ELON MUSK & TESLA ARE REBUILDING THE UNITED STATES
BY STAS MARGARONIS
Elon Musk is making the United States a global leader in car manufacturing with his development of the Tesla models of electric cars which eliminate the need for gasoline and the internal combustion engine. The company is developing a car battery factory to improve the range and reduce the costs of its electric cars and to also provide new energy storage for homes and businesses. If Tesla is successful, it could make most of the global car industry obsolete.
In his biography, Elon Musk: Tesla, SpaceX and the Quest for a Fantastic Future, author Ashlee Vance recalls how Musk built up an aerospace manufacturer and space transport company (SpaceX) and challenged the global auto industry with an electric car maker (Tesla). Musk, a South African immigrant, started his own software company, Zip2, which made online maps. He sold Zip2 to Compaq for $307 million in 1999. In the same year, he started an online finance firm to improve electronic banking which later merged to become PayPal.[1] Musk’s exposure to software systems was to be deployed later in his design and manufacture of cars and rockets.
Tesla builds cars in Fremont, California producing 1,000 vehicles per week. Tesla is building a battery plant in Nevada to support its’ electric car production.[2] SpaceX builds rocket engines, software and electronics at its Hawthorne, California facility.[3] Musk’s partnership with SolarCIty will source Tesla batteries from its Nevada factory and solar panels manufactured from a new factory in New York State.[4] Musk has discovered that he can improve quality and costs by sourcing key components from the United States.
As Vance’s book makes clear, Musk has had a genius for recruiting and partnering with some of the best and brightest American engineers and manufacturers. Musk’s teams include: Gwynne Shotwell and Tom Mueller at Space X, Lyndon and Peter Rive at SolarCity,[5] and Martin Eberhard, Marc Tarpenning and JB Straubel at Tesla.[6] Vance also notes that Musk benefited from an outstanding and loyal personal assistant, Mary Beth Brown.
Musk has been lucky with timing and his slant toward renewable energy which has attracted sizeable government funding. The Financial Times notes: “The billionaire’s companies — Tesla, SolarCity and SpaceX — together have benefited from nearly $5bn in public assistance. Says one analyst: “He definitely goes where there is government money.” [7]
There are still a number of barriers to surmount before Tesla can be a success:
- Tesla is not expected to show a profit until 2020.[8]
- The current Tesla Model S cars are expensive and prices begin at $69,000.[9]
- The introduction of the new Model X, an SUV priced between $69,000 to 79,000, has been delayed by two years and is costing the company money.[10]
- Tesla has filed for a $500 million equity infusion to support capital expenditures in its battery plant and because of slow sales.[11]
- Analysts are worried about the drag on revenues and cash flow from the battery plant.[12]
- Cyber security researchers recently found six significant flaws inTesla’s Model S cars that could allow hackers to take control of the vehicles (see footnote 15).
On the other hand, because Musk is building a car company from the ground up, it is possible to completely redesign and re-engineer vehicles with the latest electronic and software innovations:
- The investment in the battery factory will reduce battery costs by 30% and help bring the price of its third generation electric car down to around $35,000 which will attract middle class customers and a broader market. Cars will have a range of 200 miles per battery charge.[13]
- The Tesla Gigafactory is a lithium ion battery factory under construction in Reno, Nevada. The projected cost is $5 billion. Panasonic is a partner and will lead battery cell production.[14] Tesla batteries will also provide storage for homes and businesses in partnership with companies like SolarCity.
- SolarCity finances the installation of solar panels for homes and businesses allowing customers to avoid the full solar panel installation cost and the long pay back period The company then leases the panels back to customers at a fixed monthly rate. The result is customers get a lower utility bill. Solar City has partnered with Tesla to acquire battery packs from Tesla’s Gigafactory. The batteries will store solar energy and enhance savings. In effect, the batteries help take SolarCity customers off the grid. SolarCity had been sourcing its solar panels from abroad, but is now sourcing them from the United States. In 2014, it acquired Silevo, a manufacturer of solar cells. SolarCity will build a new factory in New York State to produce solar panels. Silevo’s efficiency in turning light into energy is 18.5% from its solar cells compared to 14.5% from existing solar cell providers. SolarCity hopes its acquisition of Silevo will raise solar cell efficiency levels to 24% “with the right manufacturing techniques.”[15]
- The hacking of the Tesla Model S cars was quickly remedied because Tesla has superior electronics and software compared to conventional carmakers and can issue upgrades electronically so drivers don’t have to go to the dealership. The Financial Times reports: “Tesla is issuing a patch to fix the flaws that all drivers will have by Thursday. The company said drivers will be able to download the updates via WiFi or a cellular connection….This was another key safety feature that earned Tesla praise from the security researchers. Many carmakers did not have the ability to automatically send software updates to cars without drivers having to take the car to a dealership or mechanic.”[16]
THE NEW AMERICAN SYSTEM OF MANUFACTURING
The Musk companies are pioneering a new American system of manufacturing, based on lessons Musk learned from working in California’s software industries. These innovations are being incorporated into the manufacture of electric cars, batteries and rockets.
In his book, From the American System to Mass Production, 1800-1932, historian David Hounshell describes how the United States pioneered labor saving manufacturing processes through the development of machine tools produced at U.S.Armories at Harper’s Ferry, Virginia and Springfield, Massachusetts. The use of machines improved efficiencies and lowered production costs so that Americans, who were generally higher paid workers than European workers, still undercut their competitors through improved productivity using what became known as the American System of Manufacturing.[17]
Thomas Blanchard designed a gun stock lathe. In 1822, this led to a research and development partnership with the Springfield Armory to design and build machine tools to produce rifles.[18] The military support of machine tools at Springfield in the 1820s drove development of a Connecticut River Valley complex of companies analogous to the military support of semiconductor makers some of whom formed the Silicon Valley of California during the 1950’s and 1960’s. Blanchard’s machine tools spurred U.S. mechanization of firearms by using machines to replace craftsmen. Samuel Colt employed workers and techniques developed from these “Armory practices” to manufacture the Colt revolver using standardized and interchangeable parts that improved quality and productivity. In 1851, Britain’s Crystal Palace exhibition opened to showcase British industry but .the Colt revolver and the American system of machining parts stole the show.[19]
The American System of Manufacturing was transformed into mass production by Henry Ford and his Ford Motor Company team that built the Model T automobile. They integrated the internal combustion engine with car parts manufactured by American machine tools and powered by an assembly line pioneered in U.S. meat packing. By 1914, Ford was faced with high turnover and demands from workers for better working conditions. The company responded by doubling worker wages to $5 a day. The production of Ford cars nearly doubled and production costs declined. Ford’s mass production system spread to other manufacturers enhancing the United States’ role as a global economic power.[20]
CONCLUSION
Elon Musk and his team have used the technology and manufacturing techniques derived from California’s Silicon Valley, plus Musk’s experience building Zip2 and PayPal, to build not one company but three: Tesla, Space X and SolarCity. In the process, they have created a new American System of Manufacturing that establishes electric cars, batteries and renewable energy storage as building blocks, not just for a new economy, but one that can combat global warming. There may be shortfalls in cash flow, slow sales, and batteries that need improvement, but Musk and his new generation of American engineers and manufacturers are rebuilding the United States into a global economic competitor, primarily powered by renewable energy.
[1] Ashlee Vance, Elon Musk: Tesla, SpaceX and the Quest for a Fantastic Future (2015)
[2] http://www.teslamotors.com/about
[3] Shotwell, Gwynne (June 4, 2014) Discussion with Gwynne Shotwell, President and COO Space X. Atlantic Council, Event occurs at 22:35-22:20
[4] Vance, p.377
[5] https://en.wikipedia.org/wiki/SolarCity
[6] https://en.wikipedia.org/wiki/Tesla_Motors
[7] Financial Times, June 1, 2015, Shadow banks win share, manufacturing activity slows, American socialism’s day in the sun. http://www.ft.com/cms/s/0/c2db0e6a-0822-11e5-95f4-00144feabdc0.html#axzz3icSAHnut
http://www.wsj.com/articles/tesla-china-sales-declined-significantly-ceo-says-1421186754
[8] http://www.wsj.com/articles/tesla-china-sales-declined-significantly-ceo-says-1421186754
[9] http://www.plugincars.com/tesla-model-x
[10] Ibid
[11] http://www.businessinsider.com/tesla-500-million-stock-offering-2015-8#ixzz3ihw7ubaP and Financial Times July 8, 2015, Elon Musk should sell more equity before it is too late “ The solution to stop the bleeding is supposed to be a new vehicle, the Model X, whose larger chassis is aimed at the sport utility vehicle crowd. But the schedule keeps slipping…. Tesla still has a market value of $32bn, 77 times the consensus earnings estimate for 2016. Investors have remained loyal. Mr Musk should take advantage of that loyalty while he still can.” http://www.ft.com/cms/s/3/3064e10a-3bf8-11e5-bbd1-b37bc06f590c.html#axzz3icSAHnut
[12] Financial Times September 3, 2014, Tesla to gamble on Nevada electric car plant “Making batteries in massive volumes is a key part of Mr Musk’s hopes of driving unit costs down to the level where electric cars can become affordable to a much larger market…Tesla has said that it aims to cut the costs of battery packs by 30 per cent, which will be needed to hit the price target of $35,000 that it has set for its so-called third-generation vehicle while still giving it a range of at least 200 miles….Tesla confirmed in June that Panasonic would be a partner in the factory and make lithium ion cells inside the facility for inclusion in Tesla’s battery packs…..The scale of the plant, which Tesla has said will cost some $5bn, has highlighted the giant gamble the company is taking on being able to stir enough demand from mainstream customers for electric vehicles….. In a report last month, Lux Research predicted that Tesla would be able to sell only 240,000 vehicles a year by 2020, less than half the 500,000 it has forecast. That would leave it with substantial overcapacity in battery production that would not be made up for in sales to other car companies or for other battery applications, the research firm said….To reduce the risk, Tesla has said that it is also targeting the market for large-scale electricity storage systems used by power companies, where low unit costs are also a key competitive factor.”
http://www.ft.com/cms/s/0/7236bd5c-33a6-11e4-ba62-00144feabdc0.html#axzz3icSAHnut
[13] Ibid
[14] http://www.technologyreview.com/news/526126/does-musks-gigafactory-make-sense/
[15] Vance, p 320- 322
[16] Financial Times, August 6, 2015, Hackers take control of a Tesla Model S and turn it off at low speed http://www.ft.com/cms/s/0/d0d1932a-3b05-11e5-8613-07d16aad2152.html#axzz3icSAHnut
[17] David Hounshell, From the American System to Mass Production, 1800-1932 (1984)
[18] Hounshell, pages 38-39
[19] Charles Morris The Tycoons(2005), pages 31-50
[20] Hounshell pages 217-261