Capital Project Management, Volume III

Evolutionary Forces

Robert N. McGrath

• Publisher: Business Expert Press
• Year: 2019
• ISBN:
  9781949991895
• Topic: Business
• Subtopic: Project Management
• Index: Business

As an extension of Volumes I and II of this series, this book contains a detailed elaboration of the Tesla story, in a way that also serves to examine the interaction of technology and economic forces that determine the structural profitability of any industry, especially capital-intense industries. The economics are the "five forces" introduced to the management lexicon by strategic management scholars. Here there is strong emphasis on the interplay among product technology, production and supply chains, and "Wall Street."

The author is a retired business professor; his research interest has been the management of technology and innovation. For this book, he double-checked none of the 1, 250 media items collected, accepting their overall veracity at face value. This approach advocates no one person, no one company, no one technology, and no portion of the global automobile industry. Analysis and practical application came foremost.

CHAPTER 1

Tesla through 2015: Something Old and Something New

Introduction

When Tesla first appeared, the “EV industry” was already both very new and very old. Electric autos had been around since the beginning of the automotive era, but the new version seemed more promising than previous efforts mostly due to technological advancements (mostly in lithium-based electrochemical “batteries”). One might also view it as an industry within an industry, a new one within an old mature one based on a revolutionary technology (compared to the standard internal combustion paradigm). From a pre-introduction period to introduction (Volume I), industry-wide average profitability was clearly negative, and sustained firm-specific (quarterly or annual) profit was really out of the question.

At the time, a disproportionately large amount of impetus was being generated by just one company, Tesla, and just one founder-visionary, Elon Musk. This was still a time when the industry could and would be shaped by clear and individual strategic action, not faceless economic forces constraining change in traditional, almost deterministic ways. In a way, Tesla would become an economic force unto itself, sometimes rather eccentrically challenging many old rules and creating new ones of its own making.

Key Techonomics Terms in this chapter include:

Profitability and profit

Economic profit and accounting profit

Economic forces and threat of entry

Barrier to entry and economy of scale

Capital (as money, as equipment, as property) and capital expenditure

Some Essentials

A main point of this series is this: accounting profit and economic profitability are not the same thing.

Economic profitability is first and foremost an enduring or “structural” characteristic of an industry at large; accounting profit, in contrast, “the bottom line” on a firm’s income statement, is a calculation, and is the result of specific managerial decisions over any time period in question, usually short. Sustained positive accounting profits should reflect an organization’s capabilities as they match up against the specific economic forces that structure an industry, in which case, one may speak of the sustained profitability of the firm as well.

Economic profit is measured as economic value-added (EVA). If a firm stands at the top of an industry in this way, this reflects a competitive advantage. See Volumes I and II.

Consider not only the following accomplishment, but also the context of its timing:

(Tepper June 8, 2017)

The most valuable car company in America … has never turned a profit… Yet thanks to a 65% jump in its stock price this year … Tesla now sports a market capitalization of $59 billion, versus $52 billion for General Motors and $44 billion for Ford.

But now comes the hard part. Musk & Co. are about to start production of the highly anticipated Model 3, Tesla’s first stab at a truly mass marketed car …

… investors will have to pay a high price to find out. Tesla’s price-to-sales ratio is six times higher than GM’s, and it doesn’t have a price-earnings metric since it won’t make a profit anytime soon.

The words “most valuable” are important. The value of a firm can be calculated in several ways for several different purposes (Bierman and Schmidt 2006), but often the term refers to total market capitalization, or “market cap” for short. This expression and ideas like corporate value pop up frequently, but their face value interpretations should not be taken for granted.

Market cap in business jargon is generally calculated as the number of shares of common stock that have been sold, times the price of each share at any specific point in time. Think of it as what the owners of common stock have actually ponied up out of their own pockets, plus-or-minus the vicissitudes of market ups and downs in the meantime, that is, capital appreciation. Unless qualified, this is what the media means by market cap when used in reference to what the company is “worth,” its “total value,” and so forth. Market cap means the total investment in stock as the market has determined—the “market value” of equity at any one point in time.

In contrast, the “book value” of equity is what is available for distribution to shareholders, basically total assets minus total liabilities, preferred stock, and intangible assets. (Book value was introduced in Volume II in another context, but otherwise is not important to the present point.) That said, market cap does not include things that can be important depending on the conversation; here, the most important being capital that has been borrowed by selling corporate bonds, called debt. That is considered capital too, in the sense that it is money borrowed from external investors, to be used in the expectation of it being invested profitably and later all of it returned “with interest” quite literally.

To mention another term now, then, a corporation’s “capital structure” refers to the total amount of equity and debt a firm is obliged to put to good use, where the term us used mainly for the purpose of managing the optimal balance (e.g., the “leverage”) between the two (Volume II). Capital structure and leverage become important in the Tesla story as it plays out especially in the later years, but more generally are more internal, management matters.

Debt is just that—debt, whereas equity or stock represents real, actual ownership of the corporation with all the rights due to private property possession.

Tesla Motors Inc. and the Roadster

The Tesla story begins around 1990 when Elon Musk was not the central figure, or any figure in the mix for that matter (Baer 2014). Around that time a friendly collaboration of Silicon Valley engineers—mainly Malcom Smith and Martin Eberhard—had worked on consumer gadgets and related mobility concepts. Soon another friend, named Marc Tarpenning, joined Eberhard. These latter two fellows and good friends did most of the “heavy lifting” during the earliest times.

During the late 1990s, the founders-to-be successfully marketed an electronic book, eventually selling the company for 187 million U.S. dollars (Baer 2014). Encouraged by their entrepreneurial success, they wanted to start another company. A little analysis convinced them that electric vehicles (EVs) had a viable future. With a little looking around they discovered a firm called ACPropulsion, which was doing work in California, being enervated by that state’s clean air mandates in the automotive industry (Baer 2014). ACPropulsion already had a vehicle called the “tzero,” which had impressive acceleration and controllability. It was enough for them to develop a business plan and to invest in the technology—but not in ACPropulsion itself.

Their enthusiasm was partly based on advancements in lithium-ion battery technology. Lead acid batteries had been standard automotive technology for most of its history, but simply did not have the natural potential to become the basis of an EV paradigm. Other battery technologies were also under research for years, but all had their challenges.

A problem with perceptions was that EVs were something of a joke (McGrath 1996). Very literally they were often compared to glorified golf carts an...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Abstract
• Contents
• Preface
• 01_Chapter 1
• 02_Chapter 2
• 03_Chapter 3
• 05_Chapter 5
• 06_Chapter 6
• 07_Summary Conclusion
• Media Articles
• References
• About the Author
• Index
• Adpage