Everyone And Their Mom Is Making An Electric Car. Few Will Prevail.

CES just wrapped up in Las Vegas, and we’re suddenly all hearing about a new car from Sony. Or was it Apple? Honestly, it’s pretty hard to keep them straight these days, as it feels like every week some giant company throws its name into the hat. Beyond the major automakers– many of whom were, in fact, quite late to the party, we have a laundry list of other companies that have thrown their names into the hat. Some are credible, some perhaps less so. There are the big ones that we’ve heard of. Tesla. Rivian. Lordstown. Lucid. Polestar. Nikola. The crowding of a field that was quite niche just a few years ago is perhaps not surprising– for a couple of interesting reasons. But it’s also not going to end well for all of them, and perhaps not for all of the reasons you might think.

Why Now? Stonk Talk

In MBA terms, we refer to this condition as a “frothy” market. Frothy markets bubble with excess investment capital in search of the Next Big Thing. Valuations shoot sky high, like we saw with Rivian’s wild ride following its IPO. Never mind that these companies often don’t actually make anything. Many don’t even have revenue. (Rivian is actually producing cars, and, notably, isn’t having to recall all of them). A hundred billion dollar valuation for a pre-revenue company? Why not?!

Broadly, western economies are slowing down. Populations are aging. White people are having fewer babies! This means that investors are a bit more frenetic to cycle their money in and out of new things, since growth is more elusive. It’s also indicative of new and exciting technology, or of markets that have developed to a point that can now support something or other that they couldn’t previously.

Contributing Factors

There are a few factors here. For one, battery technology has advanced by leaps and bounds, both in terms of chemistry and in terms of the hardware and software to manage charging and usage. Two, there’s an increasing interest in reducing our use of fossil fuels. Electric cars are a wild improvement on thermodynamic efficiency, even if they’re not a panacea to the question of decarbonization, something I’ve written about extensively (here, for example, or here).

And three, there’s an interesting synergy between utilities looking to modernize power grids and increasingly electrify building stock, automakers looking for mechanisms of reducing risk for expanding the EV share of the market, and governments looking to facilitate the transition to zero carbon. Electric cars can do this in ever so many ways, for all of their problems. It’s a big and complicated world!

In short, the stars are aligned! Great, right?

A crowded car market? We’ve seen this one before. At the turn of the 20th century, the complete lack of regulation and lack of manufacturing sophistication prior to the advent of Henry Ford’s assembly line led to a market frenzy to build motorcars. I used to live in the offices of the Spaulding Motor Car company, for example– in Grinnell, Iowa, of all places. The company went out of business fairly early on, and their former factory was crumbling until relatively recently, when it was turned into surprisingly affordable loft apartments.

Competition arguably facilitated some valuable innovations in the early era of the motorcar. But consolidation was also pretty rapid, whether you’re thinking about Ford’s vertical integration model or competitor General Motors’ more horizontal setup. No one could compete with Detroit. All good things, of course, especially when one of your competitors figures out how to solve a lot of technical problems but also mass produce the thing.

Electric vehicle market share has already eclipsed ten percent in major markets, with major automakers already announcing a transition to all-electric cars (source).
Production Is Valuable. Service Is Just As Valuable.

But there’s another element of it that the Big Two and a Half took many decades to figure out, and this is one of the things that the Everybody Let’s Quick Make An Electric Car Before Our Competition Does frenzy. Arguably, the Big Two still haven’t quite figured it out– Stellantis sure as hell hasn’t. Or, more precisely, this element is changing a lot in the modern day.

That element, of course, is the service model that has to accompany the production of very, very heavy machines that cost a lot of money. The service model has evolved over many years, from simply using dealerships as a sales channel to using dealerships as the primary point of interface between company and customer. Alfred Sloan reminisces in his memoirs about how the dealerships didn’t even used to have standard pricing.

When I say “service model,” I’m referring to the whole kit and caboodle that accompanies the automotive ownership experience after the car rolls off the assembly line. General Motors and Ford have the service model down. Dyson spent hundreds of millions of dollars developing an electric car before cancelling the project, and even said that it was too easy to start developing an electric car– what should have been, but clearly hasn’t been, a cautionary tale to would-be market entrants. Before getting into the service question, one might consider that the central part of an electric car is the drivetrain, which is astonishingly simple in comparison to that of an internal combustion engine. Reducing the mechanical complexity means fewer things can go wrong, and it also means that it’s easier to just bust into the market.

There aren’t that many large engine manufacturers out there. In contrast, companies have been making electric motors of all sizes for well over a century at this point. Not even getting into all of the complexities of other stuff– crash testing, for example, the expense of design, or the exorbitant cost of setting up a production line to make defect-free, complicated machines- let’s take a look at the service question specifically and why it might doom some of these smaller automakers.

Nissan at NAIAS. Remember public events? The cars will drive themselves, they said!

The dealership service model is crucial to the success of electric vehicles because customers don’t understand how electric vehicles work. Getting over the hump of early deployment confusion is the case with all new technologies, and it’s a problem on not only the customer-facing side but also on the B2B and corporate side. We have numerous historical examples that are, in retrospect, quite hilarious: When Glock handguns were first invented, for example, doomsayers said that you’d be able to sneak them through airport metal detectors because they’re plastic! (They’re mostly plastic, yes, but they still involve a lot of steel!). In the 1980s, Encyclopedia Brittanica turned down a bazillion-dollar offer from Microsoft for non-exclusive IP licensing because not that many people owned computers. When .mp3s were invented, record executives balked at the idea of licensing digital music, saying that no one would ever want to listen to music in a digital format.

Electric cars aren’t really any different. They’ll run out of power! Your home electrical panel won’t be able to handle it! Or, if you go to the dealership? They’re often pushing gas-guzzling trucks, because that’s where the highest profit margins are. Most dealerships are woefully poorly informed about electric vehicles– and even hybrids.

Companies specializing in consumer electronics, like Sony, don’t generally specialize in delivering good customer service.

Tesla shook up the auto industry by embroiling itself in an early furor, trying to sell cars directly to consumers. You can’t do that!, the automakers protested. It’s indeed illegal in many jurisdictions, because dealerships have a monopoly on new car sales. But, much as there’s not really a good reason for this monopoly, the prevalence of dealerships is still important, because they represent an interface between customer and company that cannot be replicated by the likes of the direct-to-consumer model from companies like Tesla, or even car retailers like Carvana or Vroom.

If you have a problem with your Tesla, well, you might well have horror stories about getting the issue fixed. This service has also reportedly declined in recent years, inversely correlated with the meteoric rise of the stock’s price.

The lack of physical presence saves Tesla money, because it costs a lot of money to buy, build, staff, stock, and operate a huge car dealership. Think, like, a couple million dollars, minimum. Possibly several times that. Then, the average larger metro area might have a few different locations. You can see how this becomes an untenable cost for a startup.

Does Service Satisfaction Actually Improve Sales?

There isn’t a whole lot of evidence to suggest that good service alone drives sales, because of how differentiated the product offering is on the car market. But, all other things being equal, it may well tip the scale for a consumer picking one brand over another:

While it’s relatively easy to measure satisfaction through things like customer surveys, understanding the results can be a bit complicated. The luxury brands, with proclivities toward white glove service, tend to skew the distribution a bit. Among the American automakers, for example, Lincoln, Cadillac, and Buick all rank highly. Ford and GM perform admirably. Reportedly, Chrysler’s brands all, well, kind of suck. (Shocking!). It’s also complicated because high service satisfaction has relatively little to do with car reliability. (Volkswagen and Land Rover rank pretty poorly in both).

Suffice it to say, companies specializing in consumer electronics– like Sony- don’t generally specialize in delivering good customer service. Buy our product. It’s tested and decent quality. But if you try and call us to get support for it? Good luck. The lack of a service model in the car world is certain to doom a car company in a crowded market.

People love Tesla because Teslas are a status symbol; the company didn’t get famous by delivering famously good service. They’re also the first mover, and, as a household name, they’re likely to enjoy that status for years to come. But that’s not sustainable when a million other companies enter that same market.

How Could They Do It?

There is, in my mind, one way, and one way only, for new market entrants, like Sony, to actually sustainably compete in the nascent EV market. This involves making sure their vehicles can be readily and affordably serviced anywhere. This involves reliance on standardized components and highly portable, technical knowledge. If your local body shop, for example, has the ability to do an oil change, they should be able to, say, swap out a faulty electrical component. Of course, electric cars may have simpler drivetrains, but they’re also going to be increasingly governed by software. The upside about software is that it can be easily updated wirelessly. The downside is that it’s so complicated that it’s not terribly fault-tolerant, meaning that it’s possible to have random problems crop up that dealerships even might have a hard time fixing.

It’s hard to get excited about reading about new entrants to the EV market, because it seems to happen every week these days. It’ll be less about who can rally investment capital, which seems easy in such a frothy market– and more about who can deliver an integrative business model that includes both a quality product and a comprehensive plan to maintain and service the product after purchase. Sony might have a pretty EV coming out, but I, for one, am not holding my breath on the end result.

Nat M. Zorach

Nat M. Zorach, AICP, MBA, is a city planner and energy professional based in Detroit, where he writes about infrastructure, sustainability, tech, and more. A native of Lancaster, Pennsylvania, he attended Grinnell College in Iowa, the Kogod School of Business at American University, the POCACITO transatlantic program, the SISE program at the University of Illinois Chicago, and he is also a StartingBloc Social Innovation Fellow. He enjoys long walks through historic, disinvested Rust Belt neighborhoods at sunset. (Nat's views and opinions are his own and do not represent those of his employer).

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