Tesla and Elon Musk under pressure

M. Rokonuzzaman | Published: August 28, 2018 20:53:49 | Updated: August 28, 2018 21:15:56

Elon Musk is known as innovation Mughal at Silicon Valley of the United States. His admission of stress, from overwork and psychological pressure in leading disruptive electric vehicle innovation, had recently cost Tesla's market capitalisation by $5.4 billion in a single day of trading. There have been calls from business professors and analysts alike to relieve Mr. Musk from the helm of running Tesla. Mr. Musk's leadership has cultivated Tesla to grow from a small start-up to having hundreds and thousands of electric cars on the road. Over the last 15 years, Tesla has earned the reputation of leading electric car innovation, creating a disruptive force to gasoline-powered automobiles. It seems that Musk's cult personality is intertwined with Tesla's corporate identity and culture. In the absence of Musk, is Tesla's board, primarily composing of Musk's friends, relatives, and initial investors, in a position to take major decisions to guide the company? In taking the idea to market, why has the company been suffering from loss since inception reporting record loss in 2017, as opposed to reaching profit? Upon championing of electric car innovation, why is there an apparent crisis in Tesla, even raising the question of liquidation?

Elon Musk is considered as the iconic character for conceiving out of the box ideas and mobilising shareholders in pursuing those ideas. He is reported to be a fan of science fiction. Often some commentators have characterised him as if he has been suffering from an overdose of science fiction stories. The science fiction inspires us to stretch the limit of technology and our imagination to innovate. But, the reality wants us to turn that journey into a profitable business. There is no denying that research and development (R&D) costs money to fuel innovation, but the challenge is to translate the R&D outputs into product and process features to improve the quality and reduce the cost of innovation. How is Tesla succeeding in it is a question. Elon Musk deserves credit for popularising electric vehicle concept, consequently intensifying competition for offering green vehicles. But he has the obligation to take Tesla to profit. Although the electric vehicle is taking off, Elon Musk could not turn Tesla into profitable venture over the last 15 years. Do we see Tesla's unique technology ability to outperform emerging competitors like Ford, BMW or Toyota to turn the growing loss into a profit? This question is at the crack of the matter generating enormous stress on Tesla and Elon Musk's ability to lead the company to exit worsening, apparently inescapable, loss trap.

Any innovation begins the journey in a rather primitive form -- irrespective of the greatness of an idea, the strength of the underlying technology core, and the ingenuity, dedication and stamina of working long hours by the entrepreneur. The initial version of the product is expensive to deliver, but only a limited number of consumers are willing to pay for it. And the production as well as the delivery processes being developed is often full of errors, consequentially unpredictable in performance. For Tesla, the situation is no different. As a result, the journey begins with loss. The challenge is to turn this natural tendency of loss-making revenue into profit. To succeed with innovation, the entrepreneur faces the challenge of continually upgrading the product and reducing the cost of delivery.  To address these conflicting forces, technology progression and its integration into both products and processes is a strategic tool. Moreover, scale and scope effects also contribute to the cost reduction with the ramping up of production, and also the expansion of the product family. Often, externality effect also shows up as an added help.

For Tesla's electric vehicle, the battery is the key game changer. Despite many potentials, the battery has many limitations such as cost and charging time. To deal with charging time, Tesla had to install super-fast charging stations. To address this externality factor, the company had to spend huge amount of money. On the other hand, although R&D is making progress in lowering the cost of the battery, the progress is being partly eaten up by the rising Cobalt price. Cobalt is one of the most expensive materials used to make lithium-ion battery to power electric vehicles (EVs). With the scale-up of production of the battery to power increasing number of EVs, the price of cobalt has gone up in the recent past by more than 400 per cent. As a result, the scale is not working in favour of Elon Musk to reduce the loss. Moreover, unlike the computer industry, Tesla could not reap benefit from the zero cost of copying software, like the way Apple benefited from the iPhone's scale-up of production.

Upon seeing the increasing trend of adoption of electric vehicles, all major automakers like Toyota, BMW, Ford or VW have started to spell out their aggressive plan of rolling out electric versions of their popular models. As a result, the competition is also posing an impending threat on price, which Tesla can charge. Moreover, the rollout of EVs by those producers is also going to increase the demand for cobalt, consequentially reducing the scale benefit further. Irrespective of the greatness of the idea, the emergence of competition force in the form of imitation and innovation is a common phenomenon. To counter it, the pioneer should accelerate the progression of increasing the quality and reducing the cost of the innovation in capturing the target market without giving adequate time to the competitors. It appears that competitors got enough time to show up to capture the emerging electric vehicle market before the lead innovator got a hold on the market with adequate market power.

Limited scale effect in reducing the cost, the emergence of competition, and persistent production delay, often reporting of faulty outputs, are among major factors to make investors jittery. There is now speculation among major investors, whether Tesla is caught in an inescapable loss trap or not. In facing such concerns, Mr. Musk also felt significant pressure. To avoid such questioning by the stock market analysts, he came up with the idea of finding an investor having enough deep pocket to fork out more or less $50 billion to buy back shares from the stock market, making Tesla a privately held company. It happens that a premature disclosure of such idea has created additional nervousness in the market, even raising the necessity of investigation to be made by the security regulator.

There is no denial that Elon Musk has been leading Tesla to pursue disruptive innovation. Like all other great innovations, Tesla encountered natural loss-making revenue trend. But, unfortunately, Elon Musk could not benefit like all other recent high-tech success stories from technology progression to increase the quality and reduce the cost as rapidly as it was required. Unlike other recent blockbuster innovations like iPhone or Google, highly material-centric innovation of EVs has been limiting both economies of scale, scope and externality effect. On the other hand, before Tesla could have attained significant market power, competitors supported by strong complementary assets are posing a threat. Although eccentric nature of the management practice by Mr. Musk marshalled resources at an early stage to provide massive finance to pursue the idea of EVs, unfolding that realities are now unnerving investors' confidence. The growing stress on both Tesla and Mr. Musk in taking the EV idea to market calls for analysis to draw a lesson for knowing what it takes to succeed in innovation.

M. Rokonuzzaman, Ph.D, is Academic, Researcher and Activist: Technology, Innovation and Policy.


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