Tuesday, September 18, 2018

Threshold of Pain Theory and Tesla

Lack of capital won't kill Tesla.  Elon Musk's strange behavior won't kill Tesla.  Slow production of the Model 3 won't kill Tesla.  Threshold of pain theory will kill Tesla.

Back in the 1970's, foreign cars were still considered odd, and many brands were imported to the US.  The market had not shaken out to just the Japanese and Germans just yet.  You could still buy Italian, British, and even French cars in the United States - at your own risk.   Yes, I know, you can still buy a "Jaguar" today, but it isn't quite the same deal.  And a Ferrari and a Fiat are not the same thing, even if you own a Fiat Dino.

A friend of my Dad's was into "foreign cars" which he bought at the "foreign car dealer" who sold five or six different marques. He had a Jaguar, an Alfa, and even a Citroën DS.    My parents even got into the deal, buying a 1970 Fiat 124 Sports Spider - which they quickly traded for a 1973 Vega - which believe it or not, was actually more reliable and less rusty, which isn't saying a lot.

Back then, foreign cars, other than Japanese and German cars, were largely unreliable, expensive to repair, and rust-prone.   And yet, people still bought them, often complaining about the cost of ownership as if it were a badge of courage.  "Yea, the Jag is always in the shop, and the cost of repairs is staggering, but you wouldn't appreciate how it handles.   You have to appreciate fine motorcars to really understand!"

It was - and is - a perverse form of status.    The threshold of pain of owning esoteric technology has always been higher than owning more plebian things - something I finally figured out after owning five BMWs.  Today I drive a plain-Jane Nissan and a Kia Hamster - cars I enjoy using, but do not fawn over.   You turn the key, they start, they run, and they require little or no maintenance.  Sometimes it is better to be a plebe.

And therein lies the problem for Tesla.   When Tesla started out, they took an old Lotus roadster and fitted it with lithium-ion batteries and an electric motor.  It was, in a way, a more professional version of the various kit cars and home-made electric cars that hobbyists had built before - taking old cars and removing the IC engines and fitting them with lead-acid batteries and DC motors.  The difference was, the original Tesla roadster was well put together and the energy density of the lithium-ion battery not only made it a more practical car, but an astoundingly fast one as well.

Nevertheless, if you wanted to own one, you had to pay a lot of money for one.  And with no dealer network or repair centers to take it to, owning a Tesla in those early days was a challenge.  But "early adapters" are known to have a high threshold of pain.  Like my Dad's friend, they view the hassle as the price of having a sophisticated piece of machinery.

The Model S was a big step up from the converted Lotus roadster.   It was a very sophisticated car and very, very expensive.   People who bought Porches or Mercedes, or indeed, even Ferrari's or Lamborghini's, would buy a Model S, as it was a status symbol.  I recounted before how, at a tony restaurant in Winter Park, Florida, I saw a Model S parked in a line with Bentley's, Rolls, and Ferrari's right in front of the restaurant by the velvet rope.  It was "valet worthy".

So Tesla could sell the Model S and charge a boatload of money, because people liked having an exclusive product, and were willing to pay a lot of money for what was - and is - a very fast luxury sedan.  They were also willing to put up with the hassles of owning a Tesla, such as lack of a dealer network, and long waits for repairs and parts.  Their threshold of pain was very high.

But could this magic filter down to the lower classes?  This is where Tesla is failing and will eventually fail.  The Model X was the first sign of trouble.  People will spend a lot of money for a luxury SUV, and put up with a lot of pain in the process.   A tenant of mine spend a wad of cash on a Land Rover Defender 90 - a car more suited to the Kalhari desert than the streets of Washington DC.  Others spent even more on Mercedes Geländewagens, again, a vehicle better suited to the deserts of Africa than the streets of Manhattan.  But once again, status rears its ugly head, and people seeking status will endure extreme discomfort just to show off.   It is no fun to drive a Lamborghini or a Ferrari in stop-and-go traffic.  But people do it, just the same.

The Model X featured gull-wing doors.  So did the Delorean and the Bricklin.  When you see gull-wing doors, run away.  Yes, Mercedes put them in the famous 300 SL (W198) but again, that was an impractical car for daily driving.  Go to any car meet and you will see the owners driving around with the doors "up" - the car turns into a greenhouse in the sun, and the windows don't roll down.  And no, it didn't come with air conditioning - not even as an option.

Gull wing doors are notoriously difficult to fit and make work properly, particularly over time.  And not surprisingly, a lot of complaints about the Model X relate to the doors.  SUV buyers, particularly in the Model X price range, have a lower threshold of pain, and expect a functional vehicle and reliable service centers for the price paid.   Oddly enough, the less you pay for something, the lower your threshold of pain can sometimes be.   Up to a point, that is.  If something is very, very cheap, you often tolerate quality glitches and other problems on the premise that, "Well, it was such a deal, I can't complain!"  That is how the Yugo got sold.

So, very cheap, very expensive, you get a high threshold of pain. You can sell crap and people accept it.

In the middle, however, people expect serviceable products at a reasonable price.  They want cars where you get in, turn the key and they run - for 100,000 miles without a hiccup.   And with the Model 3, this is where Tesla will get into trouble.

Moving downmarket to the middle-class, the expectations will change.  These customers are people who have owned a Camry or an Accord and driven them 150,000 miles with only periodic oil changes.  And they are used to going to a dealer or mechanic and finding someone who knows how to work on the car - and parts that are readily available.   Their threshold of pain is relatively low, and they would throw down a fit if you told them that their car needed expensive repairs or that it would take weeks to get fixed.

And that is what happened when Consumer Reports bought a Model S.  At first, they called it the "best car they ever tested" or some such nonsense (Consumer Reports is, of course, pretty clueless).  After owning it a year, they called it the worst lemon they ever owned (or something to that extent) complaining about excessive repairs and long wait times for parts and service.  After testing and owning many reliable cars, the threshold of pain at Consumer Reports was rather low.   They could not tolerate the hassle for the sake of status.  Maybe they aren't all that dumb after all.

Can Tesla provide Camry-like reliability with the Model-3?   Early reports seem to indicate not.   But of course, all of the early cars are loaded models with prices approaching the range of the Model X and Model S - close to 100 grand.   So maybe in the short run, the "early adapters" of the Model 3 will overlook shortcomings, as they have a high threshold of pain and are willing to tolerate a lot of bullshit, such as delayed deliveries and whatnot, just to be the first one on the block with the "economy model" Tesla.

But as the lesser-optioned and lower-priced models come off the line (if ever) the expectations of consumers will change.  These are folks for whom a Tesla is a financial stretch.  And when it breaks and breaks bad, they will get royally pissed off, particularly when the car is out of warranty.  Their threshold of pain is very low, and to satisfy them, you need to offer a car as reliable and brainless to own as a Camry or Accord.

And Tesla can't do that, apparently.

Of course, there are other factors, as I noted above - the lack of capital, FTC investigations, odd behavior by the CEO, and so on.   Worst of all is competition from other makers, such as Porche and Audi - and no doubt later on, Ford and Chrysler (and maybe people will remember that GM has been making the Volt for many years now, and Toyota  the plug-in Prius).  How many people with "reservations" for a Tesla Model 3 will eventually throw in the towel and buy a Prius?   An awful lot, I suspect.

Making things isn't sexy or profitable.   The actual manufacture of goods is a marginal business.   Apple makes huge profits selling iPhones.  The companies in China which actually make them (and the components) scrape by with a few percentage points in the margins.   The car business is even worse.   If you can make a few percentage points in profit, overall, you are doing pretty well.   It is a cut-throat business, and manufacturing capacity, worldwide, is nearly double the demand.

I suspect the demise of Tesla will not be a matter of lack of capital, but lack of the ability to deliver a reliable product and product support that will meet the threshold of pain of the middle-class buyer.  Lack of demand will kill Tesla, not the lack of supply.

UPDATE:  This is my 4,000th posting.   Will I ever shut up?