TIME Business

Elon Musk Could Be the Next Henry Ford

Elon Musk at the Allen & Company Sun Valley Conference in Sun Valley, Idaho on July 7, 2015.
Scott Olson—Getty Images Elon Musk at the Allen & Company Sun Valley Conference in Sun Valley, Idaho on July 7, 2015.

Can Tesla revolutionize the world by making an affordable electric car for the masses, much the way Ford did with the Model T?

The share price of Tesla Motors shot up this week after a financial analyst said that the electric vehicle maker is “uniquely positioned to dominate” the auto industry.

Is Tesla, with its tightly integrated supply chain, following the strategy of another one-time dominant automaker – the Ford Motor Company – of more than 100 years ago? Can it revolutionize the world by making an affordable electric car for the masses, much the way Henry Ford did with the Model T in 1908?

Henry Ford took control of his supply chain and made his own parts rather than buy from suppliers, which gave the company the scale needed to improve performance and lower costs. Now Musk is building a new “giga” battery factory, giving Tesla more control over this strategic component. Will it work out the same as it did for Ford?

Putting Ford in the black

In his 1926 book, Today and Tomorrow, Ford claimed his integrated approach was the key to his success (“if you want it done right, do it yourself”). In fact, he claimed to mine iron ore in Minnesota, ship it to the famous River Rouge facility in Detroit and have it sitting as a Model T in a Chicago driveway in 84 hours! However, at the time, complete standardization (yes, Ford is said to have stated “You could have any color you wanted as long as it was black”) was necessary to make this happen. No options were available as they are for today’s cars, but standardization led to lower prices.

Prior to the Model T, the typical car’s sticker price would often hit $2,000, or almost five years of wages, which put cars out of reach for all but the rich. Working to make his car affordable, Ford sold the Model T for $260 by 1926, leading to massive market share – more than 50% of the automobiles on the road worldwide were Ford’s.

Ford also paid his workers a startling $5 per day to reduce employee turnover.

By this time the average working household income had reached about $1,300 per year. That put the Model T at two to four months of a typical factory worker’s wages, something comparable to or less than today’s economy car!

Huxley’s Brave New World and Fordism

Ford’s significance can even be seen in Aldous Huxley’s classic futuristic science fiction work Brave New World from 1932. Huxley anticipated a world with intercontinental rocket plane travel and TV networks, in vitro fertilization, cloning and genetic engineering. Huxley also saw Ford’s approach to be so central to the future that Fordism – Ford’s system of mass production – would become the primary religion!

Huxley correctly saw so many things to come, yet clearly we don’t all worship Henry Ford today. So why did this prediction not come true? Maybe it is because not long after the book was written, the growing design complexity of cars and the demands of customers made Ford’s black-only Model T no longer competitive.

To offer multiple lines of vehicles and options, Ford’s integrated supply chain had to be broken into separate companies supplying specialized sets of products. No one company could handle it all.

Yet by the 1980s, local area networks meant computers could autonomously control machines and make multiple products from the same facility at relatively low costs. Then in the 1990s, the Internet made physical proximity unnecessary for achieving economies of scale since manufacturers didn’t need to control every component in the supply chain.

What Huxley missed, in other words, was the impact of computers and IT innovations, considered one of the key facilitators to modern supply chain management.

What can Musk learn from Ford?

Let’s roll the clock ahead 100 years. Elon Musk and Tesla Motors are looking to bring the electric car to the masses much the way Ford did with the Model T.

Parallels include decisions to build a “giga” factory to make batteries that are currently sourced from Panasonic in Japan, paying a premium wage to workers to reduce turnover, and planning to make an electric vehicle priced for the mass market – the upcoming Model 3.

Even model names – Tesla sells the Model S and soon the Model X – may be more than coincidental. Will it work for Tesla the way it worked for Ford? Does today’s technology allow Tesla to do even more than Ford?

The battery pack is the single most important and expensive component in an electric car. A battery can exceed $15,000 per vehicle (or $500 per kilowatt-hour of capacity). The Nissan Leaf electric car has a 24 kilowatt-hour battery and has an average range of 84 miles.

Some industry experts believe batteries need to cost about $100 per kilowatt-hour and have almost triple the current range to be truly mass market. Achieving that sort of reduction in cost and improvement in performance comes from manufacturing at greater scale, rather than relying to suppliers.

In other words, as Tesla makes more batteries, it gains more opportunities to refine production and product design.

Ford found that out, and Tesla will as well. It plans to use most of the “giga” factory capacity in Reno, Nevada to supply Tesla’s auto assembly plant in Fremont, California, but also make batteries for utilities, homes and businesses.

Because there are common battery designs and production, Tesla will be able to transfer any product and process improvements between batteries for vehicles and the grid. Tesla estimates that they will reduce battery costs by over 30% with the “giga” factory.

Claims that Tesla with pay an average of $25 per hour in Reno have not been confirmed by the company, but the ability to retain high-caliber workers is necessary to leverage the accelerated experience that comes from scale into lower costs and improved design. Ford demonstrated that a long time ago. Tesla appears to have learned that lesson.

What will it take to be the Next Model T (or Model 3!)?

Musk’s public goal of 500,000 cars per year and a $35,000 price tag on the Model 3 will need every bit of output and resulting innovation the “giga” factory creates. Ford’s limitations in communicating along his supply chain meant very little variation in what was done or how things were done.

Today, models for left-side driving, back seats big enough for customers who want a chauffeur, a third row of seats, four doors, two doors add volume but unfortunately bring complexity as well. Today’s computer-controlled process technology makes design variety much more scalable than in 1920. Research and practice show that now, the ability to collaborate with others (within or outside of Tesla) makes physical proximity moot as well.

Unlike Ford, Tesla can use a global supply chain to make a wide variety of products while still pursuing the cost benefits of large-scale manufacturing. At the same time, Tesla can focus on making in-house “core” components, like batteries, with high learning and innovation potential.

Henry Ford had to control it all because even a missing hubcap could stop the line. Musk can now choose to outsource the more commodity-like components where the potential for process or product design improvement is small.

Not there yet

Musk has increased production from 10,000 vehicles in 2012 to a projected 50,000 by the end of 2015. However, forecasts and supply issues for a variety of parts (especially batteries) are causing scheduling hiccups, which has made Wall Street anxious.

While the new “giga” factory coming online in the next couple of years (and others like it) may help achieve many of the needed performance and cost objectives, Tesla is not there yet. Here are three things the company needs to remember to achieve its goal of mass-market electric cars:

  • First, keep your eye on the core aspects of your business that define your competitive strategy. Tesla making their own batteries fits their strategy of a high-performance, low-cost electric car for the masses. Accumulating experience here moves them toward both volume and cost goals. These are both defined criteria necessary and sufficient for strategic success.
  • Second, avoid allocating resources to noncore aspects because the payback is not there. Shortages or failures in hubcaps or trunk carpeting are as much problems now for Tesla as for Ford. But you can outsource to supply chain partners far more easily now than then.
  • Finally, new products or variations of existing ones should be consistent with maintaining your core competency. That is the key to transferring innovation. If adding scale through color choices or design combinations can add to accumulated experience in the core areas without unnecessarily adding to the burden of complexity, great!

Ford’s view on color choice is no longer relevant. But Tesla’s Musk can still learn from Henry Ford’s strategy of making strategic components. Making batteries for home and business can help Tesla fuel more innovations in car batteries and vice versa.

This article originally appeared on The ConversationThe Conversation

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME Ford

Ford’s New American Plant Starts Making Trucks Today

Ford Reports Drop In Quarterly Earnings
Justin Sullivan—Getty Images The Ford logo is seen on a brand new Ford truck.

The automaker is showing its commitment to American manufacturing

Ford began production on Wednesday of its new 2016 F-650 and F-750 trucks at an Ohio plant that represents a $168 million investment. This is the first time the car maker’s medium-duty trucks will be assembled in the United States.

The plant is one of the largest employers in Lorain County, and this move from Mexico to Avon Lake, Ohio, will help secure over 1,000 United Auto Workers jobs. The move displays Ford’s commitment to American manufacturing, Ford President Joe Hinrichs said in the company’s news release.

Jimmy Settles, UAW vice president and director of the National Ford Department, spoke to the change:

Building these world-class vehicles in America helps secure jobs for more than 1,000 UAW members and provides economic growth for the Avon Lake community. Strengthening the economy through job creation continues our efforts to rebuild the American middle-class and communities across this nation.

The shift was announced in 2014 and was part of a bargaining agreement the automaker made with the UAW in 2011.

TIME Ford

Crash Test Results a Blow to Ford’s New Aluminum F-150

150728_EM_FordF150
courtesy Ford The 2015 Ford F-150.

The mediocre results apply only to the lower-selling extended cab version

A crash test of Ford’s new all-aluminum, F-150 extended cab model didn’t turn out well, according to results published by the Insurance Institute of Highway Safety.

When the truck hit a 5-foot rigid barrier at 40 miles-per-hour — a setup meant to imitate a partial head-on collision — it crunched the front driver area to a point that “seriously compromised the driver’s survival space,” IIHS said.

The poor results were specific to the extended cab version only. The better-selling F-150 crew cab received a top safety pick award from the insurer-funded group after the same tests showed the smaller cab better preserved survival space for the driver.

“Ford added structural elements to the crew cab’s front frame to earn a good small overlap rating and a top safety pick award but didn’t do the same for the extended cab,” said David Zuby, IIHS chief research officer. “That shortchanges buyers who might pick the extended cab thinking it offers the same protection in this type of crash as the crew cab. It doesn’t.”

Ford said it plans to update all its 2016 models with the extra steel to help deflect energy in the event of a crash. Ford’s F-150 pickup is the U.S.’s best-selling pickup. It’s also the company’s most profitable model. The new 2015 F-150s are also the first mass-market vehicles with an all-aluminum body.

TIME car age

Here’s Why Lots Of Cars On The Road Probably Still Have Tape Decks

Toyota Opens Hybrid Engine Factory
Bloomberg—Bloomberg via Getty Images

The average U.S. vehicle age has hit a record

You know that slot in the middle of your center-console that you sometimes use as an iPhone holder? Well, that’s actually a tape deck—an ancient artifact once used to play cassette tapes. But what’s it doing in your car?

According to IHS Automotive, a consulting firm that provides insight into the automotive industry, the average age of vehicles in the U.S. has reached an all-time high of 11.5 years. Cars have become much more reliable throughout the years, so they can endure the road for a significantly longer period of time. With new smartphones and other devices being released every couple of years, cars far outlive the technology that comes with them; thus, tape decks.

IHS has been tracking this data since 2002. The average car age has gradually increased each year, with an even more dramatic boost during the recession due to a 40% drop in new car sales from 2008 to 2009. The climb has since slowed, and it has started to plateau. IHS predicts that the number will reach 11.6 in 2016 and remain stagnant until 2018, when the company thinks it will hit 11.7.

In case you’re wondering, the last new car to be factory-equipped with a cassette deck in the dashboard was a 2010 Lexus, according to the New York Times.

And here’s one caveat about owning and older car: make sure it has electronic stability control, and side curtain airbags — two key safety features introduced a little over a decade ago.

MONEY Autos

The Hot New Luxury Car Isn’t a Car at All

The 2015 Ford F-150
courtesy Ford The 2015 Ford F-150 starts at around $26,000, though a new Limited model will soon debut for more than double that.

Upscale pickup trucks listed at $50,000+ are hot sellers

The blue-collar, middle-class, mid-priced pickup truck still exists. But it’s becoming more the exception than the rule.

In June, the average price paid for a new Ford F-series truck—the best-selling vehicle in America for more than three decades—topped $44,000, an increase of $3,600 over last year.

That’s the average price per transaction, mind you. As the Wall Street Journal noted, many Ford trucks are priced well above average, and a new Ford F-150 Limited model will hit the market later this year with a sticker price above $60,000, “a larger starting price than a Porsche Cayenne sport-utility vehicle.”

The fancy new Ford pickup will have “fiddleback eucalyptus” wood trim and massaging seats, among other features. What’s perhaps more surprising than the fact that such amenities are available with what has traditionally been the vehicle of choice in blue-collar Middle America is that the high price point for Ford’s pickups is hardly an anomaly.

In 2011, 29% of heavy-duty Ram pickup trucks sold for $50,000 or more, up from 22% the year before. The Laramie Limited trim Ram 3500 truck starts at roughly $55,000, and has an MSRP over $70,000 once all the extras are added in.

Data collected by The Wall Street Journal indicate that the average transaction prices in 2015 for the Ford F-150, GMC Sierra 1500, and Chevrolet Silverado 1500 are all above $40,000, and 22% of pickup trucks are selling for more than $50,000. That’s up from just 9% of pickups being purchased for $50,000 or more in 2010.

What’s more, the average prices for the pickups mentioned above are up roughly 50% compared to the typical prices paid for these models as recently as 2005.

Rising pickup prices, as well as pickups and SUVs accounting for a larger percentage of overall sales, have pushed overall average new car transaction prices upward. In June, the average new vehicle purchase price was $33,340, according to Kelley Blue Book. That’s an increase of 2.5% over the same month in 2014. The average price paid in June for a Ford, mind you, was up 4.6%, thanks partly to an increase in those pricey pickup purchases.

As for why so many drivers are interested in trucks that cost more than a Mercedes or Lexus, some auto experts see the luxury pickup as the perfect option for well-heeled but down-to-earth business owners who want to splurge and show off while staying true to their roots. “These are successful blue-collar entrepreneurs,” John Krafcik, president of the car-buying site TrueCar.com, told The Wall Street Journal. “There is a lot of social status and manufacturers have found a way to tap into it.”

TIME Ford

Here’s Why Ford Is Absolutely Killing It

Ford Reports Drop In Quarterly Earnings
Justin Sullivan—Getty Images The Ford logo is seen on a brand new Ford truck.

Automaker surprises with record North American profit

Ford celebrated its best quarter since 2000 Tuesday, issuing an earnings report that showed net income jumped 44% in the second quarter from the same period a year earlier.

Much of Ford’s $1.9 billion in net profit can be attributed to record profit in North America on account of high sales volume.

The automotive company posted earnings of 47 cents per share, up from 40 cents per share a year earlier, and beat Wall Street’s expectations by 10 cents.

Ford’s successful quarter in North America was not checked by a supply decline in the F-150 truck, even though that model is one of the company’s best-selling vehicles. It already completed 12 of 16 global product launches slated for 2015, including the Edge, the Focus, and the Explorer.

Ford’s performance outside of North America was unremarkable. Before taxes, the car manufacturer lost $14 million in Europe, made $192 million in Asia Pacific, lost $185 million in South America, and lost $46 in the Middle East and Africa. Ford’s CFO Bob Shanks pointed to the strong dollar as the culprit for lower revenues abroad. And while Asia Pacific performed fine this quarter, Ford lowered sales expectations for China to 23-24 million vehicles as the country’s economy slows.

Overall, Ford said it expects a pre-tax profit between $8.5 and $9.5 billion for 2015 in what CEO Mark Fields says will be a “breakthrough year” for the automaker.

MONEY

Ford Road Tests Car Sharing

Ford September Sales Are Sharply Lower
Justin Sullivan—Getty Images

Its innovative pilot program aims to offset monthly car payments by helping you rent out your car when you're not using it.

Automobile transportation options have mushroomed in recent years. No longer is it the simple choice of buying or leasing a car for long-term use or renting one for short-term use. Ride-sharing services like Uber and Lyft are providing options for those who don’t want to own a car at all, Zipcar and other services are covering the very short-term rental market, and peer-to-peer car sharing services such as RelayRides and Getaround are allowing auto owners to rent out their cars when they are not being used.

These services have not collectively taken huge dents out of auto sales yet — but they are likely to in the future, and auto manufacturers are deciding how to address the issue. Susan Shaheen, a UC Berkeley engineering professor and transportation expert, suggests that every vehicle that enters into car sharing full-time replaces four to six sales of new cars and delays up to seven more.

Reading the writing on the wall, most auto manufacturers are launching pilot programs to decide how to enter these markets without cannibalizing their sales. Ford chose the route of helping car buyers rent out their cars by teaming with Getaround.

Buyers who finance their new Ford through Ford Motor Credit can participate in a pilot program that allows them to rent out their new Ford through Getaround during times when the car is not in use. The pilot program is available to 14,000 Ford buyers in six US cities (Washington, DC, Chicago, Portland, Oregon, Berkeley, Oakland, and San Francisco). Another 12,000 buyers in London, England, will be allowed to participate through easyCar Club.

The connection through Getaround provides a pre-screened driver base and other protections including a $1 million insurance policy, 24/7 customer support, and a roadside assistance program. On their website, Getaround claims that owners earn $521 per month on average, an amount that can cover most, if not all, of the new car’s monthly payment. For millennials that are struggling economically and more comfortable with peer-to-peer services in general, the Ford offer is tantalizing to those who have enough transportation needs to purchase a car for themselves. In short: use a ride-sharing app to cover your car payments.

Ford is not completely ahead of the curve, but they are in a good position. David McClelland, VP of Marketing for Ford Credit, noted that “…this can help us gauge our customer’s desires to pick up extra cash and keep their vehicles in use.” Translation: If this service is put to significant use, we will find a way to establish this program as a combined sales tool and entry into the alternate rental market.

From an investor point of view, it is wise to monitor the results of the Ford experiment and compare it to similar ongoing efforts or other pilot programs from BMW, GM, Daimler AG, and Toyota. The first one to attach significant sales improvement to such a program, or turn the program into a separate income-bearing entity, will have a significant advantage and be rewarded in the market.

For consumers, the Ford program could be a great deal — if you live in one of the pilot areas, are comfortable with renting your car out to others, and planned to finance your car through Ford Credit. You always have the option of financing your car outside the dealership, and if Ford does not keep their rates competitive, the move is likely to backfire.

If the financing rates are tolerable, go for it, but do not take a bad financing deal from Ford (or any automaker’s credit arm) just to access Getaround. You can always do that by signing yourself up.

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TIME Ford

Ford Offering a Hefty Discount On its New Aluminum F-150 Pickup

The aluminum body of a 2015 Ford F-150.

Automaker wants to maintain the title of ‘best-selling pick-up in America’

America’s popular pick-up truck the Ford F-150 is putting in place major discounts after a dip in sales last month.

In an attempt to reconcile an 8.9% (about 5,000) sales drop, the higher-end XLT models are receiving peak discounts of $10,000 ($7,050 in other areas). Raptor lovers, apologies — this discount does not apply.

After pick-up brands such as Chevy and Dodge saw sales increases in June — as much as 18.4% for Chevy, and 0.6% for Dodge — Ford is reportedly looking to maintain the title of “best-selling pick-up in America.”

One potential cause for the drop in Ford’s sales figures, according to Automotive News, is the fact that the automaker “is experiencing some frame supplier issues, it’s likely to take some time for the truck maker to build up a proper supply of the more popular features and packages. That’s causing some orders to take longer than anticipated to fill.”

Akshay Anand, analyst at Kelley Blue Book, told USAToday: “The real development to watch is to see whether Ford moves out the incentives from being regional to nationwide. If that occurs, and whether the price cuts are extended to lower trim levels, could be even more telling.”

MONEY Autos

Ford to Test a Car-Sharing Service

Ford is joining the likes of Zipcar and other car-sharing services.

The 112-year-old automotive company is partnering with car-sharing companies Getaround (in America) and easyCar Club (in the U.K.) to test an all-Ford, peer-to-peer car-sharing service for drivers. The test will run through November in six cities: San Francisco; Berkeley; Oakland; Portland, Ore.; Washington, D.C.; and Chicago. Ford will directly invite around 14,000 American and 12,000 British customers to try out the service. GM launched a similar car-sharing program in 2012, but ended it not long after.

Read next: 3 Ways to Avoid Costly Rental Car Insurance

TIME Ford

Ford Thinks You’ll Rent Your Car to Help Pay Your Monthly Payment

Better hope no one spills anything

Do you have your eye on a certain Ford vehicle, but you’re not sure you’ll be able to afford the monthly payments? Well, the company has a solution for you: rent out your car for short periods, offsetting the cost.

The new program is called Peer-2-Peer Car Sharing, and it’s available now as a pilot program in Berkeley, Oakland, San Francisco, Portland, Chicago, Washington, D.C., and London. Ford cited research showing that one-third of millennials were interested in renting out their car as a way to supplement their income.

Right now, only customers invited by Ford can participate. To rent your car, it has to be financed through Ford Credit, the financing arm of Ford. Combined with Ford’s recently announced car sharing service in London, it’s clear the Detroit company wants to keep up with younger transportation leaders such as Uber and Car2Go.

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