Mar 9, 2021
Tesla
Most early stage startups have, and so seemingly need, heroic efforts from brilliant innovators working long hours to accomplish impossible goals. Tesla certainly had plenty of these as an early stage startup and continues to - as do the other Elon Musk startups. He seems to truly understand and embrace that early stage startup world and those around him seem to as well.
As a company grows we have to trade those sprints of heroic output for steady streams of ideas and quality. We have to put development on an assembly line. Toyota famously put the ideas of Deming and other post-World War II process experts into their production lines and reaped big rewards - becoming the top car manufacturer in the process.
Not since the Ford Model T birthed the assembly line had auto makers seen as large an increase in productivity. And make no mistake, technology innovation is about productivity increases. We forget this sometimes when young, innovative startups come along claiming to disrupt industries. Many of those do, backed by seemingly endless amounts of cash to get them to the next level in growth. And the story of Tesla is as much about productivity in production as it is about innovative and disruptive ideas. And the story is as much about a cult of personality as it is about massive valuations and quality manufacturing.
The reason we’re covering Tesla in a podcast about the history of computers is at the heart of it, it’s a story about the startup culture clashing head-on with decades-old know-how in an established industry. This happens with nearly every new company: there are new ideas, an organization is formed to support the new ideas, and as the organization grows, the innovators are forced to come to terms with the fact that they have greatly oversimplified the world.
Tesla realized this. Just as Paypal had realized it before. But it took a long time to get there. The journey began much further back. Rather than start with the discovery of the battery or the electric motor, let’s start with the GM Impact. It was initially shown off at the 1990 LA Auto Show. It’s important because Alan Cocconi was able to help take some of what GM learned from the 1987 World Solar Challenge race using the Sunraycer and start putting it into a car that they could roll off the assembly lines in the thousands.
They needed to do this because the California Air Resources Board, or CARB, was about to require fleets to go 2% zero-emission, or powered by something other than fossil fuels, by 1998 with rates increasing every few years after that. And suddenly there was a rush to develop electric vehicles. GM may have decided that the Impact, later called the EV1, proved that the electric car just wasn’t ready for prime time, but the R&D was accelerating faster than it ever had before then.
That was the same year that NuvoMedia was purchased by Gemstar-TVGuide International for $187 million. They’d made the Rocket eBook e-reader. That’s important because the co-founders of that company were Martin Eberhard, a University of Illinois Champaign Urbana grad, and Marc Tarpenning.
Alan Cocconi was able to take what he’d learned and form a new company, called AC Propulsion. He was able to put together a talented group and they built a couple of different cars, including the tZero. Many of the ideas that went into the first Tesla car came from the tZero, and Eberhard and Tarpenning tried to get Tom Gage and Cocconi to take their tZero into production. The tZero was a sleek sportscar that began life powered by lead-acid batteries that could get from zero to 60 in just over four seconds and run for 80-100 miles. They used similar regenerative braking that can be found in the Prius (to oversimplify it) and the car took about an hour to charge. The cars were made by hand and cost about $80,000 each. They had other projects so couldn’t focus on trying to mass produce the car. As Tesla would learn later, that takes a long time, focus, and a quality manufacturing process.
While we think of Elon Musk as synonymous with Tesla Motors, it didn’t start that way. Tesla Motors was started in 2003 by Eberhard, who would serve as Tesla’s first chief executive officer (CEO) and Tarpenning, who would become the first chief financial officer (CFO), when AC Propulsion declined to take that tZero to market. Funding for the company was obtained from Elon Musk and others, but they weren’t that involved at first. Other than the instigation and support. It was a small shop, with a mission - to develop an electric car that could be mass produced.
The good folks at AC Propulsion gave Eberhard and Tarpenning test drives in the tZero, and even agreed to license their EV Power System and reductive charging patents. And so Tesla would develop a motor and work on their own power train so as not to rely on the patents from AC Propulsion over time. But the opening Eberhard saw was in those batteries. The idea was to power a car with battery packs made of lithium ion cells, similar to those used in laptops and of course the Rocket eBooks that NuvoMedia had made before they sold the company. They would need funding though. So Gage was kind enough to put them in touch with a guy who’d just made a boatload of money and had also recommended commercializing the car - Elon Musk.
This guy Musk, he’d started a space company in 2002. Not many people do that. And they’d been trying to buy ICBMs in Russia and recruiting rocket scientists. Wild. But hey, everyone used PayPal, where he’d made his money. So cool. Especially since Eberhard and Tarpenning had their own successful exit.
Musk signed on to provide $6.5 million in the Tesla Series A and they brought in another $1m to bring it to $7.5 million. Musk became the chairman of the board and they expanded to include Ian Wright during the fundraising and J.B. Straubel in 2004. Those five are considered the founding team of Tesla.
They got to work building up a team to build a high-end electric sports car. Why? Because that’s one part of the Secret Tesla Motors Master Plan. That’s the title of a blog post Musk wrote in 2006. You see, they were going to build a high-end hundred thousand dollar plus car. But the goal was to develop mass market electric vehicles that anyone could afford. They unveiled the prototype in 2006, selling out the first hundred in three weeks.
Meanwhile, Elon Musk’s cousins, Peter and Lyndon Rive started a company called SolarCity in 2006, which Musk also funded. They merged with Tesla in 2016 to provide solar roofs and other solar options for Tesla cars and charging stations. SolarCity, as with Tesla, was able to capitalize on government subsidies and growing to become the third most solar installations in homes with just a little over 6 percent of the market share.
But we’re still in 2006. You see, they won a bunch of awards, got a lot of attention - now it was time to switch to general production. They worked with Lotus, a maker of beautiful cars that make up for issues with quality production in status, beauty, and luxury. They started with the Lotus Elise, increased the wheelbase and bolstered the chassis so it could hold the weight of the batteries. And they used a carbon fiber composite for the body to bring the weight back down.
The process was slower than it seems anyone thought it would be. Everyone was working long hours, and they were burning through cash. By 2007, Eberhard stepped down as CEO. Michael Marks came in to run the company and later that year Ze’ev Drori was made CEO - he has been given the credit by many for tighting things up so they could get to the point that they could ship the Roadster. Tarpenning left in 2008. As did others, but the brain drain didn’t seem all that bad as they were able to ship their first car in 2008, after ten engineering prototypes.
The Roadster finally shipped in 2008, with the first car going to Musk. It could go for 245 miles a charge. 0 to 60 in less than 4 seconds. A sleek design language. But it was over $100,000. They were in inspiration and there was a buzz everywhere. The showmanship of Musk paired with the beautiful cars and the elites that bought them drew a lot of attention. As did the $1 million in revenue profit they earned in July of 2009, off 109 cars shipped.
But again, burning through cash. They sold 10% of the company to Daimler AG and took a $465 million loan from the US Department of Energy. They were now almost too big to fail.
They hit 1,000 cars sold in early 2010. They opened up to orders in Canada. They were growing. But they were still burning through cash. It was time to raise some serious capital. So Elon Musk took over as CEO, cut a quarter of the staff, and Tesla filed for an IPO in 2010, raising over $200 million. But there was something special in that S-1 (as there often is when a company opens the books to go public): They would cease production of the Roadster making way for the next big product.
Tesla cancelled the Roadster in 2012. By then they’d sold just shy of 2,500 Roadsters and been thinking through and developing the next thing, which they’d shown a prototype of in 2011. The Model S started at $76,000 and went into production in 2012. It could go 300 miles, was a beautiful car, came with a flashy tablet-inspired 17 inch display screen on the inside to replace buttons. It was like driving an iPad. Every time I’ve seen another GPS since using the one in a Model S, I feel like I’ve gotten in a time machine and gone back a decade.
But it had been announced in 2007to ship in 2009. And then the ship date dropped back to 2011 and 2012. Let’s call that optimism and scope creep. But Tesla has always eventually gotten there. Even if the price goes up. Such is the lifecycle of all technology. More features, more cost. There are multiple embedded Ubuntu operating systems controlling various parts of car, connected on a network in the car. It’s a modern marvel and Tesla was rewarded with tons of awards and, well, sales.
Charging a car that runs on batteries is a thing. So Tesla released the Superchargers in 2012, shipping 7 that year and growing slowly until now shipping over 2,500 per quarter. Musk took some hits because it took longer than anticipated to ship them, then to increase production, then to add solar. But at this point, many are solar and I keep seeing panels popping up above the cars to provide shade and offset other forms of powering the chargers. The more ubiquitous chargers become, the more accepting people will be of the cars.
Tesla needed to produce products faster. The Nevada Gigafactory was begun in 2013, to mass produce battery packs and components. Here’s one of the many reason for the high-flying valuation Tesla enjoys: it would take dozens if not a hundred factories like this to transition to sustanable energy sources. But it started with a co-investment between Tesla and Panasonic, with the two dumping billions into building a truly modern factory that’s now pumping out close tot he goal set back in 2014. As need increased, Gigafactories started to crop up with Gigafactory 5 being built to supposedly go into production in 2021 to build the Semi, Cybertruck (which should begin production in 2021) and Model Y. Musk first mentioned the truck in 2012 and projected a 2018 or 2019 start time for production. Close enough.
Another aspect of all that software is that they can get updates over the air. Tesla released Autopilot in 2014. Similar to other attempts to slowly push towards self-driving cars, Autopilot requires the driver to stay alert, but can take on a lot of the driving - staying within the lines on the freeway, parking itself, traffic-aware cruise control, and navigation. But it’s still the early days for self-driving cars and while we make think that because the number of integrated circuits doubles every year that it paves the way to pretty much anything, no machine learning project I’ve ever seen has gone as fast as we want because it takes years to build the appropriate algorithms and then rethink industries based on the impact of those. But Tesla, Google through Waymo, and many others have been working on it for a long time (hundreds of years in startup-land) and it continues to evolve.
By 2015, Tesla had sold over 100,000 cars in the life of the company. They released the Model X that year, also in 2015. This was their first chance to harness the power of the platform - which in the auto industry is when there are multiple cars of similar size and build. Franz von Holzhausen designed it and it is a beautiful car, with falcon-wing doors, up to a 370 mile range on the battery and again with the Autopilot. But harnessing the power of the platform was a challenge. You see, with a platform of cars you want most of the parts to be shared - the differences are often mostly cosmetic. But the Model X only shared a little less than a third of the parts of the Model S.
But it’s yet another technological marvel, with All Wheel Drive as an option, that beautiful screen, and check this out - a towing capacity of 5,000 pounds - for an electric automobile!
By the end of 2016, they’d sold over 25,000. To a larger automaker that might seem like nothing, but they’d sell over 10,000 in every quarter after that. And it would also become the platform for a mini-bus. Because why not. So they’d gone lateral in the secret plan but it was time to get back at it. This is where the Model 3 comes in.
The Model 3 was released in 2017 and is now the best-selling electric car in the history of the electric car. The Model 3 was first shown off in 2016 and within a week, Tesla had taken over 300,000 reservations. Everyone I talked to seemed to want in on an electric car that came in at $35,000. This was the secret plan. That $35,000 model wouldn’t be available until 2019 but they started cranking them out. Production was a challenge with Musk famously claiming Tesla was in “Production Hell” and sleeping on an air mattress at the factory to oversee the many bottlenecks that came. Musk thought they could introduce more robotics than they could and so they’ slowly increased production to first a few hundred per week then a few thousand until finally almost hitting that half a million mark in 2020.
This required buying Grohmann Engineering in 2017, now called Tesla Advanced Automation Germany - pumping billions into production. But Tesla added the Model Y in 2020, launching a crossover on the Model 3 platform, producing over 450,000 of them. And then of course they decided to the Tesla Semi, selling for between $150,000 and $200,000. And what’s better than a Supercharger to charge those things? A Megacharger. As is often the case with ambitious projects at Tesla, it didn’t ship in 2020 as projected but is now supposed to ship, um, later.
Tesla also changed their name from Tesla Motors to Tesla, Inc. And if you check out their website today, solar roofs and solar panels share the top bar with the Models S, 3, X, and Y. SolarCity and batteries, right?
Big money brings big attention. Some good. Some bad. Some warranted. Some not. Musk’s online and sometimes nerd-rockstar persona was one of the most valuable assets at Tesla - at least in the fundraising, stock pumping popularity contest that is the startup world. But on August 7, 2018, he tweeted “Am considering taking Tesla private at $420. Funding secured.” The SEC would sue him for that, causing him to step down as chairman for a time and limit his Twitter account. But hey, the stock jumped up for a bit.
But Tesla kept keeping on, slowly improving things and finally hit about the half million cars per year mark in 2020. Producing cars has been about quality for a long time. And it needs to be with people zipping around as fast as we drive - especially on modern freeways. Small batches of cars are fairly straight-forward. Although I could never build one.
The electric car is good for the environment, but the cost to offset carbon for Tesla is still far greater than, I don’t know, making a home more energy efficient. But the improvements in the technology continue to increase rapidly with all this money and focus being put on them. And the innovative designs that Tesla has deployed has inspired others, which often coincides with the rethinking of entire industries.
But there are tons of other reasons to want electric cars. The average automobile manufactured these days has about 30,000 parts. Teslas have less than a third of that. One hopes that will some day be seen in faster and higher quality production.
They managed to go from producing just over 18,000 cars in 2015 to over 26,000 in 2016 to over 50,000 in 2017 to the 190,000s in 2018 and 2019 to a whopping 293,000 in 2020. But they sold nearly 500,000 cars in 2020 and seem to be growing at a fantastic clip. Here’s the thing, though. Ford exceeded half a million cars in 1916. It took Henry Ford from 1901 to 1911 to get to producing 34,000 cars a year but only 5 more years to hit half a million. I read a lot of good and a lot of bad things about Tesla. Ford currently has a little over a 46 and a half billion dollar market cap. Tesla’s crested at nearly $850 billion and has since dropped to just shy of 600.
Around 64 million cars are sold each year. Volkswagen is the top, followed by Toyota. Combined, they are worth less than Tesla on paper despite selling over 20 times the number of cars. If Tesla was moving faster, that might make more sense. But here’s the thing. Tesla is about to get besieged by competitors at every side. Nearly every category of car has an electric alternative with Audi, BMW, Volvo, and Mercedes releasing cars at the higher ends and on multiple platforms. Other manufacturers are releasing cars to compete with the upper and lower tiers of each model Tesla has made available. And miniature cars, scooters, bikes, air taxis, and other modes of transportation are causing us to rethink the car. And multi-tenancy of automobiles using ride sharing apps and the potential that self driving cars can have on that are causing us to rethink automobile ownership.
All of this will lead some to rethink that valuation Tesla enjoyed. But watching the moves Tesla makes and scratching my head over some certainly makes me think to never under, or over-estimate Tesla or Musk. I don’t want anything to do with Tesla Stock. Far too weird for me to grok. But I do wish them the best. I highly doubt the state of electric vehicles and the coming generational shifts in transportation in general would be where they are today if Tesla hadn’t done all the good and bad that they’ve done. They deserve a place in the history books when we start looking back at the massive shifts to come. In the meantime, I’l’ just call this episode part 1 and wait to see if Tesla matches Ford production levels some day, crashes and burns, gets acquired by another company, or who knows, packs up and heads to Mars.
