Elon Musk is widely admired for his daring vision and for his technological achievements. His talents in the financial and economic realms are less often celebrated, but they are no less important to his success. Technical and financial aptitude are rarely combined in the same individual, but Elon has displayed a mastery of both domains from the beginning - remember that his first major coup was PayPal.
Above: Tesla and SpaceX CEO Elon Musk (Image: Seventh Equation)
A new video from Wendover Productions explains that both Tesla and SpaceX are, at bottom, economic plays - in both cases, the business model depends on delivering what was thought of as a fairly mature technology at a fraction of the current cost.
When Musk first set out to realize his vision of space travel, he found that the business of launching rockets was ripe for disruption. Before SpaceX, the companies that offered launch services were aggregators that bought rocket engines, guidance systems and other components from different suppliers, which added layers of costs. And of course, they threw away the whole rocket after every flight, which made the whole business incredibly expensive. There was little competition, and governments and deep-pocketed telecom companies were the main customers, so there was no incentive to find a cheaper way.
SpaceX makes 85% of its components in-house, allowing it to take a bite out of costs. But it’s reusable rockets that will really redefine the economics of space travel. Once SpaceX is recycling rockets for commercial launches on a regular basis, it expects to be able to be able to launch payloads at a price that’s 10 times cheaper than anything the competitors can offer.
Above: Elon Musk's companies, SpaceX and Tesla, look to reduce costs by an order of magnitude (Youtube: Wendover Productions)
Now, it may not be apparent to car buyers looking at the $74k-and-up price tag of a Model S, but Tesla’s economic strategy is also based on achieving dramatic cost reductions. Like SpaceX, Tesla has embraced insourcing - of the over 5,000 components in a Tesla vehicle, around 80% are made in-house. Of course, this flies in the face of conventional wisdom - legacy automakers outsource almost everything these days. However, as Tesla’s former VP of Production Greg Reichow explained in a recent Wired article, there are several good reasons for a company making a new and innovative product to do things this way.
While taking control of its supply chain enables Tesla to squeeze out some costs, the truly dramatic cost reductions that the company is counting on will have to come from the component that’s unique to an electric vehicle: the battery.
If the biggest money pit in space travel is disposable rockets, when it comes to electric cars, it’s batteries. Since the advent of the modern EV, battery costs have steadily sunk (shades of the shrinking semiconductor costs that powered the computer revolution), from an average of over $1,000 per kilowatt-hour in 2010 to around $227 per kWh in 2016 (according to consulting firm McKinsey & Company). Tesla has always been ahead of the curve - it claimed to have reached $190/kWh in early 2016. However, that’s still not cheap enough to make EVs truly affordable - at that price, a 50 kWh battery pack like the one in the base Model 3 would still cost $9,500.
Above: As battery pack prices drop, electric car sales rise (Source: McKinsey & Company via Electrek)
By now it should be clear that reducing battery costs is a centerpiece of Tesla’s business model. The company has said that it hopes to bring those costs down by 35% just by achieving economies of scale at the Gigafactory. Incremental improvements in battery chemistry and pack design will add to the savings. Like any automaker, Tesla refuses to disclose its exact battery costs, but Elon Musk has said that he will be “disappointed” if the company can’t bring the cost below $100 per kWh by 2020.
Many industry observers believe that that figure represents the “tipping point” (or “paradigm shift” or “Holy Grail” if you prefer) at which EVs will be truly cost-competitive with legacy vehicles. When you take into account the savings on fuel and maintenance, the switch from fossil fuels to electrons will be a no-brainer.
However, some industry observers believe that much greater cost reductions are in the offing. If and when fully self-driving vehicles come into widespread use, the relevant figure won’t be the cost of a vehicle, but the cost per passenger-mile. According to a much-discussed report by futurist Tony Seba, by 2030 most of us will be getting around in autonomous electric vehicles (like the Tesla Model 3, which was designed to deliver Transportation as a Service), at a cost as low as 6.8 cents per mile. That’s a tenth the average cost of getting around today.