The History of Tesla, With Tim Higgins [FourWeekMBA Podcast]

In this session, I interview Tim Higgins, a reporter for The Wall Street Journal, and the author of a great book: 

Power Play: Tesla, Elon Musk, And The Bet Of The Century

Power Play: Tesla, Elon Musk, and the Bet of the Century by [Tim Higgins]

Gennaro [FourWeekMBA]:

It’s really my honor, because your book, it’s one of the best business books I read so far. And I’m telling you, I read a lot of business books and it’s a great book because it’s very well done research into the whole history of Tesla. I mean, you can find many accounts about Elon Musk. I mean, he’s one of the most popular business people in the world. But the whole story of Tesla, how you tell all the details and the evolution from the early days, I respect people that do well-done research, and this is incredible research. So thanks for that.

How did you get to research Tesla?

Tim Higgins:

Well, I appreciate that. I appreciate it. When I started working to write this book in 2018, I thought it was going to be about the collapse of Tesla because it looked pretty bleak. 

But as the years went on and I continued to work on it, it really became clear that this was going to be one of the most remarkable corporate turnarounds of a generation with the success of the Model 3 and Tesla becoming the world’s most valuable automaker. 

So a lot of drama in there for the reader, which makes a good book.

Gennaro [FourWeekMBA]:

It would actually make a good movie. I actually realized that in this series, in this podcast, I’m interviewing a lot of authors about which books might actually make it into great movies or series. So let’s get started from there because as you said, the near-death experience that you’re talking about, of course, is one of the last and hear that experiences of Tesla in 2018. And then, as you said, one of the greatest turnarounds, but Tesla is a company that is around for many, many years. 

Can you tell us a bit of the context of the very early days of Tesla, the main people around the project, and also a little bit of the context back then?

Tim Higgins:

Tesla began as really a very unlikely idea, a really wild startup in Silicon Valley. The founding CEO was a man named Martin Eberhard, and Martin was almost a serial entrepreneur in the Silicon Valley of the day, which was really much different than it is today, where you see these huge billion-dollar valuations. 

Back then, the ambitions were a little bit smaller, but the way to change the world perhaps was not. I mean, he wanted to bring out an electric car. He was a guy who was in middle age, going through a divorce, and the best anecdote for a divorce is to get a sports car. 

He was concerned about the environment. He was concerned about global warming, and he thought that an electric car would really be the way to go.

And as he was looking for an electric car that was cool, there really wasn’t anything out there. There wasn’t a sexy sports car. He wanted something like a Porsche, but electric and it just wasn’t really available. 

That got him thinking that maybe there was room for that as the world, the early signs of potential electrification of the automobile were out there. 

You think about the Toyota Prius, which was a hybrid, people were concerned about these kinds of things. And so he thought maybe there was room there to create an electric sports car company.

Gennaro [FourWeekMBA]:

And as you point out in the book actually, even though we are in 2003, many people might not know that actually, other entrepreneurs were trying to build already electric cars. So there was already a history behind it. And actually, there is a detail in the book, which you mentioned, which is about the fact that even when gas-powered cars won against electric cars at the end of 1800, the beginning of 1900, there was still a battle going on. This idea of producing an electric car was something that was in the air.

Can you give us some context into what the electric car industry looked like back in the day?

Tim Higgins:

Right. It was not a new idea. The electrification of automobiles was not a new idea, but going back 100 years, the challenge really lay with the battery technology. We saw General Motors try to come out with a mainstream or a more mainstream electric vehicle ahead of Tesla called the EV1. 

The challenge that companies were having with batteries was there was a trade-off, whether it was cost or range. This was one of the really, the big stumbling blocks. One of the common things you saw from the established automakers as they thought about zero-emission vehicles, was as they were looking really for the perfect technology that they could introduce. 

Whereas, one of the insights that Martin Eberhard had early on, along with one of the key hires, JB Straubel, was the use of technology that was really already proven, and that is lithium-ion batteries.

Those are the cells you have in your laptops at the time. They were becoming popular because of the video cameras. Their thought was if they could take enough of those, they were fat finger size cells, and string them together and manage them with software, they perhaps create enough power or enough juice, if you will, to power an automobile. 

Martin’s insight was that the calculation at the time was they were going to need about 6,000 of these cells in a car, that if they were buying 6,000 cells per car, and they were going to make thousands of cars, that they would immediately become one of the world’s biggest buyers of lithium-ion cells. 

And then, in theory, that would give them scale that they could then get better pricing. And then that could help bring the price down to make it more affordable and more doable in the car.

And so that was the bet, and that was really the big insight that they brought. The challenge, however, was lithium-ion cells can be very volatile. As they were developing the early car, the early Roadster, they became to the realization that they have a challenge here. 

They had a real problem that a percentage, a very small percentage of cells being made are going to be defective and essentially become, they’re going to ignite on fire. You’re not even going to know which cell it is. 

If they were packing thousands of these cells together, then the likelihood of a car catching fire was actually not as remote as you might think, and that was going to be bad. That was a really existential moment for the early company. 

And that is really, they set out to figure out how to stop that. That’s really the big technological innovation of Tesla, was figuring out how to manage the battery pack through a combination of mechanical engineering and software to prevent horrific fires from defective cells.

Gennaro [FourWeekMBA]:

So the first years really was the main challenge was really prototyping a vehicle electric, a vehicle that would work. As you said, this was a huge technological challenge. 

For a bit of context to the audience, as we said, we are in 2003, Elon Musk was already, I think, about a couple of years into SpaceX. He had sold PayPal, so he was already involved with another very challenging company. 

How did Elon Musk get involved with Tesla? 

Tim Higgins:

So Martin Eberhard had founded Tesla Motors with the idea that he was going to create an electric sports car called the Roadster. He had a co-founder and a couple of co-founders and they had an office in the Valley, but really that’s about all they had. They had a business plan and they were spending their time looking for funding. 

They had a prototype that they had worked with, a shop down in the LA area that had used some lithium-ion cells in a kit car, so they demonstrated the idea, but they needed money. 

And the problem with the idea of a car company was that the Valley at the time, the traditional Silicon Valley venture capitalists investors, were not geared towards the idea of taking these kinds of gambles.

They were really geared towards investing in software in part because you could see the returns faster, which they needed to do for their investors. And so they were really getting laughed out of the Valley. 

They came up with the idea that there was this guy who was clearly had an appetite for huge unconventional investments, so that was Elon Musk. He made his fortune, he made his second fortune, his real fortune through PayPal. 

And now, as you said, he left the Valley and he was in the LA area working on his rocket company with the idea of making space travel more affordable, and going to Mars with this really hairy, big, audacious idea. 

That’s how he was getting some early attention. And so Martin Eberhard went down to pitch to Elon Musk, “Do you want to invest in Tesla?”

And Elon did. Little did Martin know the backstory of Elon’s interest in electric cars. Elon had been interested in the idea of an electric car for a long time. He had pursued the idea of converting a sports car into an electric one with some other people. He, in fact, had already had a meeting with a promising young engineer out of the Valley named JB Straubel, who would later get hired by Tesla. 

JB had a very similar idea around the battery technology that we discussed on lithium-ion cells. And so Elon was primed if you will, for this pitch. He came in as the largest investor and became the chairman, and that’s really when the company gets going with that money. 

Then it’s a race to hire people. It’s a race to figure out if they can find somebody to build the car. It’s a race to figure out if they can actually do what they think they can do.

Gennaro [FourWeekMBA]:

And you pointed out a few key points, the early days and how Musk got involved. As we see, the history gets very interesting, and you mentioned really some of the key people like Straubel, who would really play a key role for years to come within Tesla. Probably one of the few key people that Musk could trust within Tesla. 

What was wrong with the initial business plan Tesla had envisioned? What were some of the major drawbacks that turned out to be completely wrong assumptions in this plan?

Tim Higgins:

Well, none of these people have experienced car guys, if you will. They didn’t have experience in the art of bashing metal. A lot of startups don’t have experience and that’s sometimes why they are successful, is because they’re looking at the world, looking at problems in a different way than established players.

And so the company was founded, Martin and his team had done research on what they thought and built it on basic assumptions and these sorts of things, while a lot of the assumptions just turned out to be too optimistic. 

A lot of the issue was around just the cost. The cost of everything was just more than they anticipated. The rate of the ability to do things was taking longer, which then, of course, makes it more costly. And then the reality is designing, developing, and building a car is incredibly complex.

At a certain point, it just became that the project became more complex than Martin Eberhard was accustomed to dealing with. Tesla had just become too big. The challenge of putting that car, the Roadster into production nearly did the company. 

It was monumental. They had problems with suppliers. They had problems with capabilities. They had problems with just the way that they were financing the company. And so all those things got away from them and really put them in a bad position financially at this point in 2007, 2008, when then the world changed as you recall. The great recession and liquidity around the world locked up, and Tesla was having a hard time accessing the cash it needed to stay alive. 

At the end of 2008, the company was very close to bankruptcy. It’s one of those monumental periods where Elon Musk at this point, assumes control of the company. He becomes the CEO and he puts basically every penny he has left into keeping the company afloat, in order to make it to the next day to keep fighting.

Gennaro [FourWeekMBA]:

We can trace the first near-death experience of Tesla between 2006, 2008. There have been many near-death experiences throughout the years.

Can you tell us something about these near-death experiences Tesla faced? 

Tim Higgins:

The near-death experiences tend to come for Tesla and for all startup automakers when you’re in this very delicate period of ramping up production and sales actually hitting where the money is coming in from the sale of the car. 

This is a very capital-intensive period, and it’s very easy to make a mistake and the planning of the periods of production or delivery. This is just a really, really hard thing. I mean, it’s ramping up a new car is hard for the most established carmakers, let alone for a company that doesn’t have that experience or industry knowledge. 

And so in hindsight, it’s not surprising that it nearly did them in. What’s actually surprising is that they were able to survive. They were able to survive in part, because of Elon Musk’s ability to sell the company.

The sale of the Roadster, which was their first electric car, was really basically $100,000, a two-seat sports car. Used a lot of the parts from a sports car made from Lotus. The guts of it, the internals were the electric vehicle, and it hit a core. It hit really very popular with early adopters, techies, people in California who were worried about the environment. 

And then one of the underlying things was, it was a cool car. It had a performance. The electric car was in a lot of ways, perfect for that sports car market, because the zero to 60 speed right off the line, which we call the torque, you just feel it instantly, it’s a wild ride. 

That’s really appealing to car buffs if you will. And so they had sold a lot of these vehicles, pre-sold them to these people who were very excited. And so that was really important.

What was really important, Elon Musk brought to the table as he was able to then sell the vision of what Tesla were wanting to accomplish in a multi-year, the future of the car. 

That really became very important in 2009, 2010, 2011, 2012, period, as the company is essentially trying to get the hundreds of millions and eventually billions of dollars it’s going to need to go from being a niche sports car company, to doing 2,000 cars over the course of a few years, to tens of thousands, hundreds of thousands, millions of cars. 

The key thing was always the need for cash and new investor cash to keep the lights on, to keep that effort of development going. Elon Musk turned out to be very good at selling that vision to a lot of investors, even when the company was struggling to stay afloat.

Gennaro [FourWeekMBA]:

There is actually a recurring point in the history of Elon Musk, also looking back at the history of PayPal. There is an old episode on the series about that, where he doesn’t want to be the CEO of the company, but he ends up in the position of becoming the CEO. The same happens to Tesla when eventually, Elon Musk 2008, appoints himself as the CEO of the company. 

How did Musk end up as CEO of Tesla?

Tim Higgins:

It doesn’t end up well between Martin and Elon. It started off seemingly well. I’ve read the emails between the two. They seem to have some common bond over the idea of product development and the idea of what consumers were going to want and similar ambitions. 

But ultimately, when you work for Elon, it’s Elon you’re working for, and he’s very demanding. Part of his success is not taking no for an answer. Part of his success is not resting on the easy way of doing something. 

And so you see a pattern over time of him struggling to trust the executives that he hires to do jobs. Not giving them a lot of rope to figure things out, and micromanaging them at very key times for the good and the bad.

Even to this day, he talks out how he doesn’t want to be the CEO, how he doesn’t like it. But make no mistake, he still wants to be the boss. 

He might not want to deal with the boring parts of running the company, but he wants to have the ability to put in place his broader vision, and not get tied up with the bureaucracies that you see at traditional big corporations that have concerns that are very, just understand if you’re a publicly-traded company. 

He’s thinking bigger, and that’s some of the challenges you see over the years. And so when you talk about how his relationship with Martin ended up, it didn’t end up well. From Elon’s perspective, he would talk about how he felt like Martin wasn’t keeping him in the loop about what was going on at the company.

Martin would argue, and Martin has argued in the past, that that wasn’t the case. You look at the company records and it was very clear the board knew that it was struggling. Ultimately, it oftentimes comes down to Elon’s risk tolerance as an entrepreneur. 

Somebody who did not come from a traditional corporate background has a risk tolerance that’s unlike anyone out there. Willing to time and time again, bet everything on his vision. He looks at the probabilities and he’s willing to go because he thinks that there’s a chance of success. 

That oftentimes takes the company to the near brink, and he’s able to figure out a way at the last minute to survive. When you bet big, you win big. And so they could have lost big and oftentimes he’s been lucky or determined enough to win big, and then he will then again, double down. And so you’ve seen these huge bets after huge bets from the company.

Gennaro [FourWeekMBA]:

There was also a huge divergence in terms of vision because as you explain in the book, Elon Musk had this vision of translating Tesla into a new GM when many other people didn’t think in this way; investors, also the top management.

How did Musk keep Tesla on track to its ambitious vision to become the next GM?

Tim Higgins:

Absolutely. So the company is struggling to stay afloat early on. At this point, Martin has been pushed to the side. So his vision is not really part of the conversation. Elon and Tesla at this point, have taken on other investors that have smaller stakes, but still pretty big stakes. There’s a natural conversation that occurs. 

What’s Tesla going to become? Is Tesla going to pivot into becoming a supplier to car companies? They’ve proven that they can do these battery packs. This is really where their value is at that point in time. 

They were seeing early signs that car companies were willing to, at least expressing a willingness to buy their battery packs and they could start keeping the lights on rather than generating revenue, and there was this excitement around that.

But Elon was concerned about who they were going to work with. He had this insight that if there was a problem in a, let’s say a General Motors car because of a Tesla battery pack, GM was going to blame Tesla. 

These things were going to be out of Tesla’s hands perhaps, and it might not have been their fault. And so he was very concerned about that. That was part of controlling his vision is part of the success of Tesla. He’s been able to do that when others have wanted to go other ways. He’s also very pragmatic. So he keeps control of the company. 

At the beginning of 2009, he set this vision for the next car, which is the Model S. A car that’s supposed to compete against the best of the best out there, a luxury sedan, all these things. He is also pragmatic and cuts some deals that really help the company.

He cuts a deal with the parent company of Mercedes, Daimler, to provide battery packs to their small car. He does a deal with Toyota, which is really important for keeping the company afloat. 

That gets them a car factory in California, outside of the San Francisco area, that Toyota was basically getting rid of. It also got them a deal to help build an electric version of the RAV4 as Toyota was experimenting with its electric car program. 

So those were really key deals in the early days of Tesla because it was generating revenue. It was giving Tesla experience working with traditional automakers to learn how to control quality and how to meet deadlines and these sorts of things. 

Getting money in the door as they were marching towards the Model S, which was really going to be the vehicle that would define Tesla and sell it to a larger audience.

If the Roadster was the proof of concept, the Model S was going to be an exclamation to the world that Tesla could make the best car in the world that just happened to be electric, and that was the challenge. 

That’s really what Elon’s bet was, was that if they could do that, they could show that there would be a huge demand for electric cars. 

And then they could really go on to the next idea, which would be a mainstream electric vehicle, which we now know as the Model 3. This would be the way that they become more of the General Motors of the electric car world, rather than let’s say the Porsche of electric cars.

Gennaro [FourWeekMBA]:

There are a few things that came to mind as you were recalling the whole story. And of course, I guess there are three things that we can highlight. For a bit of context to the audience, as we said, the initial business plan of Tesla was brilliant in terms of targeting the market. Because again, the Tesla Roadster would actually prove to be a successful launch, and especially a successful showcase of a showing that you could build a very cool electric vehicle, even though very expensive. And of course, not ready yet for a scaled-up production, but yet you could be in a very cool vehicle. Of course, their initial idea assumptions of Eberhard were wrong in terms of execution, where he thought he could build it by outsourcing most of the pieces to others. Instead, it turned out to be a wrong assumption.

Of course, another point was about vision, as we said, where there was a divergence where Elon Musk wanted to keep Tesla on track to becoming a GM. One thing that also came up by covering up in this podcast series is the history of PayPal and the history of SpaceX, Elon Musk has those grandest visions. He also is very good at execution, where he’s able to keep his whole team on track. Even though he’s on top of many things, and he’s a micromanager, he is able to keep his team on track with this vision. So he does it with a very good execution strategy. Indeed, he showed that when in 2006, he built the secret Tesla master plan, which was really three points that highlighted the execution strategy for the next decade of the company.

Another point is, as Tesla moved forward, we go toward 2009, 2010, it passed the first near-death experience as we go through the 2008 crisis. The company decides to go public, something that Musk doesn’t necessarily love, as we see. The reason for keeping, for instance, SpaceX private is because he understood from all the ups and downs of Tesla in the short-term as a public company, to keep SpaceX as a private company. So it was a lesson for him, but he also became his own PR.

There is something that it’s easy to forget, but before 2008, there was no Twitter. He started to tweet really, I think, in 2009. So as he goes through the IPO, he starts to become really his own medium. Before that, he had to connect with journalists to actually get coverage. Now, he can do it without any intermediary. 

He can start doing that through Twitter, and that changes the whole game. It was not easy for people around him to control his behavior, for instance, through the IPO in 2009. At the same time though, it was a very powerful strategy to have Musk become his own PR.

How did Musk become his own PR machine? 

Tim Higgins:

Definitely has. He understands the media, he understands the power of communication and these sorts of things. And so when you go through an IPO, there’s a lot of rules and there’s a lot of lawyers and a lot of bankers, and that’s really not really the thing he enjoys. 

He knows what he’s selling. He knows how to sell. Which is a funny thing, because he’s very dismissive of the idea of traditional sales methods and these sorts of things, but he is the ultimate salesman, and he knows how to communicate what Tesla is and why people should buy into it, whether the cars or the investment. 

And so you’re right. In the early days of the IPO, there were clearly signs that there was going to be tension in running a publicly-traded company, which they needed to do because, at that point in time, that’s the way you raised the money that they were going to need.

In recent years, we’ve seen from WeWork to Uber, the ability to raise billions in the private market. But at the time, getting the hundreds of millions that they needed really was a struggle and the IPO market was a way to do it. 

So there was that, but also being publicly traded meant that Elon was going to face certain rules and restrictions in the way that he could do things. And one of those key things is, if you’re the CEO of a publicly-traded company, you have to be honest and straightforward, if you will, about the public comments you’re making about the company and the material aspects of what’s going on, so investors can decide if they want to invest or not and have the best information. 

There’s been some tension between some of the comments that Elon makes publicly about the company and what’s going on with the actual company. And that would really come to a head years later as the company was in trouble again. So you’re right. The early seeds were being planted there when he was first getting on Twitter.

Gennaro [FourWeekMBA]:

Going forward, a very powerful strategy that Tesla picked up in the early days. It was a decision that they made in the early days was to go direct. This wasn’t something to give for the grant, especially in the auto industry where no one had done it before. 

How did Tesla set up its retail strategy?

Tim Higgins:

So in the US, cars for generations, are sold through third parties. They’re franchise dealers at the beginning and oftentimes would be generational families that would own groups or the local car dealership. 

And then it eventually became more like these large groups, in some cases, even publicly traded companies that have massive amounts of brands that they take care of. There’s a lot of criticism over the years about the way that you buy cars in the US.

It can be cumbersome. It can be painful. It’s oftentimes equated to going to the dentist. And so the idea of making it a better experience has been out there, but there are a lot of rules and regulations around the US that lock in that power of the car dealer. 

One of the things that Tesla had going for it is when they started out, they didn’t have 100 years of history, 100 years of contracts with dealers around the country in the US. They had a green sheet. They had a green sheet of the ability to start anew, and so they started realizing what they could do direct. The idea of how Apple was selling.

You go to an Apple store. At the time, Apple was in these high-end malls, and early on for Apple, when they were going into the stores, the brand wasn’t really known. You knew of Apple, but maybe you didn’t know what an Apple computer was, or maybe you didn’t know what an iPod was, or you didn’t know what an iPhone was. The Apple store was, some of it was really about education. A lot of it was about getting hands-on experience with the brand and letting that experience sell the product. 

That’s really what Tesla took inspiration from. They wanted to start creating facilities where people could go learn about electric cars because this was something different. It’s one thing to buy an iPhone that’s a little different, it’s another thing to buy an electric car.

It’s unproven technology. In the case of the Model S, close to $100,000. The idea was if they were going to become more mainstream, they were going to have to have these stores around to sell the car. 

They had debated going direct just online. That’s always something Elon has talked about. You get back to the early days of electric cars and there was just really a belief that the customer is going to need a little hand-holding to learn about the electric car. 

How do you charge it? How do you maintain it? These sorts of things. 

The test drive really became key to selling these vehicles in that if you can get somebody behind the wheel and they could experience that torque if they could experience the quiet ride if they could just experience an electric car, that that was the point in time the emotional connection could come, and that’s really where the sale could be completed.

So they were looking for ways to get people to think about electric cars and try electric cars when they weren’t thinking about buying a car. Really in the US, car buyers tend to be pretty loyal to the brand they’re already in. 

It’s easy to go back to the Chevy dealer or the Ford dealer and just get the newest whatever. So if you’re looking for an electric car, you’re not really looking for an electric, you’re just looking to get your new car. 

And so they needed to plant this idea of the electric car in people’s heads when they weren’t thinking about buying a car. 

So that then when they were, maybe this was an opportunity for them, that sort of thing. So that was the idea behind their stores, and they felt like they needed to control that by owning them.

Elon was concerned that a traditional car dealer if they started franchising, would not have the same motivations to direct people into electric cars, because they would be more concerned about the profits that they were making from selling traditional cars. 

The theory is that traditional cars have more parts, and so they need more maintenance and these sorts of things. And that’s where car dealers make a lot of the monies and the maintenance and the warranty work down the road. So there’s a lot of tension there, but one of the big insights that Tesla was doing was trying to sell directly to customers. They wanted to own that brand experience and that customer experience.

Gennaro [FourWeekMBA]:

Again, it seems like Tesla has borrowed a few things from Apple, and this was really one of those things, even though it was quite counterintuitive in the auto space. As you said, it’s also interesting to point out that even when it comes to car dealers, as they sell the cars at very low-profit margins, most of the money is made in the service business. Though, when it comes to the service business, if you’re a company like Tesla, you lose control of the customer experience because if the service is provided by the car dealers, the car dealers are not interested in selling just your brand. It’s interested in actually providing service for many other brands, or actually building its own brand. So this might seem trivial, but even when you look at a company like Apple, a lot of revenues like we’re talking about, billions and billions come from the service, and the services are provided within the Apple stores. So this is a very important point to emphasize.

If you don’t have a place where customers can come in and talk directly with the company, you don’t have control over the service business, which is not only very important, you can control the customer experience, but it’s also the business that has higher margins. So I think it’s a very important point to emphasize. So the retail store strategy is extremely expensive, but it works on both sides of the funnel. On top of the funnel, it’s a branding educational strategy, and at the bottom of the funnel, to create a new revenue stream at high margins, which is the service business, which you can build when you have a successful product. So again, this choice has been made 15 years ago for Tesla. It was not a cheap strategy, was quite expensive, but they built the distribution that over time, is going to enable them to build a service business that might get even bigger than the whole auto business. Who knows? We’ll see. I thought this was an interesting point to emphasize.

As we move forward through the story, it’s interesting to notice that anyhow, it wasn’t like other companies understood that Tesla was a potential threat. Also, the other companies had tried and attempted to build their own electric vehicle. At the point that actually Tesla was thinking to sell to Google in 2013, as you recall in the book. 

How did the competition respond to Tesla?

Tim Higgins:

Absolutely. So the success of the Model S, really made the company more appealing to investors. The Model S comes out in 2012 but really hits its stride in 2013. Tesla is profitable for the first quarter at that point, and really that’s when you start to see the stock start to rebound, really accelerate. It allows the company to start raising the funds that it really needs to go to keep going. 

This is creating a lot of conversation, a lot of interest among traditional automakers, and as they look at the company, there are a few things going on.

There’s a renewed idea that, okay, perhaps lithium-ion cells, which we’ve talked about, the electric vehicle, this could be potentially something that customers are going to want. You started to see companies like GM move faster. 

They have the Chevy Volt, which has been a hybrid be out there. You start to see them thinking about having more all-electric vehicles, that sort of thing. So that’s going on. The other thing is that as companies study Tesla, they really were skeptical that it was going to be able to survive as a company. 

We just talked about that direct model approach, and as car companies looked at that, they were looking at the cost of building it out. More importantly, they’re looking at the service end of that, that there was going to create all of this essentially, liability down the road for Tesla, delivering the car themselves, and then fixing them. They predicted that was going to be very messy and hard to do.

And so that was going to be an area that Tesla would struggle with. They looked at the production capabilities and were really questioning if they could really get the scale that they were going to need to bring down the cost to go mainstream and these sorts of things. And so that’s out there. 

Really, the traditional car companies were struggling with this issue of they’re making money from gas-powered cars, that’s where their bread and butter is. This electric car thing, let’s make a side bet that maybe this is the future and the future is way off. It’s where you see the industry at that point.

The Model S success at Tesla is reinforcing Elon’s vision and it’s helping him raise the money he needs as he’s thinking about that next step. We’ve talked about that three-point plan, which was to create a sports car to build excitement for the sedan. 

The Model S has come out and now the ideas move on to the next leg, which would be the mainstream automobile, which was supposed to be priced at a way that could be affordable to the masses and really get the scale and really change the world by putting the electrified automobile into the mainstream. 

And so what happens there is Elon starts making huge bets in that he’s looking at the supply chain world and saying, there are not enough battery cells out there. The company really needs to start, if they’re going to have millions of car sales, they’re going to need way more capacity. So they need to figure out a way to get battery cell production to basically, grow dramatically.

They need to push forward the Model 3, which is going to be their mainstream car. These are the key things. They’re putting the acceleration on trying to get the cost down to make it more mainstream, to take this momentum that they have with the Model S to the next level. They’re moving faster than the traditional automakers are moving. That’s one of the big things. GM sees and hears Tesla, and so they too have what they think is going to be something that competes against the Model 3, that’s the Chevy Bolt. 

As the two companies, you can compare how they approach it. GM is hearing Tesla say that they’re going to have a $35,000 car. Well, GM knows how to make a $35,000 car.

They were concerned about price and essentially the Bolt comes out and it’s technologically pretty interesting. It’s an interesting car. It’s a small car, but it’s not sexy. It’s not designed in any way that it’s going to be confused for a sports car. 

Maybe doesn’t necessarily have the coolest interior. There’s nothing luxury about it. Whereas the Model 3 is essentially the Model S, they figured out a way to take some of the cost out of it. The other thing is it’s not a $35,000 car. 

Today, it sells for way more than that. It wasn’t $35,000 at the time it was launched. That’s one of the challenges and the problems you could say about Tesla is that they have a hard time getting the vehicle in at the price point that they say it’s going to be.

This is one of the key things about the ability of Elon Musk as the CEO, and the ability is the guy who can go out and raise the capital that the company needs to keep going. When he’s looking at the Model S, for example, he’s wanting it to be the best car that happens to be electric. And so as they’re developing it, he’s developing something that he would like to drive. 

The car was supposed to be something like $50,000, but it comes out to be actually more like $100,000. If you’re a General Motors and you’re given the assignment of coming out with a $50,000 car, and it comes out at a $100,000 car, you’re not really having a career at General Motors. That’s not something you can do in the traditional auto world, or really any company.

But Elon Musk is Elon Musk. He’s raising the money to keep the company going. It’s his call, he’s the boss. He’s betting that having that Model S be the best car that it can be is actually going to be more valuable than the margin in the near term. 

That carries over to the Model 3. He gets in place a really good team that figures out how to do it more affordably, but still, it was never really a $35,000 car. So GM is coming out with its $35,000 car, and it’s competing against a car that’s really selling more like a $50 or $60,000, and they’re just out of the league. 

But what happens is that creates huge excitement among the buyer for the Model 3. And so the Model 3 is revealed in 2016, and people haven’t even been able to test drive it.

They don’t even really know when it’s going to come out, but they’re literally lining up around the block of Tesla stores to put money down, to be able to be one of the first people to buy that car. Online deposits are going through the roof. That moment in time is very important because it shows that there is this pent-up interest in electric cars, more so than the auto industry ever thought was there. 

That’s really when it’s a wake-up call to the industry that something is going on, but by that point, it’s almost too late. It takes many years to develop a car. And so the industry is trying to race to figure out how to do its electric car at that point. Whereas, Tesla is pretty close to putting one on the road.

Gennaro [FourWeekMBA]:

Very interesting. Of course, it’s not just that people were interested in electric vehicles, it was also the ability of Tesla to create excitement, which could be compared to the excitement that Steve Jobs created by releasing new, very cool products back in the day. Just to emphasize a little bit and to go back and then we move forward. Tesla successfully launched its, let’s say business plan, by proving the technology through the Roadsters. And then there was the point where the Model S became the car where Tesla could show that it could be something more scalable than just a sports car. So it moves from a very small niche of the market to have where this is more for people that know crossing the cusp. This is for real the innovators.

Those people that are interested are really interested in the technology. As it moves to the Model S, of course, it moves more toward the early adopters. Those people that yes, are interested in the technology, but they also want something that works extremely well. With the Model 3, we move toward the larger number of this early majority, where people start to be interested more in how cool is the product. So it’s not just about the technology. As you pointed out, Tesla never managed to really lower the cost of the car to the point that Musk had promised over the years. But also, I don’t think that this is probably the key, because going forward, there is another element on which Tesla may actually borrow something from Apple. Which is the fact that you don’t have to have a cheap product to make it scale. What you need is actually find something or someone that is going to subsidize the product.

By looking at the Tesla business model, I was looking at it in the last few days. It’s interesting to see also how the leasing arm of the company actually generated over 1.6 billion in 2021, which is about 3% of the revenues, but it’s not really about the revenues. The fact that the company has a leasing arm, means that it can enable more people to purchase a Tesla by not paying it the full amount, which a few people can afford right now. It’s just like the iPhone.

Many people in the US can afford it because they can amortize the price of the iPhone through the plan that they pay through the mobile carrier. So the leasing part of Tesla is extremely important to understand the scale that the company can reach over time, even though it might not be able in the short term to lower the cost of electric vehicles, because let’s remember, the batteries are very expensive. It might be able to do that in, let’s say five, 10 years, not necessarily in the short term. So I think this is a very important point to highlight. As we move forward from the Model 3 going forward, the problem is no anymore about prototyping. 

Now it’s a problem of production, and that’s where Elon Musk is going to focus.

Yeah. Production and execution, delivery. The challenge for the Model 3 is really going from doing tens of thousands of cars to hundreds of thousands, to millions of cars at that level of complexity, just is very hard. We started this conversation by talking about how it nearly did the company in 2018. 

And it really did get that production going on time. It was months late, running low on cash, concerns that maybe the company wouldn’t be able to pull it off. Incredible tension at this point, because Tesla and Elon have been able to figure out a way to generate attention. So there was all this hype, and it was looking like the company was going to fail in a massive way. Really 2018, the summer of 2018 was really one of those periods where it didn’t look good for the company.

The problem that happened was with the success of revealing what the Model 3 was going to be like in 2016, there was all this interest in the car. Elon wanted to pull ahead the production plans to capitalize on some of that success. You’ve got hundreds of thousands of people who have put money down that want it. 

Their production plans were much slower and smaller, and he wanted to get out there before maybe a rival could take some of that interest. But also the reality was there was all that interest in the car, there was now huge interest in the investor community to invest. And so he was able to raise a bunch of money to pay for that industrialization. The challenge is that ramping up production is very complicated.

One of the things he thought that they could maybe make it easier was by relying more on automation in the assembly line, going with more robots, these sorts of things. Anybody who has experience in car manufacturing knows that robots have their place, but they’re also a level of complexity that can be hard to just turn on. That you’ve got to do it right or else you’re going to have problems down the road. 

GM had struggled with it years earlier. Toyota actually doesn’t try to rely on as many robots as some might think, because they find that having people work there is cheaper and allows greater flexibility. So you had this really quick push to try to automate a lot of the factories that they had. What turned out was they basically had tied everything up in knots and they were trying to figure out how to fix it was really hard.

And so you get into early 2018 and they still haven’t turned on production in any meaningful way to get the levels they needed to get the sales that they needed to keep the lights on. Elon is sleeping on the factory floor and all of his key deputies are there day in and day out, just trying to knock down, what’s like Whac-A-Mole, with problems. 

Ultimately, they were saved because the team that was responsible for developing the Model 3, had moved beyond the startup phase. The Roadster was developed and the Model S had been developed. Elon had hired a savvy executive from Apple who’d experienced overseeing the Mac computer lineup, and he’d come in. In a lot of ways, he, I don’t want to use the term professionalized, but corporatized Tesla’s development operations in a way that it needed to be done as it was moving from a startup to being a real corporation, a real car maker.

One of the things as they looked at the challenges of the Model S and the derivative of that vehicle called the Model X, which was a large SUV, was that it was hard to build, to physically make at the factory.

 An example, with the Model X, if you will, Elon really wanted these cool seats in the back that were on pedestals and that you would be able to look under the seat and you could see out, and they weren’t going to be attached to the wall. This created all this complexity of assembling the seats, and people on the assembly line were having to go in with a wrench and twist their backs and get in there. It was really complicated.

Workers were getting repetitive injuries. It was hard to build. The Model 3 team was charged with the idea of we have to make a car that’s really easy to make, because this is a problem for us. And so that was an important part, and that comes into play. 

Whereas the assembly line is in knots because of the automation, it’s actually pretty easy to make the Model 3. One of the engineers says, “Well, why don’t we just take it away from these robots and do more of it by hand?” That was a huge insight. Essentially, what they do is they start creating new assembly lines where it’s less automated and the people can just put the car together.

In fact, they set up a giant tent outside of the factory where they can put one of these assembly lines. And then it’s just a matter of putting a lot of people on it, and just here you go, just keep cranking it out. This is the solution. This saves the company. 

In the summer they start cranking out the number of cars they need to start generating the revenue, and they avoid basically collapse, but they’re not out of the woods yet. Now they’ve got thousands of cars coming out of the factory. 

They’ve got to deliver those cars to people. As we talked about this idea of controlling their own sales and service operation really becomes a challenge, because they’ve basically run out of money and haven’t been able to scale the sales and service operation.

It’s just like what the traditional car companies had figured was going to happen years earlier, when they looked at Tesla and their ambitions and said, “This is going to be one of the bottlenecks.” And it was. 

The challenge was in the third quarter of 2018, as they had all of these cars that they had now built. They had cost the company money. The company is nearly out of cash. They have to deliver thousands of these cars by the end of the quarter, or it’s game over at that point. So there’s this massive rush to deliver Model 3s around the US to make those sales because it doesn’t count as a sale until it’s in somebody’s hand.

You see this crazy effort to do that. Included all sorts of untraditional ways of delivery from hiring people off the street essentially, to drive these cars to people’s houses and giving to them, and then taking an Uber or a Lyft back to the Tesla operation and going get another car. 

Literally, hand-delivering them to their homes. At one point, Elon was putting out requests help from customers to come to the centers and help with the deliveries that were taking place at these delivery sales and service facilities, where people were coming to get their cars and they were being scheduled in advanced and slotted into 30 minutes to an hour period, where they would come and get their car, and they drive off, hopefully, happy customers.

And so just a mad dash to do that. And they pulled it off, which was remarkable. The other remarkable thing was these were not $35,000 cars. These were the early adopters that the sales team had sold much more expensive, $60, $65,000 cars. 

And so these were high margin vehicles that helped the company turn a profit that quarter. A really key moment. And that allowed the company to get into figuring out how to make these cars cheaper, but also figuring out how to deliver them. For Tesla, launching the Model 3 was a multiyear challenge as they learned how to do it.

Gennaro [FourWeekMBA]:

One thing that is important to highlight is that one thing is prototyping. Another thing is actually mass production. Elon Musk also over Twitter has highlighted a few times that there was a production hell. So it was something that probably created the most pain for him over the years. 

And the turning point would be really the opening of the factory in Shanghai. This could be really a turning moment for Tesla after the near-death experience of 2018. The opening of Tesla in China in 2021 would be really a turning moment that made the whole dream possible.

Tim Higgins:

So continuing to struggle into 2019 with the Model 3, it’s not the cheap car that everybody anticipated. It’s a little bit of a struggle to sell it in the US at the levels that they were hoping for. Really what they need is the scale and China is going to give them scale. 

So really the doubling down there on the bet is let’s open a separate assembly plant, it’ll be in China. That’s where the growth potential is for electric cars. That’s where the luxury market is. 

This is the big bet and it just happens to be at the time when the Chinese government is very excited about the idea of getting a Tesla into the market because it’s going to put pressure on its homegrown electric car companies to scale up and to get competitive. The country wanted the electrification of its vehicles.

And so, in some ways, perfect timing. A lot of investors in early 2019 thought it wasn’t going to be possible. It didn’t look very good for Tesla. The idea had been that the Model 3 would come out in 2017, 2018 and the company was going to be then profitable going forward, and it was going to get all of the problems behind it. Here we are in 2019 and it’s still a struggle. 

This is where you start to see some investors lose faith. Some of the biggest supporters are privately saying, maybe this is not going to happen. The one thing though, is that in China with the government’s help, getting that factory going, getting it up, getting it built in record time, really surprised a lot of people. So Tesla is able to open this factory in about a year’s time.

So they announced in early 2019 they were going to do it. In early 2020, Elon Musk is there at the opening of the factory dancing on stage. What that does is create renewed confidence that Tesla can maybe pull off all of Elon’s wild ambitions, and you start to see the stock growing. It looks like this is going to be the moment for Tesla, and then COVID happens. 

All of a sudden, Tesla’s factory in California is taken offline because of local ordinances, part of the COVID quarantining effort. Without the China factory, Tesla wouldn’t be able to generate revenue. And so the China factory is keeping the lights, keeping sales going and Tesla is pushing through COVID, and Elon is very aggressive in reopening as soon as he can. 

During that period of time, the company is able to continue to be profitable and heading towards basically the first full 12 months of profitability in surviving COVID, when other automakers really suffered. The level of excitement in the investor community for Tesla soared, and Tesla was able to do something to address the biggest problem it had since the beginning, and that was cash.

It went out and very cheaply raised a mountain of cash that gave it the cushion to weather storms in the future. The ability to raise the cash then takes away one of the big concerns or risks that investors have is that if Tesla runs out of cash, because of whatever. 

So it’s this virtuous cycle, if you will, of the stock rises, it has this money, it rises more, it’s able to attract the talent, it’s attracting the attention. And it really becomes a moment for the company where people and investors are not only betting that the future of the car is electric, but they’re also betting that Tesla and Elon Musk are going to dominate that future. 

That’s what makes them the world’s most valuable automaker, is not necessarily the success they’ve had, though they’ve had some success in the near term here, but the bet that that success is signaling even more success in the future.

So the bet of the century really is, was the idea that they could create an electric car company that would change the world. They, in a lot of ways, have. People always want to say, “Well, what’s the future of Tesla?” 

We can’t really say, but if there was no Tesla tomorrow, or if they were to somehow go away, it’s undeniable that Tesla has had success in making the traditional automaker in the world think about the role of electrification of the car. From General Motors to Volkswagen, to Toyota, these companies are now investing billions and billions of dollars in pursuing the electrification of their fleets. 

Governments around the world, seeing the success of Tesla, have been emboldened to impose new and tougher regulations that are pushing for the electrification of the automobile. So it’s really, it’s a testament to Tesla and Elon Musk’s vision for that electric car, and showing that the world and that people could want an electric car if it performed and looked in an appealing way.

Gennaro [FourWeekMBA]:

Just a quick takeaway from the conversation, and then a quick take on your side. I was one of those people that believed in 2018 that Tesla wouldn’t make it because, of course, we weren’t wrong. As Elon Musk has highlighted many times, Tesla was a few months away and actually, at a certain point, a few days away from bankruptcy. 

So it had really a very short amount of money to actually survive in the short term. So we were not wrong. So in hindsight, it was very impossible to predict the success of Tesla. On the other side, in 2016, of course, Elon Musk drafted part two of this master plan, which is about, I will call the electrification platform because it’s way more than just making cars. 

Tesla starts to become, even though, as people can read in the book, there is a little bit more controversy behind this because Tesla would eventually bail out the other company, the SolarCity Company.

Anyhow, I think this was the strategy where Tesla started to build an electric infrastructure and platform. And then it also started to build the autopilot software company. So today, if we look at Tesla is worth more than a trillion, not just because it’s only speculation. It’s also because the market is betting that the market in which Tesla is in, is way bigger than just cars. It’s maybe something which is made of an electric platform infrastructure, and also the software part, which can be used both in sea transportation, but way more than that. In cargo and many other, and the wars. And of course, also the robotization of the manufacturing plants. Let’s remember that this can be used also to actually offer it as a service in the future. So we don’t know, but anyhow. The bet now is that the Tesla market is going to be way, way larger.

Then there is another key turnover event in 2022, just a few days ago, when we had again, the Elon dance because finally, Tesla managed to open the Giga Berlin. I think it’s another key event because finally, Tesla managed to open the plant in the heart of the auto manufacturing industry in Europe for the last century or more. So on your side, Elon Musk said on Twitter that he’s going to announce the master plan part three. 

Can you guess what’s next for Tesla?

Tim Higgins:

The key thing here is we look at master plan two, and we think about what we look at the last few years as he’s held events around battery technology and AI technology, and autonomous car technology. 

He’s selling this vision of what the company could become in the future. Autopilot is not fully self-driving car technology at this point. The company might have it someday, but it’s a really hard thing to do and a lot of people are trying to do it. 

The efforts on the solar have not gone as I think a lot of people hoped. The robot, I think, in large part was done to excite potential hires because the competition for AI people is very competitive.

And so the common denominator here is it’s Elon selling his vision for the future. That Tesla is more than just a car company, it is a place that is doing hard technology, the future, that sort of thing. That really is the key to keeping some of that excitement going. 

That’s the challenge that the company is going to have in the future is that a lot of the valuation, a lot of the excitement is going to be very hard to keep that growth going. At the end of the day, Tesla is a growth stock story, and it’s hard to keep the year-over-year growth that they’ve had into the future. 

So that’ll be part of the challenge is how does Tesla manage that investor demands to see 50% annual growth of car sales versus all these other things. So you’re seeing Elon talk about stuff more than just building cars.

The other challenge and the big challenge for Tesla continues to be one of execution. It has pulled off the China factory in record time, but it has struggled with some of the other projects that Elon has done. When you look at the talent that he has, he’s lost a lot of his senior leaders and he can’t do it all himself. 

The question becomes, if Tesla is going to become a multi-generational company, it has to have multi-generational leadership. How is he developing the next generation? It’s yet to be determined, yet to be seen. So the challenges ahead are how do they keep the growth? How do they keep the excitement going? Because there’s huge, huge excitement, and it’s hard to keep that going.

Gennaro [FourWeekMBA]:

Absolutely. Thanks, Tim for joining this conversation. It was a huge pleasure and thanks for your insights.

Tim Higgins:

Great. Well, thank you. It was an honor.

Gennaro [FourWeekMBA]:

Absolutely. My honor. Thank you.

Listen Also:

About The Author

Scroll to Top