Economics of Elon Musk

Source | TED

Source | TED

Most of Elon Musk’s ideas are based on simple economics, simply supplying the people with what they demand, in a right and proper manner.

The beginning of Musk

Elon Musk made the majority of his early fortune through his involvement with PayPal. In 1999 he made a company called ‘X.com’ which was then bought by Confinity, the creators of PayPal.  Therefore, when PayPal was bought by eBay, Musk’s 11% share of the company gave him a return of $165 million.

Musk and Space

All the rocket launch companies before SpaceX were aggregators | Source: SpaceX

All the rocket launch companies before SpaceX were aggregators | Source: SpaceX

Since the Apollo era, interest in space exploration has gradually decreased, yet Elon Musk had a deep passion for what lay beyond our own horizons. Musk’s plan was to launch a rocket to Mars, carrying a greenhouse sufficient to grow plants on the surface of the red planet. But his first hurdle stopped him in his tracks, as he simply couldn’t afford a rocket launch of the magnitude he wanted. However, this hurdle came with a silver lining in which Elon Musk realized that the rocket launch industry was ripe for entry.

All the rocket launch companies before SpaceX were aggregators, meaning that they bought separate parts from other firms and put them together to make a single rocket. But the component suppliers had their own suppliers to make their own products and so at each stage, firms were selling at markup prices to maximize profit; meaning by the time that the company actually built the rocket, its expensive for the firm and even more expensive for a potential buyer as the firm also has to mark-up prices to cover costs of employees and training.

This is where SpaceX shines. It makes 85% of its components by itself, which significantly reduces costs by removing the majority of markup costs.

The best electric car company? | Source: LA Times

The best electric car company? | Source: LA Times

Tesla

Similar to SpaceX, Tesla makes 80% of the 5300 parts required to build the car. However, it doesn’t make the batteries, as they are very difficult to make at a competitive price. Therefore Tesla has mainly bought batteries from Panasonic at $200/kWh; which equates to $10,000 in the smallest battery of 50kWh. Recently Tesla has attempted to reduce its costs by 30%, by building a joint factory with Panasonic. Tesla’s long-term goal is to drop the battery price <$100/kWh.

A slight problem with doing everything by themselves, is that both Tesla and SpaceX have to learn to make and perfect each stage of the production process, and if there is a hold up at a certain step, the whole line is disrupted, and no cars get made. For example, the Tesla Model 3 is built using steel rather than aluminium, which leads to problems in the welding as they’re used to working with aluminium on the model S and X.

Why America?

Source | Tesla

Source | Tesla

Another factor of the costs is the location of the company factories. Nearly all global brands around the world have moved production to cheap labour countries in Africa and Asia, but Musk has kept his companies in the U.S., where the labour market is one of the most expensive in the world. But this decision makes quite good sense, as the robots and workers are constantly learning on the job and new tweaks and adjustments are constantly being made.

With the headquarters of Tesla only a few miles away from the factory, the development and design team are heavily integrated with the production staff. Space X takes this one step further, with the offices and production area under one roof. The Tesla production line is heavily automated, and the U.S. specializes in production line automation with its large supply of highly skilled workers.

The Prices

The United Launch Alliance (ULA) has won most of the highly lucrative government launch contracts, charges >$400 million per launch. Whilst SpaceX only charges a fraction of that, at $80 million; which Elon Musk wants to fall to $40 million. The most expensive part of the launch is the rocket itself, that’s why SpaceX is designing a rocket where the first stage can land back on Earth and be reused. Musk’s long-term goal is to drop the price to around $10 million per launch.

But the problem is that space launches are quite price inelastic, in the sense that even though the price has dropped massively, people aren’t really demanding more launches. The main problem arises within the space market itself, as it’s not a consumer market. Normal people don’t buy launches; governments buy launches and they necessarily don’t care about price because it’s not the decision makers money. The USAF decides to launch a certain number of satellites a year and will pay whatever they need to.

To make money, SpaceX is getting into the internet business. Designing and building satellites that will be able to provide high-speed internet to anyone and everyone around the world. If SpaceX could get 50 million users for its low-orbit, internet supplying satellites, it would generate $30 billion a year. In addition to the massive revenue, the low costs would provide them with a massive profit margin.

The commercial aspect of SpaceX exists to fund Musk’s dreams of getting humanity to Mars. That’s why the company isn’t public, he doesn’t want profit for himself, and neither does he want to answer to shareholders and profitability. He has come out and said the company won’t go public until there’re regular flights to and from Mars.

A remarkable genius | Source

A remarkable genius | Source

The genius of Elon Musk is undeniable. He has used simple economics and creative thinking to come up with two of the most futuristic companies out there today. His humanitarian nature has meant that people believe in his ideas and methodology because they know that he will always do what’s right. His vision of humanity living on Mars goes to show just how forward thinking and aware he is about our world today.