The news that Tesla’s market value topped that of GM this week means that for the first time in the automobile era, America’s most valuable car maker is not based in Detroit. Instead, as cars become increasingly reliant on cutting-edge software and new energy technology, a Silicon Valley-based luxury electric car maker best exemplifies this convergence of the mechanical and electronic worlds.
Tesla is not profitable yet, but its high market valuation means that Wall Street is betting that Musk can revolutionize both the automobile and energy industries with his company’s innovative approach to making electric cars. Through software upgrades, Tesla can add substantial features and improvements—such as automatic braking, partial autopilot and robotic parking—to cars that it’s already sold.
“We really designed the Model S to be a very sophisticated computer on wheels,” Tesla’s brash billionaire CEO, Elon Musk, said while announcing software updates for the Model S in March 2015. “Tesla is a software company as much as it is a hardware company. A huge part of what Tesla is, is a Silicon Valley software company. We view this the same as updating your phone or your laptop.”
Innovation, of course, is nothing new for the U.S. automobile industry. More than a century ago, Henry Ford cornered the market with his ability to combine state-of-the-art auto design with an affordable price tag. The Model T, first introduced in 1908, would make automobile ownership—and the freedom that came with it—available to the masses for the first time. The techniques of mass production that made this possible would soon become standard for the industry, even as the Great Depression wiped out smaller carmakers and left only the Big Three (Ford, General Motors and Chrysler) standing.
By that time, however, a new innovator had taken the stage. Alfred P. Sloan Jr., GM’s leader in the 1920s and ‘30s, capitalized on the fact that many early car owners had become dissatisfied with their vehicles and started to look for larger, more stylish models that rode more smoothly. (Despite its groundbreaking status, and the subsequent improvements in automotive technology, Ford’s Model T remained relatively unchanged by the mid-‘20s.)
Sloan’s GM put an emphasis on regularly producing a wide variety of stylish car models as a way of enticing people to purchase new cars more frequently. His innovative strategy was one of planned obsolescence, or making customers dissatisfied with their current cars before the useful life of those cars had ended.
“Sloanism” had a huge impact, replacing “Fordism” as the dominant ethos in the U.S. auto industry. By 1936, GM had seized 43 percent of the U.S. market. Ford, with 22 percent, had fallen to third place behind Chrysler (25 percent). Fueled by Sloan’s innovations, GM continued to lead the U.S. auto industry until the mid-1980s, when Ford again surpassed the company in profits.
By that time, the era of annually restyled car models had ended, thanks to federal standards governing automotive safety, pollution and energy and escalating gas prices. Many drivers began opting for smaller, foreign-made cars like Germany’s Volkswagen “bug” (a kind of latter-day Model T) and especially the well-built, fuel-efficient small cars coming out of Japan. Significant innovations in warehouse production and quality control helped Japan become the world’s foremost auto-producing country in 1980, and it’s remained on top ever since. (To put things in perspective, Toyota Motor has a market value of some $173 billion today, compared with Tesla’s $50.887 billion.)
Despite its innovations and high market value, Tesla sold just 76,230 (incredibly expensive) vehicles last year, missing its target of 80,000. Meanwhile, GM sold 10 million cars last year, and Ford sold 6.7 million. Boosters justify Tesla’s high stock price by pointing to long-term expectations for the company’s growth. There are some promising signs, including the release of the company’s Model 3 sedan, its first car marketed to the masses (with a price tag of around $35,000). Tesla has also built an international network of “superchargers” where owners can plug in for free, and will soon work with Panasonic on the production of massive quantities of batteries at a newly opened “gigafactory”.
Skeptics believe Tesla cannot meet its ambitious growth targets and predict that traditional automakers like GM and Ford might overtake it by expanding their own electric car offerings. One thing seems certain—by making highly desirable electric vehicles that go further and faster, and the cutting-edge batteries that power them, Tesla is well placed to drive the shift from internal combustion engine (ICE) vehicles to electric vehicles, transforming the auto industry yet again more than a century after its beginnings.