If you're a car enthusiast, these are quite interesting times to think about the industry. For years we've been talking about the rise of electric cars and how cars will operate in the future. This has always been an isolated conversation around ICEs vs. electric drivetrains. But over time, the debate has evolved and it is not only about its technical nuances anymore, it goes deeper.
The car industry is on the verge of enduring a profound shift that will completely redefine what a car is, how it's designed, and, maybe, its entire ownership structure. We might be fortunate enough to see all this story unfold during our lifetime. This post will focus on the challenges that the industry will face transitioning to electric drivetrains.
This conversation revolves around many unknowns, but one thing we know for sure: sooner or later, the shift to electric is going to happen. Incumbents only hold onto ICEs because it creates huge barriers of entry and protects them from upcoming competitors.
Yet from a technological point of view, electric motors surpass ICEs in every single way. Electric motors reduce mechanical complexity in ways we can't even imagine. They are simpler and have fewer moving parts. There is no need for a gearbox, nor pistons going up and down thousands of times per minute. This means less friction, less heating, less energy wasted, and ultimately, more efficiency.
The moment cars are based on electric drivetrains, critical pieces from the ICE could turn into software — the same way that electromechanical calculating machines or cameras turned into software a few years ago. This ultimately has a huge impact on the overall car's performance and gives electric vehicles a competitive edge that ICE counterparts can't match.
The implications of this shift can't be overstated, because they span beyond technical nuances, to redefine entire layers of the market. From dealerships, repair shops, gas stations, up until the very factories in which they are made.
The engine transition from ICE to electric, tells only part of the story. While it's true that it lowers some hurdles when building a vehicle, the key for a new entrant to disrupt the car industry goes back to manufacturing — in fact, it all goes back to manufacturing.
The Ford Model-T was a huge success because of its innovative manufacturing process. It allowed Ford to bring production costs down and compete asymmetrically with hand-operated assemblers. The car industry works the way it does because of how cars are built. The sheet metal process on which modern cars are built determines everything. Capital expenses, resource allocation, cost structures, the way factories are laid out, everything.
The ultimate cost of putting a car on the market and in a sense "what is possible" is constrained by the production process. Therefore as history has already shown several times, if a new entrant wants to disrupt the industry, a necessary condition will be closely linked to a competitive advantage in the production process. This leads to an interesting intersection where changes in both the power train and the production process collide.
Because of the complexity and capital required to design and assemble an ICE, virtually zero new car manufacturers have emerged during the last century.
The car production chain has always been vertically integrated. The factories often belong to the large auto groups and their main purpose is usually assembly, not direct manufacturing. But in an environment where cars become simpler, the new entrant might kick things off by buying commodity components off-the-shelf. The car industry will probably end up looking more like PCs or smartphones than we think. This not only opens the door to potential new manufacturers but also reshapes the entire assembly stack.
The entire production stack moves from almost from in-house factories to outsourced contractors as Apple does with the iPhone. These also present new challenges for the incumbents. Because in this scenario all the supply chain gets layered and optimized, and companies like Mediatek start to pop up, bringing costs down in each layer of the supply chain.
So, with these simple tweaks, all the industry landscape has been turned on its head. Entering the car business would need much less IP and much less capital, so companies without factories, just buying components out of the self and outsourcing manufacturing to a specialized contractor might be putting cars on the road.
In an environment like the one we've described, there's a clear shift of what's important when it comes to building a car, at least, from a technological point of view. Batteries are the most important component of an electric vehicle and some design constraints of the ICE vehicles simply don't apply to EVs.
Some assumptions inherit from ICE cars are no longer valid. Tesla is a great example of this: why an electric car needs a front grille? They don't. But there's more: a huge front hatch, a spacer, and a stick between the front seats… you won't need any of this in EVs. In a nutshell, an ICE car is just an inefficient heat machine and all its design revolves around generating as much chill to dissipate it. A closer study of an ICE car will quickly reveal that all its design is constrained by this assumption.
Then how could Tesla — or other new entrants — can compete with the decades of supply chain refinement? The answer is that they don't need to. Different rules apply to them, they're just playing a different game.
What Tesla has accomplished so far is arguably the best that has happened to the auto industry in the last decades. It has shown that it is possible. Tesla is already way ahead of the competition, but the breakthrough is not yet complete, because, at its core, its production process remains the same as incumbents.
In theory, nothing is preventing other automakers to replicate Tesla's playbook. However, the most difficult thing to replicate about Tesla is something more subtle, sometimes overlooked: its vision of the car. Despite the production process remains the same, Telsa's fundamental breakthrough is that it thinks of a car as a computer with wheels. The rest of the industry is still thinking about how to put better computers into cars.
In other words, they still have a hammer, and to them, everything looks like a nail.