Tesla has moats that other automakers cannot easily copy (i.e., why most shorts are idiots)

Many of the investors who have decided to short Tesla’s stock are extremely ignorant about the technology in Tesla cars. They mistakenly believe that the legacy automakers like Mercedes-Benz, BMW, VW and GM are going to eat Tesla’s lunch, once those automakers start rolling out competing electric vehicles (EVs). They are convinced that other automakers can easily copy the technology used by Tesla, which reveals their fundamental ignorance about EVs, batteries, charging and autonomous driving.

While legacy automakers have real advantages in terms of their trained workforces, quality control, and manufacturing capacity over Tesla, the shorts fail to understand the large technological advantages that Tesla has established over the legacy automakers. Telsa has created “moats” around the company that other automakers will not be able to easily cross. Tesla is carrying a large debt load and has only recently demonstrated its ability to generate a profit, so there are reasons to not invest in the company, but the reasons given by most shorts, which are widely publicized by the press, are mostly malarkey spread by ignoramuses who don’t have the slightest idea what they are talking about.

Engineers who have examined the Model 3 know that Tesla is at least 5 years and probably a decade ahead of the legacy automakers in terms of the tech in its EVs. It will take the legacy automakers years to catch up, and by the time they do, Tesla will probably still be a couple years ahead and have established the kind of brand reputation and scale of operations that it will make it hard to dethrone as the leading-edge EV manufacturer. In the same way that Mercedes-Benz has enjoyed decades of dominance in the global luxury car market and Ford dominates the North American pickup market, Tesla is setting itself up to dominate the global EV market.

Tesla has a number of advantages or “moats” that won’t be easy for other automakers to copy:

  1. Most energy-efficient electric motor on the market
    Tesla designed a custom hybrid motor for the Model 3, which Musk describes as a “switched reluctance, partial permanent magnet” motor. It is the first motor which uses glued together permanent magnets to form a Halbach array whose magnetic field is 1.4 times more powerful than a comparable permanent magnet. The efficiency of Tesla’s motor is shown by the fact that the Model 3 LR, which weighs 1610 kg, consumes 260 Wh / mile, compared to the 2019 Nissan Leaf S which weighs 1557 kg and consumes 300 Wh / mile. This motor is not only energy efficient, but in the Model 3 Performance, it is capable of going from 0 to 60 mph in 3.3 seconds, so Tesla has managed to combine energy efficiency, high torque and fast RPMs in the same motor, which is a difficult technical feat.

    The Chinese EV makers will probably copy the Model 3 motor quickly due to its obvious technical advantages, but the fact that very few automakers bought Munro & Associates’ teardown report on the Model 3 indicates that few Western automakers are planning on copying the Tesla motor any time soon.

  2. Cooling
    Tesla has figured out how to cool electric motors with high RPMs, which is a difficult technical feat. The Roadster 2.0 can maintain sustained speeds of over 250 mph, which means that they have figured out how keep the stator and rotor cool at very high RPMs. Electric supercars like the Rimac Concept One have gotten around the problem by using a lot of motors, which is expensive.The Model 3 has centralized cooling for the motor, battery and passengers, which lowers its costs and simplifies the car. In order for other automakers to copy the cooling in the Model 3, they would have to redesign their cars and get the engineers in different sections to cooperate (which Sandy Munro considers to be very difficult). The Model 3 also has an innovative HVAC system that uses two planes of air, rather than using traditional louvers and vents, which means that Tesla was able to lower the dashboard and provide more space for the passenger.

  3. Highest energy density in battery
    The 2170 NCA cells in the Model 3 have an energy density of 247 Wh / kg (others say 265 Wh / kg), whereas the rest of the industry is using pouch or prismatic NMC cells with an energy density of 220 Wh / kg. It won’t be easy for other automakers to switch to NCA, because it requires designing a special battery management system (BMS) with custom application specific integrated circuits (ASICs), individual cell monitoring, and advanced cooling/heating to prevent thermal runaway and ensure low degradation rates of the cells. Tesla designed its custom 2170 form factor, because it is small enough to be efficiently cooled yet larger than 18650, so it cuts down on costs.

    Other automakers are not going to easily adopt the NCA battery chemistry with its higher energy density, because it bears a higher risk of thermal runaway that can lead to fires. Controlling NCA cells involves designing a special BMS with custom chips and lots of wires to monitor the cells, plus a good cooling system, special anti-fire goop, and smaller cells that can be quickly cooled. It is hard to see other automakers putting that much effort into getting a higher energy density when NMC is almost as good and has better cycle life without all the extreme measures taken by Tesla.

  4. Battery manufacturing
    Tesla has an expensive BMS, but it has the lowest battery costs in the industry, which are reportedly approaching $100 per kWh of battery cells. By doing its own battery manufacturing in partnership with Panasonic and buying metals directly from the refineries, Tesla avoids middlemen markups and reduces shipping costs. Other automakers will have to invest $5 billion and spend 5 years building their own Gigafactory to catch up with Tesla on battery costs. Now that Nissan is selling off its battery factories, every other automaker will be dependent on external battery suppliers (although Toyota just announced a future battery partnership with Panasonic). What this means is that other automakers don’t control their own battery supply, so they will be faced by battery shortages as demand for EVs soars in the future and they will have to pay much higher prices than Tesla for their batteries.

    Many automakers will make the transition to EVs by using the tech of external suppliers, so they don’t control it and can’t rapidly evolve it to match Tesla’s tech. GM turned to LG Chem to supply both its drivetrain and its battery in the Bolt, which allowed GM to quickly launch the Bolt before the Model 3, but it meant that GM had to give a larger proportion of its revenue to LG and it can’t change its tech very easily.

    Because Tesla manufactures its own batteries, it has created battery research partnerships with investigators like Jeff Dahn at Dalousie University, which has improved the longevity of batteries and made them cheaper with fewer additives. Tesla recently bought Maxwell Technologies, a company that has developed a dry electrode that it claims to produce batteries with an energy density over 300 Wh / kg. Because it doesn’t require joining together the battery materials with the liquid solvent N-Methyl-2-pyrrolidone (NMP), Tesla may be able to eliminate the use of drying rooms in future battery manufacturing, which could reduce battery costs by 10% to 20%, because the driers consume huge amounts of energy and the NMP, which is a volatile organic compound, needs to be recaptured. Other automakers who depend on outside suppliers simply can’t make these kinds of innovations in their batteries.

  5. In house design and manufacturing
    Tesla makes most of its parts in house and does its engineering and manufacturing in the same location, which allows the company to avoid the markup of outside contractors and change its designs more quickly than its competitors. Because engineering is close to manufacturing, it is easier to change the design and Tesla doesn’t have to waste time and money renegotiating contracts with external suppliers. It will not be easy for other automakers to bring their manufacturing in house.

  6. Startup culture
    Tesla has a horizontal structure and a startup culture that allows for decisions to be made quickly and changes to be implemented with less bureaucracy than in other automakers. Employees are empowered to talk to everyone else in the company and don’t have to ask permission from high-ups. Nobody has a private office, in order to facilitate easy communication within the company. Employees are encouraged to walk out of meetings where they don’t think they can contribute or they feel they are wasting time.

  7. Leadership and mission
    Musk has set the company’s audacious mission to “accelerate the transition to sustainable transport”, and Tesla employees feel that they are working for the greater good of society and the planet. This sense of mission and the leadership of Musk gives the employees a common goal and causes people to work harder to achieve that goal. This factor is hard to quantify, but Tesla manages to achieve its goals in shorter time frames and against steeper odds than other automakers, partly because of the company’s mission and the leadership which is required to fulfill that mission.

    It won’t be easy for other automakers to copy the leadership or the mission of Tesla. The management of other automakers are so worried about the bottom line and the shakiness of their positions, that they fear taking the kind of risks that Tesla has taken. It will be very difficult for other automakers to decide to build the largest battery factory in the world or jump from being a luxury carmaker to the manufacturer of semis, grid batteries and solar roofs like Tesla.

  8. High speed charger network
    Tesla is currently the only automaker with a comprehensive high-speed charger network for its autos. Tesla Superchargers use 120 kW chargers, whereas other automakers are currently relying on 50 kW CSS or Chademo chargers, which often aren’t located on highways like the Superchargers, so they aren’t as convenient or as fast. It will be 3-5 years before the 80/350 kW CSS 2.0 network used by other automakers can compete with Tesla’s Supercharger network. This means that Tesla will be the only automaker for the next couple years that can sell its EVs to customers who need to travel long-distances and don’t want to own a second car for this purpose.

  9. Autonomous driving
    A number of independent tests have concluded that Tesla’s Autopilot is currently the best driver assistant on the market. Because Tesla watches drivers and sends their driving data to Tesla servers, Tesla has more info to train its driving AI than any other automaker and it instantly learns about changing road conditions. Other automakers don’t have their autos hooked into a cellular network and aren’t collecting driver data to train their driving AIs. Simply designing such a centralized system that is capable of incorporating driving data from thousands of cars will take other automakers years, because they will have to spend years acquiring the software and hardware engineering expertise to design such a system.

    Tesla is likely to be the first automaker to achieve full autonomous driving (level 5), and even if it doesn’t achieve it first, it is certainly going to have some of the lowest costs in the industry. Its current Autopilot Hardware 2.5 is a custom circuit board with an nVidia Pascal GPU and 2 Parker CPUs, which processes 200 frames per second from 8 surround cameras, 12 ultrasonic sensors and forward-facing radar on a redundant wavelength. Tesla has designed its own custom AI chip which is capable of processing 10 times as many frames per second as the nVidia system. Because Tesla spent 2 to 3 years designing its own drive processor, it doesn’t have to pay the markup of an outside supplier like nVidia and Intel’s Mobileye, and it can distinguish its EVs from the other automakers which will all be using the same tech from nVidia and Intel.

    Because Tesla designs its own autonomous driving tech, it has to bear higher R&D costs and it might fall behind nVidia and Intel. If this happens, Tesla can always turn to an outside supplier just like the other automakers, so Tesla won’t necessarily be left behind compared to other automakers

    On the other hand, Tesla’s decision to design its own tech means that there is a good chance that Tesla will end up paying less than its competitors for full autonomy, and the company will be able innovate its own tech in a way that other automakers cannot. Most companies working on full autonomy are planning on using LIDAR, which is very costly, whereas Tesla claims that it will be able to do full autonomy with its current Autopilot Hardware 2.5. If true, then Tesla will have the cheapest autonomous cars by far in the industry. The other problem is that LIDAR doesn’t work well in rain, sleet and fog and can’t see through cars, so Tesla may end up having the most reliable autonomous driving in bad weather.

  10. Software and infotainment system
    Tesla develops its own software and has created its own infotainment system for its touchscreens based on Linux and QT. Other automakers can copy the large flat screen driver interface that Tesla uses in its cars, but they can’t easily match Tesla’s software. Most automakers aren’t good at software development like Tesla which is based in the Silicon Valley and has poached programmers from many of the leading tech companies like Apple. Because Tesla does its own software development, it can roll out new features and customize its interface in a way that other auto companies cannot. Owners of Tesla cars are constantly discovering new Easter eggs that Tesla has provided in its infotainment system, like its dance and light show. Other automakers relying on infotainment systems from Android Auto, Apple CarPlay, Visteon, Clarion, Continental Automotive and AISIN, don’t have the kind of control and customization offered by Tesla.

  11. Over the air updates and cellular connectivity
    Tesla is has the ability to provide over the air (OTA) updates to its car. This allows Tesla to update its software and improve the car’s functionality over time. Software used to not be such a large component of automobiles, but Teslas are designed to be “computers on wheels,” so much of their functionality is determined by their software. When Consumer Reports reported that the Model 3 had a very long breaking distance, Tesla released an over the air update which fixed the problem within a week. Other automakers don’t have the ability to update their cars via a cellular network, so any upgrades have to be brought to a service center which is costly for the automaker and inconvenient for the customer. Tesla can eliminate many types of recalls that plague legacy automakers by using its over the air updates.

    The cellular connectivity in Tesla cars also allows Tesla to provide an extra level of service that the legacy automakers currently do not provide. Tesla contacts the owners of their cars, when the charge in the batteries gets too low and might be damaged by sitting for too long at a low charge. Tesla can provide a towing service because it knows when its cars break down on the road. Tesla recently announced that it added an option to call a tow truck even before the car stops.

  12. Transition to EVs and the ability to raise capital
    An even greater challenge for the legacy automakers is the fact that they still have so much R&D, infrastructure and expertise tied up in ICE vehicles. Engineers and managers who have spent their whole careers dedicated to one technology will not be nearly as committed or dedicated to switching to another technology as a company like Tesla which has no divided loyalties. There is nobody at Tesla urging caution or going slow with the new technology, because everyone is already 100% committed. The challenge for legacy automakers is being able to maintain their lines of ICE vehicles, while fully committing themselves to transitioning to EVs. So far, the best legacy automaker in this respect has been Nissan under the leadership of Carlos Gosn, and Nissan reportedly lost millions of dollars on its Leaf and battery factories. Although there have been some exceptions like Volvo’s recent announcement that it plans to electrify all its models, most legacy automakers have been very cautious and risk-adverse thus far and unwilling to fully commit the entire company to transition to EVs.

    The legacy automakers are reluctant to commit because they know that they are going to face an existential crisis when they transition to EVs. They will have to raise huge amounts of capital for R&D, retooling factories and retraining workers at exactly the same time as their revenue is falling from their ICE vehicle sales. Many investors will sell off their stock, convinced that the legacy automakers won’t be able to successfully make the transition. It will be difficult for the legacy automakers to raise money by offering new stock or bonds, if investors are skeptical that they can make the transition. Creditors will likewise be skeptical and are likely to demand high interest rates on loans to companies that are likely to go bankrupt. Some governments will provide generous lines of credit to help legacy automakers make the transition, but not all. Voters in the US might not be so generous. After having already bailed out the legacy automakers in 2009, they might decide to turn off the tap on easy credit and bailout money.

    Part of the problem for legacy automakers is that the total demand for automobiles especially in developed economies is likely to fall in the future, since autonomous vehicles will provide transport as a service, so there is less need to own a private vehicle, especially vehicles such as trucks, vans, RVs, luxury vehicles and sports cars, which have low usage rates. Many truck owners only haul something heavy a couple times a year, so they might decide to rent an autonomous vehicle for those occasions. Owners of vans and RVs may decide that they no longer need to own them, when they can rent them for family vacations and people who need a bit of style may decide that there is no need to own a Bentley or a Lamborgini when they can call an autonomous one for the evening.

    Tesla has already invested in the new technology, so it won’t face the same  existential crisis as the legacy automakers. Tesla probably will need to raise lots of capital to build new factories, but it has an almost limitless supply of credit, since investors are convinced of its future prospects for growth. Not only has Elon Musk demonstrated the ability to raise capital from Silicon Valley venture capitalists, but Google was fully willing to buy the company when it got into financial trouble in 2012.

    Tesla may be carrying a high debt load, but its future prospects are better than almost all the legacy automakers who have not yet made the transition to EVs, and investors know it, which is why Tesla’s market capitalization is so high compared to its revenue. Legacy automakers like GM which have a hundred times its revenue have a lower market capitalization that Tesla because investors are skeptical that GM will be able to successfully transition to electric motors, lithium batteries and autonomous driving and infotainment systems which will define the future of automotive industry.

There are downsides to almost all these “moats” that Tesla enjoys, but most of the shorts don’t even understand that these “moats” exist. They don’t understand the differences in electric motors, battery chemistry, battery management systems, cooling systems, infotainment systems, sensors, drive processors, etc, so they think that these things are largely interchangeable.

Most shorts also don’t understand that Tesla has invested billions in doing its own in-house design and manufacturing, and has designed its own chips and written its own software. Most of the legacy automakers don’t currently have the in-house expertise to develop their own electric motors, battery management systems, infotainment systems and autonomous driving systems, so they will either have to invest billions to acquire that expertise or accept higher costs and lower profit margins by outsourcing those activities to other companies.

There are risks to doing most of the work in house, because Tesla might get undercut in price or out-innovated by the external suppliers. Nissan lost millions because it invested in manufacturing the wrong type of batteries and didn’t use active cooling in its Leaf. Tesla thus far has managed to turn its in-house development and manufacturing into an advantage for the company.

It remains to be seen whether Tesla’s current “moats” might turn into quagmires for the company, which become sunken costs fallacies that prevent the company from outsourcing when better or cheaper tech appears on the horizon. Tesla’s ongoing investment in solar roofs and the Gigafactory 2 in Buffalo might end up becoming such a quagmire for the company. Still, most of Tesla’s in-house investments have proven beneficial to the company so far.

Whether investors decide that Tesla’s tech is a “moat” or a quagmire for the company, they should understand the fundamental differences in the tech and company culture that distinguishes Tesla from its competitors.

2 thoughts on “Tesla has moats that other automakers cannot easily copy (i.e., why most shorts are idiots)

  1. Tim

    While Tesla has a better charging network, other EVs have them beat in many areas. I drive a Chevy Bolt, which achieves an EPA range of 238 miles. With a 60 kWh battery, this is an energy efficiency of 252 Wh/mile. My Bolt regularly exceeds this range figure by a considerable margin in warmer weather, nearing 300 miles per charge (<207 Wh/mile) with limited A/C usage. In the winter, my Bolt will heat the battery when plugged in, whereas Teslas do not. This reduces range on each drive not only from spending energy on battery heat, but also from reduced regenerative braking. When parked, Teslas continuously consume energy to keep the cellular connection and various systems powered up. Granted, all new cars do this, but Teslas are notorious for vampire power drain. The Model S at my work loses several percent of charge a week just sitting with Sentry Mode off. It snowed yesterday, and I noticed the front Autopilot camera was generating enough heat that snow didn’t cover it up, and by the next morning had half of the windshield thawed. My Bolt on the other hand, can sit for weeks and not lose any measurable charge. Cellular connectivity and a smartphone are not needed with the Bolt like they are with Tesla vehicles.

    Teslas, with their massive touchscreens, have a fairly poor UI for a car. Autopilot is a necessity to interact with the car. Tesla needs to get away from the iPad-esque design and get a UI that is driver-friendly. Forget trying to find music on a flash drive unless Autopilot is engaged or the car is stopped. The process is far too involved, whereas my Bolt can browse local music collections using steering wheel controls and the instrument panel and is no more distracting than the speedometer. Changing radio stations can be done without looking away from the road.

    As for Autopilot, if Tesla is the best out there, level 5 autonomy is at least a decade away on a technical level. There are still way too many instances where Autopilot can’t function or an average driver performs way better. Actually, the last few updates have made some features of Autopilot worse. Current software doesn’t handle turns or lane splits as well as older software. TACC isn’t nearly as smooth as it used to be, and is currently worse than the system in a Chrysler Pacifica Hybrid. My last few drives have been jerky and the car oscillates in the lane.

    Granted, Tesla has done a lot to get EVs out there, but I wish people wouldn’t gush over some things about them that aren’t all that great. Tesla makes some nice vehicles, but other EVs like the Bolt make for a better car.

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  2. amosbatto Post author

    Tim, There are solid reasons to buy a Chevy Bolt over a Tesla Model 3. The main one being the fact that you can get replacement parts once the car is out of warranty and have the ability to do 3rd party repair. Less electronics in the car means that it will be easier to repair and also lowers the carbon footprint of the car during fabrication. As you point out, the extra sensors, monitoring, cellular data and over-the-air updates does consume energy when the car is turned off. You might be interested in reading my comparison of the ecological costs:
    https://amosbbatto.wordpress.com/2017/07/05/emissions-from-gigafactory/

    Nonetheless, this article is about how Tesla has established a technological lead over the other EV manufacturers. I often question the practical utility (and environmental cost) of new tech, as you are doing with flat screens interfaces in cars, sensor monitoring and autonomous driving features. For example, I choose to use an old-school Thinkpad that has a good keyboard and is designed to be opened and fixed, because I find those features more important than having the thinnest and lightest laptop. Clearly, the Bolt has the features that you care about, but your preferences don’t reflect the preferences of the majority of EV buyers. Between Jan and Sept of 2019 (https://insideevs.com/news/343998/monthly-plug-in-ev-sales-scorecard/), there were 111,650 Tesla Model 3s delivered in the US, compared to 13,111 Chevy Bolts, so 9 times more US consumers chose the Model 3 over the Bolt. Maybe this difference is due to battery supply limitations from LG or lack of promotion by GM, but the Model 3 is clearly winning in the market place.

    The EV market is moving toward advanced Infotainment systems based on flat screens, sensor monitoring, cellular data connectivity, over-the-air updates and autonomous driving, so manufacturers like GM are likely to try and match Tesla’s features, and it will take them a long time to catch up. Either GM will have to pay the higher prices of outside suppliers or send years developing the tech in house, but GM is clearly at a disadvantage compared to Tesla in these areas. For example, see this review of Tesla’s autopilot compared with other car manufacturers: https://www.autopilotreview.com/tesla-autopilot-features-review/

    On the question of battery tech, LG’s NMC chemistry isn’t that far behind Tesla/Panasonic’s NCA in terms of Wh/kg, but it is far behind in terms of Wh/liter. See:
    https://insideevs.com/news/342679/tesla-model-3-2170-energy-density-compared-to-bolt-model-s-p100d/
    However, there are good reasons to chose NMC over NCA, because it doesn’t require nearly as expensive of a battery management system, because the NMC chemistry requires less monitoring to maintain cycle life and prevent thermal run-away (however those advantages probably lessen when moving to NMC 811 which has heavy nickel content just like NCA). The real problem for GM is that it can’t easily ramp up battery production to produce millions of EVs per year, because it has to rely on outside suppliers like it did when using a motor, battery management system and NMC batteries from LG Chem for the Bolt. The entire auto industry except for Tesla is going to face battery shortages and high prices once the EV revolution ramps up. Tesla reportedly has a million mile battery coming, which will give it another moat.

    On the question of motor tech, the Bolt’s permanent magnet synchronous DC motor weighs 76kg and is pretty energy efficient, but Tesla is well ahead of the competition. See: https://cleantechnica.com/2019/04/28/industry-expert-on-teslas-motors-theyve-got-magic/
    The efficiency of the Model 3 motor is reflected in the EPA’s Wh per mile rating:
    2020 Tesla Model 3 SR+: 240
    2020 Tesla Model 3 LR: 260
    2020 Chevy Bolt EV: 290
    2019 Nissan Leaf S Plus: 310
    The Model 3 SR+ has a lower drag coefficient, but it weighs 3551.7 lbs, compared to the Bolt which weights 3563 lbs, so this is a pretty close comparison of the efficiency of the Tesla motor vs the Bolt/LG Chem motor.

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