How About Some Elon Musk Economics And Cost Reduction

Elon Musk

NOV 29 2017 BY EVANNEX 24

Tesla

Tesla and SpaceX CEO Elon Musk (Image: Seventh Equation)

ELON MUSK’S ECONOMICS: ROCKETS AND ELECTRIC CARS AT A TENTH OF THE CURRENT PRICE [VIDEO]

Elon Musk is widely admired for his daring vision and for his technological achievements. His talents in the financial and economic realms are less often celebrated, but they are no less important to his success. Technical and financial aptitude are rarely combined in the same individual, but Elon has displayed a mastery of both domains from the beginning – remember that his first major coup was PayPal.

A new video from Wendover Productions explains that both Tesla and SpaceX are, at bottom, economic plays – in both cases, the business model depends on delivering what was thought of as a fairly mature technology at a fraction of the current cost.

When Musk first set out to realize his vision of space travel, he found that the business of launching rockets was ripe for disruption. Before SpaceX, the companies that offered launch services were aggregators that bought rocket engines, guidance systems and other components from different suppliers, which added layers of costs. And of course, they threw away the whole rocket after every flight, which made the whole business incredibly expensive. There was little competition, and governments and deep-pocketed telecom companies were the main customers, so there was no incentive to find a cheaper way.

*This article comes to us courtesy of EVANNEX (which also makes aftermarket Tesla accessories). Authored by Charles Morris.

SpaceX makes 85% of its components in-house, allowing it to take a bite out of costs. But it’s reusable rockets that will really redefine the economics of space travel. Once SpaceX is recycling rockets for commercial launches on a regular basis, it expects to be able to be able to launch payloads at a price that’s 10 times cheaper than anything the competitors can offer.

Above: Elon Musk’s companies, SpaceX and Tesla, look to reduce costs by an order of magnitude (Youtube: Wendover Productions)

Now, it may not be apparent to car buyers looking at the $74k-and-up price tag of a Model S, but Tesla’s economic strategy is also based on achieving dramatic cost reductions. Like SpaceX, Tesla has embraced insourcing – of the over 5,000 components in a Tesla vehicle, around 80% are made in-house. Of course, this flies in the face of conventional wisdom – legacy automakers outsource almost everything these days. However, as Tesla’s former VP of Production Greg Reichow explained in a recent Wired article, there are several good reasons for a company making a new and innovative product to do things this way.

While taking control of its supply chain enables Tesla to squeeze out some costs, the truly dramatic cost reductions that the company is counting on will have to come from the component that’s unique to an electric vehicle: the battery.

If the biggest money pit in space travel is disposable rockets, when it comes to electric cars, it’s batteries. Since the advent of the modern EV, battery costs have steadily sunk (shades of the shrinking semiconductor costs that powered the computer revolution), from an average of over $1,000 per kilowatt-hour in 2010 to around $227 per kWh in 2016 (according to consulting firm McKinsey & Company). Tesla has always been ahead of the curve – it claimed to have reached $190/kWh in early 2016. However, that’s still not cheap enough to make EVs truly affordable – at that price, a 50 kWh battery pack like the one in the base Model 3 would still cost $9,500.

Elon Musk

As battery pack prices drop, electric car sales rise (Source: McKinsey & Company via Electrek)

By now it should be clear that reducing battery costs is a centerpiece of Tesla’s business model. The company has said that it hopes to bring those costs down by 35% just by achieving economies of scale at the Gigafactory. Incremental improvements in battery chemistry and pack design will add to the savings. Like any automaker, Tesla refuses to disclose its exact battery costs, but Elon Musk has said that he will be “disappointed” if the company can’t bring the cost below $100 per kWh by 2020.

Many industry observers believe that that figure represents the “tipping point” (or “paradigm shift” or “Holy Grail” if you prefer) at which EVs will be truly cost-competitive with legacy vehicles. When you take into account the savings on fuel and maintenance, the switch from fossil fuels to electrons will be a no-brainer.

However, some industry observers believe that much greater cost reductions are in the offing. If and when fully self-driving vehicles come into widespread use, the relevant figure won’t be the cost of a vehicle, but the cost per passenger-mile. According to a much-discussed report by futurist Tony Seba, by 2030 most of us will be getting around in autonomous electric vehicles (like the Tesla Model 3, which was designed to deliver Transportation as a Service), at a cost as low as 6.8 cents per mile. That’s a tenth the average cost of getting around today.

===

Written by: Charles Morris; Source: Wendover Productions

*Editor’s Note: EVANNEX, which also sells aftermarket gear for Teslas, has kindly allowed us to share some of its content with our readers. Our thanks go out to EVANNEX, Check out the site here.

Categories: Tesla

Tags: ,

Leave a Reply

24 Comments on "How About Some Elon Musk Economics And Cost Reduction"

newest oldest most voted

How about some more Elon Musk Hagiography, because we can never get enough 🙂

The EV battery cost trajectory is universal. Tesla helps drive the curve down, but it is neither the only player nor even the leading one.

Battery production and technology is nearly entirely controlled by companies in Japan, China and Korea. That includes Tesla batteries, of course. And the battery cells themselves, the core of the technology, are *not* made by Tesla itself, but rather produced by Panasonic.

In short, while with SpaceX the author has a point, with Tesla he doesn’t. Not on the cost front, and certainly not as some unique Musk ingenuity.

Tesla has the largest battery capacity in the world.
So, they’re a player.

Actually, Panasonic may have the biggest single-site LiON cell-production capacity in the world at a single site – in their portion of the GF.

Tesla’s portion produces the drive units and assembles the cells into packs. As of now, Tesla’s pack assembly line isn’t breaking any records, but could be breaking a lot of reservation holders’ hearts.

Teslanomics? Fake math. No thanks. Actually, in regards to SpaceX, the author clearly doesn’t know what he’s talking about nor does Elon. Elon isn’t a scientist or engineer, after all. He’s a dude with a business degree. And not very good at it, thus being ousted from Paypal. This is just another promo video from a guy that sells everything Tesla. I give Elon credit for being a genius at marketing, however. Deceptive as he is, he’s good at it. Space economics is way different than consumer goods. SpaceX is nowhere near being cheaper. Expendable launch vehicles (that’s what they’re called, btw, not “disposable rockets”) are significantly cheaper than reusable at current launch rates. Current costs are roughly $50M/launch for expendable. There’s absolutely 0 chance to reach 1/10 that cost. Refurbishment is the major cost of reusable launch vehicles. As the # of launches/year increases, the cost/launch decreases. However, economic models show that true for expendable LVs as well. A reusable LV needs to be used in excess of 30+ times/year to match current expendable LV costs. Lets see, so SpaceX has reused one once in two years…. quite a ways to go. Conversely, at 30+ expendable vehicle launches/year the… Read more »

Look, a new username troll popping up to spread serial anti-Tesla FUD.

I wonder which existing username who created this new account to desperately try and spread their “fake news” FUD???

Mu guess is it is 4E/5E as he continues to falsely claim he is pro-EV when in fact he is a Tesla shorter loser based on his multiple carpet-bombing anti-Tesla posts all over IEVs.

All one has to do is look and see how Tesla met and beat the standard luxury car market of the MB S class by taking massive market share from MB with the Tesla Model S to see how these things play out.

“A reusable LV needs to be used in excess of 30+ times/year to match current expendable LV costs.”

Houston?

Yeah, that whopper jumped off the screen at me as well. Since the cost to build a first stage is around $40Mn-$45Mn and SpaceX charges $62Mn to launch your satellite, plus the re-furb cost for SpaceX is around $6Mn-$8Mn) and the fuel is less than $200,000…
Yeah, 30x is idiotic.

Inconceivable! So…which cup has the poison in it?

BS Promo posted lots and lots of lies: “Teslanomics? Fake math. No thanks.” Well there’s a lot that’s fake here… in your post, not the article. Let’s count your lies, shall we? “Actually, in regards to SpaceX, the author clearly doesn’t know what he’s talking about nor does Elon. ” That’s 1. Elon very clearly understands the economic advantage of reusable rocket launch systems; you very clearly do not. “Elon isn’t a scientist or engineer, after all. That’s 2 and 3. Elon is a self-taught rocket scientist and engineer. “He’s a dude with a business degree.” That’s 4. He has a degree in Physics. “And not very good at it, thus being ousted from Paypal.” That’s 5. Elon very clearly is one of the very best at business, since he’s a self-made billionaire! “SpaceX is nowhere near being cheaper.” That’s 6. SpaceX launch costs currently are about 20% of the industry average, and SpaceX is working toward 10%. “Expendable launch vehicles (that’s what they’re called, btw, not ‘disposable rockets’) are significantly cheaper than reusable at current launch rates. That’s 7 and 8. “Disposable rockets” certainly is what they are called in the study LEO on the Cheap. I strongly suspect… Read more »

“BS Promo”

Your name says it all.

You lost me as soon as you said that Elon isn’t a scientist or engineer.

That’s what a moron would say.

You can’t read much about him without knowing that he is a degreed physicist.

I believe I read that Tesla has the best contract in the battery industry with Panasonic, as well as the lowest cost for raw materials to make batteries. They also have the best battery engineers researching battery chemistry. How can you say none of this is an advantage? No other automaker will be able to purchase batteries for the cost Tesla/Panasonic is building them and if other automakers or battery companies decide to make their own EV batteries, they will still be behind Tesla on cost of materials and engineering.

Indeed.

Reading some of the comments here, you’d think Panasonic was operating independently inside Gigafactory One, when in reality it’s Tesla which provides the raw materials at one end and the battery assembly at the other end.

Panasonic is a major partner and major investor with Tesla in Gigafactory One, but it’s Telsa whose name is on the factory, not Panasonic. Furthermore, it’s Tesla — not Panasonic — who decides the rate of production there. That was the main point of Tesla building Gigafactory One, and the main reason for investing billions of dollars in that: so Tesla, not Panasonic, could control the battery supply. Tesla found it much too restrictive to remain dependent on how fast Panasonic was willing to ramp up its battery cell production.

The point is Elon Musk is not doing it himself entirely, rather he is very effectively disrupting what would otherwise have been a very slow transition.

In other words, large scale production/sales of BEVs by Tesla and the Gigafactory is putting immense pressure on the laggards to compete and forcing them to dramatically accelerate their own previously casual timetables.

No–regulation from China, California, and the EU are what is driving investments in EV technology from the major auto manufacturers.

What Tesla has shown is that you can bring forward a product just *little* bit earlier than it would have arrived via its natural cycle if you are willing to bleed billions of dollars ($4.3B when excluding manufacturing investments, ~$8B if you include capex) on immature technologies. Even so, the LEAF beat Tesla to market in 2011, and the Bolt did it again in 2016.

Exactly, just like Blackberry beat Apple to the smartphone market by releasing their first smartphone in 2002.

As long as you’re comparing the Leaf to the Model S, you may as well compare it to the original Roaster. In which case, Tesla beat the Leaf to market by 3 years.

“Five Electrics” posted more FUD:

“What Tesla has shown is that you can bring forward a product just *little* bit earlier…”

Tesla is so far ahead of the other EV makers that it terrifies you! You wouldn’t be in here every day posting Big Lies about Tesla if you weren’t terrified of how fast Tesla is progressing.

It’s hard to make a blanket statement, but I think even with Tesla acting as a goad to other EV makers, Tesla is still about 5-7 years ahead of the pack. And if Tesla wasn’t around to provide that goad, where would the EV revolution be? 10 years behind where it is? 15 years?

Tesla is a “little bit” ahead of the curve in the way that Elon Musk is a “little bit” richer than you are!
😀 😀 😀

So Elon Musk has said that he will be “disappointed” if the company can’t bring the battery cost below $100 per kWh by 2020…

Well, the price structure of the trucks definitely points in that direction..and beyond. The $30K price difference between the 300 mile and 500 miles models and the suggested 1.9 miles/KWh energy consumption work out at 380KWh for $30K which in turn works out at installed battery cost of barely $79/KWh retail.

Now if that happens I will admit that Elon Musk has that cost reduction game down to an art.

SpaceX just took another hit on the cash pipe, filing to raise another $450 million. Meanwhile, Tesla is about to get screwed on battery costs from Chinese competitors, and has yet to produce a car as cheap as the Chevy Bolt, which will beat Tesla to market by more than a year and a half.

The raw materials cost of a new car today is only $1,555. The true cost of creating a car is distributed across hundreds, if not thousands, of points in the supply chain. Insourcing is not the answer, and never was; specialization and division of labor are.

Exactly, just like Apple got screwed by cheap Chinese smartphones.

OH wait, they didn’t.

3 or F?ur or “5 Electrics” continued his ever more silly Tesla bashing:

“Tesla… has yet to produce a car as cheap as the Chevy Bolt…”

I certainly hope not! Nor a Yugo, either. 🙄

Conventional auto makers shifted to outsourcing for two reasons:
1) Liability protection.
2) Labor cost reductions, smaller companies pay less and deliver fewer benefits to workers.

Which Ironically opened them up to competition.

But,
but,
but,

They’re already cost competetive, once you factor in cost of maintenance and especially fuel/charging. People just have to look past the sticker price. Especially considering resale value, which will tank for ICE vehicles once the flood gates open. You don’t want to be the last one leaving the ICE party or you’ll be left with the check.

There is lots to discuss regarding this article, but I’ll start with just two points: 1. Calling large rocket launch systems “a fairly mature technology” is very, very far from the truth! In fact, you can see the business plan that SpaceX appears to be following fairly closely, in the publicly available study LEO on the Cheap. It’s not like the basic inefficiency and absurdly high cost of such launch systems wasn’t well understood; it’s just that the current system has too many people benefiting from the government funding for there to be any real movement toward greater efficiency. It took an iconoclastic innovator like Elon Musk to disrupt the industry. So we can certainly praise Elon for his innovation, but suggesting that he came up with SpaceX’s path to significantly lower launch costs is at best questionable. For anyone interested, you can find a .pdf copy of LEO on the Cheap at Wikimedia Commons: https://upload.wikimedia.org/wikipedia/commons/7/79/LEOonthecheap.pdf * * * * * 2. Citing an average pack-level cost of $227/kWh in 2016 appears to be rather inflated. It’s well known that LG Chem had contracted with GM for a $145/kWh price for its battery cells for the Bolt EV. If we… Read more »