Legacy Automakers Need More Than Incremental Productivity Gains To Keep Up With Elon Musk

By Alan Wilkinson and Simon Schnurrer

_{Alan and Simon are partners in Oliver Wyman’s automotive and manufacturing industries practice.}

At this year’s Tesla

TSLA
Battery Day, Elon Musk threw down the gauntlet on electric vehicle (EV) batteries. After years of relying on suppliers for production of the most value-added item in an EV, Musk unveiled Tesla’s plans to produce their own battery cells and change both the raw material mix used in typical automotive battery cells and the manufacturing process. The innovations could lead to the Holy Grail of EVs: batteries inexpensive enough to allow Musk to create a desirable $25,000 Tesla model.

For Musk, the goal of Tesla’s battery research goes beyond just improving EV margins — although, of course, that’s critical. Musk’s mission is to control the value creation around EVs — vertically integrating as much as he can to accelerate the pace of innovation through the manufacturing process. Where today’s car manufacturers produce only 25 to 30 percent of the content of most vehicles, Musk’s aim is to outsource as little as possible — avoiding the inefficiencies introduced into the design and manufacturing process through having multiple layers in the supply chain.

In contrast to current automotive practice, Tesla wants to dig deeper into value creation and change the fundamentals of the industry. It will not be content to become just another automotive original equipment manufacturer (OEM) with the typical margin or market share. Musk is aiming for the innovation pace and margins of a classic technology company and will defy industry rules on how to do things until he gets there.

Are incumbents prepared?

This new way of thinking about automotive manufacturing should concern legacy players who typically strive for one to two percent productivity gains each year. Over the next decade, automakers will confront all manner of transformative technologies beyond the challenges from Musk on EVs — including autonomous vehicles and those yet to be realized. The message for incumbents: Stop thinking you will be ready to compete looking to achieve only incremental annual progress in such an accelerated innovation environment. Automakers need to take more risks and stop fearing failure if they want to adopt a high-tech mentality toward innovation — and they must figure out ways to get shareholders to support their risk taking as Musk clearly has.

Take the EV. If one accepts the concept of climate change and recognizes the global regulatory trends, the EV will inevitably become the dominant vehicle on the world’s roads over the next two or three decades. While legacy car companies no longer view EVs as merely vehicles produced to lower fleet emissions to comply with regulations, they still haven’t figured out how to make money on them — even as Tesla has shown a path to profitability through design and manufacturing advancements planned over the next few years. Nor have traditional automakers focused on ways to increase customer demand.

More innovative thinking and more rapid product improvements will be required to keep their products competitive than in the past. Change cannot be made just for the sake of change on a regular cadence. Investments should be focused on changes that make the product or ownership experience clearly better.

This does not mean car companies need to abandon internal combustion vehicles and hybrids. It means they need to see this production as the way they financially support their more transformative product lines. Ultimately, the old products will become less dominant as the new become successful, meaning the old products may need fewer redesigns and less direct investment.

Magnet for talent

What does this changing dynamic mean? With the influx of new competition from Tesla and tech startups, legacy automotive companies will have to increase their rate of innovation just to remain viable. Unless they can justifiably reposition themselves as technology leaders, they may have a harder time attracting the best and brightest from the limited number of engineers and computer scientists coming out of universities, losing them to more transformative enterprises. They also may discover they won’t be the first choice of consumers either, once they start turning in bigger numbers to EVs.

Tesla sees the path to profitable EVs through manufacturing and product design innovations, and Musk has placed his bet that Tesla can become the largest automaker in the world in a decade or so, based on those EVs. He has the patience and record of success to allow him that time. While most legacy car companies will say they can’t wait 10 years to see a return, they may find that by failing to fully commit now it will be impossible to catch up later.