Henry Ford and Steve Jobs walk into a bar.
That’s one way to look at the strategy Tesla CEO Elon Musk outlined Wednesday – to the surprise of many investors, who wiped more than $50 billion off Tesla’s market cap and slashed Musk’s personal wealth by $13 billion.
As Ford CEO Jim Farley said in Detroit, no one should have been surprised. What Musk is doing, Farley said, is straight out of the Henry Ford/Model T playbook: Develop a game-changing product and manufacturing system, drive down costs, use your cost advantage to cut prices and gain market share.
“Look up 1913,” Farley said, a reference to the year mass production of the Model T began on moving assembly lines.
Steve Jobs and his successors at Apple come in with the 21st Century tech industry twist Musk puts on his master plan.
Musk’s strategy for generating profits long term assumes that Tesla can generate enormous value from fleets of self-driving, connected cars. (Stuff Henry Ford could only dream about.)
Musk’s logic for tolerating lower Tesla margins goes like this:
- Use a decisive advantage in manufacturing and supply chain costs to sell as many vehicles as possible.
- Transform those cars through software and connectivity into a network with millions of users.
- Generate billions in after-sale revenue by taking cuts from the operation of ride services enabled by self-driving Teslas, selling software services, profiting from charging, or linking up fleets of cars with large-scale Tesla energy storage systems.
Fully self-driving Teslas could become a reality this year, Musk said Wednesday. Don’t believe it? Neither did many investors, judging by the sell-off in Tesla shares.
FSD and Autopilot are under investigation and litigation. Tesla’s automated driving currently is classified – by Tesla – as effectively no different from any rival “level 2” assisted driving system that requires the human behind the wheel to stay in charge.
But never mind FSD. A Tesla that cares less about defending profit margins than growing volume is a challenge to nearly every rival – even those, such as Renault, which argue they have no need to respond to Musk’s seven-day a week price tweaking.
Consider Ford. The maker of the F-150 Lightning lost 40 cents for every dollar of EV revenue last year. (See page 9 of this deck.)
By 2026, Ford has told investors it expects to earn 8 cents pre-tax on every dollar of EV revenue. Achieving that target, Farley said, will require Ford to launch a new generation of EVs it can build and sell at much lower cost, a more agile approach to pricing and product development. The concept of the “model year” goes out the window, he said. Vehicles and their software will update multiple times every year.
The Model T history has many lessons for today’s EV industry.
Ford stuck with the Model T for too long. That allowed General Motors and other to catch up with more technologically advanced vehicles with novel designs and, yes, more color choices.
Tesla’s lineup is aging. Especially in China, the Model Y SUV is becoming part of a commoditized crowd of mid-size electric SUVs.
“What’s he’s going to learn is product freshness means a lot,” Farley said.
