This week’s podcast is about how auto companies are changing into digital business models. Specifically, it is about three archetype business models we can see in BYD, Xiaomi and Tesla.
You can listen to this podcast here, which has the slides and graphics mentioned. Also available at iTunes and Google Podcasts.
Here is the link to the TechMoat Consulting.
The 3 EV business models are:
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This week’s podcast is about how auto companies are changing into digital business models. Specifically, it is about three archetype business models we can see in BYD, Xiaomi and Tesla.
You can listen to this podcast here, which has the slides and graphics mentioned. Also available at iTunes and Google Podcasts.
Here is the link to the TechMoat Consulting.
The 3 EV business models are:
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Welcome, welcome everybody. My name is Jeff Towson and this is the Tech Strategy Podcast from Techmoat Consulting. And the topic for today, the three EV business models of BYD, Xiaomi, and Tesla. Now, this is kind of the year of electric vehicles, autonomous vehicles, especially coming out of China. A lot of big stuff happening.
It's more of a manufacturing story, so I don't talk about it much cause I, I'm not an auto. expert. I'm not a manufacturing guy. I'm a digital guy. But the story, the business models are becoming more and more digital. So I'm starting to talk about that. And fortunately, three companies, BYD, Xiaomi, and Tesla kind of line up nicely against three different types of business models.
So it's kind of a nice simple framework to think about this. It's kind of how I do it. Keep track of it in my brain. So I'm just going to lay that out pretty quickly. Here's three companies. Here's three business models. And I think that covers most of what we're seeing. So that'll be the topic for today.
Let's see any housekeeping only housekeeping stuff is we have the Beijing tech tour coming up May 22nd 26th in Beijing gonna visit some tech companies We have a couple spots left two or three. So if that's something you're interested in you can go over to Tecmo consulting. com All the information's there, including the price.
This is quite affordable. This one, this is something a little different this year than previous tours, which were much, you know, multiple cities, six days, that sort of thing. So that's kind of what this one's about. I knew if you're curious, go over there or just send an email to me info at thousand group.
com, or you LinkedIn, something like that. But yeah, we've got a couple of spots left. We're going to close that pretty soon. And let's see, that's it. Standard disclaimer, nothing in this podcast or in my writing or website is investment advice. The numbers and information from me and any guests may be incorrect.
The views and opinions expressed may no longer be relevant or accurate. Overall, investing is risky. This is not investment, legal, or tax advice. Do your own research. And with that, let's get into the topic. Now, there are a couple concepts, digital concepts, that I think line up pretty nicely with this topic.
Again, these are all in the concept library on the webpage. But the three I wanted to talk about were consumption ecosystems user interface, And really, let's call it other types of digital business models. There's either about nine that I keep in mind, but the two I want to talk about is really consumption ecosystem and a little bit on innovation platform.
So a couple of concepts, I'll explain them when we get to them. But yeah, these line up nicely with sort of what's in the concept library. Okay. So we look at these companies, BYD is making all sorts of news. The largest EV maker in the world by most metrics, you could call it number one or number two, depending if you're going to look at only pure EVs.
Versus EVs plus hybrids. Okay. If it's pure EVs, I think Tesla is still technically number one. If it's everything, then it's, but there's number one and number two. By global sales, they're rocking and rolling. They are expanding everywhere like gangbusters and they have a whole suite of products. I mean, they do everything from sort of budget cars, really economy, All the way to super cars and they just sort of released their super car.
The Yang Wang, I think it's the Yang Wang U9. I mean, go and just look up BYD and look up super car. This thing's unbelievable. It is the coolest looking car ever. Like, I mean, it's better than Lamborghini, better than Ferrari. This thing's fantastic. Anyway, so they played the whole spectrum. And I've talked about them before but I've basically talked about it as a manufacturing story because it really is, I would characterize BYD, which let's call them the global EV giant.
I would characterize them as a manufacturing plus services business model. And we know this business model quite well, especially for companies coming out of China that get to scale within China. That could be refrigerators, it could be golf cards, it could be scooters, and then they go international. And that's B2C, but it could just as easily be base stations from Huawei, right?
A lot of manufacturing intensive stuff comes out of China and Asia. And then you sort of, you know, you win by getting to manufacturing scale. And then usually you add some degree of services on top of that. And generally the more services you can add, the better off you are. So for BYD, when you look at them, the business model I see today, which is evolving quickly is okay.
It's manufacturing plus services. And the services are mostly sort of traditional auto services or let's call them auto services. So charging stations, you know, We could call it insurance. We could call it financing. And I mean, auto has traditionally been a pairing of a manufacturing intensive product, usually a durable good with some degree of services.
I mean, auto dealers have made a lot, depending who you talk to, like dealers in the U. S. make their money from the insurance. I'm sorry, not the insurance, the financing. Elon Musk had an interesting comment about this. I heard, I think I saw it on TikTok or something. He basically raised the point of like, why have there been no new auto companies in so long?
And why, why does every auto company who tries to break in go bankrupt? Now, they may survive that, but they all seem to go there. And his explanation was, there is a serious barrier to entry in traditional combustion engine based auto, which has to do with the money they make on parts, that you get this global customer base that has your existing models out there.
Toyota. Honda and most of them are off warranty. So they go to repair shops and they need parts and you make money basically selling those parts. Now I would characterize that as services. And they put a premium on the services and they make money there. And then they, you know, they sell their cars cheaper than they normally would have because they can basically cross subsidize.
from this existing base of customers who, you know, buy somewhat overpriced parts and services. So that makes it very hard for, it basically creates a barrier to entry. If you're going to break in, you're going to have to lose money on some of that until you can get an existing fleet out there in the world on your own.
Now that was his argument. I'm paraphrasing it, obviously. I think that's pretty true. I think that's mostly true. I think there's a lot of other barriers to entry, but that's one of them. But I would say generally when you. You take manufacturing and you start to pair it with various services. You are then able to cross subsidize pricing.
Which lets you sell the, the original product lower. That's a pretty common business model. And you know, we see it in printers and everything else, right? It's very common. I think that's most of what we're seeing in BYD today as they go global. And okay. Maybe traditionally it would have been insurance financing parts as services.
Now we're seeing. charging stations. And in fact, in China, a lot of this hyper competition, we're seeing China between these new electric vehicle companies is in services. They can offer all these crazy services. Like I literally know a guy who, when he bought his EV in China, he got offered a service that was, we will have someone come to your house.
I think it's every day, or maybe it's every week. And you know, wash your car for you and do very, you can use this person to do whatever you want, clean your driveway, whatever. That was a service that was paired with his car. And, you know, they're offering all these crazy services as a fight for market share, which is unsustainable, but it's kind of interesting.
He said, he's got like several years of free service of a dude coming to his house you know, just to whatever, clean the car. I don't know, fill it up, whatever. So anyways, now that's most of what I see with BYD. Now they're moving into digital services. I'll get to that in business model too, but overwhelmingly, they are a.
manufacturing plus services based business model. And then the kicker they have on top of that is they're not just doing that in auto. They're also doing it in batteries, rechargeable batteries, because BYD's background is as the world's largest rechargeable battery maker, lithium batteries for laptops and smartphones.
And now increasingly For, you know, robotics for electric vehicles for storage, but they've always been kind of number one, number two, there that lets them also transfer and cross subsidize some of the costs and pricing because getting access to batteries in sufficient volume is a problem for a lot of these EV companies.
They have a bit of an advantage there cause they've sort of vertically integrated their battery business with their, their car business. Okay. I think that's a pretty simplistic, but not. bad take on BYD's business model. Now I'm not going to go into that because as I said, I'm not an auto and a manufacturing guy.
So that model, you know, there's a lot going on there. Usually that model because you don't really have any power on the demand side, you can't really lock in your customers very well. You can't get repeat business easily. There's not a lot of brand loyalty. A lot of the power comes from economies of scale in manufacturing and then economies of scale in R& D and innovation.
And you just outspend everyone on those two, you iterate faster, you upgrade faster, you bring your cost structure down. I mean, that's kind of most of the game in terms of competitive strategy. Okay, let me move on to the other one, which is more in my strike zone, which is Xiaomi. Now their business model for cars, they've released their SU7, which is a pretty cool looking car.
If you haven't seen it go take a look at the Xiaomi EV. Like the main car they've been showing is kind of a Tiffany light blue, which is a little strange. But you know, CEO Lei Jun has had some pretty cool comments. Xiaomi. I really like Xiaomi as a management team. I think they are top tier.
I've given quite a handful of podcasts on Xiaomi in the past that you can search and find them easily. And I've mostly talked about the long history of Lei Jun and the management team, which really goes back to the mid 1990s when he was working at Kingsoft, which was kind of like a Microsoft equivalent within China, documents productivity tools.
And then he moved into other things like gaming whole, I mean, he, this guy has been leading management teams in business after business in the area of software going back to the late 1990s. He is, this is a top tier team. So then when he launched Xiaomi, he had already launched, you know, he'd run King soft, he'd run King soft cloud.
Which is a pretty cool cloud company in China. When he launched Xiaomi as a smartphone maker, he was well known and raised tremendous capital very quickly as a veteran entrepreneur. Anyways, I love how good the management team is. It frustrates me to no end that they keep choosing the hardest businesses to go in.
Like, like I think they're unbelievable at execution and really bad at strategy. Like why, why would you go into smartphones? It's a, it's a really hard business. Handset makers struggle mightily. It's if you don't control the operating system and developer ecosystem or the semiconductors, it's, it's a tough business.
That's where all the profits go. You know, that's how Apple does what it does. That's how Android does what it does. Everyone else is, you know, living in their universe. Now they, you know, they built their operating system and Xiaomi is sort of a skim off of Android, but I mean, everyone does that. But what Lei Jun and his team were very good at is they're great at consumer marketing.
They're very good at having events and having sort of. These big fan bases that buy everything they sell the moment they release it. And that's what they did with their new car. They released it within 27 minutes they sold 50, 000 cars. And that's what the press release was. You know, we sold like 27 minutes.
We sold 55, 000 cars. Now that trick, that little marketing tactic, they've been doing that for 10 years. That's how they used to sell smartphones when they first entered the space against the iPhone in 2012 ish. So they're real good at consumer marketing. The other thing they're really good at is what we would call a consumption ecosystem.
And this is sort of the other one of the concepts for today, which is I've laid out nine digital business models that I talk about a traditional linear business model, you know, like a factory. You can have digital versions of that. You can have platform business models, marketplaces, collaboration platforms, innovation platforms.
You can have stuff that's sort of halfway in between like consumption ecosystems and production ecosystems. I'll put my list of business models in the show notes and I've talked about all of those at length. Really what we're seeing with Xiaomi in the area of EVs is what I would call a manufacturing plus consumption ecosystem business model.
Now, the manufacturing part is similar. Okay. You know, there. They're building factories and they're building cars at scale, and they're trying to get to scale so that will drop the cost of their manufacturing. It will also give them more firepower to flood into R& D so that they can rapidly increase and improve their products.
which is key because this is this whole space. The product design and quality is still emerging, so you've got to keep releasing new models and improvements all the time where you're going to fall behind. Okay, so there's a manufacturing component, but there's also this consumption ecosystem and what Xiaomi has been.
Good at is marketing, as I mentioned, but they're also good at creating an ecosystem around their core product, which is the smartphone. You know, you can get the Xiaomi smartphone, it will have its own sort of operating system, sort of. But then they have a whole long list of devices that will connect with that, like purifiers vacuum cleaners, smart chopsticks.
Laptops anything for your home, smart home stuff. They do very, very well. They have this whole suite of products and they all sort of work together very seamlessly. And the reason we would call this a consumption ecosystem is one of the things you can do in digital that you can't do in the physical world is you can begin to link to other services.
And what you want to do is you want to link to the other services that are related to your core. So you're offering your customers, not just the laptop or not just the smartphone, but you're offering a whole suite of services that are all sort of linked and together. So it's one grander solution. So you might link with compliments.
You might link, well, digital, it's easier to do these linkages. I gave a whole sort of lecture on consumption ecosystems, but that's a very compelling offering. If I go to a company that only smells, let's say purifiers. I would rather get the Xiaomi one because then when I get the fans and the air conditioners and the smart door locks and the smart cameras, and they all link into my Xiaomi phone and my Xiaomi PC and all, it's a better solution.
So one of the things you can do in digital is start to link with other related devices. Compliments and services that are facing the consumer in the same area. It's a more robust solution. Basically consumption ecosystems have some power to them. They're not as powerful as platform business models.
The reason we talk about them so much is that most consumer facing companies have very little ability to build a platform business model successfully, but most Consumer facing companies can start to link up with related compliments. It's a strategy that most everyone can do and, you know, the winner can do quite well.
So I've been saying this for a while, that business more and more is becoming a team sport. You don't just want to be one B2C product. You want a whole team. You want to partner with other companies in your area. You know, you need a gang, basically. Anyway, so that's what Xiaomi is and your average Xiaomi customer doesn't own one Xiaomi device.
They own three, four, or five. That's most of their customers. I, I own probably, I don't know, seven or eight, something like that. Okay. So as a car goes from being a manufactured durable good to more of a digital service, you start to look like a consumption ecosystem. So what services can you add? Well, one, you can do things like mapping services.
Okay, you can do communication services, you can do information and entertainment services, what you're watching on your screens information as you drive, chatting with your friends, group calls, all of that mapping. Now the reason, so you see cars adding more and more digital services, and the question becomes, is the car going to become an innovation platform?
Is it going to become an operating system in its own right? like we have on a PC, like we have on a smartphone. Because if it was, then we would see developers starting to write apps for the operating system that only runs on your car. And you would start to see network effects and you would see an innovation platform.
That's not what's going to happen, I don't think. I don't think you're going to see cars with standalone operating systems and innovation platforms. I think they're going to be part of a consumption ecosystem that's tied to your phone. So that's kind of my take is, okay, first concept for today, consumption ecosystems.
I think that's what cars and phones and your smart home, they're all going to link together into a consumption ecosystem and the smartphone is going to be king of the hill. That's where the innovation platform is going to sit. I don't think cars are going to become platform business models and operating systems that are independent.
They could, I don't think that's going to happen. I think Huawei writes about this and talks about this quite well. Their argument for several years is we are going to see a one plus eight plus N ecosystem. One plus eight plus the letter N. That basically means it's going to be a consumption ecosystem.
The one sits at the center. That's going to be your smartphone. That's the device you carry in your pocket. That's the center of everything around that. We will have eight ancillary services and devices that are all linked tightly in this limited consumption ecosystem. Within that eight. We'll see the PC.
We'll see a tablet. We'll see a TV. We'll see a smart home. We'll see a smart watch. Maybe earbuds. A lot of smart home stuff probably. Meh, but they don't really put the smart home stuff within the eight, but within the eight we will see the car. Those are going to be your eight key ancillary devices that link directly to your smartphone.
They will all interoperate. Outside of that, we have what we call the N, which is an infinite number of things. So that could be the little smart vacuum in your room. It could be all the little IOT cameras that are in your house and in your workplace and in the street. It could be mapping stuff. There's going to be an infinite number of things.
But 1 plus 8 plus N is probably what the consumption ecosystem is going to look like. And that to me is what Xiaomi is doing. Their business model for cars looks to me like manufacturing plus a consumption ecosystem as a business model, which, you know, the other companies, now I think what BYD, what Xiaomi and what Tesla are doing are all going to converge, you know, they're not separate.
eventually, but they kind of are separate today. So that's kind of how I look at Xiaomi. And I think they're a good example of that because they are basically a consumption ecosystem player from the get go. That is what they do best. And they're adding the manufacturing to that. So that is number two was manufacturing plus a consumption ecosystem.
And yeah, we'll see how much they link it with their other devices. And that brings me to the third business model, which is Tesla. And I'm going to finish up here in about five minutes. So I'll keep it to 30 minutes this week. The Tesla business model, I would describe differently today. I think their business model is manufacturing plus AI services.
And that's a different animal. I mean, yes, there are these three business models, they overlap a bit, right? So we can see overlap, but I kind of look at where is 80 percent of the company's focus today. When I look at Xiaomi, to me, 80 percent of the focus is manufacturing and the consumption ecosystem.
When I look at BYD, I see manufacturing plus some services. But when I look at Tesla, I see a different focus. I see manufacturing plus AI services. Now, AI services, obviously autonomous driving is the big one. And I've been saying for a while that like, look, we've been talking about platform business models for 10 years and I've described it as sort of the, you know, super predator of the business world that this new business model emerged and nothing could touch it.
A big marketplace platform like Alibaba or Amazon can't be beat. It's the biggest animal on the savannah. I am now wondering that I think AI services might be more powerful as a business model, or at least as powerful. It's something new in the world. It's a new predator that's come onto the terrain, like, and if platform business models were the lion, AI services look like the tiger.
I don't know who's gonna win, tiger versus lion, but I accept that both of them are the king of the jungle, right? This is new. Okay, so. And we can see that, okay, the Tesla business model, fine lots and lots of manufacturing. That's been a huge part of their story. And now what we're hearing about is things like the Optimus robot.
And we're hearing this idea that Tesla is not really a car company at all. It is a robotics plus AI company. They build robots that are infused with AI. And it just so happens that their first product was a car and their second product was a truck and their third product was Optimus, the home robot or whatever it is.
But that is a very different thing. Now, in addition to that, are they tying in with other devices like your phone? I mean, whatever happened to the Tesla phone, right? Elon was talking about the Tesla phone a couple of years ago. You know, and if you were thinking, okay, consumption ecosystem, the Tesla phone would be a high priority.
He doesn't seem to talk about it anymore. In fact, he doesn't talk about a lot of the stuff that Xiaomi is talking about. He's talking about AI services, this idea that we're building a feedback loop between an intelligent system. In this case, autonomous driving. That has a tight feedback loop with data being gathered in the real world, as all these cars drive around, and as that feedback loop spins, the transportation and driving intelligence is increasing much faster than its rivals.
You know, there's this flywheel, basically, which is something I talked about for Baidu, which is they're basically building an industry specific intelligence flywheel flywheel. Basically this is the same that they're building real world intelligence as a flywheel. Cameras on the cars, see everything, gather the data, feedback to the ai, the model development, the next iteration that makes the cars better.
More people buy them, more people drive them. You've got a nice feedback loop or a flywheel that's a very different strategy. And I think that's kind of where I'm working on an article right now. For those of you who are subscribers, I've been writing a lot this month. I sent four articles on what Baidu is doing within AI and I've started to lay out models for how to think about AI as a strategy and a competitive advantage.
I'm pulling that all together right now in sort of what I call the primer on AI moats. And I'm going to lay out a basically a framework for when do AI services become an unbeatable business model, as opposed to AI services are good and we should do those because it's, you know, it's a good operational capability.
No, not that it's when does it become an unbeatable business model. I'm about halfway done with the primer right now. I'll hopefully get it out this week, I think. Yeah, that's been a big part of my focus. So that's on the way. But that's, you know, that's how I view Tesla. It's manufacturing plus AI services.
They're a good symbol of that. BYD is manufacturing plus services, mostly physical auto services, some digital services, and then Xiaomi is the manufacturing plus consumption ecosystem. And that is kind of the content for today. Let's see, the three concepts just to reiterate, oh, I'm sorry, there's one more point.
The one other concept I want to talk about today was the idea of the user interface as an advantage. Now, I've talked about this before with different language where I've kind of said, look, ultimately attention and engagement by customers, by users could be developers, could be consumers is a scarce commodity, a scarce resource, not a commodity.
I'm sorry. In fact, it may be the only scarce resource that human beings are not going to look at a thousand apps every day. They're going to look at a handful. So where you are in the queue in terms of customer attention and engagement matters, and certain companies are at the front of the queue. WeChat is at the front of the queue.
TikTok is at the front of the queue. They are a primary user interface. And to some degree, most of the other companies have to sit behind them and do what they say. It's a tremendous position of control. Now I've kind of called that the beginning of the queue the digital platform guru Sanjit I always say his name wrong, Choudhary in Singapore, a good guy and he writes on this subject.
He wrote Platform Revolution, Platform Scale, great books. Now I heard him say recently the You know, he describes this as user interface advantage, that whoever is at the front of the queue who gets the primary interface with a customer, a consumer, a content creator, a developer, any major user group is in a tremendous position of strength.
Okay, everything I just said, is anyone capturing the user interface position? I wouldn't call it an advantage. I would call it you know, sort of a key control point. It certainly looks like Xiaomi is going for that, and you have to have the phone and the car because those things are going to be linked.
Okay, it looks like Tesla is kind of going for it, but Not so much in the car. I mean, the whole AI services thing doesn't necessarily put you, I mean, yes, you're in the car some of the day. So in that scenario, you would be the front, you would be the user interface. But it looks like Xiaomi is going for it more aggressively.
Now BYD is going for it as well, but they have a much more limited suite of services to capture it. People are going to spend a certain amount of minutes in their car per day. but they're going to spend five to seven hours per day staring at their smartphone. So who captures the user interface is an important question and that's a good concept to think about.
I just never really had good language to describe it. So I like that phrase user interface. So that's kind of the other concept for today. I'll put it in the concept library. So the three concepts for today, user interface as a position of power the consumption ecosystem and then innovation platforms.
Where is that going to end up in all of this? That's kind of three concepts for today. As for me, it's been a, just a great productive week, which always kind of puts me in a good mood whenever, and I feel like I'm starting to understand things I didn't understand before. I always put something in a good mood.
I've kind of been that way all week. Fun stuff. I've been, I've been watching Peaky Blinders, which is, I really liked that show. I don't know. There's something, there's something about English historical films that I really like, and I don't really know why that's so appealing to me. Like I love the crown and.
Peaky blinders is really interesting. So anyways, I've been kind of binge watching that. Pretty great. Plus it's got, you know, look, it's, it's sort of a little historical Birmingham, you know, and then it's also of course loaded with sort of violence and sex and, you know, it's got about the right mix. of historical interest and then all the other stuff that makes television good.
Anyways, I'm on season three. We'll see. I hope it's not one of those ones where like the first couple seasons are awesome and then it totally becomes terrible. Which is like, it's so common when that happens. Like, like I'm still not over Game of Thrones, how terrible the last season was. I'm still angry about it.
So, you know, we'll see hopefully. Like the crown, like that was a good counter example. Like the crown was great every season and it ended great. Like it was very satisfying, but like House of Cards, Game of Thrones, like the last seasons were terrible. Anyways, I hope that doesn't happen. If it does, don't tell me.
I'll discover it on my own, I suppose. Anyways, that's it for me. Hope everyone is doing well, and I'll talk to you next week. Bye bye.