Please ensure Javascript is enabled for purposes of website accessibility

Is Tesla Motors Inc.'s Electric Car Truly Disruptive?

By Daniel Sparks - May 9, 2015 at 10:08AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The debate continues: Is Tesla's electric car poised to disrupt the auto industry?

Many have referred to Tesla Motors' (NASDAQ: TSLA) electric vehicles as "disruptive." After all, the company has exploded onto the scene against all odds. The Model S is heralded as "one of the best cars in the world" at Edmunds.com, the highest-rated car ever tested at Consumer Reports, and the safest car ever tested by the National Highway Traffic Safety Administration. But students of Clayton Christensen's well-known book, The Innovator's Dilemma, usually refrain from referring to the young company's electric cars as a disruptive innovation. After all, Christensen himself said Tesla vehicles are, instead, a "sustaining innovation." But what if Christensen is wrong?

Model S. Image source: Tesla Motors.

Christensen: Tesla is not disruptive
"[T]he electric car is not in any way disruptive. I don't think Tesla itself thinks this way, but there are a lot of investors who do. It's what I call a 'sustaining innovation,'" Christensen wrote in a Bloomberg article last year. "[I]t makes a good product better. It's up against the very high-end cars made by BMW and other sports cars."

In a May issue of Harvard Business Review the Harvard professor made his case again, this time via his research associate Tom Bartman. Bartman concluded: "Tesla is not a disrupter. It's a classic 'sustaining innovation' -- a product that, according to Christensen's definition, offers incrementally better performance at a higher price."

By Christensen's definition, therefore, Bartman said Tesla has "chosen a very difficult strategic path" if its goal is to surpass existing larger automakers.

Electric golf carts, however, have a chance at disrupting the auto industry, Christensen and Bartman say. As Christensen explained in his book, products "that seriously underperform today, relative to customer expectations in mainstream markets," are more likely to be disruptive than technologies that closely match market needs today. It's the technologies that sneak up from the bottom that can be the most disruptive, Christensen believes.

UBS calls out Christensen
But UBS analyst Steve Milunovich (via Barron's) suggested Christensen is wrong, citing his failure to predict the iPhone's disruptive nature.

Based on the answers to five criteria, his [Christensen's] research associate concludes that Tesla is more a sustaining than disruptive innovation. One reason is that Tesla is attacking from above at high price points rather than undercutting existing automakers in a way they will ignore. Similarly, Christensen predicted limited success for the iPhone, which came in at a high price point and was viewed as sustaining relative to Nokia. He later said the iPhone succeeded because it actually disrupted personal computers rather than handsets, which seems misguided.

While Milunovich doesn't cite a specific reason Christensen is wrong, he believes the theory might be missing something.

The iPhone and Tesla car might not be classically disruptive according to Christensen's theory, but something is going on. From a marketing standpoint, consumers view these as new categories. Creating a category then setting up your product as the leader is powerful brand building. The iPhone was the first smartphone that gained significant mindshare thanks to its design differentiation, which continues today.

In other words, Milunovich seems to believe Tesla might be positioning its brand in a way that could attract the masses if electric cars do eventually become mainstream.

Elon Musk. Image source: Tesla Motors.

Tesla CEO Elon Musk seems to fall in the camp that believes the company's vehicles are disruptive. Musk has predicted that Tesla revenue will soar 50% annually for 10 years -- growth rates suggesting a significant level of disruption.

On the other hand, Musk's decision to allow competitors to use Tesla patents and to share its Supercharger infrastructure with any vehicles made by competing manufacturers that make an electric car that can handle Tesla's high-powered charge, and that agree to fork out their share of operating costs for the network, demonstrates his belief that other companies will ultimately produce their own formidable electric vehicles. He also applauds planned efforts -- both rumored and formal -- by competitors to produce fully electric vehicles.

Assuming electric vehicles catch on with the masses, will Tesla's boldness in quickly expanding manufacturing of its products, paired with its planned 2017 launch of its lower-cost Model 3, secure the company a sustainable position as the leader in its chosen industry? Or is Tesla poised to remain a small player as the incumbent automakers easily adopt this "sustaining technology" when the time is right?

Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$883.07 (3.89%) $33.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
373%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.