Introduction
Elon Musk is widely known as the South African born innovator, entrepreneur, and investor who has revolutionized the automotive, space exploration, and energy industries. He is particularly renowned for building private space exploration companies such as Space X, helping to make electric car technology affordable with Tesla motors, and creating pioneering solar energy products with SolarCity. While many people see Musk as an engineer, inventor, and businessman, it’s important to note that he is also an economist.
As an economist, Musk has developed a keen understanding of the dynamics of the global economy and how it affects the industries he is most passionate about disrupting. He was at the forefront of creating two key initiatives with the help of economic theory; his Powerwall products and the $35,000 mass market Tesla models.
Economic Principles
It’s clear that to gain a better understanding of Musk’s formidable success story, it’s necessary to have a basic knowledge of the economic principles he has employed. A central element of his entrepreneurial success has been his appreciation and mastery of supply and demand theory. This is the idea that there is an intersection between how much of a product can be made, and how much people are willing to pay for it—and understanding and managing this dynamic helps inform production, pricing, and marketing decisions.
Musk has used this principle very effectively in the world of electric car production. By making production processes leaner, Tesla Motors achieved remarkable economies of scale, enabling them to reduce the price of the ‘Model 3’ electric car to an impressive US$35,000. By understanding how to reduce production costs and use economies of scale, Musk has managed to make electric cars, which some considered a luxury product a few years ago, into an attainable and desired product.
Battery Bank Economics
With his innovative Powerwall products, Musk has also used economic theory to his advantage. Solar power has long presented a challenge in terms of energy storage and stability. Musk understood that the best way to tackle this problem was by creating a large network of battery banks that could store excess solar energy and then convert it back into usable electricity. The Powerwall is a large battery bank that is connected to the electrical grid, and it might be used to store energy from solar panels, diesel generators, or wind turbines. The concept of battery banks has been around for a while, however, Musk was able to bravely take it up a notch. He was able to create marketable brand names for each Powerwall product and that factor alone pushed the whole concept to the next level.
These types of economic principles were also evident in Musk’s groundbreaking decision to build a massive lithium ion battery in South Australia in 2017. By building a battery farm to ensure the stability of the state’s electrical grid, Musk was able to work out the economics of potential returns of investments in renewable energy.
Tax Policies
Another point to consider when discussing Elon Musk’s economic genius is his response to taxes. Instead of bemoaning taxation, Musk has used it as another tool to drive down costs. In 2016, for example, he was able to take advantage of corporate tax credits in the US to lower production costs for Tesla Motors. He also targeted locations with favourable tax policies for the production of the Model 3. Similarly, Tesla Motors has been able to benefit from favourable tax legislation in Europe, enabling them to produce cars in bulk to power their global expansion.
In this sense, Musk’s appreciation of taxation policies has enabled the success of his business ventures, giving them much-needed financial assistance to achieve their main goals.
Business Strategy
Finally, it’s important to consider Musk’s business strategy and how this has been informed by economic theory. When discussing the $35,000 Model 3, for instance, it’s logical to think of how Elon Musk has managed to price the item in such a way that it appeals to the consumer. In this regard, understanding concepts like consumer demand and the cost-benefit analysis is essential to strategic decision-making.
Similarly, Musk’s business decisions have often been shaped by economic ideas like opportunity cost, marginal cost, and capital efficiency. By taking into account the costs of production versus the potential return on investment, Musk has been able to make strategic decisions that have allowed his companies to build up and achieve rapid success.
Marketing Strategies
Musk has also employed a number of sophisticated marketing strategies that have made his companies stand out in the increasingly crowded technology market. One of the most effective methods he’s used is to construct brand loyalty, which is made possible by understanding principles of effective pricing.
By pricing Tesla cars at a premium compared to other electric cars, Musk has been able to cultivate and nurture his customer base. Similarly, another element of Musk’s pricing strategy is to offer high-value products at relatively low prices. By understanding the economics of the market, Musk is able to offer his products at prices that appeal to a wide customer base, yet still generate enough profit to sustain his companies.
Network Effects
Finally, Musk has used concepts like Network Effects to power his growth. The idea behind Network Effects is that the product’s or service’s value increases as the network expands. In Musk’s case, this applies mostly to Tesla—as more people purchase Tesla cars, the value of the brand grows, and eventually, more people will want to purchase Tesla cars.
These types of effects were evident in 2006 with the launch of the Tesla Roadster, which Musk released to generate interest in his electric cars. After the launch, the demand for Tesla cars became more evident; the more people enjoyed the cars, the higher the demand for Tesla grew. The clear takeaway from this is that Musk was able to use economics to understand how to drive demand for his products.
Fuel Cost Savings
Electric cars are also great from an economic point of view. Electric cars are capable of saving owners a great deal of money in fuel costs; a Tesla car can cost 2 cents per mile in electricity fees, versus 15 cents per mile in gasoline fees. As electric cars become more commonplace, many drivers will see that they’re great financial investments due to the fuel cost savings they can offer.
Similarly, electric cars are highly efficient; they generate very little noise and have far fewer parts than gasoline powered cars, meaning that maintenance costs are greatly reduced. This has economic benefits for owners, in terms of lower costs for repairs and more savings in the long term.
Environmental Impact
From an economic standpoint, electric cars also provide significant environmental benefits. Burning gasoline to power cars emits carbon dioxide, which is a major contributor to global warming. By switching to electric cars, drivers can reduce their carbon footprint and help reduce carbon emissions into the atmosphere. This has two economic benefits: first, it ensures more clean air for us to breathe and second, it reduces our dependency on foreign oil supplies.
This ties in to investing in renewable energy sources; as more people make the switch to electric cars and invest in renewable energy, the economics of renewable energy such as solar and wind power become much more attractive. This encourages investment in renewable energy, which has the potential to help reduce our dependence on fossil fuels and produce cheaper and cleaner energy in the long term.
Government Incentives
Finally, the economics of electric cars have also been boosted in recent years by government incentives. Governments around the world are offering attractive incentives for drivers to make the switch to electric cars. This includes offering tax credits and subsidies for electric cars, as well as installation of charging stations and other infrastructure. These types of government incentives provide economic incentives for drivers to opt for electric cars and drive the growth of the electric car industry.
By understanding government incentives, Musk has been able to craft his business strategy in such a way that it takes advantage of these economic incentives to help power his businesses. This savvy use of economic theory has been the key to Musk’s success and growth over the years.
