I have watched Elon Musk from afar for some time. He is a better than capable business executive. As with others of his type, he seems to be capable in any business, independent of product or service. There is little similarity in PayPal and Tesla.
The question comes up, “What is his vision/strategy?”
Some people might see space flight. Others high speed rail. Cars are thrilling just now. But I don’t see any of those being economically viable. I think Elon Musk has decided to be the John D. Rockefeller of the 21st century and control the provision of energy for vehicles and buildings.
What John D. did with oil, Elon can do with electricity.
If you build only electric cars, sharing your advanced battery technology without fees, seems insane. It is not if you intend to provide the refueling ability. To do that effectively, you will need a large base of electric vehicles. Therefore share the unique element that supports your purpose.
Building cars is challenging work. Let others do that. Make you money a penny at a time with near countless repetition at the electricity pump, or whatever they will call it.
It is like software. If it runs on only one processor, there better be a lot of them. Run up the volume.
Every business understands the idea of a learning curve. Every unit you build is a little easier, a little cheaper, and a little better than the one before. You must build a large number of units to get good at it. By sharing, you get to the number count far more quickly. There is money to be made at high volume, low variable costs.
In setting prices some businesses have assumed a large number of units built prior to their building any. Texas Instruments used to do it. If you price based on current costs, then the selling price will deny purchase for many people.
Suppose it now costs $400 to build a digital watch or calculator, but by the time you have built 100,000 of them, it will cost only $125 and by 500,000 just $40. Suppose in the beginning you charge $600 each. At the same time, your insightful competitor decides to charge $129 for the same watch that also costs them $400. Who will reach 100,000 units first? 500,000?
Exactly! By the time they have reached 500,000, they will have a near monopoly with all of the profit making ability that implies. Investing in the future is a very profitable undertaking.
Elon Musk is no fool. Watch for the opportunity to invest with him in an energy delivery system. That is where the real money will be.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.