Tesla sounds like a disruptive company. Surely it has to be, with Elon Musk in the driver’s seat, a valuation 11 times bigger than its annual revenues and a grand vision of utterly transforming the $1tn global automotive and $7tn global energy markets*.
Yet it seems that Volvo – of all companies – may have just deflated Tesla’s disruptive bubble. The Swedish manufacturer, which is owned by Chinese firm Geely, has announced that from 2019 it will no longer release any cars that rely solely on an internal combustion engine. Its range will be electric and hybrids only, with diesel and later petrol to be gradually phased out entirely.
The whole point of Clayton Christensen’s theory of disruptive innovation is that it occurs when incumbents do not fight back against innovative upstarts until it’s too late, because it’s not rational to do so in the short term.
The car giants have invested in electric and hybrid vehicles for years, with the likes of the Nissan Leaf and Toyota Prius leading the market in various parts of the world, but Volvo’s bet on electric vehicles marks the first time that an incumbent has fully committed to resisting disruption.
Tesla’s many fans – the fact that it has created so many fans for electric cars is probably its greatest achievement to date - argue that its technology is just superior, but there’s no guarantee that lead will last. The car giants have immense resources at their disposal. If they do decide to follow Volvo’s lead, there’s no reason they wouldn’t be able at least to compete on quality, while maintaining their scale advantage on price.
Whether they will remains to be seen. VW, for instance, has responded to the emissions scandal with plans to launch 30 new or adapted electric models by 2025, but has hardly abandoned its core business. The big guys know internal combustion’s days are numbered, and that the only thing more costly than shifting to electric will be not shifting to electric, but they don’t know when.
It isn’t just market trends or the pace of technological improvements that they have to second guess, but the government response, which can change far more quickly. There are already subsidies for electric vehicles in many countries and ever-more stringent emissions requirements for manufacturers (whether actually met or not). Governments are investing in charging infrastructure, and cities like Paris have committed to banning diesel by 2025 – a subsequent ban on petrol isn’t an outrageous stretch.
Volvo may occupy a different position in the market to the true giants, but the fact that an established player has committed fully to clean technology is a sign that Tesla’s road to market domination may be not be a smooth one, even as it announces its mass market Model 3 has passed its US regulatory requirements.
*It should be noted that Tesla describes itself as a sustainable energy company, with automotive just one part of Musk’s master plan. Its advances in energy storage and position as a market leader in battery technology may actually end up being far more significant – and disruptive – than its car business.