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Is Musk a visionary or a madman?
VISION OR ILLUSION?

Elon Musk is using Tesla to make a Great Leap Forward for electric cars

Jean-Louis Gassée
By Jean-Louis Gassée

Editor, Monday Note

Tesla enjoys a reputation out of proportion with its 0.15% share of the US market. And Chairman Musk now says production will jump from 50,000 units in 2015 to 500,000 in 2018. This projected tenfold jump invites doubt, or worse. But a strong reaction (400,000 pre-orders) to the just-announced $35,000 Model 3 shows hope for the company to make electric cars more mainstream.

“No way. Impossible. Won’t work.”

Thus goes the chorus of disapproval that accompanies Elon Musk at every step of his unconventional way.

In 2008, Tesla, Musk’s all-electric vehicle company, brings out its $100,000 roadster, a combination of a Lotus Elise chassis derivative and lithium-ion laptop batteries.

“It’s a toy for Silicon Valley lunatics who have too much money.”

That same year, Tesla announces the Model S. The car is shown in prototype form the next year and ships three years later, in June 2012.

“Another $100,000 car, years late. This is innovation?”

The Model X SUV, with its distinctive falcon doors, is introduced in early Feb. 2012 and, after multiple delays, starts shipping on Sept. 29, 2015. Price tag: $120,000–130,000.

“Everybody, all together: It’s buggy, it’s late, and it’s expensive.”

It’s not just the cars that incite the choir; they’re also agitated by Tesla’s irresponsible way with “easy” money. By Jan. 2009, Tesla (founded in 2003) has raised $187 million and delivered 147 vehicles.

“Ha! A million dollars per vehicle. It’s a joke, just see Tesla Deathwatch section on The Truth About Cars website.”

In June 2009, Tesla receives $465 million in interest-bearing loans from the United States Department of Energy (loans they have since fully paid back).

“Highway robbery. Liberals spending taxpayers’ money on gewgaws for green-shamed millionaires.”

Then there’s Musk’s “bad memory” (or poor planning…or maybe he just improvises). In Tesla’s Jan. 2016 shareholders letter, Musk tells shareholders [as always, edits and emphasis mine]: “We plan to fund about $1.5 billion in capital expenditures without accessing any outside capital….”

Three months later, the company announces that it plans to sell $2 billion of Tesla shares in order to invest in the just-announced Model 3 production.

“Right. Three months ago, you had no idea you’d need capital for the new model?”

To finish the articles of indictment, Tesla has made a bid to acquire solar power company SolarCity for $2.8 billion. Musk calls the acquisition a “no-brainer” that fits into Tesla’s long-term strategic goal of end-to-end energy sustainability. The problem? “SolarCity was founded in 2006 by brothers Peter and Lyndon Rive, based on a suggestion…by their cousin, Elon Musk, who is the chairman and helped start the company.” [Wikipedia]

“This one takes the cake. Tesla wants to bail out another Musk company that’s a failing performer in a challenged industry sector. This would increase Tesla’s debt to $6 billion!”

The chorus is loud, but Musk doesn’t seem to be listening—or he doesn’t care.

This is a man whose long entrepreneurial career before Tesla (see his Wikipedia bio here) made him money and followers, a man who builds reusable launcher rockets with his SpaceX company, puts satellites in orbit, and says he’ll launch the world’s most powerful rocket by the end of this year.

Musk’s track record and enthusiasm can’t be denied. If you have the time, watch this Elon Musk interview from the 2016 ReCode Conference. Musk struggles with an explanation of orbital speeds and landing barges in the first ten minutes, but then the gears kick in and he finishes with brilliant musings about space exploration, Tesla, and the Nevada battery factory.

Musk does, of course, make outlandish promises, particularly when it comes to schedules and timelines. Tesla says it’s gearing up to produce 500,000 of its more affordable (~$35,000) Model 3s in 2018, and one million in 2020. Once again, we can hear the choir:

“50,000 cars in 2015… 500,000 in 2018… that’s a tenfold increase in less than three years! And deliveries are supposed to start in ‘late 2017?’ Not going to happen. Musk himself says the design isn’t even finished yet: ‘Pencils down’ some time in July.”

This time, skeptics might have a point. The manufacturing process I saw during a recent visit to Tesla’s Fremont factory can’t possibly grow by a factor of ten, an impossibility the guide acknowledges. “But,” he says, “you won’t recognize the place in a couple of years.” One hopes so, but the Model 3 is supposed to come out in 18 months. (More about the factory visit in the addenda.)

Perhaps Musk’s greatest talent is that he always manages to jump from one melting ice floe to the next bigger one, and to the next one after that. He was in the right place at the right time when he bought the Fremont factory for almost nothing, $42 million. He raised much-needed operating capital by offering a $1,000 preorder for the Model 3… and more than 400,000 aspirants took him up on it.

The same good fortune (or dark arts, depending on your inclination) applies to Tesla’s market capitalization. With the Solar City announcement, the company’s market cap was trimmed back to $32 billion, but at times it has been larger than Ford’s ($51 billion) and GM’s ($45 billion). Are Tesla shareholders simply fools who are hypnotized by a mountebank CEO? Or do they see a giant in the making and are willing to pay more for a share of a company that produces tens of thousands of cars a year than for shares from an incumbent that produces millions?

A look at market numbers reveals an interesting statistic: In the US, Tesla is winning the War of the S’s—Tesla’s Model S versus Mercedes S-Class:

luxury vehicle sales
Monday Note

Here, “winning” doesn’t mean that Tesla is profitable—the company lost $889 million in 2015 on $4 billion in revenue. But the company has gained a reputation far larger than its 0.15% share of the US auto market. The 400,000 Model 3 preorders shows a strong appetite for a “no punishment” electric car—by which I mean less limited, more fun car than a Nissan Leaf, for example.

Of course, there’s the infrastructure question: Is the all-electric car market viable without a network of charging stations? The garage under our office building hosts as many as ten Teslas on some days, with a good number of Chevy Volts, BMW i3s, and Nissan Leafs, all serviced by six outlets.

But that’s changing. The movement Tesla cleverly started by deploying its network of free Superchargers has been followed by an impressive number or for-profit charging stations, an indication of faith in the future of electric cars (with some help from taxpayers). A company called Chargepoint shows a map of the outlets in our neighborhood:

chargepoint map
Chargepoint

(The cluster of 138 outlets is undoubtedly Facebook.)

The limited but growing impact of the S and X models, the reaction to the Model 3, and the expanding charging infrastructure make me feel that electric cars will slowly but surely climb out of their little niche. It will, of course, take years before they go from their current 0.4% of the US market to 5%. That would be 900,000 cars, about Musk’s goal for Tesla alone in 2020.

Despite the delays, bugs, and overstatements, and in the face of incumbents who are determined to meet Tesla head-on—not to mention possible new players—I wouldn’t discount Elon Musk’s chances to succeed. And I’m curious to see what he’ll do with Solar City.

Addenda:

My better half recently took delivery of a Tesla Model S, thus giving us an opportunity to visit the Fremont factory. Visitors have to sign a Non-Disclosure Agreement (NDA), are forbidden to take pictures or record sound, and are barred from divulging details of what they’ve seen or heard. This is perplexing: a YouTube Search for “Tesla factory Fremont” yields more than 3,000 hits with much robot porn. NDA or not, I can’t help compare the Fremont factory to the Honda factory in Marysville, Ohio that I visited eons ago. I found the contrast striking and will just say that Tesla’s production process doesn’t belong to the lean manufacturing category pioneered by Toyota and embraced by Honda. See “The Machine That Changed The World,” which has a sad chapter on the previous owner of the Fremont building.

Finally, I’ll only make a brief mention of the recent Florida accident in which a Tesla customer lost his life while apparently driving in autopilot mode. With all due respect for the victim and condolences to his family, I’d like to see more reliable data on the circumstances before commenting further.

This post originally appeared at Monday Note.