“Far out in the uncharted backwaters of the unfashionable end of the western spiral arm of the Galaxy lies a small unregarded yellow sun. Orbiting this at a distance of roughly ninety-two million miles is an utterly insignificant little blue green planet whose ape-descended life forms are so amazingly primitive that they still think digital watches are a pretty neat idea.”
Douglas Adams, The Hitchhiker’s Guide to the Galaxy
A pretty neat idea
I recently listened to Seth Godin’s podcast titled It’s Not Just a Good Idea, It’s the Law. Part of it focused on the experience curve, which describes how products and services get cheaper when they are produced at volume. Harvard Business Review describes the effect of the experience curve: “Literally thousands of studies have shown that production costs usually decline by 10% to 30% with each doubling of cumulated output.”
There was a time when digital watches were the height of space age sophistication – the Apple Watches of their day. They were also extremely expensive. In 1972, the first commercially available digital watch, the Pulsar, sold for $2100 USD.
Seeing these huge prices caused a stampede of semiconductor firms into the wrist watch business, including Texas Instruments who had major watch ambitions. Texas Instruments first dropped the price of LEDs to under $20 USD in 1976 and again dropped it to under $10 in 1977. Their goal was to wipe out their competition was prices too low to compete with.
In the beginning this strategy worked well. Setting prices this low created enormous volumes, which allowed Texas Instruments to follow the experience curve. The more they made, the better they got at making them cheaply.
This race to the bottom was bad for its competitors, but ultimately bad for Texas Instruments as well. Cheap LED watches lost their cachet and soon their limitations (notably the fact that they consumed a lot of energy so could only be lit when the wearer of the watch pressed a button) led to them being replaced with other technology.
Texas Instruments was the last LED American electronics company still in the watch business when it ceased production in 1981.
Tesla and the battery experience curve
Thinking of the experience curve quickly leads to Tesla. Elon Musk challenged the standard thinking that the battery needed in an electric car would be prohibitively expensive. He saw the raw material price of the batteries necessary and concluded that what was needed was an accelerated trace of the experience curve: build batteries in high enough volume and the price will come down.
And build in volume Tesla has with one battery gigafactory in Nevada, another being built in Shanghai and third mooted for Europe. The Nevada facility is one of the largest buildings in the world, predicted to reach a maximum production capacity of batteries sufficient for half a million cars a year.
Tesla has played the part of both Pulsar and Texas Instruments. First it popularized electric cars with the first Tesla roadster, an expensive toy and demonstration of the technology, much like the original Pulsar watches.
Tesla has created the market for electric cars while driving down the price of them, using its dominant volume to reduce the prices of their components parts, much like Texas Instruments did with LED watches.
This creates two potential threats. First, many manufacturers are pursuing them into the market. Second, the unit costs are falling, jeopardizing already elusive profits at the company. This puts Tesla at risk of the same fate as Texas Instruments.
Will Tesla be forced out of business by competition and diminishing margins? My bet is no, not because it is immune to the end result of the experience curve, but because Musk is addicted to that curve and will surely find another curve to climb. Just like LCD watches replaced LEDs, so too will some technology replace the current lithium batteries relied on by electric cars today.
I doubt Musk will just watch (pun intended!) as that cannibalizes his business.
