Over the past month, Apple & Tesla have made major product announcements for new, cheaper product lines in their core verticals, for the iPhone SE and the Tesla Model 3 respectively.
While both companies have historically been the subject of numerous comparisons based on their similar design philosophies and high-end market segment appeal, Apple’s announcement mostly underwhelmed North-American consumers, while Tesla’s led to 115,000+ pre-orders of the Model 3 before the actual product unveiling and 270,000+ pre-orders within the first week.
Over 325k cars or ~$14B in preorders in first week. Only 5% ordered max of two, suggesting low levels of speculation.— Elon Musk (@elonmusk) April 7, 2016
Both are drastically different products, but both product announcements are very symbolic in that they reflect the same fundamental strategic target market expansion for both companies.
When Apple launched the iPhone in 2007, Microsoft’s then CEO, Steve Ballmer erupted in laughter, dismissing the phone with extreme confidence, saying:
"$500, fully subsidized with a plan, that is the most expensive phone in the world and it doesn’t appeal to business customers, because it doesn’t have a keyboard, which makes it not a good email machine … Right now we are selling millions and million and millions of phones a year, Apple is selling zero phones a year, in 6 months they will have the most expensive phone by far ever in the marketplace…"
He actually laughed, watch him in this video.
Ballmer has gotten a lot of flak over the years for his comments on the iPhone, and to be clear his predictions for the Windows phone’s ability to compete with iOS purely on price point was mostly off, at least based on the OS’s meager 2.6% market share on shipments 8 years later in Q2 2015 as reported by IDC per the diagram below.
What Ballmer got right was the fact that the iPhone’s no contract sticker price of typically $600+ and going as high as $900+ in developing markets like India effectively priced out most average consumers who otherwise longed for a phone as powerful, beautiful, durable and recognizable as the iPhone.
Keep in mind that the subsidized pricing model with contracts does not exist in most developing markets, so most non-OECD consumers have to pay the full sticker price plus local market premiums for an iPhone. This coupled with the low wages in a lot of fastest growing smartphone markets in developing countries like India, makes for a really huge pricing problem.
This explains the 82.8% sales market share of Android in Q2 2015 vs. iOS’s 13.9% (a 6x factor), as Google’s Android open OS created a platform on which innovative companies could build affordable smartphones. For instance, China’s Xiaomi has exploited the low to mid ends of smart phone market looking for cheap, beautiful and powerful smartphones, outplaying Apple in the fastest growing Asia Pacific countries by building Android Mobile devices that look and feel exactly like the iPhone and selling new versions at prices starting at the equivalent of $300 (RMB 1,999) sans subsidies.
Lei Jun, Xiaomi’s founder who is known as the ‘Steve Jobs of China’, has gone as far as actually copying Steve Job’s trademark “One more thing” slide while wearing a black t-shirt at product launches.
Jun has run a very critical experiment for Apple in China. His unprecedented revenue growth from $0 to $20 billion in the short 5 year period between its launch in 2010 and 2015, and has effectively proven that there is indeed a hungry market for cheaper iPhones. Xiaomi’s rise has definitely contributed significantly to the slow down of iPhone sales growth in China.
Another significant data point Apple has is in India, the world’s fastest growing smartphone market. As of 2013, only 6.2% of India’s 1.26 billion population owned a smartphone, that number is projected to rise to 20%+, with over 300 million units projected to be sold between 2016 and 2017.
Although the Indian market is the most smartphone eager market in the world, iOS has only a meager 1.86% market share in India as of November 2015, even lower than Windows phone’s equally abysmal 2.15% market share in India. India is a market that cannot be ignored, especially as Apple looks far and wide for opportunities to accelerate its top line growth.
The iPhone SE’s market positioning is more about pricing than it is about screen size. It was a combination of the emphasis on the latter as the only potential value add in the press and the fact that the existing iPhone models are generally already affordable to most North Americans through phone contracts that made the SE’s launch receive a below average ‘meh’ reaction in North America.
The true test of the iPhone SE’s success or failure is its sales numbers in fast growing regional markets like Asia Pacific and Africa, not the reactions by the North American press.
What Does This Have To Do With The Tesla Model 3?
At the heart of both product launches, we have two very well recognized brands with globally desired product lines priced on the high end of the market for similar products in target categories, both of which are struggling to gain mass global appeal primary due to pricing.
Like the iPhone SE, Tesla Model 3 doesn’t offer any exciting new features that predecessors didn’t have, the key to the North American market’s immediate understanding and appreciation of the Model 3’s launch lies primarily in two main points:
1. Unlike the pricing problem for previous iPhone models which is most blatantly clear only in markets outside North America with limited phone subsidies and device price inflation, the Tesla pricing problem is super clear, even in North America. iPhones have always been affordable to the average North American with contract subsidies, but we can’t say the same about the Tesla. The base Model S 70D starts at about $75k and the base Model X 70D starts at about 80k. Even with financing, the average North American is automatically priced out of the market for the most basic Tesla Model X and S builds. The American press instantly gets this.
2. Tesla’s founder, Elon Musk, has been crystal clear about his goals for over a decade. In his August 2006 blog post he laid out the following secret master plan. Here’s the most critical part of that post:
"The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model."
Apple on the other hand has always talked about pricing as a ‘by the way’ topic, never fully publicly declaring its intent to be competitive on to the lower ends of the smartphone mass market for wider global appeal and market share growth.
To be clear, both companies still have really serious challenges ahead, and the road to capture the 99% will be rocky.
For Apple, the biggest challenge is going to be competition with growing companies like Xiaomi in Asia Pacific. Apple is known for having some of the highest margins in the hardware business, and if it came down to a price war for Asia Pacific customers, Xiaomi is probably better positioned to win.
For Tesla, the biggest challenge is most likely going to be its ability to meet its production targets for a mass market vehicle, the company has consistently missed delivery targets even for smaller backlogs for its luxury product lines, most recently falling short of its Q1 2016 estimates by delivering only 14,280 vehicles of the 16,000 delivery target.
Visual model of Tesla's planned Gigafactory (under construction) | Tesla Motors
Musk blamed the miss on supply chain problems. It leaves much to be wondered with regards to how long a company that barely produces 60,000 cars a year will take to scrub through its current 270k+ backlog for the Model 3, even after all supply chain problems are remedied and after the Gigafactory becomes fully operational.
It is going to be interesting to watch both Tesla and Apple’s quest to break into much wider global markets play out over the next couple of months/years.
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