After losing boatloads of money for nearly a decade, Tesla turned the corner in 2019. That’s when it posted a full-year GAAP profit. And from that point on the company never looked back. Last year, on a per-unit basis, Tesla was the most profitable automaker in the world, easily surpassing BMW and Mercedes-Benz.
Today, legacy automakers are scrambling to try and replicate Tesla’s success. I believe only three of them – Ford, Toyota and Renault – truly understand what they’re up against. The rest of them seem to believe all they have to do is double down on the old way of doing things to catch up. I don’t think that’s going to work.
Tesla is playing by a completely different set of rules. The way it designs, engineers, manufactures and sells its cars is very different from what anyone else has done before. In fact, the way Tesla runs its business is different from any other company that I’m aware of, not just the automotive ones.
Here’s what I’ve learned about how Tesla does things. I don’t claim that this is a comprehensive list of how it does things differently. But there’s enough here to show the legacy automakers just how far behind they are.
The first secret starts with First Principles. That’s the idea of going back to basic physics to figure out what you’re trying to do. It is Tesla’s most important guiding principle. Instead of benchmarking other automakers, or tearing down competitors’ vehicles to analyze them, or coming up with some kind of work-around, Tesla uses basic physics to figure out how to overcome any engineering problem. This is exactly how SpaceX figured out how to land rocket ships vertically when everyone else said it was impossible.
The second secret is developing a software-defined vehicle (SDV). That’s where every single function in a car is defined in software, from managing the battery pack to raising and lowering the windows. Legacy automakers are also getting into SDVs, but so far they’ve only done bits and pieces of it. Tesla is doing entire vehicles in software.
Once a vehicle is defined in software, then it’s possible to update it without adding any hardware. All you need to do is beam new software over-the-air and into the car. Tesla has improved suspension dynamics, braking and even the sound system with over-the-air updates. Legacy automakers can do some OTAs, but it mainly involves the infotainment system.
The third secret is using a zonal, centralized computing system in the vehicle. That’s where all electronic controls are laid out by different zones in a car: the left side and right side, and in the front and in the back. Legacy automakers group their computers by domains – powertrain, brakes, steering, chassis – not by zone. By using zones, Tesla uses far less wiring, which cuts weight and cost.
And Tesla uses centralized computing to control it all – literally a couple of powerful microprocessors to handle the computing. Legacy automakers have chips in just about every component in a car including the lights, the seats, the window lifts, door locks – you name it. This is why the legacies were crippled when the chip shortage hit and why Tesla was largely unaffected. Tesla just doesn’t use as many chips.
Most legacy automakers will have SDVs and zonal centralized computing around 2025. That means in 2025 they’ll catch up to where Tesla was in 2010. And that has got to make you wonder where Tesla will be in 2025.
The fourth secret involves using digital twins to develop cars and how they’re manufactured. A digital twin is exactly what it sounds like. It’s a twin of a product or process that exists in the digital world. That means you can operate every single function of a car in the digital world to make sure everything works properly before you commit to hardware.
Even more, you can create a digital twin of a factory, and run it in the digital world to work out any problems before you commit to putting up bricks and mortar. One reason why Tesla can build new assembly plants so quickly is that it’s been building digital cars in digital factories well before the real-world Job One rolls down the line.
The fifth secret involves putting all the engineers on a program in one room reporting to one person. Legacy automakers, of course, are organized in silos. Design is located separately from engineering, which is separate from manufacturing, which is separate from purchasing. Even most legacy engineering departments are organized in silos, which adds layers of management and bureaucracy and slows down communication and decision making.
Tesla’s sixth secret to success is not really much of a secret because everyone knows about it. Its direct sales to customers eliminates the acres of inventory that you see on the lots of every legacy dealership. Ford estimates that gives Tesla a $2,000 per-unit cost advantage simply from eliminating most of that inventory.
And the seventh secret is that Tesla has a software operating system for the company. Not just an OS for its cars, but an OS for the company that replaces a myriad of other purchased software systems. It handles Tesla’s sales, financial services, accounts payable, HR, document generation and a host of other functions. All the software for this OS was written in-house, which is how Tesla does things: in-house.
There are many more details that go into each of these “secrets.” But in the interest of brevity, this should give you a clear picture that Tesla runs far differently than any other legacy automaker.
The reason why I think Ford, Toyota and Renault are the only automakers who recognize what they’re up against is because they’re the only ones that have carved out separate EV business units that will function like startups. That’s what I believe it’s going to take to compete with Tesla: a startup mentality. Because the old way of doing things just isn’t going to work.
John McElroy (pictured, above left) is the President of Blue Sky Productions, which produces “Autoline Daily” and “Autoline After Hours” on www.Autoline.tv and the Autoline Network on YouTube. The podcast “The Industry” is available on most podcast platforms.
