CHAPTER 2

2012–2015: Industry Form Follows Technology Function

Introduction

During the early to mid-2010s, the business environment continued to be driven by one dimension more than the others, and that was the technology dimension. As such, this chapter reviews events at Tesla Inc. and across the EV industry at-large in terms of the technology and innovation management scholarship in particular. That field helps explain some of the complex and reciprocal cause-and-effect dynamics of technological forces and Tesla’s proactive participation in them.

It is a matter of perspective whether this part of the story depicts the impact of “strategic choice” of key actors, or evolutionary determinism in the “business environment.”

Key Techonomic terms in this chapter include:

Technological discontinuity and technological breakthrough

Dominant design and technology standard (standards wars)

Radical innovation and incremental innovation

First mover and fast follower

Time-to-market and timing

Core Technological Uncertainties

It was apparent that an overcapacity problem was emerging in overall global EV production. Ordinarily, industry conditions of overcapacity do not emerge until an industry reaches a stage of overall profitability and later as it matures, conditions that induce new entrants into the fray, some of them intentionally as “fast followers.” Historically, overcapacity is more a characteristic of maturing industries than ones in new product development (NPD), introduction, or even rapid growth (Volume I). This new industry was already breaking the mold.

This condition sometimes results in “hypercompetition” because it can breed mutually destructive strategies that include price wars—not all of which help consumers in the long run if, for example, too much of the competition disappears or consolidates monopolistically. In the present case, merely summing all the global industry commitments of capital alone led to a similar prediction long before profitability was even imminent, no less empirically demonstrated.

The squeeze would probably be felt most keenly in the failure of battery manufacturers, regardless of their products’ technical promise. Demand forecasts varied, but the pattern was clear enough for some of the major manufacturers to plan smaller factories than they might otherwise build. By the time global demand for vehicles caught up with the predicted manufacturing capacity, small factories (especially those making what would become the “wrong” kind of battery) could then find themselves at a unit-cost disadvantage (if not locked out entirely by the wrong design).

In the Model 3, Tesla’s “battery” design was really an array of several thousand lithium-ion cells wired together, each about the size of an AA battery. Experience with similar batteries in consumer electronics meant that they were well down their “learning curve,” which is primarily a depiction of exponentially falling unit costs over accumulated production. In a Tesla, several thousand small batteries all sat alongside each other on a flat tray that was at the bottom of the chassis. Because they were small, they were less individually dangerous, so their energy density could be made higher, and better density in turn helped on cost of materials. Still, early experience with fires led to a special cooling system that dissipated heat quickly and removed much of that risk. The battery tray was also reinforced to defend against road debris, and software enabled the entire car to be raised a bit at speed. A firewall was installed to further protect passengers. Public acceptance was passive or, in other words, good.

Still, the battery cost of Model S could (depending on buyer choice) be between 42,500 and 55,250 U.S. dollars, which accounted for half the cost of the car. Interestingly, virtually all the press about batteries emphasized their proportional cost of an overall vehicle purchase, but it almost always failed to also mention that battery life was limited to an approximate number of effective charging cycles. This was easily calculable to happen well within the life cycle of a typical car, in turn meaning that it would need to replaced at least once over time. But at least, savvy buyers could feel secure that the second battery might soon become, say, 50–75 percent cheaper than the first.

To thoroughly understand the background of this situation, one would have to go back many decades. For practical purposes, this section will just recount a flurry of media attention that happened in 2012. In other words, while the details are specific to that year, the underlying story was timeless. To begin:

It hadn’t done the electrical storage business any good that companies like A123, which was sold to China under financial duress, as well as the well-publicized collapse of the Solyndra solar panel manufacturer, became high-profile failures-comme-evidence of the impact of government subsidies in nascent technology-driven industries. This was another headwind, but of a kind that often happens where strong opinions vary. No doubt, corporations were part of the political voices as well. Either way, contrasts like the following led to more controversy and, in the public’s eye, some progress needed to be shown for the sake of business clarity and investment:

Powerful advocates of the prevailing internal combustion paradigm reacted vigorously if for no other reason, to defend its incalculable investment made over many decades:

However, the global demand for stored electricity went far beyond batteries for EVs and was almost infinite for immediate practical purposes. Much of the planet’s population did not have reliable access to a cost-economic power grid, and “batteries” were an obvious, albeit, partial solution. For the world’s teeming poor, affordability was the key design parameter from the beginning, encouraging a search for low-cost battery components (including the electrochemically active materials) as well as low-cost manufacturing techniques.

Of course, batteries varied greatly and, moreover, the general rule was to see trade-offs from one performance parameter to the next; for example, among the number of recharging cycles, versus energy density, versus size and weight, and of course, versus cost. However, this pattern had become the norm for over a century and the trade-offs caused an inherent fragmentation of markets between, for example, automotive applications versus fixed-site power backups (Hoium 2016).

Stories like the above continued to address not only the acute needs of poor areas, but also affluent areas like southern, urban California. There, one general approach was to combine batteries (a term that could include things like ultracapacitors and fuel cells) with a renewable energy technology like solar panels. That said, a familiar problem and utmost design parameter, still after many decades of effort, was not just storage capacity but rechargeability, that is, the number of times a battery could be recharged or “cycled” for practical purposes. For better or worse, then, for almost all markets there were more prophecies about batteries than actually commercialized product technologies, beyond prototypes and some community-scale tests.

It was typical to see reports that batteries needed to come down 50–80 percent in cost for EVs to be viable, so it could easily be a waste of precious capital to pursue a promising battery technology unless low cost of manufacturing was already inherent. Therefore, manufacturability at low cost was clearly a driving design consideration from the very beginning, not an afterthought. For example, the following idea would apply to several kinds of stored electricity:

This illustrates how the choice of product componentry, the very elements, materials and chemicals that were parts of the product, presaged manufacturing obstacles, and therefore, product costs-comme-price to the consumer. Here are other examples:

As a result, some young, small startups and some old-large incumbents were beginning to form important collaborations with high public visibility. However, Musk continued to exhibit a personal penchant for internal control of such things rather than contractual, arm’s length relationships. Collaborative approaches stood in contrast to Tesla’s more system-level—and alternative policy-level—solutions, unusual in scope for a “startup”:

That article barely alludes to the idea that it was not automatically true that any EV could plug in anywhere. From the beginning, Musk had no intention of allowing this to develop along the lines that would leave Tesla locked out. The point here is, no pun intended, Musk saw Tesla being in charge of pioneering system-level solutions.

So on the technology front alone, the year 2012 was vibrant and dynamic on all levels of analysis, from specific material components of batteries to whole socioeconomic infrastructures. It was still impossible to tell with any real certainty which would win:

Much like the year began, then, news like the above closed out the year in battery developments. While policy-level solutions were sought, driven by basic battery obstacles, there was still a vibrant frontier of basic design features and configurations, which as often as not came down to the electrochemical properties of materials.

Standards Wars for Dominant Designs

Alleviating range anxiety partly depended on the standardization of disparate technological approaches, none of which stood out more glaringly than the need for a standard way to recharge vehicles away from “home.” The general issue is technology standardization and here public availability is the crucial element. At least until batteries got much better technically, it was a way to extend range through a supporting infrastructure. The more batteries improved the better vehicle range would injure the business model for rechargers, but apparently that was on no one’s mind for the near term.

The first order of business was to sell EVs to first-time buyers in sequentially evolving early markets, and to build “brand capital” or “legitimacy” for eventual mass marketization.

There were different ideas for recharging infrastructures under development at various organizations, such as the installation of recharging stations at private employer (or similarly restrictive) locations. For mass-market development, though, it was immediately appreciated that such an experience needed to be similar to that of buying gasoline at any gas station. Technologically, recharging problems were solvable but strategically, it would be problematic to pursue a proprietary approach to establishing a private or even public recharging infrastructure. Moreover, due to the complex dynamics of establishing dominant designs and bandwagon effects, an open architecture approach could be shrewd. Consider:

Should Tesla be able to establish a dominant design in recharging away from home, especially before any real battle for that could be waged, a true first mover advantage and possibly competitive advantage (Volume I) was in the offing. It might establish a certain symbiosis among players who showed strategic forbearance, meanwhile and intentionally locking out incompatible designs, and strategies aimed at anything but small niches that needed other (but not necessarily inferior) recharging technologies.

Signaled by corporate commitments that were global in scope, the prospect of not only creating a dominant design but also a significant bandwagon effect had dramatic implications for not only the Tesla company and its industry, but socioeconomic infrastructures writ large.

However, despite its near-term popularity it was not certain that lithium-ion batteries would emerge as the standard solution for all-battery EVs in the long run. In the foreseeable future, most people would agree that hardly anything else was good enough, in order to commercialize a first true mass-market EV. Longer-term, however, some experts wavered to the point of disagreeing that any kind of conventional, even any kind of electrochemical “battery” would become a permanent solution.

There were other worrisome realities, such as that lithium was not then known to be abundant and soon mass-market successes would strain global supplies and pressure battery prices up, not down. If that was true, it would become a gamechanger. Leaping ahead in time just for the moment, the situation as being reported in the media would evolve rather quickly:

With these risks known, Tesla set out to build its own network of charging stations where ordinary drivers were most likely to need them, especially on trips of any appreciable distance. Charging would be free (at least at first) and almost as fast as it took to buy gasoline and take a short break. This idea was originally announced in 2012, but it took time and some technology development to be fielded in sufficient mass. Six were originally installed along highway rest tops in California, with the goal of U.S. coverage in its entirety in a few years. For the most part, Tesla would foot the bill. After all, it was an investment in its own future.

Tesla also fiddled with the idea of swapping batteries at such places rather than recharging them—a very different design if it became standard in the industry. Tesla eventually abandoned this idea and returned to the original one. By 2017 it seemed as if Tesla’s recharging idea would emerge as the recharging standard, at least probable enough for the company to begin charging for the service.

Related, the idea of wireless recharging gained some attention (Fingas 2016). Similar to the way home gadgets could be recharged, the same idea could be applied to EVs. While still in the lab stage even as of 2016, it could challenge standards at least in some markets:

Induction versus conduction—wireless versus plug-in—that was one clear example of a competition for a dominant design, and a bit reminiscent of the AC-v.-DC struggle between Edison and Westinghouse over a century earlier.

In the EV scenario, there were similar competitions going on at just about every level of analysis, that is, every way and to any extent a “system” might be assumed. Ironically, however, while a recharging paradigm competition lasted, fleet customers and private consumers alike had an incentive to postpone purchases, not rush to buy. To illustrate:

Tongue-in-cheek, it must be said “no relation.” Otherwise, it is important to understand that the above represents not only a different technology, but a different science altogether: continuous electromagnetic induction versus electrochemistry and intermittent recharging. Imagined on any real mainstream market level, the investment in infrastructure alone is almost incalculable. Still, the idea certainly had niche applications.

Into 2013 there was no clearly emerging EV paradigm at any level of analysis, from basic battery components to national energy policy. It is clarity to the consumer that wins de facto design competitions—in free markets, the “best” technology does not always win. Plainly, there is much controversy in the words “de facto” and “best,” as the inference here is purely technical and perhaps economic, but not institutional, legal, cultural, and so on.

Anyway, technology standards set at one level could drive the emergence of standards at other levels, multiplying the intrigue. In a word, there were many “moving targets,” very little was “holding still” from a technology development planning point of view. There was not even a clear definition of an “EV” yet (e.g., the term often included hybrids), or at least any pure-battery EV had serious competition:

That article lauded the relative advantages of both hybrids and fuel cells, the latter being a technology that surfaced regularly for several decades, one with enormous promise but always displaying grudging progress. While hybrids were almost by definition a combination of battery and internal combustion technologies, fuel cells were something else again. Oddly, sometimes fuel cells are called “reverse batteries” because the fundamental principles are electrochemical, but past that they are not that simple, and they are not just batteries that work backward.

Fuel cells consume a hydrogen-based fuel and must be refueled in the mechanical sense like regular gas cars, unlike pure battery EVs, which recharge by plugging in to a power grid. Products of the space age, fuel cells had seen practical applications at least since the 1960s, most famously by the explosion of one aboard Apollo 13. Less dramatically, a common application became serving as emergency power backups for hospitals and the like, since fuel cells can kick in almost instantly should a grid failure occur. They are very bulky though, and at about the present time in the EV story, they were still only being used in large vehicles like buses. Indeed, city bus fleets were common fuel-cell testing environments. They also suffered high cost of materials (e.g., platinum) and manufacturing problems, and hydrogen refueling stations were no more convenient than battery recharging locations.

In the above article, two companies were highlighted: Nissan and Toyota. Toyota, of course, had already established itself with the popular Prius hybrid, while Nissan was newer to the scene but generally considered best-in-class with the all-battery Leaf. Said Toyota’s “father of the Prius” in reference to fuel cells: “Because of its shortcomings—driving range, cost and recharging time—the electric vehicle is not a viable replacement for most conventional cars …We need something entirely new” (Shirouzu, Kubota and Leinert 2013). And that observation was made despite the clear lead that Toyota had established in hybrids, which had indeed become and established approach with a profitable future.

In a similar vein, a Nissan official said, “We are going to continue to heavily promote electric cars, but at the same time, we are business people, we are pragmatic people. We will also develop and deliver hybrids because there are markets and consumers that require hybrids.” Announcements of billions of dollars in near-term capital investment would point to several fuel-cell alliances, such as Toyota with BMW and Nissan with Daimler and Ford. An article was reprinted after five years had passed:

Especially where it concerns truly new technologies, most consumers and especially mass-market consumers are not well-informed. It is natural for them to hold a few primal concerns about a new technology, the foremost of which is safety.

As real-world experience with lithium-based battery technologies spread and deepened, the perception that they could pose fire hazards deserved some merit. The problem was made worse by the fact that the chemical dynamics were not fully understood by scientists themselves; for example, lithium batteries sometimes seemed to burst into flames spontaneously, even when under very normal conditions. This was true for consumer devices like smartphones and laptop computers, on up through airliners. Seasoned and highly reputed companies like Samsung and Boeing were centrally involved. EVs were in the middle, and Tesla was not immune:

There’s that bothersome word “breakthrough” again, oversimplifying the stubborn way that nature reveals its secrets to scientists, engineers, and entrepreneurs of all kinds. In the present case such a word also belies what even a relatively simple “battery” needs, to be developed into commercialization. Later in the year, in a flurry of attention:

Fortunately, in this instance the Tesla vehicle design became largely exonerated in the same breath as the concern was first voiced, plus Tesla reacted positively and quickly with unique software and hardware improvements (discussed earlier). There were several more Tesla incidents that were argued both ways, once more illustrating the kind of challenges that need resolution between the lab and the marketplace, with many kinds of quasi-experimental prototypes fielded carefully along the way. Ironically, one might say that Tesla’s overall reputation as a company improved, while the at-large reputation of its core technology suffered. In more colloquial terms, to many people Tesla was innovating rather heroically at the “bleeding edge,” regardless of what the final outcome might be:

In the above article, it was noted that standards were under development at all levels of analysis. At the highest level, the relevant “system” could be circumscribed more inclusively than autos, even above transportation on the whole. Moving rapidly in the reports from the lowest relevant level of analysis (electrochemical properties of basic materials) to the highest (public policy concerning “energy” on the whole) could give any observer a case of intellectual whiplash:

Again, Tesla’s proactive role in this was as a central character, not an onlooker. Its interests in EVs and solar panels presented a golden opportunity, at least in the Golden State:

Thus the energy storage business at-large presented opportunities for some real “synergies” for Tesla, not just “economies” as the terms are often confused to mean.

At about that time Tesla announced the building of a “Gigafactory” in Nevada to produce lithium-ion batteries for all its target markets, EVs and grid applications alike (Pikkarainen 2016.) The facility would be one of the largest factories ever built anywhere, and when operating at its nominal full capacity, could establish an unassailable unit cost advantage in batteries no matter what the basic technology was. Not all of Tesla’s batteries were alike—facilitating ultimate production economies—but this development could hardly be more important. It was critical that the Gigafactory be utilized at or near its maximum effective capacity in order to mitigate its business risks, or become a cost-prohibitive empty shell with not enough car-and/or-other business to make it a going concern and viable ongoing investment.

Here was a clear example of a corporate portfolio being more than a sum of the divisions (Volume I); it represented an array of disparate products, for disparate markets, all based on a common broad-based, technology driven competency, and integrated capability:

But Tesla wasn’t the only multidivisional corporation with these things in mind:

Tesla’s “value proposition” in both EVs and energy storage included something controversial—the cap-and-trade-like “subsidies” that Tesla was said to receive in the form of tax credits and the like (Richards 2015). Tesla had for a long time been criticized for taking advantage of California and U.S. regulations, which were designed specifically for the purpose of providing incentives for private firms to do exactly what Tesla was doing. All other firms besides Tesla were provided the same opportunities; that is, this is not “picking winners.” A problem with perception, however, was that Tesla was only expected to make available a viable energy technology to get hundreds of millions of dollars in credit; it did not have to operationalize a new technology itself, nor was it Tesla’s fault if other firms did not rush to license or buy it. Also, tax incentives should be held distinct as a fiscal policy from actual cash flows. As a rule, tax incentives do not represent cash flows—no money actually changes hands, and the way they are said to “cost taxpayers” is to some degree a figment of a disgruntled imagination.

In any valid financial analysis, imaginary cash flows simply do not count. In a valid economic analysis, one can include true foregone opportunity costs, but only if they represent real cash flows that would have otherwise happened.

In any event, a few days later:

While on the subject of political controversy, there were recent, striking, and ominous reminders. In the failure of the EV movement in the 1990s, led mostly by GM and its all-battery impact, EVI and EVII, there were some accusations that industry insiders, and even some corporate executives, were practically complicit in sabotaging the effort (McGrath 1996). There were airs of conspiracy theories—that the incumbents were doing just enough to “prove” to regulators and green techno-enthusiasts that it just couldn’t be done. Much of those histrionics were fueled by frustration and were unfounded, but a similar lack of enthusiasm in the modern movement sometimes echoed the 1990s:

If any firm could be said to be winning standards wars, it was Tesla. But an early lead can be a double-edged sword.

Industrial history is replete with first-movers than vanished, and fast-followers that became household names.

Tesla was drawing many supporters and many detractors based on the agendas of each specific constituency, but no interest group was more important than Wall Street, which seemed to offer an almost limited line of capital investment. Based on that benchmark, Tesla’s position was very good. Strategy would ultimately make the difference, though, because it takes a good overall strategy to reward investors both well and consistently. Ironically, that would eventually become the most problematic issue.

Conclusion

This chapter addressed Tesla’s situation during the early through middle part of the 2010s. During this period many industrial, economic, market, and regulatory forces were ramping up, but none were more influential than technology. This was a time when the structure of the entire industry was taking shape along the limitations of product technology. Battery limitations in particular were predetermining entire vehicle designs and in turn, business strategies aimed at viable early markets. Much of the story focused on a multilevel and multifaceted battle for technology standards and dominant designs. Lithium played the central character—at times hero, at times villain. Eventually, massive capital commitments to lithium technology would have to yield to something better; meanwhile, commitments to equally massive production economies were in the balance. Otherwise, some investment communities were growing impatient with Elon Musk’s long-term agenda to save the planet.

Exercises

Define each of the following terms individually, and then compare and contrast them in the pairs shown:

Technological discontinuity and technological breakthrough

Dominant design and technology standard (standards wars)

Radical innovation and incremental innovation

First mover and fast follower

Time-to-market and timing