Tesla surely leads the way for the next-generation vehicles. It has the most advanced battery, most covered charger facility, cool car, price advantage, and strong brand. We will take a closer look at those aspects to get a better insight into the Economic Moat of Tesla.
Tesla’s economic moat analysis provides a solid foundation before investors read about its revenue analysis here.
Intangible Asset Advantage: Brand Perception
In the Economic Moat of Tesla, innovation is the new sexy.
Since the big tech(1) era, anything associated with innovation become suddenly hot. Whether it is telemedicine, ride-hailing online service via apps, or, in Tesla’s case, the electric vehicle. Tesla’s name is closely associated with the EV itself. Tesla is EV and EV is Tesla. Thanks for Elon Musk’s fantastic effort that makes Tesla unique and well known as the next disruptive wave. A computer running at 200 mph, like iPhone in 2007, a computer in your hand.
We won’t discuss how Elon achieves this, since it will be a marketing talk instead of investing perspective. What we like to discuss is whether the competitor could replicate this advantage or not.
And the answer is not.
Not because of the technological aspect or lack of great leadership. It is because the customer perception creates a jail for them. A brand like Audi or Jaguar is closely associated with sports cars and sports cars only. People won’t make Audi or Jaguar for their EV. Same with Ford and GM. They are all-around cars, they are good, fuel-efficient, cheap, but they are what they are. You won’t relate EV with GM or Ford or Nissan or Toyota, it is always Tesla.
So, in the past, the brand perception for Audi, Jaguar, or all-around perception for GM, Toyota was an advantage, but when coming to EV, this asset suddenly becomes a liability.
Simply said, Tesla is born digital. The same reason why Microsoft will never beat Google, Amazon, or even Facebook in “online” presence. Simply because they are born “online” while Microsoft is born in the server land. Try to check our article with regard to this topic here
- The big tech member are Microsoft, Google, Apple,
Low-Cost Producer Advantage I: Aramco of Electric Vehicle
Due to the industry characteristic, the Economic Moat of Tesla should talk about prices advantage
No matter how it related to innovation, the EV in the end will come back to its nature, the nature of automotive: Cruel competition. This should be a question for about years ahead since at the moment Tesla is an undisputed champion on this field.
When EV becomes a mass need and the alternative for Tesla is abundant, the price tag will become more sensitive to customers. Lucky for us, the conversation about EV price is simply a conversation about battery price. The rule become much simpler, a company with a lower-cost battery has more advantages than the pricier ones.
And it is an open secret that Tesla led again in this sector. In 2021, Tesla come with another breakthrough with a 4680 battery model that is more efficient and economical. This strengthens the existing competitive advantage in battery cost which is represented in the figure below:
Tesla’s advancement in the battery sector aligns with the CEO’s message and long vision to bring more and more affordable EVs. One of his last strong messages regarding this topic is, One of the things that trouble me the most is that we don’t yet have a truly affordable car.”
Tesla’s position reminds us a lot about Saudi Aramco. Aramco oil lifting cost only at $10 level, far lower than the shale oil counterpart. When the competitor has a similar product, the one that could produce or manufacture with the lowest cost will get the upper hand. Right now tesla has no similar substitutes, but even when that day comes, Tesla’s battery will save the day.
Low-Cost Advantage II: The iPhone of EV, Not Auto. Energy
But no switching cost
Besides the battery, another advantage Tesla has is its relationship with customers. Instead of taking the same route as a conventional carmaker that uses a middleman or dealership, Tesla sells its EV directly to the customer. This decouples the middleman cost-efficiently and at the same time gets more knowledge and intimacy with the customer as a bonus. From the customer perspective, Tesla looks really care about its buyer. Tesla listens.
Could other carmakers replicate this advantage? Difficult. The middleman is the one who could access the market, and it creates large inertia to eliminate them. The switching cost advantages are on their hand, not on the conventional carmaker side.
Besides Aramco, Tesla reminds us about Apple and its devices. Like Cupertino’s side that controls OS and the devices, Tesla controls the vehicle and the battery (also its OS). Both also run their own store. The difference is, Apple could optimize this advantage to generate sell its devices more than competitors. Tesla, on the other hand, optimizes this economic moat to bring the cost down.
Another significant difference is, Tesla has no switching cost advantage like Apple that could lock its customer into its ecosystem. Tesla, the energy company, has no ecosystem. But we don’t really know in the upcoming years will be, maybe Elon Musk has another surprise.
Low-Cost Advantage III: The Sun and The Earth
The solar panel makes differences
As we all already know, Tesla is an energy company that owns a solar panel business. The interesting plan from the Texas-based company is how it will integrate the solar panel into its supercharger facility. If this crazy plan could be realized, Tesla could cut the cost even lower since it needs not buy electricity from the utility company.
Or, install the solar roof in Tesla’s body. Who knows? We know that it is the imagination but if Elon Musk that it is needed, so it will be. But, today, we have to admit that the Tesla energy ecosystem isn’t optimized yet for its EV business.
Perhaps someday. And if it really happens, the other carmaker has no answer for this.
Final Word: Tesla Economic Moat II
Before You take any conclusion
- There is one advantage that is not yet covered in this article, and we indeed leave it to the next article. That is the Giga scale of the manufacturer. Glad you ask.
- Tesla has both low-cost producers and integration advantage to bring the production and marketing cost to low as possible. It mimics Aramco and Apple’s advantage but in an inferior manner. Still, it could make a significant advantage in the auto industry.
- The two strongest elements of Tesla integration are its battery development and direct sales to the customer. Investors need to keep eye on these two. Any significant change could affect financial performance as a whole.
- Tesla has a unique and great advantage, but it doesn’t mean that the EV maker deserves unlimited valuation. The investor needs to stay alert to buy at this premium price level.