For a company that makes cars that cost twice as much as an average vehicle does, Tesla’s current lineup isn’t exactly accessible to the common buyer. Despite its high price, the Tesla Model S is popular with people in a way that much more affordable electric cars are not. Yes, the Nissan Leaf is more affordable, but when asked to name an electric car, most people will name the Tesla. In a way, becoming synonymous with the electric car is a huge victory for Tesla, especially as it works to expand its lineup into more affordable segments.
Assuming the problems with its “falcon doors” can be worked out, the Tesla Model X will move into the incredibly profitable crossover SUV segment this summer. After that, Tesla is working to bring a smaller, less expensive sedan to market by 2017. Known as the Model 3, this sedan has a target price of $35,000, putting it in line with the average sales price of a new car and making it accessible to the vast majority of American households.
Just like that, Tesla will revolutionize the auto industry, right? A lot of people would like to think so, but according to the Harvard Business Review, Tesla isn’t going to be near as disruptive as people would like to think.
Other than the fact that it’s attempting to sell fully functional electric cars, Tesla is also drawing attention because of the way it’s attempting to disrupt the auto industry. The more widely accepted method of market disruption involves initially selling a very inexpensive product and continually improving until it begins to take over the market. Tesla, on the other hand, is flipping that bottom-up approach on its head and attempting to disrupt the auto industry from the top down. The question is, is Tesla making a mistake, or is it creating a new way of doing things?
Harvard research associate Tom Bartman and his colleagues studied Tesla closely, particularly concerned with whether Tesla should be considered a disruptive innovator. Their conclusion was that even though Tesla sells cars that are powered differently than conventional ones, it’s actually “a classic ‘sustaining innovation’ — a product that … offers incrementally better performance at a higher price.”
Bartman then went on to say that their “analysis concludes that a competitive response won’t happen until Tesla expands outside its current niche of people who prefer electric vehicles to gas-powered cars — but if it expands by creating more variety (such as SUVs) and more-affordable vehicles, competition will be fierce.”
He does have a point. With approximately 16.5 million vehicles sold in the United States last year, electric vehicle sales didn’t even account for 1% of that number. Major automakers are investing in electric car technology, and several already sell electric cars like the Chevrolet Volt and the Nissan Leaf.
But with more than 99% of car buyers opting for conventionally powered vehicles, customer tastes haven’t changed enough to justify investing too heavily in bringing Tesla competitors to market. Tesla is counting on those customer tastes to change eventually, but if they do, there’s a good chance that the major automakers would be able to respond by offering competing vehicles fairly quickly.
“It’s an amazing car,” said Bartman, but if Tesla’s goal is to dominate the car industry, “it’s chosen a very difficult strategic path.”
Where Bartman sees the true disruption coming is from low-speed electric vehicles, commonly called “neighborhood electric vehicles” or NEVs. Similar to golf carts, these NEVs are usually limited to 25 miles per hour and can only drive on roads with posted speed limits of 45 miles per hour or less. NEVs might not have the range to compete directly with conventional cars, but they usually only cost a few thousand dollars, and manufacturers are starting to add more desirable features as well.
Currently, they’re most popular on university campuses, in retirement communities, and for business deliveries, but they could quickly become more popular with people looking for an inexpensive way to get around cities. One of the most popular brands in the U.S. is GEM, a division of Polaris Industries. Its e2 NEV costs just $8,000 and can carry two passengers up to 35 miles. The $11,000 e4 can carry four passengers up to 30 miles.
With such a short range and a top speed of 25 miles per hour, owners won’t be driving these vehicles on family road trips anytime soon, but they could easily be used for quick trips around the city on low-speed roads. Scott Wine, Polaris’s chairman and CEO, wouldn’t give too many details, but he did tell the Harvard Business Review that in the not-too-distant future, GEM is planning on releasing a vehicle that follows the innovative disrupter model exactly.
GEM’s plan to continually improve on its NEVs and offer a potentially game-changing product shows that it isn’t just researchers at Harvard who are interested in approaching electric vehicles in a more conventional way than Tesla. Perhaps building a business model that flips convention on its head will come back to bite Elon Musk. Then again, if Tesla upends the car market and ends up becoming a major automaker, it could be the textbook example of top-down innovation.
There’s also the popular opinion that Elon Musk isn’t interested in building Tesla into a major car company. Instead, he could be more interested in batteries and selling those batteries to everybody else who makes electric cars. With Tesla’s announcement that in-home batteries are coming and Musk’s attempts to build a battery “gigafactory,” that could certainly be the case. You never know, though. Tesla could always end up doing both.