• Nick

Until the pips squeak - the costs of growth

I'm not sure what's worse - a dash for growth that's underfunded (like Tesla), or a scramble to hit numbers as a result of over investment (Revolut - endless woes). Both hurt.

Is Tesla heading for a Field of Dreams strategy?

This week Tesla continued its run of doing very odd things to save cash whilst trying to get into the mass market. Last July they asked suppliers for some cash back to prop up the finances, then they laid off 9% of the workforce, in January they laid off another 7% of the workforce, in February they cut commission from the retail staff, and this week they said they were shutting the stores.

It looks like trouble but is - according to the spin - 'a plan'. All of this is - apparently, maybe - necessary rationalisation to fund some modest price reductions in a bid to woo the mass market (whilst at the same time screwing up the residual values for loyal early adopter Tesla buyers). Hmm.

"It's 2019 - people want to buy online" was the terse bit of justification for shutting the stores. But as anybody who has ever worked in automotive knows the 'buying' of the car is just a fraction of what you need your brand to support.

If Tesla wants to go mass market (and every noise it's making suggests it does) then it is going to have to get beyond the early adopters and pioneers into the more conservative mass. These are people who are naturally much more cautious ('settlers') and much less likely to shell out $35k - on the internet - for a car they've never driven with a propulsion system they've never experienced.

Bringing people face to face with the brand is crucial to going mass - but expensive. It doesn't have to be done in the old dealership model - it could be in EV pop ups like TryEV - or new retail models like that pioneered by Rockar. But ditching the stores to shave a bit of money off the list price doesn't make sense if you want to go mass - unless the pressure to cut costs is existential (and/or you have nearly $1bn in loans to repay in March....)

Even for subscription models like Polestar or Riversimple, converting people into the proposition requires getting them to sit in it. To see how to fuel it, or recharge it. To see if they can imagine having this new fangled thing in their lives?

Loads more where this came from

And of course for the likes of Tesla there's the residual value problem. Mass market car makers end up with cars nobody wants. Too many cerise coloured over-equipped Audi A4's with last model year's engine. A bucketload of all-in-white special edition Scirocco "storm" coupes. A long line of 7-series searching in vain for owners. 'Managing' residual values is key to a brand's success - whether its BMW managing the value of its 7-series or VW running out a model year there needs to be a way to ease less attractive vehicles out into the market without trashing the residual values. The big unanswered question for Tesla is what a second hand one is worth. A while back Tesla had a buy back guarantee - but dropped it because it was too expensive. The fear is that a Tesla depreciates faster than a grand piano chucked out of a skyscraper. Meaning the cost of ownership rockets - a car that costs $35k the day you buy it but is worth nothing when you come to sell it is a whole lot more expensive to run than the one that's worth 60/70% of its original price.

'Stores' and dealers play a crucial role - the crucial role - in maintaining these values. Without them Tesla is exposing the brand to a very grave risk of being a bad financial bet for consumers.....

Squeezing suppliers to fund growth - until the pips squeak

I just don't get why Tesla is so obsessed with being mass. Pretty much all that's wrong with the global car industry is down to its pursuit of scale at all costs. Factories producing cars that nobody wants is a chronic problem. Much of the intellectual work inside a car company is engaged in working out what to do with all the unwanted stock - pushing it out through dealer networks, or through rent-a-car deals, all with costly incentives. And of course it is - to borrow a phrase - just kicking the can down the road because the unwanted cars push down residual values.

But for many - including Elon Musk - big is beautiful. No matter what the cost. It's a bizarre ambition for a brand that professes to be challenging the norms of the motor industry. Tesla has no need to play the "get big at all costs" game that the rest of the motor industry is trapped in. Tesla has a brand, Tesla has loyal customers, it has even turned a profit at low volumes. Tesla does not need to be big to thrive. Tesla could prove that value is about happy customers and profit. But for reasons (I guess) driven purely by conventional investor expectations - or ego - or both - Tesla has set off on a dash for mega scale. Shame - it could have been a great and profitable business.

A while back VW hired a cost reduction ninja, Jose Ignacio Lopez, to slash costs in the supply chain. The cars had got bit fat and pricey, and dropping prices wasn't feasible until costs came down. A lot.

Lopez - quite a character

Lopez had a band of warriors working for him who ate a special diet to "heighten the fighting spirit" and symbolically wore their watches on their right arm until they'd slashed the cost base.

They declared war on the supply chain.

Reverse auctions were held, on Fridays, for global suppliers of say windscreen wipers to bid for high volume contracts. The cost reductions sought were 20-30%. Lowest price won. And to make sure margins were 'OK' the warriors would then be despatched into the supplier to help them become more efficient.

It was cost optimisation taken to a new level.

And it hurt. Suppliers slashed margins to win contracts, and of course occasionally bid recklessly just hoping they could make it work. Some went bust.

The real cost of cost cutting

I was sent to Trier in the far west of Germany to be part of the team explaining to the local dealers that from henceforth VW was swapping German steel for some less pricey steel from elsewhere.

They were aghast. Cutting supplies from Germany threatened German jobs. And that would have a knock on effect on prosperity and ultimately their customer base. They pleaded for a reversal - arguing that it was better to respect the value in a tight knit supply chain where everyone's fortunes were interlinked and co-dependent. But the assault on the supply chain continued.

Bad actors

There's an asymmetry of power when big elements of a supply chain get self interested. Bidders for contracts feel they have no option but to propose unsustainable commercial terms just to win or keep the deal. It happens everywhere - even, maybe especially, in Government. Look at Carillion - even players that big can get killed by this practice.

Apart from the commercial danger there's a worrying psychology when one part of a supply chain declares war on another. In the end it went too far - forcing suppliers to drive down prices to win contracts is not smart business. They go bust, jobs get lost, and of course supply is disrupted.

There is a better way. We recently bought a bike made by Orbea - a Basque collective. They don't do volume. They do quality. The care and craftsmanship that goes into the bike is part of the brand's value. The co-operative of bike enthusiast makers gives the brand a story of origin with real value.

I bet that the people who make the bikes are a lot happier than the poor sods cranking out windscreen wipers for cents.

Every supply chain should be built on mutual interest, not on the self interest of the most powerful player. It's a key part of what we're trying to do in Good Growth - align everyone around a common cause and drive out monopolies that lead to power imbalances.

The folks in Trier were right - in the end value isn't about price. Maybe Elon should go speak to them before it's too late.

#tesla #goodgrowth #nickkeppelpalmer #orbea #lopezaffair #supplychain #polestar #rockar

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