Elon Musk: Tesla’s Single Point of Failure

Businesses need more than visionaries to be successful
August 21, 2018 Updated: August 22, 2018

Elon Musk’s meltdown in the pages of The New York Times is a reminder that enterprises need both vision and operating smarts to be successful. It was obvious years ago that Musk needed help to build a new car company. Yet, somehow, the members of the board of directors did nothing as the Tesla CEO and co-founder led this extraordinary endeavor.

In my book “Ford Men: From Inspiration to Enterprise,” I noted that Henry Ford had the vision, but it was his partner James Couzens who actually turned the idea into a successful business. So bad was Ford’s reputation for tinkering and racing that he wasn’t even an officer of Ford Motor Co. when it was founded.

Thanks to Couzens, Henry Ford’s idea exploded in less than a decade into one of the great American fortunes, a transformational wealth built on manufacturing. The business was wildly successful and repaid its investors and more in the first year. Thanks to another Ford employee, engineer Charles Sorensen, the company invented the assembly line, which enabled it to meet the astronomical demand for cars a century ago.

Musk is no Henry Ford, but Tesla is the latest case in point to the lesson that solitary leaders often fail. No matter how brilliant or inspired, most of us need the moderation and help of business partners, directors, and investors to make an enterprise succeed and endure. Having Horace Dodge on the board of directors, for example, certainly didn’t hurt the company’s prospects. The Dodge brothers actually built the early Ford cars as kits until the company had its own factory.

When Couzens resigned as general manager of Ford in 1915, the company remained under the control of Henry Ford and would suffer for three decades from his distracted, idiosyncratic mismanagement. The fact that the company didn’t fail prior to World War II is a miracle. How difficult was Henry Ford? Think Steve Jobs squared.

Good Managers Are Essential

Of course, personalities and vision are essential to any enterprise, but it can’t be dependent upon just one person if it is to endure. Over the years, there were many managers and bankers who kept Ford afloat. But for the singular efforts of James Couzens, though, the company almost surely would have been Henry Ford’s third business failure.

Henry Ford II saved the Ford company from bankruptcy after WWII, but he had a deep bench of managers and financial minds behind him and the Ford family. Yet, fate plays a strange role in business. Ponder how different the auto industry would be today if Horace and his brother John Dodge hadn’t both died of the Spanish Flu in 1920. Dodge might be the No. 1 U.S. automaker, followed by General Motors. Ford might have already disappeared from view under the erratic leadership of Henry Ford.

The Fords are celebrities but not magicians. You need a dose of techno-buzz to achieve that. Had Bill Ford announced in 2003 a project to build all-electric Ford cars, he might have caused a bit of a stir. However, Bill Ford never would have escaped the financial straitjacket of the existing auto business.

Technology demigod Musk, on the other hand, was able to launch a “new” car company based upon the dubious promise of future profits from battery power. Musk is Tesla’s single point of failure. The dependence upon Musk to maintain the nosebleed valuation of Tesla seems a key reason why the company’s timid board hasn’t tolerated any competition in the C-Suite.

Tech Hype and Valuations

Despite the tech-sector pretensions, the impact of Tesla and Musk on the auto industry is enormous. Consider the fact that Volvo Cars expects to go public at a $30 billion valuation—more than 16 times the $1.8 billion Ford received from the sale of the business in 2010. The Volvo IPO owes as much to the hype surrounding Tesla as it does to the credit-market machinations of global central banks.

Does a business that made a half-million cars last year, with a single-digit profit margin, really deserve a $30 billion valuation? Only if you really believe that Tesla is worth $50 billion or more with a fraction of that output. If Tesla crashes, then the Volvo IPO very likely is toast, as well.

Just as Tesla thrived due to the vision and passion of Musk, the company’s prospects and equity-market valuation would suffer greatly in his absence. Tesla without Musk is just another unprofitable car maker, albeit one that promises to “accelerate the world’s transition to sustainable energy.” Really?

Tesla’s Dilemma

Musk and his investors are stuck on the horns of a very nasty dilemma. In order to make Tesla a functioning car manufacturer, CEO Musk must bring in some operators before he burns out or worse.

However, to do so means destroying the techno-hype that has fueled Tesla’s forward equity valuation, enabling Musk to burn through billions in debt and equity capital, based on a promise of “green” transportation. Anybody familiar with making lithium batteries knows that this technology is anything but green or sustainable.

Musk’s most recent outburst about Tesla going private illustrates that the reputation of a successful inventor may not necessarily translate into business acumen. Visionaries such as Musk and GM founder William Durant are showmen. They are great at building new businesses, so long as they are spending someone else’s money.

Ultimately, the iron law of profit-and-loss destroyed the lofty dreams of Durant, forcing GM into the arms of JPMorgan and the DuPont zaibatsu twice prior to WWII. I suspect the same fate awaits Tesla and its credulous shareholders. As I’ve said before, bondholders are the true owners of Tesla.

Investors rightly love Musk because he is more than a mere speculator like Durant. Musk imagined big ideas and turned many of them into reality, a proud achievement that he shares with another great American inventor, Thomas Edison. It was Edison, never forget, who loved the idea of electric vehicles. Yet, when Henry Ford left Edison’s employ in 1900 to build cars, he chose to use gasoline instead of electricity.

After creating and selling what would become General Electric Co., Edison’s business fortunes declined. Merely being brilliant and having a vision of the future wasn’t enough. Ford’s immensely powerful mind generated its own inspirations based on observing the industrial activity that was welling up from the ground in and around the Detroit region in 1900. He took counsel with peers like Edison, Dodge, and Harvey Firestone.

Musk belongs to this same exclusive category of visionary inventors inspired by change. But Ford, Edison, and Musk all stand as examples of why being a visionary isn’t sufficient to be successful in building and operating a business. As noted earlier, Musk has defined a market for electric cars and created a brand, but the better part of valor may be to declare success and sell his creation to a larger global manufacturer.

Henry Ford called Edison “the world’s greatest inventor and the world’s worst businessman,” a telling assessment that a series of failed commercial ventures ended up confirming. Edison himself said that having an idea isn’t enough.

The Bottom Line

John Kenneth Galbraith summarized the basic truth when he wrote in Atlantic Monthly more than a half-century ago: “Although Ford conceived of the Model T, Couzens made the Ford Motor Company.” Musk now faces this very same challenge of how to turn inspiration into an enduring and profitable commercial enterprise.

Leaving aside the particular operational concerns of building an electric car, Musk and Tesla face a more basic problem. In the century and more since Henry Ford, James Couzens, and Horace Dodge began to build cars, the automobile has become a very relevant but entirely undifferentiated commodity good.

There are basically three types of cars: small, mid-sized, and full-sized. Most are now styled outwardly as SUVs, but designed to maximize efficiency and minimize price. The companies that manufacture these vehicles all barely make money.

The fact that batteries power Tesla vehicles is interesting, but there is nothing transformational about the company, despite all the hype about green transportation and “sustainability.” Yes, electric motors and batteries are far more efficient today than they were a century ago, but strides in internal combustion engines are impressive, as well.

Compared with the explosive event of the first Ford Model T, when Americans learned 110 years ago that they could get a gasoline-powered car instead of a horse, today’s innovations in transportation are incremental. Electricity, gasoline engines, radios, and semiconductors are all past-century inventions, while today’s innovations are largely derivative.

Seen in this harsh light, is Tesla really worth $50 billion? Is Volvo Cars worth $30 billion? We shall see.

Christopher Whalen is the chairman of Whalen Global Advisors and the author of “Ford Men.” This article was first published by the Institutional Risk Analyst. 

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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