Elon Musk’s most successful companies, Tesla and SpaceX, are having very different years in 2018.
SpaceX debuted a powerful new rocket, the Falcon Heavy, and has successfully launched seven orbital missions. Tesla has struggled to produce its Model 3 electric sedan at promised rates, raising questions about the company’s cash flow and encouraging short-sellers. On March 23, a driver was killed after his Tesla’s autopilot system steered the car into a barrier, though the system is not intended to be used without a driver’s hands on the wheel.
Analysis of both companies tends to focus on Musk’s social media antics and brash confidence, but both are run by professional teams and their business success is determined as much by market forces and global trends as Musk’s brand of strategic risk-taking.
Indeed, the growing pains faced by Tesla are connected to a simple fact: It’s trying to do a much harder job than SpaceX.
SpaceX’s banner year has been based on its ability to make the launch and recovery of reusable rockets routine. In the past year, it re-used more rockets than were flown at all by its chief American competitor, the United Launch Alliance. Even without reusability, its rockets are far cheaper than any other vehicle capable of flying to orbit.
The firm’s secret sauce was simply…trying to build a cheaper rocket. SpaceX’s main competitors are government-subsidized firms that didn’t have much incentive to innovate. By adopting fairly straightforward strategies, like using off-the-shelf components, focusing on simple, reliable systems, and planning for high rates of flight, the company was able to out-compete incumbent firms.
Its reusable vertical takeoff and landing rocket technology, while a real engineering accomplishment, was demonstrated in the 1990s by McDonnell Douglas and NASA. Other rocket-makers, aware that reusability was possible, weren’t confident that they could fly rockets enough to re-coup the costs. SpaceX was willing to take the risk to make this technology real.
Perhaps most notable is that SpaceX’s competitors have not been quick to catch up with them. The company’s primary rival in technology is another startup, Jeff Bezos’ Blue Origin, which has yet to launch its orbital rocket. Rocket makers like Europe’s Arianespace and United Launch Alliance are only now developing reusable systems. And one potential competitor, China’s space program, is largely off-limits for many satellite operators because of national security rules.
There’s no doubt founding a rocket company is hard—history is littered with bankrupt entrepreneurs who have tried, and SpaceX nearly went under itself before its rockets started flying. But SpaceX benefitted from being an aggressive player in a stagnant industry.
The world makes very few rockets, and it makes a lot of cars. In 2017, there were 90 orbital rocket launches in the world; SpaceX was responsible for 18. The same year, global carmakers built 73 million cars; Tesla made about 100,000.
Tesla, rather than entering a stagnant market, entered one of the most competitive on earth, facing off not only against domestic competitors like Ford and GM, but also global giants like Volkswagen, Toyota, and Hyundai that have spent decades developing ultra-efficient plants that make 5,000 cars or more each week.
Tesla’s growing pains have lately focused on the challenge of catching up to these automated mass-production systems; Tesla is currently churning out 2,200 Model 3 sedans a week with significant back-orders to fulfill. In the space industry, conversely, mass production is unusual, and most components are hand-assembled. SpaceX has been notable in seeking to add automation to the process, in part because of lessons Musk learned at Tesla.
And Tesla isn’t just trying to make a cheap car. It is trying to make the first mainstream all-electric passenger car. This required pushing existing battery technology to the limit and indeed will likely require new advances before electric vehicles push past current ranges of a few hundred miles per charge. It also means competing on taste and user experience as much as price and capability. That’s one reason the company chose to start with a luxury car and work its way down to the Model 3, an affordable mid-range sedan.
Unlike the space industry, the auto industry is not standing pat in the face of Tesla’s challenge. The successful debuts of the Tesla Roadster and the Model S demonstrated the market appeal of all-electric cars. GM debuted the all-electric Chevy Bolt in 2015, and its sales have been climbing. Volkswagen says it will offer the full range of its vehicles in all-electric versions by 2030. Another challenge taken on by Tesla, building self-driving cars, is not only novel but also enormously competitive, setting it up for rivalries with traditional car companies and start-ups like WayMo and Uber.
It might surprise you to know that SpaceX has required far less outside financing (around $1.7 billion in equity) than Tesla (about $12.5 billion in equity and debt).
It’s partially a question of customers. There are only a few dozen organizations that purchase rocket launches, and they are used to putting down multi-million dollar deposits. The most important rocket customer is the US government. NASA provided billions in funding for SpaceX to develop tools to fly cargo and astronauts to the International Space Station, which allowed the company to mostly boot-strap itself to success with outside revenue instead of fundraising rounds.
Tesla, on the other hand, has to reach potentially millions of customers, and though it took deposits from buyers, it maintained they were refundable. Reaching and servicing all those customers has required setting up more than 200 stores worldwide—no small capital cost on top of design, engineering and production. All that required not just private investment, but an initial public offering, and significant amounts of debt. The IPO, too, had come with public scrutiny that SpaceX, quite intentionally, does not face. Musk says he will not take the company public until it is flying regular service to Mars.
“I’m hopeful that people think that if we can send a Roadster to the asteroid belt, we could probably solve Model 3 production,” Musk told investors during an earnings call after SpaceX launched a Roadster into the solar system with its new Falcon Heavy rocket. Instead, he might have noted that if building one thousand electric cars every day was as easy as launching an orbital rocket, Tesla would be doing it already.