by Aishanya Gupta
From Paypal to Tesla, Elon Musk is continually finding ways to revolutionize our lives.
Although he is known for his high-risk-high-reward inclined ideologies and ameliorations in the technological world of today, have you ever wondered what was the driving force behind his aggressive advancements? The very basic principles of economics!
The Entrepreneur took to what’s been discovered and coined by Adam Smith as, ‘economies of scale’ which is how the cost of production per unit decreases as a company produces more units. This is because fixed costs (such as administration, rent, and the like) are distributed across a higher number of production units.
An easy-to-understand example of economies of scale would be, if we were to produce a video game, there would be a one-time cost of actually creating the game. As we create more copies of the game, the cost per game decreases as the one-time cost is distributed—in other words, we achieve economies of scale.
On the question of how he applied this principle to his numerous startups that are now worth over $20 billion, here’s how:
In 2003, when Tesla Motors was founded, Elon Musk, after a few hassles with the U.S. Government and unrealistic markup suppliers, managed to create 80% of car equipment in-house ( i.e. - within the boundaries of his production factories.)
The only problem is the price level that is well above $75K only because Musk has not been able to align batteries and has to buy them from the only three companies that exclusively manufacture heavy-duty batteries one of them being Panasonic, but Tesla is advancing towards a joint partnership with Panasonic that would further on decrease the cost of the batteries by 30%.
On the note of space exploration and SpaceX, an extensively discussed topic, the South African businessman realized that it is difficult to survive in a field with strictly public enterprises and an inelastic price market (where the demand of a commodity is unchanged due to its price) therefore; he used economies of scale as a tool to make 85% of the rocket parts through heavily automated machines.
By doing this, he cut out the problems of buying components from many buyers and then especially employing people to fit them together.
It is monumental to note that he reduced the cost of the reusable and environment-friendly rockets by 10-fold.
His telecommunication service also plans on kick-starting broadband services that would provide at a starting stage, 7 billion people a high-speed data privilege, not even 7-G users enjoy.
His infrastructure company, The Boring Co. has taken up a project that reflects Elon’s dream of self-sustainable underground colonies in the future.
The above visual explains how fitting the concept of ‘Economies of Scale’ is in Elon Musk’s ventures and thus, through an analysis of the dynamics of his Company chains, it is understood that all this while, by manufacturing units strictly through centrally controlled factories, Musk has considerably reduced costs and been able to take advantage of the Law of Demand (lesser the price, greater the demand. Even for rockets).
That explains, in a nutshell, why: Tesla's market capitalization is $93 billion, compared to $50 billion for General Motors and $37 billion for Ford and SpaceX, which landed a $75 million contract with NASA.
Let’s not forget, with his upcoming startups, he contributes to providing more than 56,000 jobs per annum that massively helps the educated unemployed sector of the United States of America, is underway in developing a robust space economy and has given stimulus to a quantum leap towards common man’s accessibility to the matrix of complex science.