In an earlier post entitled “The Attack on the Western Auto Industry Explained” I referred to the five generic strategies that American Harvard professor Michael Porter identified as the only options of any business strategy. The first two are cost-based (targeting the whole market or a segment of it) in which the company aims to offer products or services of similar quality to the competition, but at a significantly lower price. The next two are those based on differentiation (targeting the whole market or a segment of it) whereby the company tries to offer products or services of a higher quality than the competition for which customers will be willing to pay higher prices. Finally, the last variant is a combination of the two in which a qualitative differentiation is attempted at a slightly lower cost. That and nothing more. Other miracle strategies do not exist.
In this context, I explained that cars with internal combustion engines, unlike today’s electric cars, had a multitude of differentiation criteria that were sometimes difficult to imitate, which ensured the leading position of European manufacturers on many international markets. But…
“The appearance of electric cars fundamentally changed the picture and the strategic context. The simplicity of the construction makes differentiation much more difficult in the case of electric cars. And when differentiation is still attempted, it is based on the IT applications that these cars have, an area in which companies in the area of digital applications are better prepared than traditional car manufacturers. Automobiles cease to be engines on four wheels and become IT applications on four wheels. It is no coincidence that a number of electric car manufacturers in China come from the IT field.
But this way of differentiation is not sustainable in the medium term, as many of the applications can be copied relatively easily by competitors. Under these circumstances, unlike the world of internal combustion vehicles, the main strategy that matters in the world of electric vehicles is that of cost competition. (…)
In this context, Tesla continues to benefit from the image of Elon Musk and the aspirational brand that he managed to become. But we see that even this leading company is aware that in the long term, a strategy based exclusively on differentiation, while the price gap with the Chinese cars are increasing, cannot work. Production volumes matter for reducing costs, and they can only be increased by approaching much wider segments of the market. In the end, the differentiation limitations offered by electric cars are the same even for Tesla, which is left only with the brand created through its pioneering. But for how long?”
A question that, it turns out, has been answered much sooner than I expected. Today, Tesla is no longer an aspirational model for many. The pride with which Tesla owners used to display and position themselves in society has been replaced by a sense of guilt that they bought such a car. The sticker attached to any aspirational product that says “I bought this product before its manufacturer went crazy” instantly destroys any trace of aspiration, turning it into a feeling of shame. And nobody aspires to something that makes them ashamed, do they?
So what’s left of a product that used to sell expensively simply because it was the aspiration of the middle classes around the world? Nothing. And we can see that from the collapse in sales on multiple continents where Mr. Musk’s political work is not appreciated. Countries like Germany and Australia were showing Tesla sales plummets of more than 70% year on year in February.
Against this backdrop, Tesla’s share price has been in decline for several weeks now, mirroring the adjustment in investor sentiment about the company’s financial outlook. In fact, ever since Mr. Musk took office in Washington, Tesla shares have been falling week by week, currently undoing the enthusiastic growth reported immediately after President Trump won the election.
And that brings us to an interesting parallel that can be drawn between Tesla and the US. Because the US, in recent decades, has also been for many countries around the world an aspirational model in democratic and economic terms. And this aspirational model has been one of the basic ingredients of “soft power”, the important side of the power vector that the US has designed and with which it has led the whole world in the last decades. Today, however, the US is in a premeditated and active process of disintegrating this type of power.
With the changes that new American leaders are bringing, the US, like Tesla, is ceasing to be an aspirational model. As a result, very few are willingly following it out of pride in being associated with an aspirational model. Many countries do it out of fear. President Trump does not believe in “soft power” because, presumably, real estate deals are negotiated on entirely different terms. But as Joseph S Nye (the originator of the soft power concept) notes in a recent article in the Financial Times, “Trump is so obsessed with the problem of free riders that he forgets that it has been in America’s interest to drive the bus”.
And to continue the Tesla analogy, we can see that while the US has ceased to become an aspirational model, the costs associated with relations with the US are rising for all who wish to partner with it. Without being an aspirational model and with rising relationship costs, the US is beginning to be deserted by the countries that have stood by it for decades. And the change in attitude is not just geopolitical. Global financial investors also seem to be turning their backs on the US, judging by the performance of stock indices and the dollar, and are at least for the time being turning towards Europe. Topics that seemed more like theoretical exercises just a few months ago, such as the dollar’s loss of its status as the world’s leading global currency or the restructuring of US foreign debt, are now increasingly being discussed in all seriousness.
As an article in the Financial Times notes, not coincidentally, both Tesla and the US seem to be enjoying the same “sell” recommendation in the international financial community these days.
Have a nice weekend!
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