If you haven’t already realised, cars are no longer machines, but rolling computers. This also means that cars will move from being powered by fossil fuel engines to electric motors. It’s already started, and it is going to happen much more quickly than we anticipate. I’d go as far to predict that there will hardly be a petrol car on the road in 10 years. Here’s why:
When cars transition to rolling computers, the Law of Accelerating Returns applies. Innovation goes from incremental and factory-based to curve-jumping and technology-driven. You’ve probably heard of Moore’s Law – the maxim that states that computing power will double roughly every 18 months while prices halve. This maxim and many other accelerating technology laws will apply to the production of cars, laws which make the end product better and cheaper by significant degrees. The revolution which transformed smart phones, cameras, laptops, solar panels and flat screen TVs is about impact the auto industry. Let’s take the pricing example of the Tesla Electric car range:
1st car – Tesla Roadster: $109,000 (released 2006)
2nd car – Tesla Model S: $75,000 (released 2012)
3rd car – Tesla Model 3: $35,000 (projected – release due 2016)
Not only has each model been progressively cheaper, but also far better in terms of range (distance per battery charge), safety and features.
It’s the same pricing pattern we saw during the personal computing revolution. Here is where we get an entire curve jump. The Tesla model 3 is so cheap that an electric car is no longer a plaything for Silicon Valley types, but a viable new car option for everyone. This is because the switching costs get very close to zero. Why? Because the running costs of having a Tesla Electric car does not include the cost of petrol. (Tesla already have 453 free super charging stations and the cost to fully charge the battery at home is around $3). This means the average consumer can use their saved petrol money towards acquiring a brand new car without increasing their weekly expenditure. For example:
Model 3 Tesla
- Cost to buy = $35,000
- Avg petrol p.a. = $3,120
- New funds available = 8.9% of purchase price.
- Avg Cost new car finance = 6-7% unsecured interest rate.
When the Model 3 arrives, it only takes some creative financiers to change the landscape of the auto industry virtually overnight.
Want a new car at no cost?*
*Just give us your weekly petrol bill and drive away in a sexy new high tech Tesla!
It’s when this happens that we transition to an all-electric car world. The transition will be as swift as the smart phone – in a few short years, non-electric cars will be a lot like feature phones.
This is exactly how disruption happens. It’s not the product itself, but often the change in the business model around it which leaves industry incumbents blindsided. When there’s an opportunity for consumers to get into a superior product with low or no switching costs, they will always take it.
Buckle your seat belt.