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Can Tesla take over the world? It all depends on Elon Musk finding a lieutenant

Steve Jobs at Apple had Tim Cook, and Mark Zuckerberg at Facebook has Sheryl Sandberg. Behind every visionary leader stands an execution tsar

PUBLISHED : Friday, 04 August, 2017, 11:03am
UPDATED : Friday, 04 August, 2017, 9:28pm

Tesla announced its earnings on Wednesday last week. Nobody expected chief executive Elon Musk to come through with any profits, unlike other carmakers. By merely posting less-than-expected losses for the second quarter, the company increased its share price by more than 6 per cent in after-market trading.

Tesla’s lack of profits should come as no surprise. All start-ups must go through an investment phase. In 2016, the Palo Alto, California-based carmaker lost about US$770 million on US$7 billion revenue, meaning it was losing money on every car it sold. Ford, conversely, was making US$10 billion in pre-tax profits on US$150 billion revenue.

Google, Facebook and Apple all underwent that tormenting phase before turning into cash machines. What’s surprising is that Tesla was publicly listed in 2010. Its share price has since been on the upswing, rendering the company the No 1 US carmaker by market value despite making zero profits. All Fortune 500 chief executives would envy such leniency when facing the tyranny of quarterly earnings announcements.

Behind every visionary leader stands an execution tsar. The failure of Uber’s Travis Kalanick is recent proof of this age-old wisdom

Is the financial market blindly exuberant about Tesla?

In studying disruptive innovation, Harvard Business School’s Clayton Christensen noticed more than a decade ago that technology creators often struggle to commercialise promising technologies, even when the clear benefits of doing so are demonstrated. The problem is further exacerbated when the firm must work with other companies down the value chain to manufacture the finished goods.

In 1965, scientists at DuPont invented an ultra-strong fibre called Kevlar. The endurance of the miracle fibre would have made it an obvious choice for tire cord, replacing the steel-belted radial tyres of the time. After spending US$400 million on constructing a Kevlar cord plant, however, DuPont belatedly discovered an adhesion problem with Kevlar cord and tyre rubber when manufactured at a high volume – a problem that had not appeared in test tyres handcrafted in-house. In other words, Kevlar could not be implemented directly into the existing manufacturing process in the downstream tire manufacturers such as Firestone or Michelin.

The only solution would have been for DuPont to forward-integrate and essentially become a tyre manufacturer. Alternatively, DuPont could have hoped for a tyre company to completely retool its manufacturing plant to take advantage of Kevlar’s unique properties. But none did.

Kevlar therefore remained a scientific curiosity until its application as bulletproof fabric, thanks to its perfect compatibility with existing weaving technologies in downstream textile manufacturers, such as W. L. Gore.

Carmakers face a similar dilemma when going electric.

Long gone are the days when Henry Ford still ran his rubber plantation and timberland, coal and iron ore mines to feed raw materials into his Michigan factory at one end and crank out cars at the other. Today, almost nobody makes their own windshields or upholstery or rear-view mirrors. Carmakers rely on foreign suppliers that span the globe, leaving domestic manufacturing plants to only perform the final assembly.

It is not that traditional carmakers do not invest in innovation – they do. Big car companies routinely spend up to US$1 billion on it and engage thousands of people to design new vehicles. However, they do so across a great span of geographic regions, with multiple parties, while ensuring that thousands of moving parts perform to perfection. That is why, before Tesla, nobody could bring to consumers an electric vehicle at scale.

Tesla is not a carmaker. If its future revenues were to only come from cars, it could hardly justify any of these investments

At Tesla’s Palo Alto headquarters, visitors can marvel at the myriad manufacturing activities that the company carries out in-house, including operations that a traditional carmaker would outsource. Although the batteries inside a Model S might resemble those found in a laptop, Tesla seeks to master battery chemistry first-hand. Its Gigafactory in Nevada is set to produce batteries at a scale that far exceeds the current capacity of today’s global supply chain, preparing to drive down production costs to a level the world has not yet seen. SolarCity, a seemingly unrelated manufacturer of solar panels, was also merged into Tesla in November last year. And that is exactly the point – Tesla is not a carmaker. If its future revenues were to only come from cars, it could hardly justify any of these investments.

The mastery of energy storage in car batteries or at home, energy generation through solar cells, and an energy delivery system via superchargers are arguably keystones to upgrading our mobility system. Tesla’s pursuit of driverless cars may set it up for autonomous fleet management, a nascent sector in which only Uber and Google are significant contenders. Where Tesla would persist in operations is where the current supply chain underperforms, enabling the company to build capabilities at a scale nobody can match.

Tesla’s share price has been on the upswing, rendering the company the No 1 US carmaker by market value despite making zero profits

Viewed in this light, the biggest uncertainty of Tesla lies not in the company’s strategy but in Elon Musk’s own ability to secure his next reliable lieutenant. Now that Tesla has established the legitimacy of electric vehicles, its next hurdle is to populate our driveways with the affordable Model 3. But even Musk feels squeezed by such demand. “We’re going to go through at least six months of production hell,” he said publicly.

For all the creativity and genius of Musk, his individualistic activities that were so critical for Tesla to get off the ground no longer suffice. So consuming are Tesla’s operations that Musk reportedly “moved his desk to the end of the Model 3 production line in Tesla’s Fremont factory and kept a sleeping bag in a nearby conference room”. But there is a solution. Bill Gates at Microsoft had Steve Ballmer. Steve Jobs at Apple had Tim Cook. And Mark Zuckerberg at Facebook has Sheryl Sandberg. Behind every visionary leader stands an execution tsar. The failure of Uber’s Travis Kalanick is recent proof of this age-old wisdom.

When Musk said “some people don’t like change, but you need to embrace change if the alternative is disaster”, he was partially referring to the ongoing turmoil in the car industry. But judging by the growing pains at Tesla, that quote might well apply to his leadership team as well.

Howard Yu is professor of strategy and innovation at IMD Business School with campuses in Switzerland and Singapore

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