This article intends to analyze Tesla from the perspective of team culture. The influence of a company’s founder on the team and product is crucial.
Some Tesla enthusiasts often compare Tesla to Apple to exemplify its disruptive nature. This is mainly because Apple started the smartphone revolution, and it seems that Tesla is now starting the electric car revolution. However, although both are American companies, technology companies, and have the upper hand in a vast market, their cultures are quite different.
Apple has a founder who values industrial design extremely, has perfectionist tendencies, and has a strong insight into users – Steve Jobs. Most of the products Jobs launched during his lifetime, such as the graphical user interface, Mac, mouse, iPod, and iPhone, were already on the market, that is, after polishing existing technology to the extreme, he used super-strong industrial design to create products with excellent user experiences, and pushed them to the market. Even after Jobs passed away, the team was still “troubled” by his three views, and successively launched the iPad, Apple Watch, AirPods, all of which were explosive products in the market of their respective categories. This kind of culture where products must be nearly perfect before being launched has led to the fact that even objectively experiencing the product without considering the brand factor, there is no competitor in the market who can match Apple’s quality. It is precisely because the quality of competing products has always been somewhat weaker, that Apple products have been the highest-priced among similar competitors in the market, allowing Apple’s hardware products to maintain a high gross profit. Therefore, most of Apple’s profits at the beginning came from these hardware products with extreme quality. Later, with the introduction of service products such as the App Store, iCloud, and Apple Care, the proportion of profits from these services has been increasing year by year.
According to Q3 2020 data, Apple’s hardware accounts for 80% of its total revenue, and software accounts for 20%. Both are increasing year by year. The contribution to total gross profit is 65% for hardware and 35% for software. The gross profit of hardware is decreasing year by year, while the gross profit of services is increasing year by year.And Tesla’s founder, Elon Musk, is a geek who is extremely passionate about technology and exploring outer space. The similar feature of every company, including Tesla, SpaceX, and Neuralink, is that they first release an imperfect product and then gradually improve it through iteration. Firstly, this is completely different from Apple’s perfectionist philosophy. Take Tesla as an example, Roadster and Model S were both released when various technologies were immature, and they did not become bestsellers in the market after their launch. Model X, Model 3, and Model Y, which were released after the technology became slightly mature, are all imperfect products and are rough in terms of production, which is not like the quality of Apple products that can beat market competition. On the contrary, they may be worse than competitors. However, why did Model 3 and Y achieve interim success and become bestsellers in the market?
I think that the route by which Tesla products become bestsellers is completely different from the route by which Apple products become bestsellers. Apple sells products by perfectly fitting user needs, creating a piece of industrial art with high quality, and selling at a high premium. Tesla sells products through advanced autonomous driving technology, highly engineered large-scale manufacturing, and low prices. This means that Apple rejects competitors by craft and quality, while Tesla rejects competitors by technology and scale at low prices.
However, Apple and Tesla have one thing in common, which is to insist on the integration of software and hardware, and the ecosystem is highly closed. Because their founders believe in a sentence. A company that truly wants to do good software must also make hardware. The implication is that hardware sets the stage for software performance, and software is the core. The main reason is that the barrier formed by software is difficult to overcome, and software can create a network effect, that is, products within the same software ecosystem can further improve the user experience. For example, the iPhone is paired with the MacBook, Apple Watch, iPad, etc. Users can seamlessly switch between these devices and merge their features. The devil is in the details, and only the hands-on experience can make it clear.
If even smartphones need to integrate software and hardware to achieve ultimate experience, how can intelligent cars or autonomous driving cars, as the crown jewel of human engineering, achieve extreme experience through the separation of software and hardware? So Tesla, like Apple, has done software and hardware integration and a closed ecosystem.But it can be imagined that the profit margins left for the upstream supply chain are relatively ample due to Apple’s mode of perfect fit with user needs, high-quality production of an industrial art piece, and high premium; it’s just a matter of making small profits on large volumes. On the other hand, Tesla’s mode of advanced autonomous driving technology, highly-engineered mass production and low pricing will leave limited profit margins for the upstream supply chain because cost-cutting measures must be implemented to achieve low prices. Therefore, Elon Musk places a great emphasis on cost control, and Tesla must build its own super factory, procure directly from Tier 2 suppliers, and even build its own super battery factory–which constitutes a large portion of the cost of electric vehicles. All the measures to reduce costs are returned to the market, gradually forming a super price barrier. Therefore, Apple products have never lowered their prices, while Tesla’s products often do so because of this mode.
If Apple’s consistently high-quality and high-priced products maintain a high gross profit margin, then based on the latest information, Apple’s hardware product gross profit margin is about 31%, while software and service gross profit margin is 65%. So, where does the gross profit for Tesla’s low-priced products come from? The answer is obvious– software, or services. Tesla’s cars maintain a gross profit margin for the automotive industry of approximately 20%, but the truly high gross profit percentage is from its software or service sections, such as FSD software and supercharging network, which may have gross profit margins as high as 90% and 60%, respectively.
To a certain extent, Tesla is more reliant on software to increase its gross margin than Apple. In fact, Tesla’s software unit price is indeed much higher than Apple’s, such as the FSD subscription price being $100/month, while iCloud subscription price is $10/month. However, after all, the mobile phone and car platforms are different, so it’s more accurate to look at their respective software to hardware ratios. Currently, Apple’s software and hardware revenue ratio is 20%:80%, with a gross profit ratio of 35%:65%. While estimated to be, Tesla’s hardware and software revenue ratio is 95%:5%, with a gross profit ratio of 90%:10%.
Apple’s software and services mainly consist of two types: one-time purchase of Apps or subscription Apps, and iCloud, Apple Care, with both modes of income increasing continuously as more people purchase iPhones and Macs. For example, I subscribed to Ulysses, Office 365, iCloud services and did not pay for other software.
Tesla’s software and services are similar, including one-time purchase of FSD, various function activations (0-60 mph acceleration, heated seats, etc.), or subscription of FSD, monthly data service package (charged in the US, not yet charged in China), and insurance. For example, I purchased the one-time EAP, which is a half-priced enhanced version of autonomous driving compared to FSD and has fewer functions, and did not pay for other software.This analogy reveals that Tesla should hope to bring software and service revenue like Apple with a massive hardware base. However, it is almost impossible for the automobile industry to exceed the market in craftsmanship and quality, and the cost of doing so is not on the same level as creating a perfect iPhone or AirPods. Therefore, Tesla cannot follow Apple’s blockbuster product route, but must find a unique path. Tesla has chosen imperfection, leading with cutting-edge autonomous driving technology and using extraordinary engineering ability to create a forward-looking, high-tech and super-priced blockbuster.
Steve Jobs, a perfectionist and a master of user needs, has led the Apple team and its products, constantly confirming the characteristics of its founder.
Elon Musk, an engineering geek with strong engineering ability, has led the Tesla team and its products, constantly reminding users that Tesla is a company with a culture that breaks out of the box.
Although Apple and Tesla are so different, they seem to be taking different paths to the same destination.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.