SYNDICATED FROML'Ecole de Paris
With the Model S, Tesla offers not only “the best car in the world,” but also an object from the Silicon Valley, closer in its architecture to a mobile electronic device than to a car, in the conventional sense. The electronics and system architecture but also the streamlined user experience: everything is designed in a framework where models are smartphones and tablets. The result is a car that draws its attractiveness from its own features, including its mechanical performance, and from the enchanting experience it promises, more than from simply rational, technical and economic features. Electronics and automotive technology, the best of both worlds, and beyond! This performance owes much to the personality of Elon Musk and to the culture of the company, which shares both the qualities and defects of a start-up. Will this culture survive to a change of scale?
Having spent over twenty years in the Renault Nissan Group where I worked since 1993 on the design of electric cars, I left the company in 2011 to become Vice-President of Tesla Motors. I was responsible for the quality and my main role was to develop and perform qualification and certification tests of the Model S. I left Tesla in 2012, due to an incompatibility of temperament with Tesla’s boss, Elon Musk.
The best car in the world
Elon Musk was born in 1971 in South Africa. He was educated in Canada and the United States. In 1995, he left Stanford University to create his own business, a software publisher specialized in online content. After selling the company in 1999 for $341 million, he co-founded another company that became Paypal and was sold to eBay in 2002 for $1.5 billion. In 2002, Elon Musk created SpaceX with the objective to divide by ten the cost of space launchers. Seven years later, the company won a NASA (National Aeronautics and Space Administration) tender for flights to the International Space Station. SpaceX has now launched several commercial satellites, at much lower prices than those charged by Arianespace, which now considers this company as a very serious competitor.
In 2008, Elon Musk became chairman of Tesla Motors. He is also a shareholder and chairman of SolarCity, a company offering photovoltaic products and services. Finally, he also initiated the Hyperloop project, a system that may be able transport people at over 620 MPH in a vacuum tube. The project was first considered as wacky but today, everybody agrees on its feasibility. A company has recently been established to study its practical implementation.
When I arrived at Tesla, I was informed that according to the specifications of the Model S, it was bound to become “the best car in the world.” I thought it was a commonplace used by all manufacturers but I was told that it was a serious goal and, moreover, that it wasn’t just about making the best electric car in the world but the best car, period. In fact, Model S was highly acclaimed by the press when it first came out in 2012. Motor Trend, the first automobile magazine in the United States, named it Car of the Year and Consumer Reports, a consumer association, felt it was “the best car ever tested.” The Model S has become an undisputed benchmark for luxury sedans, facing no direct competition.
Manufacturers are used to identifying the so-called USPs (unique selling points) of their models i.e. its unique features that make it particularly attractive. I enjoyed myself doing this for Tesla’s Model S and its USPs are particularly numerous.
The Model S is able to go from 0 to 60 mph in 2.8 seconds, which is faster than most sports cars. It has a range of 310 mi. Its handling is extraordinary with a very low center of gravity, thanks to the location of the batteries underneath the car. The driving experience is extremely pleasant, the hydropneumatic suspension is top quality and security is at an exceptional level. The interface is driven by a 17-inch touchscreen with a quality on par with that of an iPad in terms of resolution, brightness and contrast. This is the real heart of the car. It manages the suspension, regenerative braking, lighting the lamps, trunk release, air conditioning, heating of seats, navigation, radio, phone, rear camera, calculate the battery charge and remaining range. It is connected to the Internet, which allows Tesla to perform remote software updates and transform this electronic object – computer on wheels – into a connected object. Model S users tweet to indicate where they are with their cars and what they are doing.
The distribution and maintenance systems are also very original. Tesla has no dealer and sells its cars in shops called Tesla Stores, often located in city centers or shopping malls. The creator of these shops, George Blankenship, is also the inventor of Apple Stores. Tesla offers amazing financing solutions: the car cash value is guaranteed by Elon Musk with his own funds. Ordered cars can be delivered at home. Maintenance is provided by Tesla Rangers, who come in pairs at the client’s location and lend him a vehicle if the intervention takes longer than expected.
The Tesla Motors company was founded in 2003 by young engineers from Stanford University. Elon Musk joined them as an investor. The company defined its strategy in 2006. It planned to start with a limited series of 2,500 roadsters, to show what an electric car could do, and secondly, to release a large sedan at a rate of 20,000 units per year, at a price more consistent with the market. This strategy was well respected to this day and has earned Tesla an excellent stock market valuation. The next step was to produce a crossover or minivan called Model X. Ultimately, Tesla plans to launch the Model 3 in 2018, that is to say, a vehicle that has similar performances to the previous one but will be sold at $35,000, with volumes of 100 to 150,000 units per year.
Between 2008 and 2011, Tesla produced and sold approximately 2,500 Roadsters, a small car with a chassis manufactured by Lotus. In June 2010, the company was floated. At the same time, it forged strategic partnerships with Panasonic for battery cells, and with Toyota and Daimler for the electrification of their vehicles (the RAV4 for the former, the electric Smart for the latter). Tesla gave them the electrical system, battery, motor, electronics, charger, wiring, etc. All three companies entered the Tesla capital up to 7 or 8% each. Daimler withdrew in 2014, obtaining profits of nearly one billion dollars. Model S was launched in June 2012 and reached full production in 2013. In 2014, the capacity was increased and Tesla introduced a new, improved 4WD variant. Finally, the Model X was officially launched in late September 2015 and the production rate is increasing steadily. Tesla’s objective is to manufacture and sell 500,000 vehicles by 2020.
A start-up culture
Today, Tesla has approximately 12,000 employees, which can be characterized by the formula “Silicon Valley Meets Detroit”. Half of the engineers are specialists in electronics, hardware and software. The others come from the automotive industry, hence the reference to Detroit, even though most of them are European.
Despite its ten years of existence and size, Tesla maintained its startup culture, characterized by an appetite for risk-taking. In France, saying “it’s risky” generally means “this is a direction we will not explore.” Tesla, on the contrary, always choses the most risky path among the different technical solutions: if successful, it will save considerable time and stay ahead of competitors.
Another trait of this culture is to “dream big” i.e. set extremely ambitious objectives, such as building the best car in the world, or making things that nobody has ever made. This attitude creates an extremely stimulating atmosphere. As a disadvantage, it sometimes causes strange situations, like when Elon Musk, just after appointing me as director of quality, told me to “never talk to him about the process.” He refuses to suffer from the constraints of the automotive world, such as cumbersome procedures for quality, validation or development, that this industry has spend over a century in building.
One of the favorite terms of Tesla is the adjective scrappy. The term proves difficult to translate, but it evokes the “System D”: problem-solving and creativity to achieve goals despite the limitations of the available means.
By the end of 2015, Tesla will have delivered over 100 000 Model S and its backlog for Model X exceeds its production capacity. The company has been profitable once in the first quarter of 2013, one quarter earlier than expected, according to the 2006 strategy, and has chosen since to focus on its development and continues to show negative results. Financial markets (Tesla is listed on the Nasdaq) don’t seem to bother and the firm’s capitalization reaches approximately $30 billion.
The company repaid the $500 million loan of the Department of Energy several years in advance, in a context of economic crisis. The accidental fire of three cars in late 2013 caused a decline in the share, but the company was able to explain what had happened and its stock price regained its former level.
The challenges ahead
The question on everyone’s lips right now is whether Tesla will be able to continue on this path.
The first challenge was to reach a profit margin of 25%, as prescribed by the initial strategy. This high objective is achieved only by a few manufacturers, such as Porsche. But the valuation of the company is based on this promise. Any violation of this promise will automatically trigger negative impacts.
To achieve such a margin, the company will have to cut costs but also increase sales. So far, Tesla has never spent a penny in marketing, advertising or sponsorship: it counted only on the buzz. But once all the so-called early adopters will have bought their Model S, we have to expand this sales network to find new customers, which is likely to involve significant costs.
At the same time, Tesla will need to develop new models, including the Model 3, dividing the cost by two or by three and multiplying the production capacity by five or more. It is unclear whether the Tesla system will still work with such a change of scale.
What is very striking among Tesla customers is that they don’t chose to buy Model S because it’s an electric car or because they want to “save the planet”, but because it provides a totally new experience. Model S users love their car, like geeks love their iPhone: they have a very strong bond with their object.
We need to understand what creates this bond and take advantage of it to create new cars and new devices. There is no reason to think that only Tesla is able to design cars that generate such enthusiasm.
Current car makers, however, may not be best placed to identify opportunities and make the necessary changes in their industry. For many years, they’ve introduced “incremental” innovations and failed to reinvent the car. This situation could leave the field free to a new entrant searching for the next “coup”, perhaps in the field of autonomous vehicles. According to a well-known formula: “the light bulb wasn’t invented by candle-makers…”
Speaker – Is the original team of Tesla Motors still part of the Group?
Philippe Chain – Of the five original founders, three had to leave the company after one of its two bankruptcies: in 2007, Elon Musk, who was a simple investor, brought new capital, took control of the company and demanded the departure of these three people. The only member of the original team who remained was Jeffrey B. Straubel, the “guardian” of Tesla technology. He, too, has a somewhat difficult relationship with Elon Musk.
Who was the project manager in charge of the Model S? I imagine Elon Musk does’t take care of all the details of a project?
In fact, he does… The project director for Model S was Jérôme Guillen, a French engineer who previously worked for McKinsey and Daimler. But Elon Musk is very intrusive. Even though he is only there two days a week, he decides of absolutely everything, especially the “small details”. He decides alone about the product plan. He has a great vision but he isn’t very easy to live with because he doesn’t trust anyone and is very interventionist… He is also known to defend himself quite vigorously when the company is criticized. To my knowledge, he’s the only car manufacturer to have sued the BBC because one of its shows had been critical of the Roadster.
You seem to confirm the thesis that disruptive innovation can only be led by visionary/dictator hybrid personalities, like Steve Jobs or Elon Musk. Can a great innovator be also a “normal” entrepreneur?
I would like to believe so, but I fear that there may not be many examples.
Tesla’s turnover seems very high.
During the twelve months I spent in the company, I saw five vice-presidents leave: I was the sixth. Since I left, I believe a few others also left the company. Some are depressed, others had a burnout, many suffer. Life in the company isn’t easy.
How can one create an affectio societatis in such conditions?
What creates the bonds are the highly ambitious goals of each project. This Californian feel that we will “change the world” is a unifying force. Elon Musk instills this spirit. I remember the day he arrived at the office saying: “I have decided that we will deliver the first cars on June 22.” We were in March and we hadn’t made a single salable vehicle yet. He added that he had already summoned the top ten customers and the press for a big party in the factory.
What would happen if, one day, Elon Musk was no longer the CEO of the company?
He definitely plays a key role. However, the company could reach the orbital speed that would allow it to continue operating on its momentum… It would then perhaps become a constructor increasingly similar to the others.
The issue of autonomy is paramount for electric cars. What is the secret of batteries on the Model S?
There is no particular secret, except that the volume of batteries and the number of kilowatt hours they can deliver: 16 for Smart (Daimler), 22 for Zoe (Renault), 30 for Autolib (Bolloré), 90 for Model S. The Model S battery pack is located under the car. It takes all the space between the front and rear axle, is 10 centimeters thick, and weighs about 700 kg, bringing the empty total weight of the car to 2.1 tons and has an important impact on the overall cost.
The battery is composed of small columnar cells with a diameter of 18 mm and height of 65 mm. This is the standard format (called 18650) of the battery cells on our laptops. Originally, Tesla made this choice to ensure the availability of cells. In use, this is a very good choice because millions of units are already produced and their learning curve is very advanced. Tesla added a cooling system by placing small coils between each cell, an effective solution to the heat management problem.
The charger supplied with the car can fully charge in eight or nine hours i.e. 50 km/h (kilometers of autonomy per hour of recharge).
With a second charger, optionally available, this period is halved and recharge can reach 100 km/h.
As the issue of long journeys concerned customers, Elon Musk decided to install “super chargers” at regular intervals along the main roads. These can charge about 75% of the battery in half an hour, at about 600 km/h. They are free to use for Tesla owner. Cars are parked under shadehouses with solar panels for renewable energy and there is of course a restaurant next door. The network now covers all of North America and most of Europe, with a charger every 200 km, and also parts of Asia (China, Japan).
Is it also possible to swap batteries?
In principle, yes. The battery pack has been designed for this and the technical feasibility has been demonstrated. In a TV show, Elon Musk proved it was possible to change the battery in less than a minute. But this device requires heavy investment, which proves difficult to sustain. In June 2015, Tesla announced that they wouldn’t deploy this solution.
Currently, in France, the delivery period of Model S is of several months. In the US, this period is much shorter. Why such a difference?
The annual production capacity is of 50,000 units and the number of pending orders is between 10,000 to 15,000 units. This automatically creates delays. In addition, the company favors orders from the United States and Canada. In Europe, they give priority to Norway, a country that offers many advantages to buyers of electric vehicles, such as the exemption of import tax. In September 2013, 650 units of Model S were registered in Norway, making it the best-selling car in the country during that month.
Is this situation due to a strategy to organize shortages or are there real technical barriers to a significant increase in production?
The Tesla factory is located in California. Built as part of a joint venture between Toyota and General Motors in the 1980s, it closed in 2009. The site is huge and has produced up to 500,000 cars a year.
The total installed capacity for the production of Model S is of only 20,000 units per year and increasing this capacity would require heavy investment. One of the specificities of the company’s strategy has been to opt for a high degree of vertical integration.
Tesla itself provides plastic injection molding for the manufacture of shields and dashboards or an aluminum smelter for the body. A special technology of vacuum pressure casting has even been acquired for some large critical parts of the structure. Tesla designs, develops and also manufactures electric motors, coils, power electronics and electric chargers. The computer screen, motherboard and operating system are all developed by Tesla. But their production is handled by a major subcontractor for electronics, in China.
How do the relationships with suppliers work?
In the beginning, Tesla turned to suppliers who had no reliable references for the car, for example in terms of vibrations. When it became a supplier for Toyota’s batteries, motors and electronics, the company was forced to adopt quality procedures inspired by Toyota and they made considerable progress.
Tesla teams began their work on the Model S project in 2007 and the car was released in 2012. This is a relatively short period of time compared to other experienced car makers that already have years of experience, with a staff that masters all the technologies involved.
In large automotive groups, the time spent in following procedures or waiting for decisions can prove quite frustrating. Gradually, one gets used to this rythm and the pace slows down. There is a saying that large manufacturers work with 10% of their best engineers: the others just follow. At Tesla, I immediately had the feeling that the company only recruited engineers from the top 10% tier…
The rate of development is also linked to the number of validation procedure. In the automotive industry, software validation is done very precisely and comprehensively but not in Tesla. The instrument panel was designed, like for many consumer software, with an accumulation of functions that could generate coding bugs, and a system that kept diverging. One day, we began to prioritize functions and eliminate some of them, but there were still many bugs remaining when we delivered the first cars. The updates are applied at night, while the batteries are being charged.
To change the scale, the company will move from scrappiness to more conventional methods. Will it be able to do so?
Scrappiness is about using “pieces of string” but also about being creative and working hard. When I joined Tesla, the company had only 1,200 employees and didn’t work at all as it does today. This company has been able to face extraordinary challenges through the successive stages of its development. It will need to be creative again if it wants to reach a production of 500,000 cars a year. In light of its history, one can imagine that it will still reinvent itself, even though there will always be a risk that everything can stop at some point.
Of all the possibilities you mentioned, the craziest seems to be the aim of dividing costs by two or even three between Model S and Model 3. In the automotive industry, net margins are usually a few percent, if not negative. Does this goal challenge the very concept of these vehicles?
The use of aluminum for the body or battery capacity are maybe being put at risk. This being said, the Model S was not immediately optimized from an economic point of view. The good enough principle was applied: let’s produce the first model first, and correct next. The battery pack has been reworked many times to improve safety, but its costs could be reduced further by 30 to 40% by redrawing it completely.
There are increasing announcements about the autonomous car. Renault has plans for 2020, Toyota will implement some features in 2015 or 2016 and Elon Musk announced a 90% autonomous car for 2016. What does he mean by that?
A number of driving situations can be automated: parking, traffic, highway driving, “simple” city driving… Once all these situations are covered, a 10% of residual situations will be impossible to automate.
In October 2015, Tesla launched a new software release (version 7.0) that includes most of these features, under the label “Auto Pilot”.
The concept of autonomous vehicle depends on three main issues: sensors, infrastructure and algorithms. Sensors already exist; they are very expensive, but their price could drop. The issue of infrastructure is crucial: are we talking about fully autonomous vehicles, vehicles that communicate with an infrastructure or that communicate with each other? For what I know of Elon Musk, I suppose he will focus on fully autonomous vehicles. Finally, there is the algorithmic aspect. Google has heavily invested in this area for a long time and they are probably the most advanced player on these issues. Since Elon Musk and Larry Page are good friends, I wouldn’t be surprised to see them team up in this field.
How do Tesla Rangers operate?
I know quite well the French responsible of Tesla Rangers. At the time of Roadsters, he only had fifty customers in France and he knew them all by name. His biggest problem was concerning customers who pretended they had failures to make him come and see them!
With the transition to a production of 50,000 cars a year, we entered another dimension, but Tesla Rangers are still highly valued.
Some time ago, a customer complained on social networks that his car would discharge alone while he wasn’t driving. Tesla Rangers came over and failed to resolve the issue. Two days later, Elon Musk himself spoke of this problem during an interview and announced that he was taken it very seriously. The next day, an update was sent to all vehicles. The customer noted progress but nevertheless, the problem remained. Half a day later, Tesla Rangers announced they had analyzed all the car’s records and detected a fault on the 12 volt battery. They came to change it and the customer expressed his satisfaction on social networks.
There appear to be two strategies for developing the electric car. Europe chose to offer vehicles for less than 15,000 euros and supports their purchase with subsidies, with the prospect to go upmarket later. Tesla chose to start with beautiful yet extremely expensive cars, then to progressively develop the bottom of the line. This approach seems smarter because it is easier to develop a technology by selling it at a very expensive price. Incidentally, Tesla managed to make electric cars not only as a possibility but also as an attractive product. They created a market that other manufacturers will take advantage of.
I share your analysis. Tesla began selling Roadsters at €120,000, then the Model S at €80,000 or €90 000; the following model is expected to have a price tag of €40,000. Renault Nissan opted for “the electric vehicle for all” approach, with heavy constraints on design. I worked a lot on the economic model of renting batteries for Zoe; it’s really hard to offer contracts for €80 per month without losing money. That being said, it is possible, as you suggest, that after having contributed to the attractiveness of electric cars, Tesla won’t be able to resist the power of more established manufacturers when it comes to producing affordable electric cars.
This document is the report of a seminar called “Technological Resources and Innovation” in the École de Paris du Management (Paris School of Management) held in December 2013. It has been slightly amended by the speaker in order to update certain references.
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