The three wise men and Tesla

In some amazingly rare alignment of the stars this week, three wise men of the automotive consulting world had similar thoughts on the same topic.  Given that those three wise (arguable) men would at one time have been competing for big ticket jobs from the global OEMs, trying to establish differentiated positions, this is quite significant, a bit like trying to get a consistent view from three economists.

Last week, you may recall that I wrote about the advance of the Chinese, potentially forcing the traditional manufacturers into ever smaller, ever more premium niches.  That generated an email from John Wormald, formerly with Booz Allen Hamilton, working in their automotive practice round the corner from my own office with A.T. Kearney.  John drew a parallel between what happened to the European motor cycle industry in the face of the Japanese challenge in the 1960s and 1970s, and the challenge we now face from Chinese car manufacturers.  However, he also wondered whether consumer taste is evolving in his words with “less demand for self-expression through one's car, more emphasis on practical low-cost motoring, and a different balance between individual and collective means of transport, plus remote working and shopping.”

My response was that I had a similar thought whilst stuck in a traffic queue last weekend, and noting how many of them were Teslas, and of them how many were white.  When Tesla has such a limited range, and any variation away from the core standard, such as any of the four optional colours, come with a significant price tag, then where is the opportunity for self-expression?  Have we genuinely entered the era of ‘car as a washing machine’ – a phrase I have been using for twenty years, but is never more evident than when looking at a line up of white Model 3 and Model Y Teslas.

Then our good friend Glenn Mercer – who was one of the senior people in the automotive practice at McKinsey when John and I were at Booz and Kearney – stepped into the frame with his excellent blog yesterday, called ‘Tesla’s other great achievement.’  That achievement is the way in which they have grown in little over a decade to approach the size of Mercedes, but with only four models, very light facelifts and extremely limited options (my point).  Glenn suggests that Tesla are approaching the car as a cell phone, with few models, limited hardware options and the customisation all through software and installed apps.  Many people still change their phone every year or two in order to access a bit more processing power or some new app functionality that is dependent on a new feature, even though the visual appearance is largely unchanged.

As Glenn points out, and ICDP has done in various research outputs, the impact of complexity on the effectiveness of online channels and the management of finished vehicle order pipeline and logistics is substantial, forcing customers to the dealer for assistance and inevitably resulting in ‘wrong car in the wrong place at the wrong time’.  However, my interest comes back to John’s question concerning self-expression.  ICDP research consistently shows that consumers want to have the keys to a car they can call their own, regardless of whether that is owned or leased, but do they care as much as to whether their car stands out in a traffic jam, or blends in with all the others?  (Not wanting to digress, but if you’ve not seen it, worth looking at Fiat’s announcement regarding any colour you like as long as it’s not grey).

The arguments in favour of a growing willingness to be flexible on specification and favour bland over bling are numerous.  As a growing number of cars are leased, the monthly payment becomes dominant in decision making rather than the invoice price.  We know that residual values for optioned cars and unusual colours are lower than for the plain vanilla option, so that may be a factor.  As the car is leased, or possibly on an even shorter subscription, we’re not stuck with a particular specification for long anyway.  As huge screens and configurable mood lighting start to dominate the interiors, does anyone really notice the backdrop?  Everyone can picture the Mona Lisa in her frame on the wall of the Louvre, but what colour is the wall?  When there are rich opportunities to customise your in-car experience through your smartphone, does it matter so much if the seats are not quite to your preference?

This goes to the heart of what many brands have traditionally been about.  Huge numbers of options have allowed individuals to order personalised cars, with those options carrying very substantial profit margins.  Another genuinely wise man, Max Warburton, calculated over ten years ago when he was at Bernstein that metallic paint alone generated most of the profits of the major European OEMs.  The calculation of incremental sales and higher revenue per unit vs the cost of the added complexity is a tough one, but it will come into focus even more under agency where the manufacturer will be setting up the order pipeline and be responsible for market stock.  Should they follow the Tesla route, or create a richer mix hoping to meet the majority of needs and generate higher net profit?

For the sake of making traffic queues more interesting, I hope that the desire for self-expression remains strong enough to drive continuing demand for some variety, but there are still lessons to be learned from Tesla in terms of the impact of taking this to excess.