Elon’s Secret Sauce

February 19th, 2020 by Guest Contributor

Guest post by Ian Richards

Elon Musk may be a showman and a visionary, but he is unfit to be a CEO. His run-ins with the SEC, intemperate tweets, and a catalogue of missed deadlines show that he does not have the character or the competence to run a major public company.

Or so the bears say.

But there is a problem with this. All the major automakers are experiencing declining sales and laying off workers. Tesla just recorded a blowout quarter, and is growing unit sales faster than any automaker in history.

Musk’s decision to make the Model 3 before the Model Y was in contrast to the strategy employed by other manufacturers in the premium-vehicle market. They decided to enter the EV market with a crossover or hatchback — Audi with the e-tron, Jaguar with the I-PACE, Ford with the Mustang Mach-E, Chevy with the Bolt, Volkswagen with the ID.3.

Model 3 production was crazy difficult to get rolling — Musk called it “production hell” — but it paved the way to the launch of the Model Y, which is coming ahead of schedule and at a significantly reduced cost. Audi and Jaguar have encountered significant teething problems with their products, and these cars underperform Tesla’s products on every key metric. Volkswagen has thousands of ID.3 cars sitting in parking lots waiting for the software to be fixed.

Company structure at the legacy automakers is heavily segregated. Musk, on the other hand, encourages fuzzy lines between departments. Meetings are informal, engineers communicate freely. Each engineer is encouraged to think like the chief engineer and view the product as a whole.

Engineering troubleshooter Sandy Munro had this to say about one of Tesla’s components: “The Superbottle is a great example of how the normal automotive companies don’t work together, and Tesla does. That Superbottle crosses many lines that you can’t cross here (in Detroit). If I’m in charge of engine cooling or battery cooling, I don’t want anything to do with cooling the cabin. And yet, we’ve got the motor cooling, the battery cooling, and electronics, all going through one little bottle that’s got some clever little ball valves that open and close to make sure that everything’s getting heated or everything’s being cooled to where it needs to be. We all thought that was the best thing in the whole damn car.”

Big auto likes stability. New and radical ideas create risk. Musk loves change. Engineers are expected to come up with regular ideas for improvement. The Model 3 has a glass roof because it gives robots better access to the interior. Tesla’s new patented wiring system radically improves assembly efficiency. The Cybertruck’s exoskeleton architecture makes it much cheaper to manufacture.

In Detroit or Munich, projects are planned by referring to a previous project. Musk starts with a clean sheet. That’s how Musk worked out that he could build rockets far cheaper than NASA. At Tesla, he did the same thing with batteries and built a gigafactory in Nevada.

Before Musk, big auto would say that EVs were uneconomical to manufacture. Now they are all scrambling to build gigafactories.

Big auto outsources as much as possible. Musk prefers to make things in-house. No other major auto manufacturer, except Tesla, makes their own seats.

Because of this, Tesla captures all of the profit that would otherwise go to a seat manufacturer. If there is a problem with a seat, it can be addressed and fixed within days, instead of weeks or months.

Historically, software has been a small part of car manufacture, and automakers have outsourced it. Elon sees software as fundamental, and Tesla has thousands of super-smart developers. VW realised its mistake late in the day and is now struggling to build in-house software capability.

Because of big auto’s love of outsourcing, a significant percentage of the profit in a car is shared with the supply chain. Retail and servicing profits are taken by the dealers. Refuelling profits are taken by the oil companies. Vertically integrated Tesla shares a lower percentage of its manufacturing profits with its suppliers. It keeps all of the servicing and retailing profits. And it takes some of the refuelling profits from its Supercharger network. The icing on the cake is in the super-high margins Tesla makes from software goodies (such as the recent $2,000 power boost offer, or $7,000 for the Full Self Driving upgrade).

Tesla’s vertical integration and software capability provide a platform that, in time, will lead to far higher operating margins than those achieved by the established automakers.

No industry veteran could do what Musk does — it is not in their DNA. Many highly qualified industry figures have tried to start automotive companies in recent years, but so far every attempt has failed.

Musk is different. Not just a brilliant engineer. Not just a brilliant promoter. Despite the tweets, the braggadocio, and the optimistic targets, when you look at the reality of what he does, how he does it, and the consequences for Tesla; it becomes clear that Tesla’s success is not in spite of Musk, but because of him.

Elon Musk is the smartest CEO in the auto industry.

All photos by CleanTechnica

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