The first thing you notice when you step onto Tesla Motors’s production floor are the robots. Eight-foot-tall bright-red bots that look like Transformers, huddling over each Model S sedan as it makes its way through the factory in Fremont, California, on the eastern, shaggier side of Silicon Valley. Up to eight robots at a time work on a single Model S in a choreographed routine, each performing up to five tasks: Welding, riveting, gripping and moving materials, bending metal, and installing components. Henry Ford and the generations of auto industry experts who have followed would dismiss this set-up as inefficient—each robot should do one task only before moving the car on to the next Transformer.
It’s a $3 billion criticism, to be specific. That was the amount shaved off the company’s market value in early August after Tesla cut its sales forecasts for the year by 10 percent to 50,000 vehicles, citing delays in teaching the robots to make both the Model S and the new crossover SUV Model X. “The Model X is a particularly challenging car to build. Maybe the hardest car to build in the world. I’m not sure what would be harder,” admitted Elon Musk, Tesla’s billionaire founder and visionary CEO, who also serves in those same roles at SpaceX.
But neither delays nor the cash burn ($1.5 billion in the past 12 months) particularly phases Musk. He just wants to focus on making the world’s best car, and the $90,000 Model S, by all rights, can claim that prize. An all-electric vehicle, it offers a week’s worth of driving on a single charge from any one of a nationwide network of free solar-powered charging stations. It goes from 0-60 in under three seconds in “ludicrous” mode, the fastest of any four-door production car on the planet, and is also the safest car in its class. When it collides with the crash-test machine, the crash-test machine breaks. You can order it online and have it delivered to your door, get software updates beamed wirelessly and receive maintenance alerts before bad stuff happens. Plus, it’s beautiful. The door handles reach out to be opened as you approach, then fold flat for better aerodynamics. Don’t believe us: Consumer Reports called it the best overall car on the market for the past two years.
These are the kinds of superlatives that shoot Tesla Motors to the top of Forbes’s World’s Most Innovative Companies list in the first year we’ve had enough financial data to consider the company. The word “disruptor” gets attached to Tesla all the time. For several years, we’ve closely studied the phenomenon of disruptive innovation, identified in the late 1990s by Harvard Business School’s Clayton Christensen. We quantify it, based on the difference between a public company’s market value and the measurable intrinsic value of its existing business—an innovation bonus, if you will.
Tesla has built its entire company around this idea. The Model S and X will be followed in 2017 by a cheaper Model 3, a $35,000 Tesla for the masses, if all goes according to plan. And despite the fact that Tesla abandoned its forecast of turning a profit this year (even with its unusual and pro-company lease accounting), investors can’t get enough of it: Musk has raised $5.3 billion in equity and debt for Tesla since 2010, with each round increasingly oversubscribed by investors, including a $650 million secondary offering in mid-August, partly to complete its giant battery-making Gigafactory in the Nevada desert. “The willingness of the markets to support the company with various financing structures leads me to believe that everything will probably be okay, assuming the model proves viable,” said Jacob Cohen, senior associate dean at the MIT Sloan School of Management.
That viability moment should come around 2017, say analysts at Credit Suisse, when Tesla is expected to show its first significant dose of free cash flow, or operating income after capital expenditures. The other metrics look golden: It is on track to gross $5.5 billion this year, up 54 percent over 2014. Its shares have soared 15-fold since its 2010 IPO to a recent $33 billion market capitalisation.
Meanwhile, incumbent automakers face the same challenge now and long term: If much of the auto business ends up going electric (and that’s a big if right now with sub-$3 gas and sales falling overall for electrics and hybrids), Tesla will be miles ahead at the high-end and coming down-market to eat away at the $1 trillion industry. Detroit finds it easy to dismiss Tesla as a money-losing startup, but it has changed the industry. “[In 2001] GM crushed all of its electric models in a junkyard,” Musk says. “When we came along and made the Roadster, it got GM to make the Volt and then Nissan felt confident enough to go with the Leaf. We basically got the whole ball rolling with the electrification of cars. The ball is rolling slowly, but it is rolling.”
Peel back the aluminium skin of a Tesla Model S and you will see what high-end disruption looks like. The motor and gearbox are a fraction of the size of a combustion engine drivetrain, mounted low between the wheels to create a larger crumple zone for passenger safety. The chassis is like a giant skateboard built to accommodate lots of battery wattage.
To create a car that looks this different, Musk has engineered a team and process that look different. Call it the Musk Way. Most car companies try to capture value with an established product. Labouring under radical uncertainty, Tesla has a process that is centred on a single purpose: Speed. Like the big automakers, Tesla stamps its own body panels in-house, but it also makes its own battery packs and motors in the Fremont assembly plant. It even makes its own plastic steering wheel casings—a part easily and usually outsourced—because suppliers (much to their regret) tried sending their B teams and took months to turn around designs. Tesla cannot wait—it updates designs continuously, borrowing ideas freely from its sibling SpaceX, including its extensive use of aluminium in both the body and the chassis of the Model S, as well as drawing and casting techniques used to produce the aluminium bodies of SpaceX’s Falcon rocket and Dragon capsules. “It’s very helpful to cross-fertilise ideas from different industries,” says Musk.
You’ll rarely find someone at Tesla who worked at GM, Ford or Chrysler or an automotive supplier (Aston Martin is one notable exception). Sterling Anderson, a former McKinsey associate and MIT-trained expert in self-driving cars, was hired in the summer of 2014 to work on Tesla’s autopilot systems. Now he’s the programme manager of the Model X.
The reason Tesla will occasionally put someone in a position without prior industry experience is that Musk is known for selecting people based upon their ability to solve complex problems—not based upon experience. Says Jay Vijayan, Tesla’s chief information officer (CIO), “Elon doesn’t settle for good or very good. He wants the best. So he asks job candidates what kinds of complex problems they’ve solved before… and he wants details.”
Musk’s team screens job applicants for their ability to learn under uncertain conditions. Every new employee, no matter which department, has to have proven some kind of ability to solve hard problems. “We always probe deeply into achievement on the résumé,” says Musk. “Success has many parents, so we look to find out who really did it. I don’t care if they graduated from university or even high school.”
When the Model S was introduced in June 2012, it came with a “smart” air suspension system that automatically lowered the car at highway speed for better aerodynamics and range. One day, a Model S owner was zooming down the highway and ran over a three-ball trailer hitch. It punctured the underbody’s ballistics-grade armour and the battery pack above it with incredible force. No one was hurt; the car’s warning system told the passengers to exit the vehicle before a fire started in the front compartment. Tesla quickly added a titanium underbody shield to the existing armour on all new cars and made it a free upgrade on existing ones, and it updated the software so the car doesn’t automatically lower at highway speed.
Most automakers lay out their shop floor once to minimise costs and plan model lines that will remain unchanged for several years. Tesla’s production engineers are continually changing the layout of the factory to learn as much as possible. Over time, as Tesla wrings out the uncertainty in the development and manufacturing process, it will transition to a more familiar arrangement, a process that is already starting to happen in the second and third production lines for the Model S and Model X.
Tesla learnt the benefits of staying nimble early on with the Roadster when, in an effort to reduce costs, it tried to establish a global supply chain similar to a giant carmaker’s. Tesla wasn’t ready for that set-up, and having manufacturing spread out over the world led to massive coordination problems. “We definitely don’t get it perfect on the first try, not even close,” says co-founder and chief technical officer JB Straubel. “But that’s how we learn.” The stakes will go way up when Tesla adds the future Model 3 on another production line. If one part isn’t right, the whole factory can grind to a halt. FiatChrysler, for example, delayed the launch of the popular Jeep Cherokee by about six months because of problems with its new nine-speed transmission.
(This story appears in the 18 September, 2015 issue of Forbes India. To visit our Archives, click here.)