Tesla Is Not A Car Company
Tesla may be a car company today, but Tesla won’t be a car company in 15 years. Rather, Tesla will be a full stack, vertically integrated clean energy company. They may still produce cars, but cars will represent a fraction of total profits.
For a sense of scale, consider that Tesla generated $7B of revenue in 2016. Of that, Tesla does not even break out non-automotive revenue, meaning that their battery/solar business today is small fraction of total sales.
To substantiate the bold assertion above, let’s understand why Tesla exists. The easy way is to ask Elon Musk directly. He recently updated Tesla’s official mission statement from [emphasis mine]:
Tesla’s mission is to accelerate the world’s transition to sustainable transport.
To:
Tesla’s mission is to accelerate the world’s transition to sustainable energy.
Also, Tesla recently renamed itself from Tesla Motors to Tesla.
The long answer is that Musk has been telling us this for a while. If you want a mega-scale view of how Musk thinks, and why/how he started SpaceX and Tesla, check out this 6-part, 100,000 word expose on Musk and his companies. Here’s the part about Tesla, which dives into the history of the global energy industry, climate change, and how Tesla came to be.
So how is Tesla going to pivot from being “just” a car manufacturer into a full-fledged, full stack sustainable energy company?
Tesla’s Master Plan
Everyone knows about the idea of economies of scale in manufacturing. This is the key to future. Musk has talked about the importance of scale in battery manufacturing, but the importance of scale is even more obvious when you look at Musk’s master plan for Tesla.
Here’s part 1 from 2006. The short version:
- Build sports car
- Use that money to build an affordable car
- Use that money to build an even more affordable car
- While doing above, also provide zero emission electric power generation options
And here’s part 2 from 2016. The short version:
1. Create stunning solar roofs with seamlessly integrated battery storage
2. Expand the electric vehicle product line to address all major segments
3. Develop a self-driving capability that is 10X safer than manual via massive fleet learning
4. Enable your car to make money for you when you aren’t using it
The underlying theme across all 8 of these bullets, except perhaps the last, is that each drives scale of battery production. This theme is obvious in part 1, bullets 1–3. I’ll come back to part 1, bullet 4 and part 2, bullet 1 in a bit. Let’s examine part 2, bullets 2–3.
At first, many were surprised when Tesla announced a semi, pickup, and other consumer vehicles. But in the context of Tesla’s grand mission, this makes perfect sense. It seems unlikely manufacturers in these other segments were contemplating electric vehicles. Per Tesla’s mission to accelerate the world’s transition to sustainable energy, Tesla wants to catalyze other manufacturers in these other automotive spaces to go electric faster.
Self-driving is also incredibly important to the future of batteries. Once you can call a self-driving Uber/Lyft, the cost of transportation will fall ~75% (current driver take-rate), and probably 85–90% in the long run as cars are re-engineered to be designed as taxis first. Many people will sell their cars when this happens, and rely exclusively on self-driving cars for daily transportation. This may increase transportation use in aggregate, but it will accelerate the percentage of trips made using electric rather than internal combustion engines.
Self-driving cars and electric are self-reinforcing in the long run. Electric vehicles have somewhere on the order of 100 moving parts. Internal combustion engines have somewhere on the order of 10,000 moving parts. Self-driving vehicles are going to be on the road 24/7 except charging time, meaning that reducing maintenance complexity will be paramount. Given the dramatically lower number of moving parts, the best taxis will be driven by electric motors, not internal combustion.
Driving The Industry Towards Electric
Tesla has by far the cheapest battery technology in the world. Tesla just announced that it has achieved $125/kWh at the Gigafactory 1 in Nevada. Meanwhile, GM is targeting $100/kWh by 2022. Tesla is multiple years ahead of GM in this front, despite an approximate 10x difference in resources.
Tesla doesn’t want to limit the scale of battery manufacturing to the number of cars it can produce. So Tesla is selling its batteries to other car manufacturers. This is pretty astonishing. Tesla has developed a material technology advantage over its direct competitors. Rather than using that to differentiate its product, Tesla is selling that technology to its competitors! This is all in the interest of driving scale. Tesla knows it will never produce cars for everyone, so it instead decided to produce batteries for all automakers. Scale, scale, scale.
The desire for scale goes even further. In 2014, Tesla promised that it wouldn’t sue anyone who violated its patents. Despite investing so much to differentiate itself, Tesla instead decided to encourage other manufacturers to copy Tesla, in hopes that other manufacturers would get electric vehicles onto the road more quickly.
Lastly, Musk has recently been talking about offering up an entire car factory as a product to other car manufacturers. In Tesla’s 2016 annual shareholders meeting, Musk said:
“We realized that the true problem, the true difficulty, and where the greatest potential is — is building the machine that makes the machine. In other words, it’s building the factory. I’m really thinking of the factory like a product.”
This was the basis of Tesla’s recent acquisition of Grohmann Engineering. Grohmann already supplies virtually all of the major auto companies. Tesla intends to use leverage these relationships and Grohmann’s expertise to scale out the process of building “the machine that builds the machine.”
Looking at these three decisions, it’s clear that Tesla wants to kill the internal combustion engine as fast as possible. They are literally giving away hundreds of millions of dollars of R&D for free to other auto manufacturers. And they’re going out of their way to product-ize electric-car-manufacturing-facilities for other auto manufacturers.
But there is a much bigger use case for batteries than cars.
Batteries Will Power Everything
Remember the master plan, part 1, bullet 4 and part 2, bullet 1? Most sustainable energy sources cannot produce energy 24/7 — solar, wind, ocean waves, etc. Contrast this to a coal plant, which can burn coal 24/7. This means that everything — residential and commercial — that consumes energy will need batteries in a true sustainable energy future.
Tesla’s solution to this problem? The residential and commercial Power Wall and Power Pack, respectively. The commercial-use Power Pack can scale out linearly with no efficiency loss. Businesses can buy thousands of Power Packs and literally just put them in a line:
Let’s get a sense for the scale of this. The diagram below shows how energy is produced and consumed globally. Transportation represents about 28% of global energy consumption.
Tesla’s vision is simply batteries everywhere, for everything, all the time. And that means Tesla is going to need to produce a lot of batteries.
This explains why Tesla’s mission is so ambitious. There isn’t a good middle ground here. If you’re going to accelerate the transition to sustainable energy, then you need to drive battery scale as fast as possible and give away all the secrets for everyone else to adopt batteries quickly and easily. And that’s exactly what Tesla is doing. This isn’t just a function of Musk’s personal ambition. Giving away patents, selling to competitors, moving to autonomy, and selling batteries for all conceivable purposes is the most efficient and effective path towards a future of sustainable energy.
So basically, Tesla’s strategy can be shown like this:
It’s a virtuous cycle. And Tesla already has a large and growing lead. The global energy industry is on the order of trillions of dollars of revenue. Tesla wants to get us there faster, and in the process generate revenue from every piece of the ecosystem — generation, storage, and transportation.
Musk Is Copying From The Best
The diagram above is mine, but it’s not original. It’s inspired by a diagram that Bezos reportedly drew on a napkin once regarding Amazon’s retail business:
Amazon could have raised prices and maximized short-term profits years ago. Wall Street would have cheered on the move. But instead, Bezos executed towards a much larger vision: to generate revenue on every ecommerce transaction on the Internet. He realized that he would never be able to own all the world’s inventory and price it competitively. So instead, he set out to commoditize all the infrastructure that power ecommerce.
Today, Amazon owns the top of the funnel — customer discovery and search. People instinctively go to Amazon to buy many items. Most of the items listed on an Amazon search page are not actually owned by Amazon. Instead, they’re owned by 3rd party sellers. Amazon operates a marketplace in this regard. Amazon does own some of its own inventory, but an increasing percentage of its business is selling other people’s inventory.
But those inventory items sit in Amazon’s warehouses. Amazon charges sellers to store their items in Amazon’s warehouses, and for fulfilling orders — putting items in boxes and shipping them.
Today it’s widely recognized that Amazon is going into shipping, the final frontier to own the entire customer experience from end-to-end.
If you’re a merchant who wants to sell online today, you can choose to manage your own inventory and shipping, and hope you can drive search traffic or product discovery in some other way. Or you can go to Amazon, let them store and ship your stuff for you, and receive all of the search traffic that comes from Amazon.
The more sellers agree to this, the more scale-advantages Amazon receives as it can amortize its enormous fixed costs over an increasingly large number of transactions. It’s virtually impossible to build a more efficient logistics and fulfillment system than Amazon. Scale is everything. Amazon is leveraging that to try to take a slice of every online transaction on the Internet.
You can say the same thing about Amazon Web Services. Amazon doesn’t care what consumer or business applications are out there, or what they do, or who they’re made by. Amazon just wants to take a cut on every computing transaction in the world.
Scale, Scale, Scale
This is the key to understanding Tesla. Global energy markets are astronomically large. Sustainable energy sources cannot produce energy 24/7 in a given location. Tesla is aiming to provide batteries and solar production to everyone as cost effectively as possible. And the key to a sustainable future is scale. Everything Tesla does can be looked at through a supply or demand-side lens:
On the demand side, Tesla has been working to produce affordable electric cars, along with self-driving. Cost is key to get consumers to drive electric vehicles.
On the supply side, Tesla is giving away whatever it can, and actively trying to sell its battery products and manufacturing know-how to help other manufacturers get to a sustainable future as quickly as possible.
A hundred years from now, we’ll all look back and think “duh.” Obviously scale was key. Tesla is catalyzing and capitalizing on what will be the largest economic and technology shift of our lifetimes. This is bigger than IT, tech, AI, the Internet, blockchains, or any other buzzword. Everything runs on electricity, and Tesla is going to radically alter how electricity is produced and consumed around the world.
Side note: Tesla isn’t getting into wind or ocean power. These two forms of energy generation are intrinsically regional. But solar is global. Every house and business is bathed in sunlight everyday. There’s no reason that every roof can’t have a solar panel on it. That’s why in addition to batteries, Tesla is pursuing solar. That’s why Tesla bought Solar City.
