When it comes to technology, there’s a tried and true methodology to translating innovative research into profitable products.
First, create a product that in effect creates its own market. Next, figure out how to make it at scale—a move that simultaneously improves profit margins and brings down costs. Then stage high-profile, high-stakes personal product demonstrations to overcome skepticism.
This is the process that Henry Ford, the most important industrial figure of the 20th century followed in creating a crucially important product. And it is the process that Elon Musk, one of the most important industrial figures of the young 21st century is following as he tries to improve upon Ford’s work.
At first blush, Henry Ford, the founder of Ford, and Elon Musk, the founder of Tesla Motors, would seem to have little in common. Ford was a poorly educated Midwesterner, who held a naïve and occasionally offensive views about the world and the people who inhabited it, and who displayed a healthy a disdain for book learning. “History is bunk,” he famously said. Musk, by contrast, is far more worldly. Born in South Africa, he moved to the U.S. as a child, earned a degree in economics and physics from the University of Pennsylvania, and founded technology company PayPal before trying to make an electric car.
But the keys to their success, separated by almost exactly a century, have proven to be quite similar.
First, both set out to change a vital American sector with an expensive experimental product that would gradually become more affordable.
Ford began tinkering in his garage in Detroit in the 1890s, trains and the horse and buggy was the dominant mode of transport. Using gasoline as a fuel for transportation simply wasn’t done by regular people. And to the extent motor cars existed, they were super-luxury products, toys for the very wealthy. The first car Ford built, the Ford Model N, sold for about $3,000 in 1903; by contrast, the typical yearly income in the U.S. in 1901 was about $750. But Ford wanted to democratize the automobile. “I would build a motor car for the great multitude,” he said. Not content to build fancy sports cars, he believed he’d have a much greater impact on the world by building the Model T—a cheap, basic, reliable vehicle that would come in any color, so long as it was black. When it was introduced in 1908, the Ford Model T cost $825, and with each passing year, the price fell. By 1912, the price was down to $575, much more easily affordable for a typical worker. “When I’m through, everybody will be able to afford one, and about everybody will have one,” he said. He was right. The Model T, which sold tens of millions before it was retired in 1927, put America on wheels.
When Musk decided he want to make electric cars, he was confronting the world that Ford had pioneered. Gas-powered internal combustion engines were pretty much the only way to move a car from one place to another. Like Ford, Musk started by building a high-end sports car that would be a toy for the ultra-rich. His first product, the Tesla Roadster, cost $110,000 in 2010, more than twice the national median household income for that year. Like Ford, Musk knew that Tesla could only become a significant player if it were to democratize the electric car. The next iteration, the Model S (an explicit homage to the Model T), launched in 2012 with a base price of $57,700—roughly equivalent to the typical family’s annual income. Tesla is now planning to introduce the Model 3, which will have a base cost $35,000.
Second, both realized that in order to lower the price so it is affordable to more consumers, companies have to make significant innovations in their manufacturing process—including the contrarian step of vertical integration.
In theory, having suppliers of raw materials and components compete for your business is a great way of keeping down costs. They incur all the development costs and take a lot of risk. But Ford had another idea. Suppliers build in profit margins at every step of the way, and sourcing components from all over the country often leads to higher distribution costs. His River Rouge plant, a vast, sprawling, 2,000-acre facility that opened in 1921, was an industrial model of vertical integration and tight control. The Rouge, as it came to be known, produced its own electricity at its power plant, forged its own steel, recycled waste paper into cardboard boxes at its own paper mill. Workers there could turn raw materials into a completed Model T in 41 hours. These efforts helped drive down costs and boost profits.
Musk is taking another page from Ford. Perhaps the most important component of the Tesla is the heavy, expensive battery pack that powers the vehicle. And for most of its existence, Tesla has relied on a single supplier for the battery cells: Panasonic. To ensure that Tesla will have an adequate supply, to bring down costs, and to gain greater independence, and cut down on distribution costs, Musk decided the company would start producing its own batteries in the U.S. In September, it announced it would invest $5 billion (along with Panasonic) to construct the so-called Giga-factory in the Nevada desert. Powered by solar panels on its vast roof, the plant will help Tesla get greater control over a key supply—and possibly create a product it could sell to other car manufacturers.
Third, innovative breakthroughs don’t always speak for themselves, especially when they are trying to win over a wary public to do things differently.
The Ford Model T presented a challenge to consumers in the early 19th century. It was loud and required maintenance, roads weren’t up to snuff, and there weren’t a lot of places to fuel up should the gas run out. In short, people simply didn’t know if it would work for them. To prove otherwise, Ford helped stage highly public events that got a lot of media coverage—including a cross-country race. In June 1909, Model Ts were two of the first three finishers in a grueling New York-to-Seattle rally.
To combat contemporary fears about the utility of electric vehicles—the ability to handle the elements, the possibility that batteries would run down, concerns over a thin network of charging stations—Elon Musk earlier this year staged his own cross-country rally. In the spring of 2014, Musk embarked on a cross-country trip in a Tesla, tweeting quips and photos of motels and restaurants along the way. Reversing the direction of the 1909 race, Musk covered 3,200 miles in six days, spending only nine hours recharging its car.