What matters is the pace of innovation
“I think moats are lame. They are like nice in a sort of quaint, vestigial way. If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation, that is the fundamental determinant of competitiveness.”
Elon Musk – during Tesla Q1 2018 earnings call
Musk made these comments when asked about moats, a term Warren Buffett was first quoted using in 1999 to define obstacles to a company’s competitors.
The two men have aired this disagreement publicly, but in my view it is a question of semantics. Buffett is using the term as a metaphor – he is not advising businesses to build a body of water around a castle.
Certainly Musk’s companies have moats – or more literally, obstacles to competitors – of their own. SpaceX has its rocket engine factory and rocket reuse capabilities. Tesla has its devoted fans, produces batteries at enormous scale and is free of the dealer networks that burden other automakers.
Musk’s companies do excel at innovation, and this ability is itself also an obstacle to competitors, who must scramble to keep up. Tesla has committed itself to staying ahead by releasing its patents to competitors. This is a bold statement – it says Tesla values its ability to generate ideas over the ideas themselves. Their moat is their ability to build moats, to strain the metaphor.
What year is that Tesla?
Another hint that Tesla sees innovation as a continuum rather than an event is the fact that the cars they produce do not have model years. As soon as improvements are available to be implemented in their cars, they begin building cars with that improvement.
Musk has said that Tesla makes roughly twenty engineering changes on its assembly line every week and major revisions every 12 to 18 months.
Contrast this with other automakers who generally have an eight year product cycle with a mid-cycle refresh.
Tesla’s financial position is certainly precarious, and there’s the constant threat that it won’t have enough money to complete the investments it needs to build the Model 3 fast enough to turn a profit.
It would seem that the automaker’s competitors are not willing to wait and see if Tesla dies of natural causes. Google “tesla killer” and you will get about 4,060,000 results. Most mainstream auto manufacturers are promising ambitiously spec’d electric cars in the next few years.
They all face Tesla’s “meta-moat” of constant innovation. Their planned cars may have what it takes to compete with Tesla cars as they exist now, but Tesla is not sitting still.
“Tesla will never stop innovating. People are buying the wrong car if they expect this”