Elon Musk’s Basic Economics

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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100 thoughts on “Elon Musk’s Basic Economics

  1. Elon Musk just opened a new Giga factory in China and is planning on another in Europe to move production closer to the EV markets if Europe and Asia.

  2. The sad part on his comment about not opening the company is that it is true: instead of being a instrument of accountability and corporate governance, it becomes just a reinforcemento to short term views and startegies

  3. Doesn't what musk is doing sound a bit like a monopoly? If he has all of the steps of production under his control…

  4. Beyond all the ludicrous reasons to doubt Elon and all the pie in the sky impossible ideas and downright impossible ventures, this is the reason to respect him.

  5. What a living legend!
    Guys we should be proud to live in the same century as him.
    Hope more people would join him in the process of taking humanity to next giant leap.

  6. No crew on the moon and no crew on mars- keep trying. Try the lottery like 6/49 played once a month drawing or once a year drawing.

  7. andrew carnegie: vertical integration
    everyone: the perils of capitalism

    150 years later
    elon musk: vertical integration
    everyone: wow musk big brain

  8. Vertical integration, in this case backwards integration, is an excellent way for a firm to reduce costs as long as the company has the skills and determination to take on the larger scope of responsibilities. Clearly Musk is one of the best with regards to backwards integration and it would seem that he will likely execute some forward integration strategies as well. I admire his ability to think big picture and so far ahead.

  9. Avg charge for 1 rocket taken by SpaceX = 50 million dollars
    Avg charge for 1 rocket taken by ISRO = 15 million dollars

    So according to this ISRO is cheaper but because SpaceX is a private company maybe that's why they have to increase their charges

  10. This is a strategy called forward integration. Wherein you'll be the one to supply yourself the components you'll be needing to dramatically reduce the overall cost of the end product.

  11. This is a strategy called forward integration. Wherein you'll be the one to supply yourself the components you'll be needing to dramatically reduce the overall cost of the end product.

  12. Here is someone who understands Musk's purpose in life and how he is doing it. Religious, Marxists, Neo-Nazis, KKK, Progressives, etc WILL HATE THIS…

  13. As a welder i do not understand how welding steel is giving them fits, but they say aluminum is easier to weld. My experience says the opposite is true. Id rather weld steel ANY day over aluminum. Aluminum is way to soft and melts very quickly. I dont like TIG. But whatever thats just a novice welders take lol

  14. Not just governments buy launches but tens maybe hundreds of companies do. Google, satellite TV, satellite internet, etc

  15. another reason SpaceX manufactures everything inside the United States is that rockets are considered advanced weaponry by the United States government so it's forbidden for them to hire anybody from overseas or build them there.

  16. 50 million users
    30 billion $ per year
    = 3000 $ per 5 users per year
    = 600 $ per user per year
    = 50 $ per month
    man we'll have to wait till it's 5 $

  17. B.S. by all means, both from a technical and organisational perspective! They're far from new or disruptive in their orga or prod, just leveraged and overvalued whilst burning cash

  18. Only issue with putting so many sats into low orbit is the risk of accidentally creating a shrapnel debris field, especially through a chain reaction. It could set us back hundreds of years in space navigation if our rockets lose the ability to leave the atmosphere without getting blendered by flying metal.

  19. Elon Musk is the man that everyone aspires to be, and I love that. His mere existence proves that not only will smart and ethical business always be successful, but can also be incredibly profitable in a world where big businesses try their damndest to generate as much profit out as possible.

    I just wish more businesses took notes from the guy. Currently big businesses are debating whether or not to side with the Chinese government's tyranny just because it nets them slightly more profit. Such a business practice can only lead to distain for such companies and thus their eventual collapse.
    However, moral companies are safe from that kind of situation because they don't do anything to generate legitimate outrage, and thus are safe from boycotts and protests.

  20. Elon economics = Make Government cover his business losses with your tax dollars. Then brag you don't take a paycheck so people like you.

  21. Elon Musk is a parasite and autocrat who profits by paying his thousands of workers less than their labour earns for his companies. No-one elected Musk, and all of the achievements of the companies he owns are wrongly attributed to him, instead of the combined efforts of thousands of experts. All billionaires are bastards; Musk especially so.

  22. Elon Musk: Let's get to Mars since we've already fucked over our own planet. Oh man, it's too expensive? Well, let's disrupt the market and invariably put hundreds of thousands of people out of work in the end. lol.

  23. "Governments don't care about cost so much because it's not the decision maker's money". In fact, they don't care about quality either because it's not for their own consumption. That's why government needs to be as small as possible.

  24. eh…. this video is in dire need of an update

    also…. there was no need "to learn how to make cars", there are millions of books on the issue, production has been perfected by Toyota literally 30 years ago.

  25. Usks care are too expensive to compete with Audi, VW, Honda and Toyota which is why we see so few of them in UK.
    Besides, who wants a 70's look when sharp SUVs are the way to go.?

  26. He is a set up fake. This Person is only here to make you think wrong and to carry the lies of Govt. deeper into the minds of people that believe without investigation. The car in space? How does the tires stay inflated? How does the paint stay on without burning or freezing off? Its a lie people.

  27. They have been saying that the moon will have hotels and people will go to space for YEARS! It will never happen people! It can't happen. Its a FRAUD that we good people pay for. Nasa ia a fraud. More and more investigating people are seeing it.

  28. Musk should be the only billionaire allowed. Other billionaires can fuck off and give all their fortunes if they are not going to to great things with it.

  29. Musk builds in the US in order to convince politicians and the public that his ventures are worth subsidizing. It’s PR. Once those subsidies dry up he will move production elsewhere. It’s already happening.

    Bill Gates already tried a satellite internet company called Teledesic. It failed.

  30. electric cars are also bad for the environment because of mining the metals for wiring and batteries and they still get shipped with not so carbon efficient ships

  31. is there an update to this?

    I think the SpaceX observations are a tad bit off … corporations buy launches too – satellites don't last forever … they care about lower prices

  32. Musk has massive balls to be doing what he does… a lot of people with way more money and political influence arent doing what he does i think primarily because they lack his interest and implication

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