In February Elon Musk boldly predicted Tesla motors would go where no car company has ever gone before, to a $700 billion market valuation by 2025. To put that in perspective, Apple became the most valuable company in history when it reached a $700 billion market valuation in November 2014. Compared to the automobile industry, $700 billion dwarfs the market value of the five biggest public automobile companies. Together, Toyota, Volkswagen, BMW, Ford and Honda have a market cap of just $522 billion. Is Elon Musk crazy? Or is he planning something only he can see?
Let's connect the dots because there's a world-changing strategy behind Musk's insane prediction. Technology changes a lot, but will solar power and batteries change the world?
Imagine that it's 2010 and you're talking to the chief executives of Mercedes-Benz, BMW and Audi. What’s the impact of breakthrough technology on their market dominating vehicle sales?
• Electric cars: No threat
• Shared cars: Minor market segment
• Self-driving cars: Will take decades
Then Tesla launched its Model S luxury electric car in 2012. By the first quarter of 2013 Tesla’s sales passed the high-end German large luxury cars sold in the U.S.:
• Tesla Model S: 4,750 sold
• Mercedes-Benz S Class: 3,077 sold
• BMW 7 Series: 2,338 sold
• Audi A8: 1,462 sold
This summer Tesla will take its first big step toward self-driving cars. It plans to upgrade the software in its fleet of Model S vehicles. All Tesla’s will become nearly autonomous driving cars for highway travel. Soon your 2013 Model S will drive you from LA to Silicon Valley without touching the steering wheel, “gas pedal” or brake — except when you pull off the highway to get food, fuel or visit a local town.
This self-driving upgrade is actually brilliant marketing. After this, why would you buy a 2017 Mercedes when all you’ll ever own is a 2017 Mercedes? If you buy a 2017 Tesla, it can obviously be upgraded with new software, when there are new features in the future.
2017 will be another turning point. That’s when Tesla will introduce the mid-market Model III, an electric car in the $35,000 range. That’s close to the $30,026 average amount paid for new cars at US auto dealerships. Many will be able to afford an electric Tesla instead of a gasoline powered car.
Tesla's challenge is huge, however. In 2014 it produced just 35,000 cars while both Toyota and Volkswagen sold over 10 million automobiles. There has to be an elephant in the room. Without something unexpected, a $700 billion valuation in 10 years doesn't make sense.
The elephant arrived on April 30th, when Elon Musk announced Tesla home and industrial batteries to store photovoltaic generated electricity. By 2017 the batteries will come from a new $5bn “Gigafactory” that is under construction. It will be the world’s largest source of lithium-ion batteries.
With Tesla batteries, your home solar system generates electricity while you're away at work. Then your batteries power your home at night. They will also refill your car’s batteries while you sleep, as solar energy productivity increases along with battery storage capacity. Think about eliminating your electric bill and your car's gas costs in one step.
The dots connect when you see that Musk is Chairman of SolarCity, the #1 installer of residential solar systems in the USA. With Tesla cars and batteries, solar can start powering millions of families' residential AND transportation energy needs. What happens when consumers realize they can slash their energy costs for both electricity and gasoline in one step by buying Tesla’s new tech - including their car, solar energy system and batteries?
Two hard trends (as Daniel Burrus puts it) accelerate this. First, as electric utilities lose customers they will raise prices to cover their high fixed costs. Second, solar capacity will rise while its costs fall due to scaling and tech advances. Together, the price incentives will grow to switch to home solar. It’s what happened to the price and power of your laptop, tablet and cell phone since 1990.
Musk is selling lithium-ion batteries, and their cost decline is a prime example. Compared to 15 years ago, these batteries store 11 times more energy for a $100 cost. That’s an easy trend line to project: Musk is selling a 10kWh battery for $3,500, or $350 per kWh. If the downward cost spiral continues, in 2020 $3,500 will buy 47kWh, enough storage for a house and an electric car. By 2025 a $3,500 battery will buy 83.33kWh of storage, enough for a luxurious house and two cars.
Solar systems are on an even faster cost decline. Though their prices have been falling quickly, solar is projected to fall another 40% in the next two years, reaching “grid parity” in 80% of the world’s markets. With continuing declines solar is forecast to be the cheapest form of energy by 2025.
This fits energy’s history well, since the world’s main energy source has kept changing repeatedly for the past two centuries. In a broad view:
This “fourth age of energy” has huge advantages, according to energy scientist Mara Prentiss, Harvard’s Mallinckrodt Professor of Physics. In her new book, Energy Revolution: The Physics and the Promise of Efficient Technology (Harvard University Press), she uses cars and utilities to illustrate the differences between yesterday’s fossil fuels and tomorrow’s renewables.
As Prentiss describes it, the United States would need only half as much energy as it consumes today if it switched to renewables generated electricity.
That’s because fossil fuels are burned to produce heat, and that heat is converted to mechanical energy (cars) and electricity (utilities). Her most shocking example is a car in city driving. For every 6 gallons of gasoline burned, only 1 gallon moves the car:
• The car’s biggest energy loss: 63% is thermal engine loss
• Other losses: 21% other engine losses, friction loss and drivetrain loss
• The car’s gain: 16% of the fossil fuel produces power to the wheels (roughly 1 out of 6 gallons burned moves the car in city driving, and about 1 out of 4 gallons in highway driving)
Today’s electric generating utilities are only a little better. They average just 32% efficiency, which means two-thirds of the fossil fuel burned produces more heat and smoke than anything else.
Electric power generation consumes 40% of energy consumed, and transport consumes 27% of energy. Together, about two-thirds of today’s energy consumption is at such low efficiencies that dramatic improvements are readily available.
For example, today’s electric cars operate at about 60% efficiency. Their motors can approach 99% efficiency, stop when the car stops (like at traffic lights, where gasoline engines idle), and regenerative braking recaptures and reuses electricity whenever the car slows. As a result, today’s electric cars require less than one-third the energy required by gasoline cars.
On April 30th, Elon Musk called for a “fundamental transformation of how the world works.” His vision is to end the reign of carbon-based fossil fuels like coal, gasoline and natural gas. If Tesla executes this plan successfully, fossil fuels will no longer power households, businesses and transportation.
“The goal is complete transformation of the entire energy infrastructure of the world, to completely sustainable zero carbon,” Musk said to reporters at the April 30, 2015 launch of “Tesla Energy” and its new battery product line.
Musk speaks only of positive benefits for the world, but those come at a cost: this could signal a decline for oil-producing countries and energy companies committed to oil and gas — as well as companies that supply their equipment and services. It could also be an equally dire threat to electric utilities and infrastructure corporations that power them.
Musk, however, claimed the necessity of ridding the world of its dependence on climate-changing fossil fuels when he said, “It’s something we must do, and we can do, and we will do.”
Musk's business strategy centers on a new business unit, Tesla Energy, that sells batteries from its new TeslaEnergy.com website. Tesla’s new line of batteries scale from a single home’s “Powerwall” to a business’s or utility’s “Powerpack,” with multiple batteries used at each level to power different levels of energy consumption. Together, this line of battery products would power homes, businesses and transportation.
Without mincing words or numbers, Musk said 160 million battery packs could transition the United States to post-carbon zero emission energy, and 900 million could transform the world. To power electric transportation, a total of 2 billion battery packs will be needed worldwide.
Showing this is within humanity's ability, Musk compared this to the 2 billion cars and trucks in use right now, adding that this fleet is refreshed every 20 years.
Musk claimed batteries are the product that ends the addiction to fossil fuels and fights global warming. The big problem with solar and wind right now is that the energy is only useful when it is actually produced. Renewable sources like solar generate the most energy during the middle of the day, while electricity demand peaks in the morning and evening. Musk claimed batteries store the sun's clean energy for when it is needed, producing independence from the electric grid.
A live demonstration proved the reality of Tesla's alternative energy solution. At Musk’s launch announcement, on April 30, 2015, stored sunlight powered this evening event. Lights flashed, loud house music played, and a colorful nightclub ambiance surrounded the hundreds attending. The building’s rooftop solar system had captured solar energy during daylight and stored it in Tesla’s new batteries.
The media and tech participants, as well as a worldwide streaming audience, discovered that they had been transported into Tesla’s battery powered, post-carbon future.
Musk added that the Powerwall is a global product for remote villages and the poor who are not on the electric grid. They can take solar panels, combine them with Tesla Powerwalls and have electricity 24x7 without needing to string electric transmission lines or pay a power company.
At a larger level, Musk said Tesla’s $5 billion battery factory was designed as a replicable giant machine, like a product of Tesla. Calling it Gigafactory version 1, he said there will need to be many Gigafactories in the future. He hopes other companies will build Gigafactories, too, and emphasized that Tesla is open sourcing its patents to help them succeed.
The biggest announcement is that Tesla Motors is adding a Tesla Energy business, and this company’s overall goal is to change the world. Elon Musk expressed his belief in ridding the world of its consumption of climate-changing fossil fuels when he said, “It’s something we must do, and we can do, and we will do.”
The “Tesla powered home” will include a solar energy system that powers both living and transportation, along with the increasingly self-driving cars in which you ride. Instead of building gas stations everywhere, Tesla cars will be charged from Tesla batteries at home, using home garages as charging stations.
The public’s pent-up need to help with climate change can be released. In a recent poll 81% of parents said they want to live in a solar powered home. By 2025 millions of families could be changing the world, not just Elon Musk.
What will 2025 look like? “Home solar” could be a packaged product at HomeDepot, Lowe’s and WalMart. Just walk into a big box store’s “home solar” aisle and find the 3 packaged, off-the-shelf “whole house” systems with click-to-sign financing and “This Week!” installation. From “just your house” to a “house and 2 electric cars,” home solar packages will be transformative. One signature and you'll slash the energy bills from the oil companies and the electric utilities, while switching to an abundant energy lifestyle.
You’ll know the 21st Century has arrived when you see those one-stop packages, with TV storytelling ads about “my family’s unlimited energy life.”
Elon Musk’s April 30th announcement was a bigger disruption than the automotive and energy industries. If executed well, Tesla will transform multiple industries, living standards, the world’s quality of life, national security, and the 21st century.
That’s what will produce a company worth $700 billion. This acceleration has just begun, and on April 30th the 21st century finally started growing in many new ways. A $700 billion market valuation would be a well deserved reward.
(This article was updated on May, 1st 2015)