Digital competitors are from Mars. They suddenly swoop in from alien territory.
The music industry had its business model turned inside-out by computer company Apple. The computing industry saw online retailer Amazon become one of its biggest challengers. In Africa, mobile network operators have become retail banks. The hotel industry worries about home sharing network Airbnb, while licensed taxi operators (and perhaps soon parcel carriers) struggle to fend off the likes of Uber and Lyft.
In all these cases, powerful new competitors arrived on the scene, seemingly from nowhere, to challenge the established business models of longstanding industries. These alien invaders aren’t even on the horizon of normal competitive analysis — they land unexpectedly from another world, bringing digitally-enabled innovation that opens up entirely new market segments.
Now electric car-maker Tesla Motors is working on one of the most audacious cross-industry pivots of all time. You may have thought Tesla’s success with its high-end sports cars made it primarily a threat to more established rivals in the motor industry. While that may be true, its reliance on power storage is drawing it into a far less glamorous pursuit: manufacturing lithium-ion batteries. This is where it could have its most disruptive impact, fundamentally changing the landscape of power generation and transmission in the US and elsewhere.
If Tesla’s plans work out, its sales of batteries could far exceed its sales of cars. It is currently building a massive, $3 billion, so-called ‘gigafactory’ in Nevada (see artist’s impression pictured) that by 2020 will be churning out half a million battery packs a year. To be sure of enough demand for this output, Tesla will sell the units not only for its own cars but also for use to store solar power at homes and businesses.
Tesla’s SolarCity opportunity
Tesla already has a channel into this market through its ties to SolarCity, the solar power provider formed in 2006 at the behest of Tesla’s flamboyant CEO Elon Musk. His cousins Lyndon and Peter Rive are respectively CEO and CTO of SolarCity, while Musk is its chairman and largest shareholder.
SolarCity has risen to become the leading US installer of residential and commercial solar panels, largely through its business model of leasing panels to its customers, who repay over a 20-year period out of savings on their electricity bills .
Installing stationary batteries that store solar power for later use would accelerate those savings, as The Verge explained last week in an article titled Why Tesla’s battery for your home should terrify utilities:
SolarCity has already begun installing Tesla batteries, mostly on commercial buildings like Walmart stores, which have to pay higher rates when they use lots of power during peak hours. Tesla’s batteries let them store up solar power when they don’t need it, then use it when rates are high, shaving 20-30 percent off their energy bills, according to Ravi Manghani, an analyst at GTM Research.
Tesla is well aware of the market opportunity and anticipates almost a third of the Nevada gigafactory’s output will be dedicated to stationary batteries for homes and businesses, according to comments attributed by The Verge to the carmaker’s CTO:
Tesla CTO JB Straubel (who has said that he “might love batteries more than cars”) says that the market for stationary batteries “can scale faster than automotive” and that a full 30 percent of the gigafactory will be dedicated to them.
The impact on power utilities was spelt out by Morgan Stanley analysts last year, as Bloomberg noted in a December piece headlined, Musk battery works fill utilities with fear and promise:
In a July report, Morgan Stanley said Tesla’s home and business energy-storage product could be “disruptive” in the US and in Europe as customers seek to avoid utility fees by going ‘off-grid’.
“We believe there is not sufficient appreciation of the magnitude of energy storage cost reduction that Tesla has already achieved, nor of the further cost reduction magnitude that Tesla might be able to achieve once the company has constructed its ‘gigafactory’,” Morgan Stanley analysts wrote.
If large numbers of homes and businesses start using small arrays of solar panels and static batteries to economically generate and store their own electricity — even selling it back to the grid at a profit — then the entire power network will move away from its existing model of distributing power out from large generating plants. The grid will still need to be managed but the way that power is bought and sold in this more distributed and fragmented model will be very different.
What I find truly remarkable about this story is the sheer chutzpah of Musk’s vision. Right from the beginning, Tesla Motors made no secret that it would start out offering premium models to build out its market presence, technology and infrastructure, and then go on to introduce lower-cost models for the volume market.
The ‘gigafactory’ is an important step towards driving battery costs down to a level that enables volume market pricing for that next-generation model. Creating an entirely new market to add to demand for its output is a stroke of genius.
There’s a telling observation in an EnergyWire interview last year with SolarCity’s CEO — Musk’s cousin, Lyndon Rive — about Musk’s role as company chairman:
It is, Rive said, as if he [Rive] is at the wheel of a car. Musk is in the passenger seat and sometimes instructs him to swerve into a pothole. But why would I do that? Rive asks. “The pothole will be less harmful than the invisible wall,” Musk says. To which Rive says: What invisible wall?
“Without Elon, we may have hit a few walls,” Rive said.
Building a multi-billion dollar battery plant may seem like a huge risk, but in doing so, Musk is reducing Tesla’s exposure to factors beyond its control, such as interruptions to supply from overseas, or currency fluctuations. By offering a new stationary battery product for homes and business premises, Musk taps into an additional pool of demand. That protects against the risk that Tesla’s planned mass-market electric car will be delayed or that sales will ramp up more slowly than currently projected.The resulting upheaval in the power industry can therefore be seen as just a side-effect of Musk’s masterplan. An electric carmaker wants to increase demand for its batteries, therefore it creates a product that stores power from small-scale arrays of solar panels. Suddenly the power market has an alien invader upsetting all the familiar dynamics the established players are used to working with.
Which market will Musk unexpectedly invade next? He is also CEO of SpaceX, the space transportation company with a mission to enable human colonization of Mars. With high-capacity batteries relying on relatively scarce elements such as lithium, perhaps it was always part of the plan that SpaceX would be there to find new sources once terrestrial reserves run out.
In which case, mining companies in the next decade may suddenly discover that their most disruptive competition really does come from Mars.
Image credits: All from Tesla Motors.