Volume 164: What Cost Cybertruck?
1. What Cost, Cybertruck?
tl;dr: Will cost Tesla more than anyone realizes.
If you’ve ever studied economics, you’ll be familiar with the term “opportunity cost,” which references the cost of an opportunity forgone when you choose an alternative. For example, let’s imagine you have $100, and you can invest it in either Apple or Microsoft stock for 12 months. Let’s say you choose Apple, and at the end of the 12-month period, your stock is worth $105. Congratulations, you made a 5% return. However, in this same fictional universe, a hundred dollars invested into Microsoft returned $125. This means the opportunity cost of choosing Apple over Microsoft was $20 ($125-$105=$20), or 4X your Apple profits.
If you work in the realm of strategy, whether you realize it or not, you’re dealing with opportunity costs all the time. Whenever you decide to move in a specific direction, any other activity you could have done with those same resources represents an opportunity cost.
One of the reasons this matters as a concept is that it affords us a powerful tool to analyze and critique a strategy as it unfolds.
Whatever anyone may think about Elon Musk (good/bad/whatever), Tesla has historically had a knack for making optimal strategic choices, where the returns from activities undertaken seem to have consistently exceeded the cost of opportunities foregone.
For example, the choice to forgo a dealer network and place showrooms in high-end malls, the choice to enter the market at the luxury end and then work down, the choice to market on the basis of performance rather than environmentalism, the choice to look like a regular car instead of pursuing sci-fi aesthetics, the choice to rely on a carnival barker CEO instead of advertising, the choice to build the worlds most comprehensive charging infrastructure…the list goes on.
Indeed, one of the reasons Tesla has grown to such gargantuan market capitalization is that it’s consistently made smart, somewhat contrarian to the received wisdom, strategic choices, even when it was far from clear in advance that they’d be the right choices.
And then there’s Cybertruck, which may have ended the run and may cause real pain for the company moving forward.
Let’s walk through why this might be the case.
Tesla announced Cybertruck in November 2019. At the time, Tesla was a $60bn market capitalization company (today, it’s worth just under $600bn, down from a pandemic peak of $1.2 trillion). This means it was a different time and a different company. Musk had yet to unleash his inner Space Karen or shift his attention to Twitter and was instead focused on activating the giant pay package he’d been granted in 2018 (The exact same package a judge in the Delaware Chancellory Court just negated). Anyway, the net net is that at the time, Tesla was still seeking to maximize consumer attention and stock price growth through splashy, Musk-fueled product launches.
The timing looked to be perfect: trucks represent the most popular US automotive segment and are more profitable than cars, and at the time of the announcement, there were zero EV trucks in the market.
All Tesla needed to do was release a decently functional truck in a timely fashion to exploit whatever latent demand was there. However, the sheer ambition of the vehicle led to a 5-year wait as the company tried to figure out how to realize a production model from such a radical concept, during which time the price increased by 50%, and annual production will always be highly constrained due to the complexity of manufacture.
And, of course, this being a Tesla, it’s already dealing with its fair share of issues. Terrible build quality for an up-to $100k vehicle, edges so sharp you could easily lose a finger, terrible visibility (get used to looking at a video window in the center console screen), and aero wheel covers that are shredding tires to ribbons, for starters.
In the meantime, much changed in the market for EVs. Ford launched its EV truck, the F150 Lightning, almost two years before Cybertruck, Rivian entered the market as a new entrant, and trucks from RAM and GM are imminent, creating a radically more competitive environment.
More broadly, Tesla has faced increased competition and slowing EV demand in the US as the category shifts from early to mainstream adoption, and people start asking harder questions about cost, range, charging infrastructure, and, increasingly, the unbelievably steep repair costs of an EV (Replacement battery costing more than a new vehicle, anyone?). Meanwhile, outside of the US, Tesla has faced rapidly intensifying cost competition, primarily from aggressive manufacturers in China.
As a result of intensifying competition and slowing demand, Tesla responded with price cuts across the board. I suspect it did this because of the opportunity cost of Cybertruck, which left the company with few other options. Let me explain.
By allocating so much of its engineering and R&D resources to figuring out how to build a vehicle as radical as Cybertruck, Tesla appears to have missed two critical innovation cycles:
It failed to update the existing model range in any truly meaningful way. Although known as an innovator, Tesla has an older product portfolio than any major automotive manufacturer, and its models are now extremely long in the tooth compared to competitor EVs coming on stream. (For example, its most popular model, the Model 3, was introduced seven years ago, and even its most recent facelift was entirely minimal)
It failed to develop the new, small, cheap, high-volume vehicle it needs if it’s to maintain market share leadership. The unveiling has been promised for this year, so if history is any guide, it won’t hit production until 2027-ish, by which point competition will be at buzz-saw levels.
A seemingly capricious approach to pricing in any given month has also created further headaches for the company. Analysts have, quite rightly, noted that discounting has been a short-term game to boost sales of an aging portfolio, which has caused a hit to both profitability and market capitalization, while fleet customers are increasingly refusing to buy Tesla because the random-ness of its pricing directly impacts the value of what they’ve bought, and consumers who’ve bought Tesla’s are becoming increasingly angry at how much value their purchases have now lost.
In other words, I’m positing that the long-run impact of Cybertruck is likely to be value destructive to Tesla rather than value additive. Too few will be made to make any meaningful impact on the value of the company, while the opportunity cost of expending precious R&D resources on it rather than other models has directly led to a huge hit to profitability today (via discounting) and the very real risk of a too-late, uncompetitive product portfolio tomorrow.
2. Careful What You Wish For.
tl;dr: Professionalizing marketing is a bad idea.
Two weeks ago, I wrote a piece on B2B branding. In it, I co-opted the term “demand creation” because it’s in common parlance in marketing circles, and I was building on someone else’s work where they used the term.
Anyway, on LinkedIn it was pointed out that “demand creation” is a misleading term because it suggests that you can use marketing communications to magic demand out of thin air when you can’t.
And this is true. As the unicorns turned unicorpses are finding out, it’s almost impossible for mar-comms alone to raise aggregate demand in any category. What it can do is divert more of the existing demand to you, which gives the impression that you’ve created demand for yourself.
The discussion then shifted to the trope that marketing should be professionalized like finance or law to encourage higher standards and prevent such confusion in the future. Largely because we’d all have a common understanding of the field, a common set of definitions, and presumably, an overarching body, like the bar that sets the rules and dictates terms.
What an absolutely terrible idea. For three big reasons:
Marketing is a source of competitive advantage.
Marketing is dynamic.
Who gets to decide? (hint, it would be Google)
First, marketing isn’t a profession to be standardized, commoditized, and defined by an outside body; it’s a dynamic source of competitive advantage.
In business, we often compete on the basis of information asymmetry, which is a fancy way of saying that one party has better information than another. Google Search is a great example of information asymmetry in action. Because more people use Google Search than any competitor, Google has more information about what people are searching for, which it then uses to tune its algorithms to provide better results, which in turn means people are more likely to come back and use Google again in the future.
In other words, because more people use Google Search, Google has information competitors do not have, which it then exploits to make the product perform to a higher standard, making it more popular…Rinse/repeat.
Marketing is also an example of information asymmetry. If the overall understanding of marketing in your category is weak, then relative to your competition, the more knowledge you have about how it works, how to do it well, how to structure and resource it, and how to connect it to your overall business priorities, the bigger the information asymmetry will be, and the more likely you’ll be able to exploit it competitively to your own advantage.
This neatly brings me back to the point about “demand creation” being inaccurate. Initially, I beat myself up because I’d been caught dead to rights. It is inaccurate, and that inaccuracy does have the potential to be deceiving, and deceiving people is the literal opposite of the intent of this newsletter.
And then I stood back for a bit and thought, “Hang on a minute.” There’s a problem here. Knowing you can’t just magic demand out of thin air through marketing communications isn’t an esoteric concept. In fact, it’s a very basic concept. And if you’re in business and don’t understand basic concepts, maybe you deserve what you get.
I don’t mean this to sound harsh or to neatly excuse myself, but we can’t think about the “professionalization of marketing” in a vacuum. It exists within the capitalist systems that underpin our business environment. And in a capitalist system, it's a feature, not a bug, that the weak fail while the strong survive.
Professional groups abound in business - medicine, finance, law, civil engineering, and so on - but are rarely viewed in and of themselves as sources of competitive advantage. This is typically for two reasons:
It’s a field where standardization benefits everyone.
Take accounting. This is the function that keeps score in business. Scorekeeping must be standardized because otherwise, shareholders and financiers wouldn’t know which corporations to invest in or lend to (as they wouldn’t know how to compare or trust the scores given to them). And if investors aren’t willing to invest, nor lenders lend, the entire economy would grind to a halt. Law is similar. If accounting is scorekeeping, then the law sets the rules of the game. And again, it’s important that everyone has a common understanding of the rules, lest they find themselves in legal jeopardy.It’s a field where people might get hurt or die.
We want doctors to have a common understanding of medicine because we might get hurt or die otherwise. We want civil engineers to have a common understanding lest our bridges collapse and kill us. In other words, in addition to arenas where standardization serves a common good, there are other areas where we’ve chosen to professionalize because if we didn’t, the negative impact on people and society might otherwise be too great.
Notice anything about the points above? Yeah, marketing doesn’t fit either of these criteria.
Second, marketing is dynamic. Now, for all that we beat ourselves up over definitions, imprecise terms, and the use of different words to describe the same thing, the flip side of this chaos is how gloriously dynamic marketing has proven to be.
Professionalization does the opposite. It aims to create a standardized understanding, which, by definition, means having the field operate in a small-c conservative fashion. This is not at all a criticism when we consider fields like law, accounting, or medicine, where we might want change to be glacial. However, this would be a bad idea in a field like marketing, which represents the pointy end of the competitive stick within the cut and thrust of capitalism.
Far from improving marketing, it’s more likely that professionalization would simply commoditize it, eliminate its dynamism and innovation, and, perhaps ironically, reduce its value to the business as it would no longer represent a competitive advantage to be exploited. In other words, marketing would look more like a compliance activity than a pathway to success.
And, finally, and very importantly, who gets to decide?
This is not a small concern. For example, had we professionalized marketing as recently as the turn of the century, we’d likely have professionalized around the 4Ps of the marketing mix and the segmentation, targeting, positioning (STP) theory of marketing. Had we done that, it’s likely that marketing science and organizations such as the Ehrenberg Bass Institute would never have existed because dynamism and innovation at the macro-level would’ve been chilled by the forces of standardization. And if you think this wouldn’t happen, just look at how often medical breakthroughs have been dismissed by the institutional conservatism of the professional bodies that oversee medicine.
This means the recent paper by Prof. Byron Sharp positing an alternative to the STP theory called the Market-Based Assets theory may never have happened at all. And even if it had happened, this critique suggests that it isn’t compelling enough to negate STP, which means everyone would just be arguing over terms again.
Of course, this doesn’t even begin to address the 800lb gorilla in the room, which is that, in many ways, we already have a standardized understanding of marketing, only it comes from the biggest players in the marketing landscape rather than any professional body and is wildly limited as a result. Were we to require all marketers to be qualified by a professional organization, there’s literally no way the biggest players in the space wouldn’t engage in a bout of regulatory capture to ensure their agenda leads. (If you don’t believe this would happen, just look at how Google and Meta already co-opted the major advertising bodies) While marketing isn’t professionalized in any formal sense, I’d argue that the AdTech/MarTech industrial complex has already gone a long way toward standardizing it in its own image and to everyone else’s detriment.
So, while I think the chances of marketing ever being professionalized are extremely slim (way too many competing agendas to find agreement), I’m also convinced that it would be a self-defeating act were we to do so. It would hardly represent progress were we to shift marketing from a potential source of competitive advantage to a compliance activity, were we to choke off its dynamism and innovation, and were we to allow the largest players in the space to engage in regulatory capture in order to continue their dominance.
No. I think it’s better to view marketing as a dynamic source of competitive advantage within the cut and thrust of capitalism.
And ultimately, we should let the market decide. If ignorance of marketing represents an exploitable source of competitive advantage, it won’t last forever. Over time, competitive advantages tend to be competed away as the strong thrive, the weak fall by the wayside, and others rush to replicate whatever it is that made the strong strong.
Until then, if you’re a CEO, you should stop looking at your marketing function as a source of inefficiency and waste and instead view it as a source of exploitable competitive advantage. And if you’re a marketer, you should feed your brain constantly with well-reasoned and well-evidenced thinking so that you’re the one doing the exploiting and not the other way round.