The Musk of a Dynamic Business Model – Part 2

This is the second post and final post of this series. To read the first please go to this link.

One thing that connects both Tesla Motors and SolarCity is renewable energy. Lower oil prices, shale oil, and the huge reserves of oil and gas that have not been tapped into still offer energy sources that can sustain humanity for a few centuries. But the clamor for sustainable energy sources that has gained steam at the turn of the century has meant that our profit maximizing capitalist is looking towards renewable energy. Indeed, the UK even has a green investment bank. But being highly capital intensive as well as offering less energy than what can be produce from fossil fuels, renewable energy is not a particularly attractive option for the capitalist looking for a decent return.

Thus government investment and support is necessary to turn the cogs in the machine: to invest in improving renewable energy, to invest in R&D and to support profit maximizing companies that are involved in this field. Yet companies in this field have found it difficult to continue given the high capital costs and the lack of an effective demand. For many people, the ease and efficiency of a gasoline car, or being part of the grid, better than the uncertainty and poor performance associated with green energy. People, in general, do not want to struggle. But they are interested in the idea of renewable energy.

Musk is trying to change that, and given the investment in his ideas from both government and the private sector, there is a feeling that he could succeed. But this only considers the profitability of the immediate products. Musk could spend his life just one industry, one product, and yet he has an interest in three (four if you include PayPal). Having such diverse interests, it is not surprising that there are externalities, positive externalities. His recent announcement that Tesla Motors will sell lithium-ion battery packs, known as Powerwall, to consumers to power their homes and businesses to power their facilities has the potential of shaking up many industries. The hope is that renewable energy produced bysolar power could be stored in these batteries which can then be used during the night, a time when most electricity is used in the homes.

Powerwalls could disrupt the way we look at the energy industry is structured. Indeed, for renewable energy to even be commercial viable, it has to stored on a wide scale. Optimistically, it has the potential of not only affecting energy conservation in developed countries, but the potential for developing countries is considerable. Most developing countries are in sunny climates afflicted by load shedding; to harness, store and apply would be a boon and affect industries in terms of production. Less reliance on fossil fuels means less pollution.

But this is for the future. The US Department of Energy estimates that for energy storage to be competitive, it must not cost much more than $150 per kWh. Tesla’s lithium-ion batteries cost more than $700 per KwH.[1]The current economic argument for the batteries is weak, though Musk has commented that there is a strong demand for the battery. Energy analysts believe that the economic argument of producing batteries will change as cost of producing batteries has become cheaper over the last 20 years although other commentators have said there is a limit as to how much cheaper litihium-ion batteries can become. Nevertheless, if we are to assume Moores Law to be applicable, more research cold produce more efficiency, or perhaps an innovation in the way we store energy. Compressed air has been touted as an alternative to lithium ions.

Nevertheless, Tesla continues its focus on batteries.   There is the construction of a $5 billion Gigafactory in Nevada (to be opened in 2017) which will provide batteries for the Tesla cars and create Powerwalls. With a high percentage of revenue in R&D (between 40-50% ), a dedicated factory, strong demand, and a relationship with SolarCity, there is a real possibility that renewable energy could become widescale in the next decade.

However, it is only a possibility. Both the government and the investor are unsure whether this can come into fruition. Governments have hope and access to tax pay money. But investors are more concerned with the success of the immediate products of Tesla Motors and SolarCity. Investors do not have the patience for ambiguity or new ideas. Investors have to be sold an idea, and see quicker returns Indeed, consumers and investors are looking for a benefit with as little struggle or loss as possible, and renewable energy in its current form is not profitable or efficient enough for mass interest. More research has to be undertaken and this requires funds. Government offers this, but so can private capital. Musk has perhaps found a way to satisfy both parties in that he has created revenue, and not profit, maximising companies. At the same time, he has whet the appetites of investors though persuasively arguing that one day, Tesla cars will be profitable. Consequently, through stoking up interest in a product (Tesla cars) and in the potential of a different product (batteries for energy storage), he is channeling various forms of funds into R&D. This is a dynamic business model in that it links a number of products and industries. It leverages off both the short term horizons of the investor, and the long term horizons of the government. Whether he is successful in all his endeavors remains to be seen, but he is certainly giving the world much to be excited about.

[1] To explain, to produce a 1000 watts of electricity in an hour would cost $700. A heater uses 1000 watts an hour. A heater does not cost $700!

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