Inside Tesla — And What’s Really Disrupting The Automotive Industry
Earlier this summer, Worm Capital and I published our first report on electric vehicles and solar and wind energy titled, “The Renewable Energy Revolution: A Longterm Outlook For Investors.” In it, we document a core thesis of our firm: We believe electric vehicles, automation, and renewable energies are disrupting entire industries — and it’s happening quicker than most people realize.
While researching this report, we came across the work of Tony Seba, a clean energy guru, Silicon Valley entrepreneur, and Stanford lecturer. Seba’s most recent study on automotive disruption, “Rethinking Transportation 2020–2030,” makes the fascinating argument that by 2021, oil prices will collapse, electric vehicles will go mainstream, and that by 2030, about 95% of the U.S. population will be served by electric, self-driving vehicles.
He calls it “Transportation as a Service,” or “Taas,” for short.
Seba, like us, sees that the revolution happening in real-time, not in some far off future. For investors, this dynamic creates both enormous opportunity — as well as downside risk. Some companies are moving quickly and innovating within the automotive industry, but others are stuck in the past. In March, for instance, I criticized GM for spending $17 billion on wasteful stock buybacks and, in my opinion, not pivoting quickly enough to electric. (Buybacks, we believe, are a major cause of harm to the U.S. economy).
Tesla, meanwhile, is building Gigafactories all around the world and turning itself into the gold standard brand for fully electric, automated vehicles. They also don’t do buybacks. (Disclosure: Worm Capital owns shares in Tesla.)
Seba’s work has been getting plenty of attention — he’s been quoted by The Guardian, Axios, CNBC, and others — so for this month’s Q&A, we reached out to him to talk a little more about his views on automation, Tesla, and the death of the internal combustion engine.
An edited transcript appears below. (Note: The opinions expressed in this Q&A are those of Tony Seba and not necessarily Worm Capital.)
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Worm Capital: Tony, you make the prediction that the internal combustion engine (ICE) will be obsolete in the next couple of decades. For traditional manufactures, is this the “innovator’s dilemma” playing out as we speak? And how do you see the battle between electric vehicle (EV) companies and ICE vehicle companies?
Tony Seba: Right. It’s about the inability of the incumbent to make a transition. It’s essentially about them being addicted to the existing business model, to the cash flow that it generates, and not seeing that it’s going to dry up — and it’s going to dry up very quickly.
So just to use an example, Kodak — they essentially invented digital imaging, they had a thousand patents on digital imaging — digital cameras and sensors and so on, and still they were unable to transition. So it’s not like they didn’t see it coming; they were just unable to make the transition. Culturally, it was very difficult to adjust.
The same thing seems to be happening with the traditional OEMs versus electrification of vehicles. This is a technology that they know well. EVs are very simple to build — they only have twenty moving parts, plus the battery, versus the 2,000+ moving parts of the internal combustion engine.
So the inability to transition does not lie in the technology itself, but in the fact that they’re addicted to the cash flow that they already have. Also, the internal combustion engine industry hasn’t changed, really, in a hundred years. They add one little thing at a time, but it hasn’t really changed substantially.
On the other hand, electric vehicles are more like computers on wheels. Things change dramatically very quickly. So back to your question — how do I see the battle between EV companies and ICE vehicle companies? It’s more cultural than it is about their technology itself. That’s one. The next one they don’t understand, or at least have been denying, is the speed of the rate of change in electric vehicles. That has mostly to do with the drop in costs of Lithium ion batteries, which is more than anything what drives the cost of electric vehicles.
This is what I call disruption from above. Think about the smartphone: When it first came out 10 years ago in 2007, experts said, “Who would ever buy a $600 phone, when you can buy the $100 Nokia?”
Worm Capital: Famous last words, right?
Seba: Right. But all the costs of the technology of smartphones have come down substantially since. It’s the disruption from above when you start out with a superior product that drops down in cost. And notice that I said “cost” not “price.”
So for EVs — in 2010 the Tesla model S was a $100,000+ car. And now the Tesla model 3 — we are talking about a $35,000 electric vehicle.
Worm Capital: You research quite a bit on the automation side as well. Can you talk about your findings there?
Seba: There are two ways to look at the disruption. What most mainstream analysts are looking at is a one-to-one substitute. They believe that folks are going to sell their ICE vehicle and buy an electric vehicle. We’re still going to have a billion or two billion cars on the road over the next 15, 20 years and so on and so forth.
Within a year or two we could have EVs that are cheaper to buy than the median new car in America. And they will be 90% cheaper to fuel on a charge, on a per mile basis, and 90% less to maintain. So essentially the operating cost and the marginal costs are next to nothing.
In other words, the economically rational choice to make will to be to buy an electric vehicle.
So within two or three years, the mass market could go toward electric vehicles because they’re believed to be superior products — they’re cheaper to buy and to maintain and to fuel than the ICE car.
That’s one way to look at it, essentially. What most analysts fail to see is that disruptions usually happen because of a convergence of a combination of technology and business model innovations — not just one technology.
So what I see, in my latest work, is that a convergences of autonomous technology, electric vehicles and ride hailing — meaning Uber, Lyft and so on — will essentially bring a completely new model of transportation that we call “transport as a service” that will be ten times cheaper on a per mile basis.
Worm Capital: So you believe that not only are we moving electric, but that car ownership models will change in the near future?
Seba: Right. So assume that 2021 is the year when autonomous vehicle technology is ready and is basically approved by regulators for commercial purposes.
Essentially that day, the cost of buying a new car will be ten times higher than the cost of transportation service — essentially the cost of getting an Uber or a Lyft to come pick you up at work, take you home, take you to the supermarket and so on.
The decision of somebody who’s going to go and buy a car is going to be “do I want to spend $50,000?” — which is what an average American probably would spend over the next five years, or — “Do I want to spend on-demand $5,000 over the next five years?”
I’ve studied disruption throughout history, and every time that there has been a 10x difference in cost for a similar product or service, essentially we’ve had a disruption. Every single time there’s been a 10x difference.
And this time it’s going to be no different. The incentive for a family to go with transportation as a service is even bigger — looking at average savings of $6,000 to $9,000 a year, which is equivalent to an increase in annual income of anywhere from 10% to 15%, which is something that the average American family has not seen in a generation.
So essentially what we see is by 2021, or whenever Level 4 economy vehicles are approved, the cost of transportation service will be so low, 10x lower, that folks are going to essentially stop buying new cars — period — where transportive service is available.
Worm Capital: And how do you predict this will affect the car manufacturers?
Seba: As a society, we’re going to need 80% fewer cars. Because today we drive cars 4% of the time. So here’s what the OEMs are facing: They’re facing a market that is going be 70 to 80% smaller what than it is today, and they are facing a market that is only going to buy autonomous electric vehicles.
On top of that, as if that were not enough — you have new entrants. You have all the computer companies that are getting into the car business. I mean, if you don’t see this as an existential threat, I don’t see what constitutes an existential threat. And this is going to happen within the next few years.
Worm Capital: It makes a lot of sense that there will be a fleet of autonomous vehicles, and that prediction about 2021 is fascinating. But the question I would have is — who owns that fleet? In your view, are these personally-owned vehicles that then get leased out into this fleet? Or is it a company that owns this fleet?
Seba: We imagine this being owned by companies, not by individuals — some folks have talked about individuals basically buying cars and putting them as part of fleets and so on, but from an economic perspective that makes no sense. Fleets have more purchasing power for cars; they have better purchasing power for maintenance, for energy, for insurance, for basically everything — there are individuals who may try this route, but they won’t be able to compete with fleet.
It could be the car company that essentially goes up the value chain and have their own fleet of cars, or it could be brand new companies whose business it is to run the fleet — as in the aviation industry. In the airliner business, up to 50% of all airplanes are owned by fleet leasing companies. They essentially lease them and buy them from Boeing and Airbus and they lease them to the airlines.
Worm Capital: In the shorter term, we are already seeing Tesla having about 500,000 pre-orders for the Model 3. How would you characterize the next two to three years for manufacturers?
Seba: The next two years are going to be interesting, because this is not going to be a slow disruption. Again, if you go with the individual ownership model of disruption, then it is going to be slower, and it’s going to take a couple of decades and so on, if all new vehicles are electric by 2025.
But the autonomous disruption is more like a Big Bang disruption, meaning — on the day that the autonomous vehicles are approved, that day the cost of that is going to be ten times cheaper. That date depends, though, on the technology being ready, and more than that, on regulatory approval. Also, it depends on where these AVs are going to be available.
They are first going to be available in the highly dense, highly populated cities — San Francisco, New York, Chicago, Los Angeles, Singapore and so on.
So, the question for the car manufacturer, if they see it coming, is, what do I do in the meantime? They still have a business model to run, and consumers still need cars, and so on and so forth.
So from now, until the moment when the autonomous vehicles are approved, it’s an interesting time frame, the next three, four, five years, where autonomous vehicles are not going to be ready for approval — then it’s going to be a big bang disruption.
Worm Capital: Do you think the mainstream analysis right now underestimates how quickly and maybe dramatically this is all happening?
Seba: Yes, totally. The mainstream models tend to think linearly. Meaning that — take the number of EV sales this year and say, look, what do I think the growth is going to be over the next few years — 11%, 12% or 15% — and just do the spreadsheet and see what comes out at the end. That is a linear model. It is all incremental changes. And in some cases, some may see themselves as being aggressive by putting up bigger numbers.
But no successful technology has been adopted linearly. Once they get up to a tipping point, they are adopted on a super-exponential basis, until that technology grabs 80% of the market.
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