Comment: Tesla and all those Chinese electric vehicle makers are on to something worth hundreds of billions
LAUSANNE, Switzerland: It’s hard to be in the automotive industry. Competition can be insane when there is so much money to be made.
Just look at the market value of the big boys. The world’s most valued automaker, Tesla, has a valuation of US $ 650 billion. It is also bigger than JPMorgan Chase and Alibaba.
Next is Toyota, worth around $ 240 billion. It’s about the size of Netflix and Coca-Cola. The third is VW, at $ 140 billion. This places him somewhere between Hermès and Dior.
Now what’s interesting is that the world’s fourth most valuable automakers are the youngest and based in China: BYD, a battery-powered electric vehicle (EV) maker in which Warren Buffett’s Berkshire Hathaway has invested. 13 years ago.
Today, it is valued at nearly US $ 100 billion. Daimler, GM and Nio follow closely behind, hovering above $ 80 billion.
Last week, another Chinese electric vehicle maker, Xpeng, was listed in Hong Kong. This is the company’s second listing after its IPO on the New York Stock Exchange last August.
Xpeng and BYD are just two of many emerging Chinese electric vehicle companies – like Nio and Li Auto – benefiting from a boiling capital market. It is a market that disproportionately favors new entrants.
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Whether it is a pension fund or a foreign sovereign wealth fund, these institutional investors already view automakers as having fairly positive and resilient growth prospects that are different from those of other sectors.
But is there something about these new electric vehicle makers that seem to be attracting more investors? What’s so special about EVs? After all, making one isn’t that difficult. Every automaker knows how to make one. Do you remember the Nissan LEAF? It was first introduced in 2010, over ten years ago.
WHEN DISTURBANCE MEETS CONVERGENCE
Old electric vehicles like the Nissan LEAF are the classic victim of disruptive innovation.
Nissan’s batteries in its early days weren’t really that good. Drivers suffer from range anxiety when abilities were low. And building an electric vehicle is more expensive than building a traditional sedan using an internal combustion engine.
This is why incumbents like Nissan still lack the motivation to develop disruptive innovation, the late Harvard professor Clayton Christensen would say. This does not lead to profitable growth, at least in the short term.
But there is a new development today that is game-changing for electric vehicles.
The maturation of computer technologies is fueling a new type of EV that is more connected and smarter. An EV, in other words, is less of an electrical device than a supercomputer on wheels.
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Electronic components will soon be half the cost of producing a car. It should come as no surprise then that already nearly 50 percent of car recalls by manufacturers are due to electronic failures, not mechanical errors.
And yet, traditional automakers won’t find it easier to assemble the new electric vehicles.
Even though the electrification of the powertrain is easy, the new electronics and their interactions can be extremely complex. The system should give the driver control of all safety functions, as well as infotainment and navigation assistance.
Sitting at the top is a potential requirement for autonomous driving, which is still in development, but getting better and better every day.
This is a fundamental architectural change at the product level, several automotive executives told me separately. It’s a change in the way we conceptualize how a car should be built, they say.
HOW ELON MUSK “ARCHITECTS” TESLA
And so, with good reason, what Elon Musk pursued as he evolved Tesla was vertical integration. This approach gives Tesla full control over all of its parts.
At the Palo Alto headquarters, visitors can observe the myriad of manufacturing activities that Tesla does in-house. These are operations that a traditional automaker would have outsourced.
The company seeks to master battery chemistry firsthand. Its giga-factories in Shanghai and Nevada are expected to produce batteries at a volume never seen in the world. SolarCity, a seemingly independent manufacturer of solar panels, was part of Tesla’s plan to spur growth in infrastructure construction.
By solving tough problems internally, Tesla offers a new kind of customer experience. And this directive is also reflected in the architecture of a passenger car.
Tesla radically redesigned the electronic architecture under the hood to reduce complexity. It divides the overall architecture into four controlled areas: the autopilot, the central information display, the instrument cluster and, finally, the transmission and energy storage.
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Thus configured, the architecture optimizes permanent connectivity. It allows over-the-air software updates like the way you get heavy antivirus updates and new OS fixes without the driver going to a repair shop.
It is a product architecture designed for data collection, algorithm testing, and interaction with the driving infrastructure and with other vehicles. Meanwhile, it leaves room for development and downloading of future features.
In contrast, in most traditional car manufacturers, the electronic architecture reflects their past experience. It is a design that adapts to the configuration of different vendors.
The five historic areas are the powertrain and chassis, driver assistance and safety systems, infotainment, climate and comfort, and connectivity. It is difficult to “update” them. Too many features are “hardwired” into the physical parts.
Now we can see that the automakers are not fighting against the car models. They are fighting over the architecture of the product.
THE BATTLE OF STANDARDS
When something goes digital, it often sets off a race between old and new standards. Some would say that the German automotive standard remains the safest in the world. There are advantages to a product architecture based on traditions and experiences.
But of course Tesla and other EV upstarts can and will improve safety over time. And we must keep in mind that an industry standard is often less determined by technical superiority, but is shaped by a series of factors that satisfy the immediate needs of consumers.
After all, several lower standards have become the dominant designs. Sony’s Betamax had much 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 much larger installed user base, but everyone will agree that Apple iOS is more secure and protects personal data better.
As investors invest money in new EV companies, the real questions are: Will Tesla’s architectures and those of new variants from other EV manufacturers outweigh automotive architecture? traditional which has evolved from the past? Which product architecture and which industry standard will provide the most benefits that consumers really care about?
Looking at the valuations of Refinitiv, we can see that the market has a very strong opinion on both points.
Investors certainly think Tesla and these new Chinese electric vehicle companies pioneering this new car model of the future are. They believe there is a growing industry convergence in the electric vehicle sector that will one day become the dominant vehicle type on our roads.
And this is an opinion that is not that of individual investors like you and me. This is a view shared by your pension funds and the world’s most sophisticated institutional investors – Warren Buffett included.
Howard Yu is a LEGO Professor of Management and Innovation at IMD Business School in Switzerland and Singapore. This article is co-authored with Angelo Boutalikakis, researcher at the Center Of Future Readiness at IMD.