https://www.designnews.com/electronics-test/op-ed-elon-musk-and-sergio-marchionne-have-lot-common/51044819658824
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Tesla CEO Elon Musk is learning what Fiat's Sergio Marchionne already
knew:
Squeezing profit from an entry-level electric vehicle is a monumental
task that
requires a great deal of patience.
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[Photo] Last week, Elon Musk (right) tweeted that shipping $35,000
versions of the Model 3 right now would cause Tesla to “lose money &
die.” (Image source: Wikipedia/ By Steve Jurvetson). In 2014, FCA
chairman Sergio Marchionne (right) said about his Fiat 500e: “I hope you
don’t buy it because every time I sell one, it costs me $14,000.” (Image
source: Wikipedia/from Dgtmedia)
Many lessons can be learned from Elon Musk’s recent tweets about the
trials and tribulations of the Model 3 electric car, but the main one is
this: Musk and Sergio Marchionne have a lot in common.
Musk’s most revealing tweet occurred last week, when he said that
shipping $35,000 versions of the “affordable” Model 3 right now would
cause Tesla to “lose money & die.” He added that he needs three to six
months after reaching production levels of 3,000 to 5,000 cars a week,
just for Tesla to stay alive.
As if those words weren’t shocking enough, Musk also announced that
Tesla has hatched a plan to market a souped-up, $78,000 version of the
Model 3. The underlying plan is for Tesla to sell higher-priced versions
of the Model 3 until it can make ends meet with the $35,000 models. This
would be accomplished by boosting performance and adding such features
as bigger battery packs, automated driving capabilities, glitzy wheels,
and colors other than black. Only after that could the company begin
delivering lower-cost versions to the 400,000-plus customers who have
plunked down $1,000 deposits over the past few years.
Not surprisingly, Musk’s tweets weren’t met with a lot of happiness—even
among the media that has helped hype the company for the past decade. In
a typical headline, the Los Angeles Times called the Model 3
unaffordable for the masses. Similarly, US News & World Report ran a
story saying that Tesla lost $14,000 on each of the Model 3s it
delivered (based on an average sales price of $54,000) in the first
quarter of 2018.
The Old Reality
In essence, Musk’s comments aren’t much different from those of Sergio
Marchionne, the plain-spoken chairman and CEO of Fiat Chrysler
Automobiles (FCA). In 2014, Marchionne made this blunt statement about
the little Fiat 500e electric car: "I hope you don't buy it because
every time I sell one, it costs me $14,000."
Marchionne was, of course, heavily criticized for his comment. But the
criticism seldom mentioned the fact that Marchionne recognized the
inevitability of electrification. He frequently said that as emission
standards were tightened, the auto industry would naturally gravitate
toward a combination of combustion and electrics. Under his leadership,
Chrysler even launched its effort to build the Pacifica plug-in hybrid
minivan.The lesson here is that Marchionne’s reality was not much
different than the reality now facing Elon Musk. And that same reality
is shared by the rest of the auto industry, which has long known that
the entry-level market would be a tough nut to crack for the electric
car. In fact, the auto industry has known for decades that all small
cars—even those with internal combustion engines—exist on razor-thin
profit margins.
Somehow, though, that reality has managed to elude much of the public,
the media, and even Wall Street. That’s why Tesla’s market cap is so
absurdly high. Today, Tesla’s market value is about $450,000 per car
sold—about 16 times that of BMW and 90 times that of GM.
What this means is that investors have showered money on Tesla, largely
because of its vision of the future. And—let’s be honest here—that
assumption is based on the fact that Tesla is a Silicon Valley company
led by a genius, whereas the conventional auto industry is characterized
as a Midwest, Rust Belt industry with one foot firmly planted in the
past.
The corollary to this assumption is that Silicon Valley knows how to
quickly drive the cost out of new technology and will do so in batteries
and electric cars. In 2010, The New York Times even explained this in an
article that introduced the concept of “Moore’s Law for Electric Cars.”
Which, of course, is ridiculous. Gordon Moore’s famous “law” applies to
semiconductor chips, not to batteries and not to cars. The cost of
electrics is never, ever going to drop the way semiconductor chips did
for 40 years.
Detroit knows this and so does Musk. But the public doesn’t, which is
why the concept seems to linger.
The irony now is that the viewpoints of the two sides are converging.
Detroit (which has brilliant engineers, too) now knows what Musk has
taught—that there’s a market for electric cars in the luxury sector. And
Musk is learning what Detroit already understood—that squeezing profit
from an entry-level electric vehicle is a monumental task that requires
a great deal of patience.
Maybe Sergio Marchionne actually knew what he was talking about.
--
Senior technical editor Chuck Murray has been writing about technology
for 34 years. He joined Design News in 1987, and has covered
electronics, automation, fluid power, and auto.
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Len Moskowitz
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