Musk: Osborning His Model 3

By Jean-Louis Gassée

by Jean-Louis Gassée

Tesla Website Image

At Tesla’s Los Angeles design studio this past Thursday, Elon Musk unveiled his latest creation, the much-awaited Tesla Model Y. As you probably know, it’s what we now call a CUV (Crossover Utility Vehicle); it’s not quite a brawny Chevy Tahoe SUV, but neither is it a plain Honda Accord or Toyota Camry sedan. Once derisively called Cute Utes, CUV’s have become a wildly popular car genre, so much so that Ford will stop selling conventional sedans — with the exception of the still-loved Mustang — due to the “unstoppable crossover onslaught”.

In this context, Musk is merely following a market dictate: If customers now want CUVs, we’ll give them the Model Y, based on our successful Model 3 with which it’ll share 75% of its organs.

All this sounds good. Indeed, the new vehicle looks like a Model 3 derivative, only a bit taller and longer (by about 4 inches), with an optional third row of seats. Price-wise, the Model Y is slated to cost a few thousand more than the Model 3 — nothing as forbidding as the Model X price tag that easily breaks the $100K barrier.

The Model Y is bigger, better, and still affordable (for a Tesla). So why have reactions to the unveiling been so tepid? To many, “the event was more of a capital raising effort and branding exercise” than a product launch meant to excite demand.

What happened?

A few bits of context will help.

First, We’ve Seen This Movie Before. Three years ago, on March 31st, 2016, the Model 3 announcement felt like a secular revival meeting, the birth of the $35,000 Tesla. Three years later, Teals’s site quotes “Estimated Delivery 6–8 weeks” for first deliveries of the base $35K vehicle. (Other configurations costing up to $66K with full autopilot are promised “Within 2 weeks”.)
 The revivalist enthusiasm translated into more than 400,000 net reservations by the middle of 2017. At $1,000 per reservation, this provided a welcome infusion of cash for an on-the-edge company whose production line is chronically undernourished.

This time, a Model Y reservation goes for $2,500 but, unlike 2016 when Musk immediately boasted about getting 115,000 reservations less than 24 hours after the introduction, we haven’t heard from him — yet.

Second, What Took You So Long? CUVs having been eating into the classic sedan market for years now. Without exception, all automakers have long since introduced one or more crossover models…all but one: Tesla. Living in production hell because of its boldly announced Model 3, Musk’s company had no money, manpower, or manufacturing space left to tackle yet another new challenge. Hence its late entry into the CUV segment.

Third, Musk’s bizarre marketing/PR zigzags. A mere two weeks ago, Musk sends yet another salvo of revolutionary announcements: With just a couple of exceptions, Tesla will close all of its retail stores; from now on, it’s online orders, only. Buy the car without a test drive and return it for a full refund within 7 days or 1,000 miles. Lauding what he calls Tesla’s “sky-high customer satisfaction”, Musk contends his new scheme is perfectly workable. And what will Tesla do with the money they save by shuttering their brick-and-mortar stores? Lower prices on their vehicles!

At the top of the line, prices are cut by as much as $10,000. More important, the promised $35K Model 3 finally becomes really real. So do the inevitable headcount reductions.

Reactions are surprisingly muted, as if the media and the buying public have shrugged it off as yet another shot from Elon’s Musket (pardon the pun). Jaded observers were right not to jump on the announcement: Within days, store closings, online sales, and staff reductions are rescinded…and prices will be raised.

Now, picture yourself as the CEO of a company. Your marketing VP makes a momentous retail sales announcements and then takes it back a few days later. You’d mercifully fire the individual, take responsibility, and apologize to your customers and Board of Directors.

Well… we know who Tesla’s VP of Marketing is, and he won’t lose his job over this. But he isn’t helping his company’s credibility. This creates a bad context for the delicate Model Y launch.

Fourth, last, and worst: Osborning The Model 3.

Allow me to start by quoting myself from a June 5th 2011 Monday Note:

One false step and you’re dead. Or worse: You’re the walking dead. This is what awaits CEOs who mismanage a product transition and allow the existing revenue stream to run dry before the promising new product shows up.
This is known as the Osborne Effect, named after Adam Osborne, the prolific inventor, entrepreneur and writer, and founder of the eponymous Osborne Computer Corporation. In 1981, Osborne introduced a machine that was, in effect, the first commercially available portable computer, the Osborne 1:
Sales took off, reaching 10,000 units per month. This might not sound like much by our smartphone standards, but thirty years ago it was a truly phenomenal success.
This wasn’t enough for our fearless entrepreneur. In 1983, he told anyone who’d listen: Just you wait! I have two superior models in the works, the Executive and the Vixen.
Customers took his advice. They stopped buying the current model and waited…and waited… In 1985, the company ran out of cash and went bankrupt.
Hence the verb: To Osborne one’s product is to kill the current model, and its revenue, by prematurely announcing a more attractive replacement.

The parallel with Tesla’s Model Y announcement needs little elaboration. Musk finally announces Tesla’s CUV, a model many will would prefer to the Model 3 sedan. No trouble if both are available simultaneously or in close succession. But the Model Y is promised for the “last quarter” of 2020, and the base model for “early 2021” — past Tesla performance easily explains the skeptical quote marks. First deliveries are 18 months away and manufacturing plans are glowingly vague.

This could be Tesla’s riskiest transition ever. Model 3 production hell came with strong demand from an enthusiastic following. Now, with output and demand about to reach equilibrium, one wonders what possesses Musk to put a close-to-normal situation at risk. One possible explanation floats around: Tesla has begun to experience a demand air pocket, a softening in what used to be unquenchable thirst for its product. Hence these past weeks’ sales strategy zigzags — and taking the risk of Osborning the Model 3.

My wife regularly lets me drive her almost 3 year-old Tesla S. Since I normally drive a three-row Audi — perfect for a family with two very young grandchildren — I wouldn’t mind stepping into a Model Y. But when?

Like many sometimes uncomfortable admirers of the Houdini of the car industry, I hope Musk will successfully manage what seems to be his company’s most dangerous transition, especially when 2021 seems the year that German automakers will finally make good on their promise to produce all-electric cars.

— JLG@mondaynote.com