Is Tesla’s Biggest Edge Due To Software?

Tesla Model 3

OCT 1 2018 BY EVANNEX 22


We hear the term “disruption” a lot in connection with Tesla. There’s no question that a wave of disruption is beginning to hit the auto industry, and that Tesla is the earthquake triggering the tsunami. But which of Tesla’s products and features are truly disruptive, and who, exactly, is going to get disrupted? A recent article by Benedict Evans delves into the details of disruption, with some cogent comparisons to other tech quakes of the past.

*This article comes to us courtesy of EVANNEX (which also makes aftermarket Tesla accessories). Authored by Charles Morris. The opinions expressed in these articles are not necessarily our own at InsideEVs.

Above: Tesla’s center stack touchscreen display in the Model S (Image: Tesla

One apt analogy is the disruptive wave that Apple unleashed on Palm, Nokia and other makers of previous-generation cell phones. “When Nokia’s people looked at the first iPhone, they saw a not-great phone with some cool features that they were going to build too, being produced at a small fraction of the volumes they were selling,” writes Evans. “When many car company people look at a Tesla, they see a not-great car with some cool features that they’re going to build too, being produced at a small fraction of the volumes they’re selling.”

We all know what happened to Nokia, but is Tesla “the new iPhone,” and if so, what would that mean? Disruption occurs when a new technology or concept changes the basis of competition in an industry. However, not every new technology turns out to be disruptive. “Some things do not change the basis of competition enough, and for some things the incumbents are able to learn and absorb the new concept instead,” writes Evans, noting that Clay Christensen calls this sustaining innovation as opposed to disruptive innovation.

Most products and services don’t exist in isolation, but rather as part of a stack or value chain. Evans points out that a new technology may be disruptive to some links of the value chain, but not others. “The iPhone disrupted the handset business, but has not disrupted the cellular network operators at all, though many people were convinced that it would. Online flight booking doesn’t disrupt airlines much, but it was hugely disruptive to travel agents.”

Traditional OEMs are likely to be disrupted by the coming waves of electrification and autonomy, but some component suppliers may be able to adapt easily enough. For example, Cummins, one of the world’s largest manufacturers of diesel engines, is steadily moving into the electric motor space.


Of course, Tesla is an innovator in several areas, not all of which have to do with electrification (autonomy, direct sales, software). Evans takes a detailed look at some of the significant areas in which Tesla is expected to play the role of disruptor.

Most industry insiders agree that Tesla has a lead of several years in the technology of batteries and motors. However, Evans writes, “lithium batteries and electric motors are not an exotic new technology with lots of primary IP. Nor are there any network effects or ‘winner takes all’ effects. It seems pretty likely that in the medium term (that is, by the time batteries are cheap enough for wholesale conversion of the industry from ICE to electric) both the batteries themselves and the motors and control systems will be mostly commodities.”

“In such an environment, creating great components in-house does not necessarily give you any particular advantage any further up the stack. Sony’s image sensor unit is doing very well in the smartphone business, but Sony’s smartphone unit is not doing well at all. Conversely, Apple rigorously manages close to 200 suppliers (including Sony) and designs only a small number of critically differentiated parts itself. Hence, industry insiders have opinions about who makes the best power amp or GPU, but this is mostly invisible to consumers.”

Tesla and its partner Panasonic will remain major battery suppliers for the foreseeable future, but will this give customers a reason to choose a Tesla vehicle over a competitor?

Above: Even prior to the big Model 3 ramp-up, Panasonic/Tesla was already the world’s biggest maker of electric vehicle batteries by MWh (Source: Renew Economy via Bloomberg New Energy Finance)

Another significant innovation that Tesla has made is taking a systems approach to vehicle software. As Tesla founder Ian Wright told me in 2014, “If you’re a Silicon Valley technology engineer, and you look at the way modern cars are designed from an electronics point of view…it looks like a dog’s breakfast.” Whereas a Tesla is controlled by a single integrated computer system, a legacy automobile is a mishmash of separate, incompatible computer systems, each one sourced from a different supplier. Moving to a more system-centric approach will be no minor adjustment for the automakers – it will be a revolution in the way they design and build their products.

Evans reminds us of the old car industry saying that you can see the organization chart of a car company in the dashboard, and also see that the steering wheel team hates the gear stick team. “A modern car has dozens of different electrical and electronic systems…and the only point of integration is the switches on the dashboard,” Evans writes. “Each of these components has what the car industry calls software, but this is really what Silicon Valley would call firmware, or at most device drivers.”

Evans agrees with Ian Wright that this approach is going to have to change, and predicts that it will be a huge challenge both for the suppliers and for the incumbent automakers. In fact, he thinks that this looks a lot more like disruption than electrification does. “Tesla is of course already here, which is why it could fix a brake problem in the Model 3 over the air – the code it needed to change wasn’t in the brakes. This is also apparently one way that Tesla reduced the cost of the Model 3 compared to the Model S.”

“There’s a useful parallel here with PCs and laptops,” says Evans. “Apple is very specific in what components it uses and how they are optimized to work together and fit into the available space, and this produces small, light, power-efficient laptops. Conversely, a laptop from Dell, or a desktop PC, has much more flexibility and interchangeability of parts, which also means less integration and more empty space inside the case. Each approach has its benefits, and the modular PC model had perfect product-market fit in the 1990s. So, how far does this translate into reasons to buy?”

Evans notes that vehicle autonomy is likely to be more of a world-changing disruption than electrification, and that Tesla is also a pioneer in this realm. “However, in autonomy, Tesla is not just competing with car companies – it’s competing with other software companies. It doesn’t have to beat Detroit at software – it has to beat all the rest of Silicon Valley at software. In this competition, Tesla’s thesis is that the data it can collect from its cars will give it a crucial advantage.”

Many have written that the vast amounts of data Tesla is gathering from its fleet of Autopilot-equipped cars gives it a huge head start over other players in the autonomy game. Evans is a bit skeptical of this thesis, noting that Waymo’s cars have driven 8 million miles already. “Tesla’s have driven more, but how much do you need…before your autonomy is as good as the best on the market? How many companies might be able to reach that? Meanwhile, machine learning itself is changing quickly – one cannot rule out the possibility that the amount of data you need might shrink dramatically.”

The disruption scenario turns out to be quite complex, and many questions about who’s going to be disrupted, and how, remain to be answered. “The history of the tech industry is full of [situations in which] having a lovely product, or being the first to see or build the future, were not enough,” Evans concludes. “A great, innovative car and a great car company are not the same thing. Tesla owners love their cars. I loved my Palm V, and my Nokia Lumia, and my father loved his Saab 9000. But being first isn’t enough, and having a great product isn’t enough… [to stay ahead] you have to try to think about how this fits into all the broader systems.”


Written by: Charles Morris; Source: Benedict Evans

*Editor’s Note: EVANNEX, which also sells aftermarket gear for Teslas, has kindly allowed us to share some of its content with our readers, free of charge. Our thanks go out to EVANNEX. Check out the site here.

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22 Comments on "Is Tesla’s Biggest Edge Due To Software?"

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Tesla sales $8000.00 worth of software on each car, Autopilot and FSD.

Another Euro point of view

Amongst the biggest yes, for sure. I remember seeing a review of the Jaguar i-pace where reviewer were complaining about absence of precise information about charging stations availability (whether functioning yes/no, opening hours if applicable etc.). On that front VW group (Audi eTron) seems way more aware how those aspects are crucial. Now whether they deliver on that or not is another story (to see with coming reviews of the eTron). For Mercedes EQ series, no idea.

One problem with this sort of analysis is that it uses analogies. Analogies are great, they are easy to understand, though in the case of Tesla I find no appropriate analogy to compare their rise to, as they all fall short. Tony Seba’s transition from horse to car is inadequate, my own comparison, the advent of color TV also falls short. The iPhone analogy is not good either. So maybe we should eschew the easy path of analogy and look at first principles as Musk does. The electric motor is superior to the ice. There is no need to delineate all of its superiorities. Batteries as fuel are superior to liquid or gaseous fuels, and falling in price. EVs are safer, as design allows for large crumple zones. (no engine block). The Model 3 is the best car ever made since it’s an ev , well designed, with superior components OTA updates, which have not been emulated by other manufacturers. Autopilot SC network. Rabid evangelical community. The Tesla experience as the podcast refer to it, above. Is not something that will be copied anytime soon. So, as a society, we are moving to evs and Tesla is the premier ev… Read more »

Good take on it ffbj.

I would likewise add that Tesla is seriously out-innovating the competition by doing things like taking full advantage of all the inherent advantages of designing and building clean-sheet EVs like the skateboard pack and now much reduced electrical cabling with the Model 3 to make assembly simpler/easier to more fully automate.

I’m sure that as they bring out newer designs they will continue these trends and lets not forget that they had the foresight to build their own battery gigafactory to ensure their battery supply.

I would say that conservatively, Tesla has at least a 5 year advantage baked in and it could easily be stretched to a decade or more depending on how slow the laggard, legacy LICE manufacturers continue to drag their feet and be very slow to innovate, facing the dilemma in order to protect their LICE product lines.

Thanks. They don’t rest on their laurels and are constantly seeking ways to improve, as the wiring for the Model 3, as you point out.
I think of legacy auto being entrenched and suffering from “that’s the way we have always done things.”
Their 1960’s model of vehicle development is simply inadequate.

Nice write up. I find it hard to summarize a collection of advantages that Tesla has over traditional car makers other than to point out their advantage can be summarized as not having to deal with institutional inertia. It seems that Tesla asks “what would be the best way to do X?” and takes that approach.

Consider the OTA updates. The only time Ford would update software was to fix a recall issue. No way they would provide regular updates to improve the car because customers would have fewer incentives to buy the next generation model that was coming out in 4-6 years. There mindset is that you don’t just hand out upgrades for free.

The question will be as Tesla sells more vehicles will they have less incentive to update their older cars software? People take Tesla’s actions as innovative and not as necessary given their limited ability to service vehicles as well as lack of vehicle portfolio. Updating 1 million vehicles is very different than updating 100k. What happens when there are 5 million vehicles out there? Probability would say a percentage of those would fail just because. Now imagine a company like GM that sells millions of vehicles a year each with the ability to do remote diagnostics and the ability to update the firmware via OnStar. Yet they will have you bring it into the dealer – free of charge for an update. It doesn’t save GM any money doing that, but it cuts down liability.

Take 5M computer hardware built by 100 different manufacturers to 100 different designs.
Load it with an OS.
Then run a patch on that OS.
You’re thinking some will fail to update?
Is that your Win10 experience?

Now take 5M computer hardware built by 1 manufacturer to 1 design.
Is that gonna fail?
So taking the car to the dealer cuts down liability?
I’m sorry, you lost me there.

You make the assumption the hardware isn’t being revised. How many versions of autopilot hardware are their currently? It’s more than 4.

Write an emulator. No really, yours is a valid point. But hardware doesn’t last forever.

Once they start leasing the 3, they will have incentive to update the older cars software as that will improve the residual value.

Needing to bring a car in the dealer for a software update is a fat kiss for a parasitical dealer’s profits.

> Updating 1 million vehicles is very different than updating 100k.

Less so—the first 100k would cover many use cases and deployment issues—the next million would uncover fewer and fewer bugs.

It essentially doesn’t cost Tesla any more to update a million cars using an OTA than to update a single one.

You’re also wrong to suggest that the number of Tesla cars failing an attempt to update is a significant problem. I’ve read some complaints from Tesla owners on the Tesla Motors Club forum that they had problems adjusting to a new update, or that the car took an extraordinarily long time to recalibrate after an update, but “I tried to get the update but failed to do so” isn’t a problem I’ve seen reported. I suppose there might be times when the download was interrupted, but that just means that a 2nd attempt was necessary.

You seem to think Tesla cars are like Android phones, where a certain app may work erratically on different phones because people are trying to run it under similar-but-not-identical operating systems.

You’re overlooking the boat anchor dealerships are. Tesla sells the majority of their used vehicles so they get a second and third shot at making a profit. OTA updates make all Teslas retain higher resale value and sell much faster.

In addition, other companies may not be able to provide OTA updates because of restrictive dealer contracts (Providing ‘maintenance’ that bypasses dealer service profits)—and dealers have tremendous legislative protection and power in most US States (they are heavy contributors to local politicians).

But I agree with the thesis that the key internal advantage to Tesla is the software integration, and the fact that they work in the Bay Area with deep software talent available. Tesla has written an operating system for autos over 10 years, both for hardware operations and user-interface—that is very difficult and costly to replicate. By now, they have a stable software base and more importantly, internal personnel who know how it was programmed and how to fix and improve it.

Stuttgart and Detroit know they couldn’t possibly get that big and difficult software right, so they outsource little pieces to each supplier and each subsystem has its own microcontroller and distinctly programmed firmware.

The next potential Tesla/Panasonic advantage is battery cells. Not yet a commodity—at least nobody else I know has battery cells as good with such low cobalt use.

That’s a good point, institutional inertia, although the example you chose of the Model X, is not the most flattering to Tesla. But it also shows that they can make errors and overcome them, and are still learning.
The conveyor system was an overthought mess that did not work, so they ripped it out.
Many older established companies however, may continue to do things the wrong way due to institutional inertia.

Biggest edge is the Supercharger network. #2 is just great designs. #3 is the software.

The vertical integration (how all the components in the car come together) is a big IP that legacy automakers do not have. They have been outsourcing parts way too long. From the engineering perspective, you’d be surprised how many different controllers there are in just GM vehicles. Many with FW that cannot even be upgraded. Back then, the secret sauce was in the engine, so everything else was left to their suppliers.

The Chevy Bolt is a great basic BEV but it also shows the limitations of GM’s current vehicle product development lifecycle. I can’t speak for German automakers – not familiar with their design processes.


I’d say design (not including model X), smart integration (important) and experience gained during the years in the EV business. Also, the design of the batteries (system) was very important. Now I think most manufacturers have studied that to death, and found what they liked and what they would do different. I think Tesla has 2-3 new cars pretty much designed, and if they can get them to market soon enough, they will be very competitive. I also think huge companies like VW will push prices, and if Tesla wants to compete in the lower price EV market, they have to develop a platform they can use on several models AND maybe license out to companies that is slow on EV adaptation and development. 3-4-500K extra vehicles to cover development cost, with maybe 15-25k in profit for platform and batteries. . Utilize Gigafactory to the max, keep and improve volume advantages. . And maybe keep some brands dependable on Tesla for a decade, or more. I’m not sure Tesla should focus on the cheapest EVs, if they can make good money on higher end EVs. On the other hand. . Very good integration is key to low production cost. .… Read more »

Software for sure is an advantage for Tesla. But I think it’s an enabler for something more disruptive that other car companies can’t match: it’s the principle behind the company – building the car architecture that allows improvements over time in the hands customer by means of OTA software updates. It also enables a continuous feedback loop from the customers for things to improve, thus making the customers part of a process and in some sense part of a community.

While legacy car makers do take customer’s feedback and make improvements, the updates take too long by means of model refresh cycles or factory recalls. The customers are at the end of a mostly open loop rather than part of the continuous process. There is some sense of brand loyalty but without the feeling of belonging in a community. Throw in the dealership experience, the sense of community if at all existed would quickly evaporate.

“Whereas a Tesla is controlled by a single integrated computer system, a legacy automobile is a mishmash of separate, incompatible computer systems, each one sourced from a different supplier.”

I’m continually surprised to see that a rather obvious superiority in Tesla’s cars isn’t highlighted in more car reviews. It’s like most car reviewers don’t consciously understand why they subconsciously find driving a Tesla car to be so pleasurable and pain-free.

As the “Everyday Driver” video review of the Model X put it, things in Tesla’s cars just work. They work the way you’d expect them to, and they work well together because they are designed to work together (see link below).

It’s not just software, as the title of this article suggests. Nor is it just the hardware, the use of a touchscreen for controls. It’s the gestalt, the whole, the way everything works together seamlessly, which makes a Tesla car quite literally greater than the sum of its parts.

While the iPhone is a useful analogy, there one big difference: The iPhone was the product of consumer electronics manufacturing, a light industry which can be scaled up rapidly, and without an overly large capital investment. Contrariwise, making mass produced cars is a heavy industry, requiring a capital investment of many, many billions of dollars. Tesla will certainly be able to sell every car they can possibly make for the next 2-3 years, but they can’t grow fast enough to dominate the market the way the iPhone did… at least, it did until the cheaper clone Android phones came along to steal the majority of the market.

And let’s not forget that lesson, either. How many years will it be until cheaper Chinese made EVs start flooding the American market, the way cheaper Japanese cars did in the late 1970s and 1980s?

In the short term, let’s say 2-4 years, Tesla’s dominance of the plug-in EV market is assured. But in the long run… eventually they will have serious competition. I’m sure Tesla will be around 5 years from now, and probably expanding their line of cars and trucks.. But 15-20 years from now… that’s not so certain.