Managers must push new capabilities key to future success
As a thought experiment, imagine Elon Musk were to enter your industry, what would he do differently?
Elon Musk has been known as a builder who loves to construct things. He builds Tesla cars that lure buyers from BMW, Maserati and Audi. He founded SpaceX, which manufactures and launches rockets and spacecraft. He opened the Gigafactory, which produces lithium-ion batteries, and will be the world’s second-largest plant after Boeing. He runs SolarCity, the largest solar energy services provider in America.
A sceptic of artificial intelligence, Musk has long scoffed the idea of letting the powerful technology only be controlled by a small group of elite scientists or government bodies. He founded OpenAI, a billion-dollar non-profit, to work on safer artificial intelligence, as he once solemnly warned that artificial intelligence could be “potentially more dangerous than nukes”, and likened it to “summoning the demon”.
On Monday this week, Musk launched yet another company called Neuralink, aiming to implant tiny electrodes in our brain to directly flash data to and from our consciousness. “Your phone and your computer are extensions of you, but the interface is through finger movements or speech, which are very slow,” Musk told the Vanity Fair.
This is a bold response in the age of technological acceleration. Lately, scientists have begun to realise that there is no way that human can keep up with the advancement of artificial intelligence. Millions of years of natural evolution have endowed us with an outsized brain. We possess an unparalleled skill for language and the brilliance to coordinate complex activities, well enough to outcompete every other species on earth. But that natural evolution took eons.
Meanwhile, the improvement of computing power, on average, has been doubling every 18 to 24 months. Intel has been delivering on that promise since the mid-60s, and has immortalised it in the name of the company’s co-founder: the Moore’s Law. That is why in recent successions, we saw IBM Watson beat human contestants on the game-show Jeopardy!, and then AlphaGo won the ancient board-game Go against the world champion Lee Se-dol.
There is little doubt about whether machines will become smarter than humans. They will. The only dilemma is how humankind will respond. For Elon Musk, our carbon-based wet brain needs an upgrade.
For investors at large, however, the most pressing question remains whether Elon Musk is stretching himself too thin. Has his family of companies diversified into too many unrelated businesses?
In the ’70s, the idea of conglomerate discount gained rapid popularity among financial analysts. It was a time when private equity was in full swing. Big, lacklustre, publicly listed companies were taken over one by one, often unwillingly, by activist investors. They streamlined, split, and diced the newly acquired companies into simpler, leaner and smaller descendants, with each focusing on fewer businesses.
With sweeping changes of top management teams and through the use of highly incentivised compensation, many of the companies were reborn agile and regained market leadership in their own right, and in the process, unlocked shareholder value.
That wave of leverage buyouts, hostile takeovers, and divestment proved to be so powerful that the idea that complicated businesses are always bad took root in all financial analyses. Other than exceptions like GE and Johnson & Johnson, companies that don’t have a narrow focus are punished with a discount on their stock price. If Wall Street analysts can’t pigeonhole a company, it is probably a bad company, so the thinking goes.
To be sure, Tesla is not exactly a conglomerate, as SpaceX and Neuralink are operating as separate entities. But within Tesla, as a carmaker, the scope of its operation is bewilderingly wide compared to General Motors, Ford or Toyota. As of November 2016, Tesla’s market share in cars and light trucks was a tiny 0.3 per cent. During the year, some 76,000 vehicles rolled out of the factory. Ford’s F-Series alone sold 780,000 units in 2015.
And yet, at Tesla’s Palo Alto headquarters, visitors can marvel at the myriads of manufacturing activities that the company carried out in-house, including operations that a traditional carmaker would outsource for reasons of staying focused.
Although the batteries inside a Model S might resemble those found in a laptop, Tesla sought to master battery chemistry first-hand. Its Gigafactory in Nevada is set to produce batteries at a scale that far exceed the current capacity of today’s global supply chain, ready 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 the financial markets love it. Tesla’s stock has risen more than 40 per cent over the last four months. The company is valued at more than US$45 billion, worth more than Nissan Motor, and only a few billion shy of the reigning queen of Detroit: Ford Motor.
All this means that the conventional wisdom that a company should focus on existing core competencies or current business lines in order to achieve a stock premium looks downright ludicrous. Kodak did have a singular focus and look what happened to it. And one can theoretically argue that Tesla is enjoying a conglomerate premium rather than a discount, precisely because it is building critical capabilities to reinvent a century old industry.
The mastery of energy storage in car batteries or at home, energy generation by solar cells, and an energy delivery system via superchargers are arguably keystones to upgrading our current mobility system. Only with a combination of these critical capabilities can we hold out hope of creating sustainable transport that can power the 21st century. Where Tesla would persist in operations is where the current supply chain underperforms, turning in-house control of component parts into a real advantage.
In the today’s era of abundant cash and capital, managers must therefore ask themselves:
● To what extent are we committed to new capabilities critical to future success?
● As a thought experiment, imagine Elon Musk were to enter your industry, what would he do differently?
And if Musk’s Neuralink does materialise, we may one day summon a Tesla by mere thought. Now that’s autopilot for real.
Howard Yu is professor of strategy and innovation at IMD Business School with campuses in Switzerland and Singapore