Decoding Tesla's Secret Formula
Geege Schuman stashed this in Tesla
Up to eight robots at a time work on a single Model S in a choreographed routine, each performing up to five tasks: welding, riveting, gripping and moving materials, bending metal, and installing components. Henry Ford and the generations of auto industry experts who have followed would dismiss this setup as inefficient–each robot should do one task only before moving the car on to the next Transformer.
Tesla has raised over $5 billion since 2010. It will only sell 50,000 cars in 2015.
Tesla cut its sales forecasts for the year by 10% to 50,000 vehicles, citing delays in teaching the robots to make both the Model S and the new crossover SUV Model X. “The Model X is a particularly challenging car to build. Maybe the hardest car to build in the world. I’m not sure what would be harder,” admitted Elon Musk, Tesla’s billionaire founder and visionary CEO, who also serves in those same roles at SpaceX.
Neither delays nor the cash burn ($1.5 billion in the past 12 months) particularly phases Musk. He just wants to focus on making the world’s best car, and the $70,000 Model S, by all rights, can claim that prize. An all-electric vehicle, it offers a week’s worth of driving on a single charge from any one of a nationwide network of free solar-powered charging stations. It goes from 0-60 in under three seconds in “ludicrous” mode, the fastest of any four-door production car on the planet, and is also the safest car in its class. When it collides with the crash-test machine, the crash-test machine breaks. You can order it online and have it delivered to your door, get software updates beamed wirelessly and receive maintenance alerts before bad stuff happens. Plus, it’s beautiful. The door handles reach out to be opened as you approach, then fold flat for better aerodynamics. Don’t believe us: Consumer Reports called it the best overall car on the market for the past two years.
High-end disruptors produce innovations that are leapfrog in nature, making them difficult to imitate rapidly. They outperform existing products on critical attributes on their debut; they sell for a premium price rather than a discount; and they target incumbents’ most profitable customers, going after the most discriminating and least price-sensitive buyers before spreading to the mainstream. If you look within some large companies, you can flesh out previous examples: Apple iPod outplayed the Sony Walkman; Starbucks’ high-end coffee drinks and atmosphere drowned out local coffee shops; Dyson’s vacuum cleaners now have solid market share; Garmin’s GPS golf watches have taken much of the business from range finders. The incumbents didn’t react fast enough, and the high-end disruptors took over their market.
Tesla has built its entire company around this idea. The Model S and X will be followed in 2017 by a cheaper Model 3, a $35,000 Tesla for the masses, if all goes according to plan. And despite the fact that Tesla abandoned its forecast of turning a profit this year (even with its unusual and pro-company lease accounting), investors can’t get enough of it: Musk has raised $5.3 billion in equity and debt for Tesla since 2010, with each round increasingly oversubscribed by investors, including a $650 million secondary offering in mid-August, partly to complete its giant battery-making Gigafactory in the Nevada desert. “The willingness of the markets to support the company with various financing structures leads me to believe that everything will probably be okay, assuming the model proves viable,” said Jacob Cohen, senior associate dean at the MIT Sloan School of Management.
That viability moment should come around 2017, say analysts at Credit Suisse, when Tesla is expected to show its first significant dose of free cash flow, or operating income after capital expenditures (see charts, p. 102) . The other metrics look golden: It is on track to gross $5.5 billion this year, up 54% over 2014. Its shares have soared 15-fold since its 2010 IPO to a recent $33 billion market capitalization.
Meanwhile, incumbent automakers face the same challenge now and long term: If much of the auto business ends up going electric (and that’s a big if right now with sub-$3 gas and sales falling overall for electrics and hybrids) Tesla will be miles ahead at the high-end and coming down-market to eat away at the $1 trillion industry. Detroit finds it easy to dismiss Tesla as a money losing startup, but it has changed the industry. “[In 2001] GM crushed all of its electric models in a junkyard,” Musk says. “When we came along and made the Roadster, it got GM to make the Volt and then Nissan felt confident enough to go with the Leaf. We basically got the whole ball rolling with electrification of cars. The ball is rolling slowly, but it is rolling.”
Hiring and promotions are focused on The Great and The Phenomenal:
You’ll rarely find someone at Tesla who worked at GM, Ford or Chrysler or an automotive supplier (Aston Martin is one notable exception). Sterling Anderson, a former McKinsey associate and MIT-trained expert in self-driving cars, was hired in the summer of 2014 to work on Tesla’s autopilot systems. Now he’s the program manager of the Model X. The reason Tesla will occasionally put someone in a position without prior industry experience is that Musk is known for selecting people based upon their ability to solve complex problems–not based upon experience. Says Tesla Chief Information Officer Jay Vijayan, “Elon doesn’t settle for good or very good. He wants the best. So he asks job candidates what kinds of complex problems they’ve solved before and he wants details.”
Musk’s team screens job applicants for their ability to learn under uncertain conditions. Every new employee, no matter which department, has to have proven some kind of ability to solve hard problems. “We always probe deeply into achievement on the résumé,” says Musk. “Success has many parents, so we look to find out who really did it. I don’t care if they graduated from university or even high school.”
Promotions and bonuses at both Tesla (and SpaceX) are built around a 1-to-5 rating system, with 4 and 5 being “great” and “phenomenal,” respectively. “You don’t get the two highest ratings,” says Musk, “unless you have done something innovative. It has to be significant in the case of phenomenal, something that makes the company better or the product better. Anyone can be an improver: HR, finance, production, they can all figure out how to improve things.”