Elon Musk’s Basic Economics

Economics of Entrepreneuring

Imagine a $2,000 car… or a $100 laptop… or a $70 iPhone… or imagine any product ten times cheaper than it was.

Imagine the fundamental market change that would bring.

Imagine the amount of demand there would be for that $2,000 car or $100 laptop or $70 iPhone.

That’s what Elon Musk imagined 15 years ago when he sat on a pile of $165 million dollars.

Elon Musk’s businesses are all centered around some the most basic principles of economics out there. When he starts a business, he’s not necessarily trying to do something new, he’s trying to do something right. Musk made most of his early fortune through his involvement with PayPal.

In 1999 he founded a company called X.com which was quickly bought by Confinity—the creators of PayPal—so when PayPal was bought by eBay in 2002, Musk’s 11.7% ownership of the company translated to $165 million dollars.

Colonization of Mars

Colonization of Mars

Elon Musk has always been deeply passionate about space exploration and, as anyone knows, public interest in space has been falling since the Apollo era. Therefore, Musk’s plan with his newfound fortune was to launch a rocket to mars carrying a small greenhouse that would grow plants on the surface of the red planet.

Basically, he wanted to take all his money and put it into a big publicity stunt for space exploration.

But he had a problem—it was too expensive. The cost of launches was absolutely immense and, even when Musk tried to buy decommissioned Russian ICBM’s, he couldn’t find a way to pull off the project, but he had discovered something.

The space launch industry was ripe for disruption. Here’s Joseph, the economics expert from Real Life Lore to explain why … (see the video)

Tesla’s economic strategy is fairly similar to SpaceX’s.

Tesla themselves makes about 80% of the 5,300 parts in a Tesla car, but for the most part they don’t make these, the batteries, at least yet. Batteries are very difficult to make at a competitive price so very few companies do.

The largest three manufacturers—Panasonic, BYD, and LG Chem—make a combined 63% of the world’s batteries. Tesla, therefore, has historically just bought batteries from Panasonic at a cost of about $200 per kWh. But that means that Tesla’s smallest battery pack, the 50 kWh version, costs $10,000 dollars just in components. When you’re trying to sell a $35,000 dollar car and make a profit, that’s a significant cost that can be reduced.

Therefore, Tesla is attempting to reduce the cost of their batteries by 30% by building their own factory in a joint-venture with Panasonic.

Their long-term goal, however, is to … (See video).

For example, the Tesla Model 3, the low-cost Tesla, is built using steel instead of aluminum like the Model S and X. With this change, the manufacturer is having troubles properly welding the vehicle bodies together and so the entire production line is slowed down massively.

SpaceX Engine Test Bunker

SpaceX Engine Test Bunker

But there’s something else unique about SpaceX and Tesla’s production lines—they’re in the US. Now this probably seems counterintuitive—why would you put the production lines of two companies working to make the least expensive products on the market in one of the most expensive labor markets in the world? Almost every US company has relocated their production lines to cheaper labor markets in Asia and Africa but Musk has always had his in the US.

Believe it or not, this isn’t a PR move. It actually makes sense for the two companies …

While China might be able to build Tesla cars at the same price by using cheaper human labor, Tesla’s US factory is just miles away from its headquarters in Palo Alto meaning that the executive, development, and production staff are all heavily integrated and can make changes fast. SpaceX even takes this a step further.

SpaceX’s long-term goal is to … (See video)

Want to see more about the Mars initiative?  Click here.