Next is Toyota - worth about US$240 billion. That makes it roughly the size of Netflix and Coca-Cola. The third is VW, at US$140 billion. That puts it somewhere between Hermes and Dior.
Now, what is interesting is the world’s fourth most valuable carmakers are the youngest and China-based: BYD—a battery-turned electric vehicle (EV) maker which Warren Buffett’s Berkshire Hathaway invested in 13 years ago.
Today, it’s commanding an almost US$100 billion valuation. Following closely are Daimler, GM and Nio, hovering above US$80 billion.
Last week, another Chinese electric vehicle maker — Xpeng — listed in Hong Kong. It’s the company’s second listing after its IPO on the New York Stock Exchange in August last year.
Xpeng and BYD are just two of many emerging Chinese EV companies – like Nio and Li Auto - benefiting from a red-hot capital market. It’s a market that disproportionally favours newer entrants.
Whether it’s a pension fund or a foreign sovereign fund, these institutional investors already see car companies as having pretty positive, resilient different growth prospects compared to other sectors.
But is there something about these new EV makers that seem to attract investors that much more? What’s so special about EVs? After all, making one is not that hard. Every car company knows how to make one. Remember Nissan LEAF? It was first introduced in 2010, more than a decade ago.
WHEN DISRUPTION MEETS CONVERGENCE
Old EVs like the Nissan LEAF are the classic victim of disruptive innovation.
Nissan’s batteries in its early days were not exactly high-performing. Drivers suffer range anxiety when the capacities were low. And building an EV is more costly than putting together a traditional sedan using an internal combustion engine.
That’s why incumbents like Nissan always lack the motivation to scale disruptive innovation, the late Harvard professor Clayton Christensen would say. Doing so doesn’t lead to profitable growth, at least in the near term.
But there’s a new development today that’s changing the game for EVs.
The maturation of computing technologies is powering a new type of EV – one that is more connected and smarter. An EV, in other words, is less of an electrical device and more like a supercomputer on wheels.
Electronic components will soon make up half the cost to produce a car. That should be little surprise when already, close to 50 per cent of car recalls by manufacturers are due to electronic failures, not mechanical errors.
And yet, traditional carmakers won’t find putting the new EVs together any easier.
Even though electrifying the drive-train is easy, the new electronics and their interactions can be exceedingly complex. The system must give the driver the control of all the safety features, together with the infotainment and navigation assistance.
Sitting on top is a potential requirement for autonomous driving, which is still being developed, but is improving by the day.
This a fundamental architectural shift at the product level, several car executives have separately told me. This is a shift in how we conceptualise how a car should be built, they say.
HOW ELON MUSK ‘ARCHITECTS’ TESLA
And so, quite aptly, what Elon Musk has pursued as he scales Tesla is vertical integration. That approach gives Tesla the full control over all its parts.
At Palo Alto headquarters, visitors can observe the myriad manufacturing activities that Tesla carries out in-house. Those are operations that a traditional carmaker would have outsourced.
The company seeks to master battery chemistry first-hand. Its gigafactories in Shanghai and Nevada are set to produce batteries at a volume unseen by the world. SolarCity, a seemingly unrelated manufacturer of solar panels, was part of Tesla’s plan to drive growth in infrastructure building.
By solving hard problems internally, Tesla delivers a new type of consumer experience. And this directive is also reflected in how a passenger car is architected.
Tesla has radically redesigned the electronic architecture under the hood, in order to reduce complexity. It splits the overall architecture into four controlled domains: Autopilot, the central information display, the instrument cluster, and last, drivetrain and energy storage.
Configured in this way, the architecture optimises always-on connectivity. It allows for over-the-air software updates like the way you get pushed anti-virus updates and new operating system fixes without needing the driver to head down to a repair shop.
It’s a product architecture that’s geared for data collection, algorithm testing, and interaction with driving infrastructure and with other vehicles. All the while it makes room for future features to be developed and downloaded.
In contrast, at most traditional carmakers, the electronic architecture reflects their past experience. It’s a design that fits the setup of different suppliers.
The five historic domains are the power train and chassis, driver assistance systems and safety, infotainment, climate and comfort, and connectivity. It’s hard to “update them.” Too many features are “hardwired” into the physical parts.
Now we can see car companies are not battling with car models. They are battling over product architecture.
THE BATTLE OVER STANDARDS
When something goes digital, it often sparks a race between the old and the new standards. Some may argue the German car standard remains the safest in the world. There are advantages of a product architecture based on traditions and experiences.
But then of course, Tesla and other EV upstarts can and will improve safety over time. And we need to keep in mind that an industry standard is often less determined by technical superiority but is shaped by a range of factors that gratify immediate consumer needs.
After all, multiple inferior standards have become the dominant designs. Sony’s Betamax had a far better picture quality, but VHS won in the market because it had a longer recording time.
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The Google Android operating system has a far bigger installed user base, yet everyone would agree Apple iOS is safer and better protects personal data.
So as investors pour money into the new EV companies, the real questions are: Will Tesla’s architectures and those of the new variants by other EV upstarts trump the traditional car architecture that has evolved from the past? Which product architecture and industry standard will deliver the most benefits that consumers truly care about?
Looking at the valuations by Refinitiv, we can see the market has a very strong opinion on both counts.
Investors certainly think Tesla and these new Chinese EV companies pioneering this new model of the car of the future are it. They think there is growing industry convergence in the EV sector that will one day become the dominant vehicle type on our roads.
And it’s an opinion not from that of retail investors like you and I. It’s a viewpoint shared by your pension funds and the world’s most sophisticated institutional investors — Warren Buffett included.
Howard Yu is the LEGO Professor of Management and Innovation at IMD Business School in Switzerland and Singapore. This article is co-authored with Angelo Boutalikakis, a researcher at the Center Of Future Readiness at IMD.