Elon Musk’s Basic Economics

This video was made possible by Hover. Buy your domain before its gone for 10% off
by going to hover.com/Wendover. 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. 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. “The rocket development and space-launch
companies before Space X were essentially aggregators. They bought engines and guidance systems and
all the other various components from other companies to cobble together one completed
rocket. But all the different component suppliers
also had their own component suppliers to make their product. The suppliers of the suppliers not only had
to cover their development and manufacturing costs, they had to sell their components at
a markup in order to make a profit, and then the next component manufacturer had to do
the same which means that by the time the component gets to the company assembling the
rocket, it’s expensive. Not only that, but the assembly company also
has to pay for employees that work to actually figure out how to make all of the different
pieces work together. SpaceX however, works differently. It makes 85% of the components it uses itself,
which allows it to make cheaper parts. For example, if SpaceX had bought their radios
externally they would be paying $50,000-100,000 dollars each, but since they develop them
internally they only cost $5,000 each to build, a dramatic improvement in reducing cost.” Joseph from Real Life Lore has a brand new
book which includes two fantastic chapters explaining simple economic concepts like this
that I’ll link in the description, but let’s talk Tesla. 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 drop
the battery price below $100 dollars per kWh which would either double the range or halve
the price of that 50 kWh battery pack. But the vertical integration of Tesla and
SpaceX isn’t all useful. The companies basically have to learn and
perfect each step in the manufacturing process and, if one step isn’t working, no cars
get made. 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. 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. Tesla and SpaceX’s production processes
are constantly being tweaked and optimized as the companies learn to make their products. 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. It’s offices and manufacturing lines are
all under one roof. The Tesla factory in particular is also heavily
automatized and the US excels in production line automation with its abundance of highly
skilled workers, but just how much is Musk dropping the price on his products? The United Launch Alliance, which historically
has won most of the highly lucrative US government launch contracts, is believed to charge more
than $400 million dollars all-in for a military satellite launch while SpaceX charges about
$80 million dollars. So, SpaceX is already at a fifth of the price,
but as mentioned, Elon Musk wants that to fall to a tenth. Here’s the key for that—the fuel used
in the Falcon 9 rocket only costs about $200,000 dollars per launch—it’s practically a
non-factor in the launch price. The real cost is of the rockets themselves,
so that’s why SpaceX is making them reusable. The first stage of the rocket is now being
designed to land back on earth and be put back into service with dozens more launches. Once this system becomes reliable, it’s
believed that the cost savings will drop the launch price to $40 million dollars—a full
10 times cheaper than United Launch Alliance’s military launch price. SpaceX’s long-term goal is to get the launch
price down to about $10 million dollars per launch. While the company has already made a significant
impact on the space industry, a launch price as low as this would fundamentally change
what’s possible in space. Real space tourism would become feasible,
commercial satellites would become downright commonplace, and Space would become closer
than it’s ever been. But SpaceX does have a bit of a problem—people
aren’t really buying more rocket launches even though prices are down. It’s what’s known as a price inelastic
market. That’s the opposite of Tesla and the electric
vehicle market where lower prices lead to huge increases in sales. The problem with the space launch market is
that it is not a consumer market—normal people don’t buy rocket launches. Governments buy rocket launches and they don’t
care about price nearly as much as people since it’s not the decision makers’ money. The US Air Force, for example, decides they
need to launch a certain number of satellites each year for the national security reasons
and they’ll pay whatever it takes. But Elon Musk’s life goal is to get humanity
to Mars—that’s why SpaceX exists—and he needs money to do it. Lots of money. So, SpaceX is getting into the internet business. The company is actively developing a satellite
constellation that would provide high-speed internet to anywhere on earth. Thousands of small satellites would be put
into low earth orbit and then anyone worldwide could hook into the network using an inexpensive
ground receiver. If SpaceX got just 50 million users out of
the 7 billion in its proposed service area, this business could bring in $30 billion dollars
a year. Since SpaceX would be building and launching
the satellites themselves, costs would be dramatically lower than the competition’s. The whole commercial aspect of SpaceX essentially
exists to fund Musk’s future space exploration projects. For that reason, SpaceX is not a public company
like Tesla. Elon Musk does not want to make money with
SpaceX, he wants to get to Mars. He does not want to be beholden to shareholders
and profitability. Musk has therefore publicly said that SpaceX
will not go public until the company achieves regular flights to and from mars and thanks
to the entrepreneur’s understanding of basic economics, that might not be too far off. If you’re looking to start a company, you’ll
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