[E6] Tesla: Elon Musk’s vision for sustainable energy
Create a flywheel of demand to generate, store and use renewable energy
Dear Reader,
This profile in Product | Strategy | Innovation details a co-founder and CEO whose company is using a leading brand, bold design, product innovation and advanced manufacturing to disrupt our hydrocarbon economy. The bar is high. But the company is making progress executing its Master Plans to decrease the use of hydrocarbons.
We recently released updates on various aspects of this company including [U7] Energy Reimagined, [U8] Advanced Battery Technology, [U9] Tesla is all-in on AI at the Edge and [U10] Tesla Advanced Manufacturing.
Tesla’s mission is to accelerate the transition to sustainable energy.
Adam Jonas at Morgan Stanley estimates the total addressable market for transportation and energy is $14 trillion. Companies like Toyota, Volkswagen, Daimler, Ford, GM, Exxon, Chevron, BP and Royal Shell pursue their respective industries with mature technologies and supply chains. Most of these companies also pay dividends and buy back stock to return value to shareholders.
Conversely, Tesla raises capital by selling stock at increasingly higher market caps and through earnings to invest into factories, automation and expand product lines. Tesla also lowers prices for its core products as it increases scale and efficiency. Tesla will consolidate these same industries if successful by driving innovation with advanced technologies for transportation and energy sold direct to consumers and businesses.
The strategy is similar to how Apple consolidated consumer electronics and how Amazon consolidated retail with e-commerce. This playbook has yielded four $1 trillion market cap companies so far when you also include Google consolidating the advertising industry and Microsoft consolidating the productivity/business process/personal computing industry.
We will explore the following potential Objectives after covering the relevant background:
Convert Transportation to Electric Vehicles - Tesla expands the Tesla electric vehicle (EV) product line to include most major segments. Example: Cybertruck
Leverage Mega Machines to Streamline Manufacturing - Tesla is using the largest die cast machines in the world to cast large single parts to eliminate manufacturing processes. Example: Giga Press
Save Lives with Tesla Vision - Tesla combines edge and cloud computing with deep learning to advance computer vision for autonomous navigation. Example: FSD Computer
Background
Elon Musk co-founded and served as CEO for Zip2 and X.com early in his career. Zip2 was sold to Compaq Computer and X.com merged with Confinity to form PayPal. Elon was the founding CEO for PayPal. PayPal was later sold to EBay in October 2002 for $1.5 billion. Elon exited with $180 million on this transaction as a major shareholder in PayPal.
Elon Musk founded SpaceX on May 6, 2002 to pursue space exploration with reusable rockets at a time when NASA had fallen behind advancing space technology. SpaceX intends to not only commercialize space by deploying satellites and operating crewed missions to the International Space Station, but to also utilize reusable rockets to lower the cost to start and maintain colonies on the Moon and Mars. The desired outcome is for humans to inhabit multiple planets.
Colonizing Mars is not an exit plan.
But for humanity to be multi-planetary, we also need to preserve human civilization on Earth. Transitioning Earth to sustainable energy is critical to preserving life long-term on this planet since hydrocarbons are a finite resource. Products based on sustainable energy were fundamental to the founding of Tesla Motors July 1, 2003 and later with Elon Musk as a lead investor and Chair for its Board of Directors. Elon took over as CEO in October 2008 to protect his investment and to advance the company’s mission. Tesla began production of its first electric vehicle, the first generation Roadster sports car, in 2008.
Tesla acquired the New United Motors Manufacturing, Inc. (NUMMI) automobile manufacturing company in Fremont, California from Toyota for only $42 million and some equity in 2010. Tesla made substantial investments in the factory to automate EV production. Tesla launched the 5-door liftback Model S EV sedan in June 2012 with production at the prior NUMMI factory. The sleek design, performance and crash safety for the Model S won consumer reports best score ever for a car with a 99 out of 100.
Tesla announced a partnership with Panasonic in July 2014 to create what it called a Giga Factory to produce gigawatt hours of lithium ion battery cells annually to power Tesla vehicles. Gigafactory 1 (aka Giga Nevada) would be located just outside of Sparks, Nevada near Reno. Panasonic began mass production of a new 2170 cell design in January 2017. By 2018, Panasonic was delivering 3 million cells to Tesla daily and by the end of 2019 was producing cells at a run rate of 30 GWh of battery capacity per year.
Tesla revealed the Powerwall 7 kWh residential rechargeable battery storage model for $3,000 and 10 kWh model for $3,500 in April 2015. The target use case is for energy storage with on-site solar energy generation, time of use load sharing and backup power. Tesla partnered with Solar City for solar panels to offer Tesla vehicle owners a total closed-loop solution to generate, store and charge their vehicle with clean energy. Tesla acquired Solar City in 2016 and announced the Solar Roof system with interlocking photovoltaic tiles to replace a roof at similar cost to installing a conventional roof and then adding solar panels. But the sleek design of the Solar Roof is more appealing than solar panels on top of a roof.
With every EV sold, Tesla builds a network effect to transition more energy use away from hydrocarbons towards more sustainable energy.
To understand Tesla, it helps to understand the flywheel around customer experience that drives the growth of Amazon. Better pricing and faster delivery with Amazon Prime memberships drives more sales. This attracts more third party sellers. Over time this consolidates more and more commerce onto the Amazon platform to fuel its growth. Tesla is building the same effect to accelerate the transition to sustainable energy. With every EV sold, Tesla builds a network effect to transition more energy use away from hydrocarbons towards more sustainable energy. And even if a Tesla vehicle is charged with electricity generated by nuclear energy or natural gas through a utility company that is still cleaner than burning hydrocarbons with an internal combustion engine vehicle.
Early adopters of Tesla’s mission are home owners who add Tesla solar and Tesla battery storage to recharge their Tesla EV(s). But as the Tesla EV fleet grows, commercial use of Tesla solar and battery storage also grows. Utility companies are adding grid-scale battery storage with Tesla Megapacks to scale use of solar and wind electricity generation. Utility companies are also adding Tesla Energy Software to realize virtual power plants with thousands of homes connecting their Powerwalls to the grid. When electricity demand peaks, it is cheaper to buy energy from the network of Powerwalls in homes than to operate natural gas peaker plants for a few months out of the year. The business case of converting to sustainable energy will eventually drive its adoption.
And to further accelerate the transition to sustainable energy, Tesla expanded its EV product line with the Model X SUV, Model 3 mid-size sedan, Model Y mid-size SUV, Cybertruck (future), 2nd generation Roadster (future) and Tesla Semi (future to expand into commercial trucking). And to scale production of these vehicle designs, Tesla is also expanding its gigafactory footprint.
Gigafactory 2 (aka Giga New York) is located in Buffalo, New York and produces the solar line of products. Gigafactory 3 (aka Giga Shanghai) produces the Model 3 and Model Y for the Asian market. Gigafactory 4 (aka Giga Berlin) is under construction to first scale production of the Model Y for Europe. Gigafactory 5 (aka Giga Texas) is under construction to scale production of the Model Y and Model 3 for the eastern half of the United States, Cybertruck and Tesla Semi.
Tesla is developing full self-driving capabilities to enable a robotaxi use case for Tesla EVs.
And to disrupt the need for car ownership with transportation-as-a-service priced even more competitively than Uber and Lyft, Tesla is developing full self-driving (FSD) capabilities to enable a robotaxi use case for Tesla EVs. Using the same Tesla mobile app, Tesla EV owners will be able to subscribe to Tesla FSD if not purchased with the vehicle and deploy the Tesla EV to an on-demand robotaxi fleet. Riders will also use the Tesla mobile app to hail a robotaxi that auto-navigates from point A to point B. Tesla would share revenue with the vehicle owner just as Uber shares revenue with its contracted drivers. Tesla will also operate its own fleet of robotaxis to add to the density of available cars-for-hire to accelerate demand for the robotaxi service.
Tesla
Company: Tesla, Inc.
Founded: July 1, 2003 as Tesla Motors; Palo Alto, California
Founders: Martin Eberhard, Marc Tarpenning, Ian Wright, Elon Musk, JB Straubel
CEO: Elon Musk
NASDAQ: TSLA
2020 Revenue: $31.5B (+28.6% Year-over-Year)
2020 Unit Production: 509,737 electric vehicles; 3 GWh battery cells, 200 MW solar
Tesla’s mission statement is “to accelerate the transition to sustainable energy.”
Product:
Mobile app: Tesla app to put owners in direct communication with their EVs and energy products anytime, anywhere; Electric vehicles: first generation Roadster (discontinued), Model S, Model X, Model 3, Model Y, Cybertruck (future), Semi (future), second generation Roadster (future); Energy Storage: Supercharger global network, Powerwall for residential, Megapack for utilities and corporate accounts; Solar Energy: Solar Roof, Solar panels; add-on services & accessories: Full Self-Driving (FSD) for Tesla vehicles with Hardware 3 (Hardware 2 & 2.5 upgradeable to Hardware 3 with the purchase of FSD); Tesla Energy Software for Utilities and Corporate accounts includes autobidder, powerhub, microgrid controller and opticaster; Wall Connector to charge EVs.
Strategy:
Tesla has released 2 Master Plans to communicate their corporate strategy and objectives. So far, these have had about a 10-year time horizon. Tesla released its first Master Plan in 2006. This plan presented the case to produce a high-priced, low-volume sports car (original Roadster) and use that money to build a more affordable car (Model S & Model X). Then use that money to build an even more affordable car (Model 3 & Model Y). Then also provide zero emission electric power generation (Tesla Solar).
Tesla released its second Master Plan in 2016. This plan presented the case to produce a solar roof integrated with battery storage (Powerwall). Then expand the EV product line to address all major segments (Cybertruck, Tesla Semi). And develop self-driving capability that is 10 safer than manual with massive fleet learning (Tesla FSD). And lastly, to enable your car to make money for you when you are not using it (Tesla mobile app).
Elon Musk has also mentioned in different interviews what appear to be 6 guiding principles across his companies: 1. move fast, 2. do the impossible, 3. constantly innovate, 4. reason from “first principles”, 5. think like owners and 6. we are all-in. These are certainly seen in Tesla and do influence strategy, but I would highlight what I would call Tesla’s corporate objectives based on my research. These influence capital allocation.
Design
Tesla builds its own seats to improve the customer experience in the component that drivers and passengers interact with the most. Tesla continuously updates its designs with use in the market. It doesn’t hold back design improvements for annual releases. When Tesla determines a new design is better it goes straight into production.
Brand
Tesla launched as Tesla Motors, but once they resolved some legal issues around using the Tesla name more generally, the Motors was dropped to focus just on Tesla. To achieve it’s mission, Tesla must be a trusted, household brand on par with Apple and Amazon. And not just an EV company. Tesla is a clean, sustainable energy company. Interbrand currently ranks Tesla as 40 on its list of the best 100 global brands. Apple and Amazon are 1 and 2 on the list. Toyota is 7 on the list as the top automotive brand. Tesla is not competing with Toyota for top automotive brand. Tesla is competing for the top global brand with Apple and Amazon.
Direct-to-Consumer
Elon Musk and Tesla communicate directly with consumers. Elon Musk has over 50 million followers on Twitter and tweets to these followers himself without a public relations department. There is no Tesla PR department. Elon controls the company narrative as the CEO by being its primary voice. Tesla also sells products direct to consumers. You can buy an EV on the Tesla mobile app in 90 seconds without any interactions with a dealer. And your EV can be serviced remotely and receive over-the-air-updates just like an iPhone to upgrade software without the need to drive to a service center.
Vertical Integration
Tesla takes on many functions that are outsourced at other companies. Tesla designed its own FSD chip to optimize the semiconductor for autonomous navigation. Tesla built its own Enterprise Resource Planning (ERP) software instead of using SAP or Oracle Finance. Tesla acquired Grohmann Engineering to design its own automated production lines. Tesla is producing its own high nickel lithium ion battery cells and is expected to eventually enter mining to secure key raw materials. Tesla wants all critical materials, components and processes to be under its control to drive superior customer experiences.
Operating Leverage
Tesla uses investments in machines and processes to drive efficiency and reduce cost. This requires up-front fixed capital investments, but as operating margins improve, profits accelerate as unit production scales. Ford and GM cannot do this because the hit on earnings would kill their stock price. But Tesla attracts long-term investors who do not expect a dividend. They want exponential growth and that is what operating leverage delivers over an adequate time horizon.
Innovation:
Tesla uses a deep innovation stack to deliver superior customer experiences. Electric motors generate substantial torque, so all Tesla vehicles accelerate 0-60 mph with performance similar to a top sports car. The upcoming second generation Roadster and Model S Plaid will achieve 0-60 mph in less than 2.0 seconds. Tesla superchargers enable the freedom of long-distance trips away from the primary charging location. And Tesla EVs can be purchased directly from Tesla in less than 90 seconds on the Tesla mobile app or website.
Three pillars help illustrate how Tesla innovates. The most important pillar is the flywheel that continuously converts more and more energy consumption away from hydrocarbons. A primary strategy for this pillar is to scale electric vehicle use across transportation and logistics to continuously reduce the demand for hydrocarbons. This also increases the demand for electricity generation and energy storage as the fleet of EVs scales. Tesla sells solar products and battery storage to also power their electric vehicles. The energy infrastructure created spans residential, commercial and utilities.
The second pillar focuses on “the machine that builds the machine” with advanced manufacturing in what Tesla calls a Giga Factory. These facilities by definition produce and/or utilize gigawatt hours of battery capacity per year. Tesla is expected to produce around 1 million EVs in 2021 using Giga Factories and this is projected to increase 50% a year to reach 20 million EVs annually around 2030. Mega machines are a key attribute to these factories. Examples are die cast machines forming large single parts and stamping machines converting aluminum sheets into finished body panels. Automation helps standardize and scale production lines. Advanced robotics are a key part of the automation.
And the third pillar leverages the growing fleet of EVs, electric power infrastructure and factory processes to create additional value through add on services. But these services are not just about creating operating leverage by monetizing software over and over. These are services that improve the value proposition for the core products with robotaxis for low cost transportation for hire and energy market arbitrage to buy and sell electricity. This is all done with deep learning neural networks and artificial intelligence. Tesla innovation is driving the design and commercialization of FSD chips and computers in EVs to enable edge computing with neural networks and over-the-air updates to the EV fleet. Cloud computing and training neural networks with an advanced supercomputer build out the full stack for computer vision for autonomous navigation.
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1. Convert Transportation to Electric Vehicles
The current operating fleet of vehicles worldwide is over 1 billion vehicles. This fleet primarily burns hydrocarbons as a source of energy using internal combustion engines. Trends in global greenhouse gas emissions show total emissions increased 4x from 2,500 million metric tons of carbon in 1960 to 10,000 million metric tons in 2014. China and the US are the largest emitters with about 45% of the global production. Transportation accounts for 14% of the global greenhouse gas emissions.
Electricity and heat production account for another 25% of these emissions. So the Tesla flywheel to accelerate the transition to sustainable energy is aiming at 40% of the global greenhouse gas emissions based on 2014 EPA data. Widespread adoption of EVs across all major categories is critical to transition the 1 billion vehicle fleet to electricity. And that demand for electricity will drive the market towards more sustainable sources like wind and solar when paired with grid-scale battery storage.
Tesla launched its first EV in 2008 with the original Roadster. This was a limited production sports car with only around 2,400 units sold between $109,000 to $170,000 from 2008-2011. Tesla scaled up production with lower priced sedans and SUVs, but to convert transportation to EVs, Tesla is further expanding its product line to include most major segments. Pickup trucks are a a major segment in the US and major source of unit production for Ford, GM and other auto manufacturers. Tesla targeted this segment, but with a radical design called the Cybertruck shown in Fig. E6-5.
Key features of the Cybertruck are an ultra hard 30x cold-rolled stainless steel structural exoskeleton that also provides the primary body of the vehicle. Doors and Tesla armor glass are added to complete the outer shell. The Cybertruck was designed to support use cases with 3,500 pounds in payload capacity, adjustable air suspension and 100 cubic feet of exterior, lockable storage. The tri-motor option has 500+ miles of driving range, 0-60 mph in less than 2.9 seconds, 14,000+ pounds of towing capacity and up to 16 inches of ground clearance. Onboard electric power and compressed air are also standard.
Tesla has stated they have taken over 500,000 pre-orders for the Cybertruck that require a refundable $100 deposit for either a single, dual or tri-motor option. The single motor option is rear-wheel drive with a base price of $39,900. The dual and tri-motor options are all-wheel drive with base prices of $49,900 and $69,900, respectively. Full Self-Driving (FSD) is available as a $10,000 upgrade and can be locked in with the $100 deposit at that price. When Tesla releases FSD Beta v9.0 and is made available by subscription to more Tesla owners, it is thought the purchase price for FSD will increase, too. A full product line of vehicles including the Cybertruck and Tesla Semi plus market specific economy designs will provide the majority of consumers and businesses the opportunity to purchase a Tesla EV to meet their needs.
2. Leverage Mega Machines to Streamline Manufacturing
Tesla has purchased, installed and now operates the largest high-pressure die cast machines in the world to cast large single parts to eliminate manufacturing processes. The current design can provide 6,000 tons of clamping pressure. Tesla is working with an Italian company IDRA on these machines and has also ordered an even larger 8,000 ton design for the upcoming Cybertruck at Giga Texas. These machines use a metal alloy that Tesla engineered just for this application due to the technical challenges. Molten alloy is injected into the high-pressure die cast press that forms a mold of the part being cast. Once that process is done, the press expands to release the casted part. A robot removes the part and the press is prepared to cast another part. A new part can be cast about every 60-90 seconds.
Tesla Grohmann Engineering team was involved with the selection of this technology although it seems to be out of their scope of expertise. Grohmann primarily works on the automation of processes with advanced robotics. But when you explore both the Giga Press process and what it eliminates you better understand how disruptive casting single body parts can be. The Model 3 uses about 70 separate pieces to form the rear underbody segment of the car. These parts need to be sourced or manufactured on site. They then need to be spot welded to form a single part. This overall process requires about 300 robots plus the time and cost in additional to the raw materials.
The Giga Press eliminates the need for robots to form the same part in the Model Y. It only needs a robot to remove the single part from the press and put it into production. This investment in fixed capital to activate a Giga Press eliminates the ongoing cost and time to operate 300 robots and the raw materials for each unit of production. Tesla is also working to replace the front underbody segment with a casted single part. That eliminates the need for another 300 robots. So the Giga Press concept even with multiple units eliminates 600 robots to compound the effect. This results in a capital investment returning operating efficiency in the form of reduced manufacturing costs over the life of the Giga Press. That is operating leverage with Mega Machines.
3. Save Lives with Tesla Vision
The only viable roadmap for widespread, FSD regulatory approval for unsupervised autonomous navigation will require convincing evidence FSD saves lives compared to human drivers. Early adopters in the United States likely include Florida and Nevada, but other states may require as much as an order of magnitude difference or only 1 death with FSD for every 10 deaths with human drivers. Australia could also be an early adopter to prevent single vehicle accidents from drivers falling asleep on long journeys. Statistics on motor vehicle accidents are usually reported as the number of events per 100 million miles driven.
Tesla will likely receive regulatory approval first for level 4 autonomy without a human driver with geofencing to a specific route for a niche use case like the Vegas Loop. Underground one-lane tunnels transport tourists within the Convention Center, but will eventually expand to connect the airport and casinos with additional tunnels. The Vegas Loop launches with Tesla vehicles and human drivers, but full autonomy is feasible right now for this use case. Once the system is operational it will not take long for Las Vegas to push for approval to gain the publicity of autonomous navigation in the Vegas Loop.
I have covered Tesla’s innovation stack for computer vision in a prior update, but to summarize there are 3 key domains for Tesla Vision:
Tesla Dojo - This highest level domain automates training the deep learning neural network (NN) with labeled images collected from the Tesla fleet. Training the neural network requires running the entire labeled image dataset through the NN model to compare performance of the new model to prior models. Driving simulations can also be run by Dojo to test various edge cases that are likely driving the need for improvements.
Tesla Cloud - This domain centralizes communication with the Tesla fleet and mobile app. Over-the-air updates are pushed out to vehicles and apps when they connect to the Cloud computing services. When the inference NN is updated this can also be pushed out to the fleet to improve the performance of auto-pilot and FSD Beta. The fleet also uploads driver disengagements of autopilot and FSD beta to the Tesla Cloud to better understand potential edge cases for autonomous navigation.
Tesla Vehicle FSD Hardware 3.0 - This is the lowest level domain for Tesla Vision and includes an inference FSD computer with 2 Tesla FSD chips, 8 cameras for 360 degree computer vision, a dashboard camera, radar and 12 sonar sensors. When combined these components make up edge computing optimized for autonomous navigation at low power. The last criteria impacts the driving range for the vehicle and was a key factor for Tesla taking on designing its own FSD chip.
Edge computing is growing fast to reduce the latency of systems that may have originated with cloud computing, but would benefit from real-time performance. This is especially true for systems that sense their environment and need to respond with a low latency. Anything other than real-time control is not adequate for autonomous navigation with computer vision. That means Tesla’s FSD use case requires sensors, computing, the NN model and vehicle controls to all reside on the vehicle.
But Tesla takes edge computing to the next level with the added feature of continuously building the image database in the cloud with labeled edge case images to improve the NN training. These edge cases are identified when drivers disengage autopilot or FSD Beta. Dojo automates training and driving simulations. Once the NN model improves enough to warrant an upgrade, an over-the-air update pushes the new NN out to the Tesla fleet. This full innovation stack for computer vision is unique to Tesla Vision.
Tesla recently announced going forward they are doubling down on computer vision and will eliminate radar and sonar sensors in the future from Tesla vehicles to reduce cost and weight. They determined those sensors provided no incremental value to driving decisions. Tesla Vision also opens the opportunity to take this capability to other use cases like robotics and drone navigation.
Conclusion
Tesla has an ambitious mission to accelerate the transition to sustainable energy that is counter to most of the $14 trillion total addressable market for transportation and energy based on a hydrocarbon economy. But just as Apple and Amazon have innovated their way to disrupt and consolidate the markets they serve, Tesla also has the opportunity to consolidate transportation and energy with its own disruptive innovation. Electric vehicles will be a factor, but the 3 innovation pillars mentioned in this profile will help determine if Tesla becomes the first $20 trillion market cap company. Amazon and Apple will beat it to $10 trillion.
Other companies would benefit from the transition to sustainable energy, but none more so than Tesla. Battery companies will certainly benefit as long as battery technology is a preferred technology. Mining companies will benefit for a decade or two providing raw materials like nickel, iron, lithium, graphite and other materials. But as the the number of batteries reaching the end of their life cycle scales, recycling will emerge as the primary source of mining for the raw materials using discarded batteries. So even the batteries alone are sustainable by recycling them.
Elon Musk is all-in on Tesla as its CEO. His net worth is almost entirely invested in Tesla, SpaceX and his other companies. Elon’s 10-year Tesla compensation plan is driven by 12 ascending benchmarks tied to Tesla’s market cap to grant stock options. These grants started when the company market cap reached $100 billion and then in increments of $50 billion thereafter to $650 billion with various other criteria for the grant to be awarded. The overall compensation package is worth about $55 billion to Elon Musk if all criteria are met to grant all 12 tranches of stock options.
For full-disclosure, I follow Tesla with a primary interest in their products, strategies and innovation. As a retail investor, I’m long TSLA, AMZN and GOOG mentioned in this profile.
Best,
Stephen
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Nothing in this post is intended to serve as financial advice. Do your own research.