Published on December 23rd, 2015 | by Zach0
Tesla’s Secret Master Plan (For Those Just Joining The Party)
If you’ve obsessively been following Tesla for long, there’s a decent chance you’ve already run across this. But a few things this week reminded me that the majority of the population, and probably even the majority of EV drivers and enthusiasts, have never heard of Tesla’s “Secret Master Plan.” I think it’s a very important thing to know about and understand, so I’m revisiting it here in order to give more people a more complete picture of Tesla and what it is focused on achieving. (Full disclosure: I’m an investor in Tesla, for reasons that I think will become obvious by the end of this article.)
Starting a car company is not particularly easy. Chrysler was started in 1925. See if you can name an American car company that has been started since then, has prospered, and is still alive today (and never mind that Chrysler is now Fiat Chrysler Automobiles… with the Italian brand at the front of that name). Think of that, and think of how much chance an electric car company had of surviving.
Elon himself expected Tesla wouldn’t survive, but he seemed to know very well that, if it was going to survive, there was a particular path to success.
Disruptive technology typically just takes over the market if it’s much better and/or cheaper than the incumbent leader in that field. But it almost never starts out cheaper than the incumbent technology. Lacking economies of scale, and with the transformative tech typically based on some relatively new components that are expensive to produce, the newer technology is often way above the price point an average American (let alone an average resident of the world) can afford.
Initial computers were crazy expensive (and much worse than the ones today). Initial cell phones were crazy expensive (and much worse than the ones today). Initial smartphones were crazy expensive. Initial high-quality digital cameras were crazy expensive. Initial flat-screen TVs were crazy expensive. Initial camcorders were crazy expensive. Cars themselves were initially far outside the price range of the average American. But all of these technologies have become relatively commonplace, and they’ve all followed the same general path to widespread market adoption.
That path is actually pretty simple: Very expensive models of these technologies were sold to very rich people. This allowed the companies producing them to make a good enough profit that they could pump more money into R&D and production that they could bring costs down a bit more. As production scaled up, economies of scale and the experience curve kicked in — bringing costs down almost via a law of nature. Eventually, the manufacturers were able to produce the technologies at a low enough cost that they were affordable to the masses, while the manufacturers still (or finally) made a profit (i.e., survived).
Now, see if you can think of a disruptive technology that took over the market starting on the low-cost end…. Really, see if you can name one such technology.
Back in 2006 (yep, nearly a decade ago), Elon Musk (when he was just Chairman of Tesla Motors “on the side”) wrote a blog post on the Tesla blog titled, “The Secret Tesla Motors Master Plan (just between you and me).”
In that article, Elon made it clear that his goal was to help stimulate and hasten an EV revolution, in order to help bring society into sustainable operation. Here’s one key paragraph for those of you who currently think Tesla is just interested in building high-priced, premium-class vehicles: “As you know, the initial product of Tesla Motors is a high performance electric sports car called the Tesla Roadster. However, some readers may not be aware of the fact that our long term plan is to build a wide range of models, including affordably priced family cars. This is because the overarching purpose of Tesla Motors (and the reason I am funding the company) is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy, which I believe to be the primary, but not exclusive, sustainable solution.”
And here’s where he more succinctly explains Tesla’s plan for how to succeed as a company and help speed up the transition to electric cars: “Almost any new technology initially has high unit cost before it can be optimized and this is no less true for electric cars. The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.”
To put this in other words, rich people are often willing to pay a lot more for a new, innovative, high-quality product, while people with less money simply have much less flexibility in how much they spend on any given product. Starting at the top of the market allows a company to recoup the initial high costs of producing a new technology while also adding in a healthy markup for more R&D, production expansion, and operational expansion. R&D and production expansion bring down costs, allowing the company to sell to somewhat less rich (but still rich) people. Operational expansion supports production expansion and makes the products accessible to more people. The cycle is repeated and repeated and repeated until the technology is affordable to majority of the population (assuming it is truly a disruptive technology and is destined for that fate).
Some people aware of this plan still want to argue that Tesla isn’t actually moving fast in the direction of affordable, long-range electric cars for the masses. But look at a few things…
… Look at the fact that Tesla has gone from producing ~800 cars per year in 2010 to ~50,000 cars per year in 2015.
… Look at how quickly Tesla has built out Supercharger networks in the US and Europe, so that Tesla drivers can go on long-distance trips with approximately the same convenience as gasmobile drivers. Such a capability/convenience will be essential to the mass-market adoption of electric cars. No other auto manufacturer has done anything comparable. Even the mainstream manufacturers who are most eagerly producing electric cars and building out a fast-charging network aren’t doing anything comparable, despite having a lot more money to invest in such matters. Their networks are much smaller, much less logically integrated (for long-distance travel), much less reliable, run by startups, and charge a car about half as fast as Tesla’s Superchargers. A Tesla owner can quite easily drive around the US. An owner of any other fully electric car has to spend much more time to make a long-distance trip, and can’t make it between many major cities on popular routes without having to stop for hours at a time to charge on a slow, Level 2 charger or a even a ridiculously slow conventional 120-volt outlet. Tesla didn’t build this Supercharger network just to make high-end Tesla buyers happy. It built this Supercharger network (and is still building it at a rapid pace) so that when it comes out with an electric car for the masses, the masses aren’t turned off by an inability to make long trips in the car.
… The key impediment to low-cost, long-range electric cars is batteries. Batteries are expensive. They have to come down in price considerably in order for a financially viable long-range electric car to reach the average price of a new car in the United States (~$31,000). As noted above, the way to bring down the price is to increase production. But you need to have demand for products grow (incrementally, at first) in order to increase production in a financially sustainable way. Tesla has driven (no pun initially intended) demand for its own electric cars as well as other manufacturers’ electric cars by producing a very attractive sports car with impressive specs and performance (the Tesla Roadster), the quickest premium sedan in history — by a large margin (the Tesla Model S), and now the quickest production SUV in history (the Model X). In the latter two cases, the S and X aren’t just quick for their class, but they’re quicker than almost every production car in history. The handful of cars quicker than a Model S mostly cost over $1 million and/or were produced in very low numbers. Aside from the quickness, these vehicles have other neat cutting-edge features, like the most advanced autonomous driving suite on the market, over-the-air software updates, falcon-wing doors, the most effective air filter in a car… by a large margin (on the Model X), and the biggest windshield in the world (on the Model X). The point is, Tesla is stimulating massive demand for high-priced vehicles via as many means possible so that it can scale up battery production enough to significantly bring down costs. No other automaker is producing such exciting and desired electric vehicles.
… Tesla isn’t just generating as much demand as possible for electric car batteries (via highly desired electric vehicles) — it’s also building (with Panasonic) a battery “gigafactory” in Nevada that will eventually produce as many batteries in a year as the entire world produced in 2013. It is taking this initiative in the manufacturing space in order to ensure that such a large scale of production exists in a few years, and to thus bring down costs. It is also doing what it can at the chemistry level to further bring down battery costs. As far as we know, no other car manufacturer is engaged in any way (whether as a manufacturer or as the partner of a manufacturer) in increasing battery production to such a large degree.
So, yes, Tesla is still producing very high-priced sedans and SUVs, but it is doing so in order to increase battery production, in order to bring battery prices down, in order to bring electric car prices down, in order to electrify transport.
Elon and Tesla are doing this out of a desire to help protect society from itself and to get back on a sustainable path — to “save the world,” if you want to use a common phrase.
It may seem like Tesla is just producing and selling fancy toys for the rich for a bit of fun, but the plan has long been much, much bigger than that. It was shared with the world in 2006, but I’m sure it was in Elon’s mind, and in the minds of many Tesla founders and employees, much further back than that.
Thanks to Bonnie Norman for partially stimulating this story with the picture of her Tesla Roadster and Tesla Model X at the top. Thanks to a CleanTechnica writer from ages back for reminding me this week that even many cleantech enthusiasts don’t know about Tesla’s master plan. And thanks to Elon and Tesla for trying to save the world.