After years of relying on suppliers for production of the most value-added item in an EV, Musk unveiled Tesla’s plans to produce their own battery cells and change both the raw material mix used in typical automotive battery cells and the manufacturing process. The innovations could lead to the Holy Grail of EVs: batteries inexpensive enough to allow Musk to create a desirable $25,000 Tesla model.

For Musk, the goal of Tesla’s battery research goes beyond just improving EV margins — although, of course, that’s critical. Musk’s mission is to control the value creation around EVs — vertically integrating as much as he can to accelerate the pace of innovation through the manufacturing process. Where today’s car manufacturers produce only 25 to 30 percent of the content of most vehicles, Musk’s aim is to outsource as little as possible — avoiding the inefficiencies introduced into the design and manufacturing process through having multiple layers in the supply chain.

In contrast to current automotive practice, Tesla wants to dig deeper into value creation and change the fundamentals of the industry. It will not be content to become just another automotive original equipment manufacturer (OEM) with the typical margin or market share. Musk is aiming for the innovation pace and margins of a classic technology company and will defy industry rules on how to do things until he gets there.

Are incumbents prepared?

This new way of thinking about automotive manufacturing should concern legacy players who typically strive for one to two percent productivity gains each year. Over the next decade, automakers will confront all manner of transformative technologies beyond the challenges from Musk on EVs — including autonomous vehicles and those yet to be realized. The message for incumbents: Stop thinking you will be ready to compete looking to achieve only incremental annual progress in such an accelerated innovation environment. Automakers need to take more risks and stop fearing failure if they want to adopt a high-tech mentality toward innovation — and they must figure out ways to get shareholders to support their risk taking as Musk clearly has.

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