CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.
Innovation often happens slowly and then all at once. That’s the felt reality of disruptive innovation. Basically, if a big company doesn’t watch out, a startup can come in with a new inferior offering. Ignored long enough, that upstart can improve its product and eventually, seemingly suddenly put the incumbent out of business.
That phenomenon is well understood now. What’s hard is getting the timing right. You move too quickly to the new tech and customers aren’t there yet, you’re out of luck. Wait too long, someone else eats your lunch. Even when established companies recognize disruptive innovations and deliberately bring them on, it’s a complex balancing act to transition the business for the future.
Case in point, actually cases in point, electric vehicles. The car industry is bursting with disruptive innovation case studies in the making. You’ll find many of them to learn from in the new book, Inevitable, Inside the Messy, Unstoppable Transition to Electric Vehicles. The author is Mike Colias, Deputy Bureau Chief at the Wall Street Journal, and he joins us now. Hi, Mike.
MIKE COLIAS: Hi, Curt. Thanks for having me on.
CURT NICKISCH: It’s such a fascinating industry, of legacy companies, amazing brands, this consumer technology that we all totally get and are totally familiar with. A lot of emotion and economics involved. Then you’ve got electric vehicle technology, you’ve got driverless automation technology. It’s just a really amazing business. I think maybe we should set the scene here. Why do customers buy electric vehicles? What do companies know that they’re looking for?
MIKE COLIAS: Yeah, we’ve seen this evolution playing out now for about 15 years. It was 2010 is when GM came out with this Chevrolet Volt. It was actually a plugin hybrid. Nissan had the Leaf. That was a full EV and they came out about the same time and it was a big deal. It was a breakthrough. What you saw, I think, from 2010 to early this decade was a lot of people bought it for certainly environmental reasons.
You had a lot of people who were interested in the technology, who wanted to just have the latest thing, who wanted to have the first EV in the neighborhood, those early adopters. As we’ve gotten to recent years and you’ve seen more and more models coming out – we can talk about why the industry has tried to pivot so hard toward EVs – more and more people are interested in them.
I mean, surveys show that of the average car buyer, roughly half of them are at least open to the idea of electrics, but it’s less of the early adopter who’s going to, “Hey, I’ll pay 20 grand above sticker for this new electric truck,” and it’s more of a discerning buyer who’s maybe on the fence about it and has to be convinced. So I think that’s where you’re starting to see some headwinds in the industry.
All the car companies went really big for a number of reasons. Now sales are still going up in the U.S., but the companies are having a harder time getting people to make that jump to electric because they’re more your everyday buyer. They’re trying to figure out how it fits into their life rather than just so enamored by the technology or what it can do for the environment.
CURT NICKISCH: Why do people get enamored by the technology? I think what advantages do electric vehicles have?
MIKE COLIAS: Yeah, I think for a long time they were thought of as these glorified golf carts. I don’t think people really thought that they could have the capability and reliability, fun to drive, all the reasons why a lot of people choose their vehicle. I think Tesla really showed that EVs can be sporty and fun to drive, and so you get into one today and now many, many brands, I mean, the choice has really exploded in the last couple years.
You can expect it to be super quiet, very zippy. You feel like you’re driving the future a bit. I’ll credit this to a colleague of mine, Dan Neil who writes a column for the Wall Street Journal on cars. He said, “If you drive an electric, going back to a gas engine car is like going back to whale oil lamps.” You know, not everybody. There are examples of people who just realize after six months, “Hey, maybe this isn’t for me,” but by and large people don’t go back.
CURT NICKISCH: Is there any doubt in your mind that the industry is going to shift to electric vehicles? I mean, some people might say it’s a fad or it’s just not going to last. Inevitable, the title of your book came from Ford’s CEO, Jim Farley, who said it’s an inevitable transition. What’s your opinion from your experience?
MIKE COLIAS: Yeah, it’s funny, we actually titled the book before he said that, and so it was nice that we’re getting some backup from the industry. No, I think it is interesting because from the time I started the book, let’s say 2021 ish, it was all systems go. All of the companies were saying, “We’re pouring all of our capital into this. We’re going to have dozens of electric vehicles by X date.” GM made a lot of news when they said they were going to be fully electric by 2035.
Then the slowdown, which we’ve already talked about, where consumers are like, well, not quite so fast. I think they did to a certain extent leave the consumer out of the picture when they were making these decisions. So now it is messy. You’ve got companies who are starting to slow walk some of their factory investments or cancel models.
President Trump and Republicans have been pretty harsh on electric vehicles. They’ve made it known that… It’s become very politicized in the last couple of years, and we can talk a little bit more about why that is. So right now it looks like a tough time for EVs and it is in the U.S. That gets to why I think this goes from where it is now to inevitable is, in China… So everyone talks about the EV transition.
There’s multiple transitions unfolding around the globe. China is the leader in EVs. Nearly half of all car sales in China are now either electric or plug in hybrid. This is really gets back to why it’s so difficult to be the leader of a car company today.
If you’re Mary Barra sitting in Detroit. She took over in early 2014. One of her lines I remember at the time was we’re going to see more change in the next five years than we have in the last 50. Mary was one of the first big car company CEOs to declare this is what we’re doing, this is the path.
For the company that puts out big Cadillac escalades and Corvettes that roar around the track, 8 cylinder, that’s a jarring thing to hear. Mary gets a lot of the credit for that. It’s a bit of an unfinished story because the execution of thoses EVs that she put the plans in place for the last decade have kind of stumbled, at least in the last several years. And now they’re starting to get really good cars out and they’re hitting this sort of demand headwind where consumers maybe aren’t showing up in ways that they expected.
And only 5% of your sales are electric and you’re losing billions of dollars on that, and you’re making, I think they’re going to make something like 12 to 14 billion, that’s what they’ll have made in 2024. That all comes from big pickup trucks and SUVs. How do you play that? Europe’s somewhere in the middle, 20 to 25% of their sales are EVs.
So you’ve got to decide, okay, am I going to lean into this thing that right now my investors don’t like and I’m losing a ton of money on because I know that in the future I’ll probably have to compete. She’s on record as saying the future is electric, so they have to put their money where their mouth is, but it hurts right now to do that.
CURT NICKISCH: She’s one of the really interesting case studies in the book. Somebody who’s trying to manage that transition. You painted a picture where GM is making a lot of money by selling its quote, unquote, legacy vehicles, but also not seeing its stock price go up. Meanwhile, there’s this other company, Tesla, that’s putting out all electric vehicles, only electric vehicles.
It’s not making money at that time early on, but its stock price was going up because investors thought that that’s where the future was going to be. And it was just interesting to see somebody who was making money as a CEO, but envious of the growth of a competitor stock price. What does that say about the business challenge that she was facing?
MIKE COLIAS: Yeah, I think if you look at Tesla, their investor base doesn’t look like the investors who go into the stocks of the traditional automakers. The autos is not a growth, it’s not been a growth industry for a very long time. So their stocks are assigned values that reflect that. It’s slow, steady, but investors don’t go into a stock like GM looking for a big moonshot bet on self-driving cars and electric cars. That’s a big source of frustration to the CEOs of these companies.
For years, auto executives rolled their eyes or dismissed Tesla, didn’t think they’d ever get to be able to mass market cars. They wouldn’t be able to get their factories. Making cars is hard, and it was hard for Tesla. Once they punched through, I think that’s when they came out with a Model 3 around the 2018 timeframe. That was the proof point that I think the industry needed to say, “Okay, these guys are for real, and oh, by the way, their stock value just passed ours.”
Then by the time you get to 2020, 2021, Tesla is worth more than the top 10 automakers in the world combined, market cap. So there’s two big reasons why the industry piled into EVs as seemingly suddenly as they did. One was boring. It was regulations around the world, climate change, regulators, politicians were trying to get a handle on that problem.
CURT NICKISCH: Just to underline that there, they’re offering tax incentives and things like that for customers who buy EVs. So trying to tilt the economic playing field a little bit in the favor of electric vehicle adoption.
MIKE COLIAS: Yeah. The regulatory part of the story is more, it’s like carrot and stick. Yes. Incentives to get companies to make EVs and batteries and for consumers to buy them. Also, tougher regulations, right around tailpipe emissions, how much carbon you could emit and other pollutants. So over the years, the companies could meet those regulations through improvements to their gas powered vehicles and diesel vehicles.
There were, I think the miles per gallon today is something like double what it was in the late ’70s. So there was tons of improvement in the internal combustion engine, but it got to a point where these regulations have become so tight, especially in Europe and China, that the companies needed to start to electrify. The regulations certainly pushed them in this direction, but the effect of Tesla and other startups, and now the Chinese really I think is what got the attention of the global auto CEO to say, “We’re getting left behind. Investors aren’t paying attention to us. We need to go in this direction.”
CURT NICKISCH: You have a really great image, a good leadership lesson here in the book of Ford CEO, Jim Farley, meeting with his engineers and doing a teardown of a Tesla and a Ford electric vehicle side by side.
MIKE COLIAS: Yeah, Jim Farley, this is early 2022 when they did this exercise, and he’d only been CEO for a little over a year. He had been talking to some of his engineering leaders a few weeks beforehand, and he was pondering this question. He was one of the few auto executives who really was paranoid about Tesla back in the early days.
So he’s always been looking over his shoulder at Tesla, and when he got to be CEO, he knew that that was going to be really his biggest nemesis or one of them. So he wanted to get a better handle on how Tesla had become so successful, starting to turn a profit at that point where really none of the traditional automakers were profitable.
CURT NICKISCH: In EVs, yeah.
MIKE COLIAS: In EVs. Right. They questioned his engineering leadership. He said, “I don’t know that we’re designing these EVs in the most efficient way. What’s the difference between the way we do it and the way Tesla does it?” According to Jim, he was told that there really isn’t much of a difference. So he ordered up this dissection side by side of a Tesla Model Y and a Ford Mach-E, which had been… It’s an SUV. It’s really cool looking. It had done really well in the market.
These teardowns engineers in the auto industry do them all the time; somewhat rare to have a CEO roll up his sleeves and want to get involved. So this empty warehouse in Dearborn near the headquarters, they had these two cars. They picked them apart. And the results were, there was a pile of guts laying on the floor next to the Ford that was a lot bigger than the pile of stuff laying next to the Tesla. There were brackets that didn’t need to be there, and there was something like hundreds of feet of wiring more in the Ford than there was in the Tesla. So it’s just all cost in weight, when weight is a killer when you’re trying to squeeze more miles out of an electric car.
So he was upset about this, and the next week he paraded the board through this warehouse to show them this is what we’re up against. If we don’t figure out how to do this and get the cost out and compete with a company that has only been making cars really for five years, and we’ve been doing it for a century, we’re going to lose this. He’s really talked in terms of how this is an existential threat and battle that Ford is under right now.
CURT NICKISCH: “Only the paranoid survive,” that was Andy Grove at Intel’s disruptive innovation lesson. What I liked about that story was just how it showed how a company that’s using a technology that leapfrogs you, that was it.
MIKE COLIAS: Yeah, it’s the innovator’s dilemma, right? Which I’m sure a lot of your listeners are familiar with. This idea that institutionally you almost have this subconscious aversion toward jumping to the thing that is going to be the next big growth area because it requires abandoning what you’ve done and what has worked so well for you for a century.
And in this case, some of that inertia of how you design a car. It’s always been with a big engine block up front and a transmission running through the middle to the rear of the car.
One of the executives I talk to a lot calls it scar tissue. They haven’t been able to figure out a real great, clean sheet design for electric vehicles, at least not until recently. Now we’re starting to see some of those come out. There’s a lot of great cars out there, but companies like Tesla and the Chinese are just, it’s sort of like you get the feeling they’re on versions 4.0, 5.0, 6.0, when many of the traditionals are one and 2.0.
CURT NICKISCH: One really emblematic episode in your book is just when Tesla lowers its prices. So for a long time you’ve got these established car companies in the U.S., they realize that electrics are where they need to go. They start putting lots and lots of money into it. It’s all about cost. You have to drive those costs down and make it profitable at scale.
They’re matching Tesla as a benchmark. And right when they feel like they’re about to put models into the market, Tesla lowers its prices. Can you describe just how meaningful that was and what that meant for these big car makers?
MIKE COLIAS: Yeah, I think as you described, it was really this gut punch because this is early, right at the beginning of 2023. Until then, the EV story was really, EVs were taking off and you had people willing to pay above sticker price and on wait lists to get these new models. We were finally getting new cars, new EVs onto the market that weren’t Tesla’s.
The other brands had finally gotten into the game and they were still not making money on these EVs. They didn’t have the scale yet. They’re only making a few thousand to start, and it’s still a money losing endeavor, but it was looking bright because the demand seemed to be there.
When Musk took the step to weaponize his profit margin is what one executive described it to me, because by that time, Tesla’s profit margins, the company, the auto industry thought would never be able to be profitable, had been way bigger than the rest of the industry. So he had some headroom. He was more profitable than these other companies just on a company-wide basis, let alone the fact that these companies were actually losing money on their EVs and making money on gas power cars. So what he decided to do, and this might not… We don’t know exactly his reasoning.
CURT NICKISCH: He said his reasoning was to democratize access to these vehicles.
MIKE COLIAS: Right. And that’s a message that he’s had for a long time. He said many times that he started Tesla for environmental reasons and he wanted as many people as they could to drive electric cars. Competition probably played into it too.
The other thing that’s super scary
