Elon Musk's Basic Economics | Wendover Productions

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1:01Propel hydrates better than water to help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade Electrolites. This video was made possible by Hover. Buy your domain before it's gone for 10% off by going to hover.com slash whenover. Imagine a $2,000 car, or a $100 laptop, or a $70 iPhone, or imagine any product 10 times cheaper than it was. Imagine the fundamental market change that would bring. Imagine the amount of demand they would be for that $2,000 car or $100 laptop, or $70 iPhone. That's what Elon Musk imagined 15 years ago when he sat on a pile of $165 million. Elon Musk's businesses are all centered around some of the most basic principles of economics out there. When he starts a business, he's not necessarily trying to do something new. He's trying to do something right.

2:01Musk made most of his early fortune through his involvement with PayPal. In 1999, he founded a company called X.com, which was quickly bought by Confinity, the creators of PayPal. So when PayPal was bought by eBay in 2002, Musk's 11.7% ownership of the company translated to $165 million. Elon Musk has always been deeply passionate about space exploration, and as anyone knows, public interest in space has been falling since the Apollo era. Therefore, Musk's plan with his newfound fortune was to launch a rocket to Mars carrying a small greenhouse that would grow plants on the surface of the red planet. Basically, he wanted to take all his money and put it into a big publicity stunt for space exploration, but he had a problem. It was too expensive. The cost of launches was absolutely immense, and even when Musk tried to buy decommissioned Russian ICBMs, he couldn't find a way to pull off the project. But he had discovered something. The space launch industry was right for disruption.

3:04Here's Joseph, the economics expert from Real Life Lore to explain why. The rocket development and space launch companies before SpaceX were essentially aggregators. They bought engines and guidance systems and all the other various components from other companies to cobble together one completed rocket. But all the different component suppliers also had their own component suppliers to make their product. The suppliers of the suppliers not only had to cover their development and manufacturing costs, they had to sell their components at a markup in order to make a profit, and then the next component manufacturer had to do the same, which means that by the time the component gets to the company that's assembling the rockets, it's expensive. Not only that, but the assembly company also has to pay for employees that work to actually figure out how to make all of the different pieces work together. SpaceX, however, works differently. It makes 85% of the components it uses itself, which allows it to make cheaper parts. For example, if SpaceX had bought their radios externally, they would be paying $50,000 to $100,000 each.

4:06But since they develop them internally, they only cost $5,000 each to build. A dramatic improvement in reducing cost. Joseph from Real Life Lore has a brand new book which includes two fantastic chapters explaining simple economic concepts like this that'll link in the description. But let's talk Tesla. Tesla's economic strategy is fairly similar to SpaceX's. Tesla themselves makes about 80% of the 5,300 parts in a Tesla car. But for the most part, it doesn't make these, the batteries. At least yet, batteries are very difficult to make at a competitive price, so very few companies do. The largest three manufacturers, Panasonic, BYD and LG Chem, make a combined 63% of the world's batteries. Tesla, therefore, has historically just bought batteries from Panasonic at a cost of about $200 per kilowatt hour. But that means that Tesla's smallest battery pack, the 50 kilowatt hour version, costs $10,000 just in components.

5:06When you're trying to sell a $35,000 car and make a profit, that's a- This episode is brought to you by Palm Olive. Family time isn't just the big moments. It's weeknight dinners. Sitting around the table, everyone talking all at once. So when the plates are empty and the sink is full, use Palm Olive Ultra. Palm Olive's most powerful formula removes up to 99.9% of grease, leaving your dishes sparkling clean, and the new convenient pump makes cleaning even easier, so you can spend less time tackling dishes and more time together. Shop now at palmolive.com with Gatorade Electrolites, Zero Sugar and Vitamins.

6:12Pell hydrates better than water to help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade Electrolites Significant cost that can be reduced. Therefore, Tesla is attempting to reduce the cost of their batteries by 30% by building their own factory in a joint venture with Panasonic. Their long-term goal, however, is to drop the battery price below $100 per kilowatt hour, which would either double the range or have the price of that 50 kilowatt hour battery pack. But the vertical integration of Tesla and SpaceX isn't all useful. The companies basically have to learn and perfect each step in the manufacturing process, and if one step isn't working, no cars get made. For example, the Tesla Model 3, the low-cost Tesla, is built using steel instead of aluminum like the Model S and X. With this change, the manufacturer is having troubles properly welding the vehicle bodies together, and so the entire production line is slowed down massively.

7:15But there's something else unique about SpaceX and Tesla's production lines. They're in the US. Now, this probably seems counterintuitive. Why would you put the production lines of two companies working to make the least expensive products on the market in one of the most expensive labor markets in the world? Most every US company has relocated their production lines to cheaper labor markets in Asia and Africa, but Musk has always had his in the US. Believe it or not, this isn't a PR move. It actually makes sense for the two companies. Tesla and SpaceX's production processes are constantly being tweaked and optimized as the companies learn to make their products. While China might be able to build Tesla cars at the same price by using cheaper human labor, Tesla's US factory is just miles away from its headquarters in Palo Alto, meaning that the executive, development, and production staff are all heavily integrated and can make changes fast. SpaceX even takes this a step further. Its offices and manufacturing lines are all under one roof.

8:17The Tesla factory in particular is also heavily automatized and the US excels in production line automation with its abundance of highly skilled workers. Which is how much is Musk dropping the price on his products. The United Launch Alliance, which historically has won most of the highly lucrative US government launch contracts, is believed to charge more than $400 million all in for a military satellite launch, while SpaceX charges about $80 million. So SpaceX is already at a fifth of the price, but, as mentioned, Elon Musk wants to fall to a tenth. Here's the key for that. The fuel used in the Falcon 9 rocket only costs about $200,000 per launch. It's practically a non-factor in the launch price. The real cost is of the rockets themselves, so that's why SpaceX is making them reusable. The first stage of the rocket is now being designed to land back on Earth and be put back into service with dozens of more launches. Once this system becomes reliable, it's believed that the cost savings will drop the launch

9:18price to $40 million, a full 10 times cheaper than the United Launch Alliance's military launch price. SpaceX's long-term goal is to get the launch price down to about $10 million per launch. While the company has already made a significant impact on the space industry, a launch price as low as this would fundamentally change what's possible in space. Real space tourism would become feasible, commercial satellites would become downright commonplace, and space would become closer than it's ever been. The SpaceX does have a bit of a problem. People aren't really buying more rocket launches even though prices are down. It's what's known as a price in a plastic market. That's the opposite of Tesla and the electric vehicle market where lower prices lead to huge increases in sales. The problem with the space launch market is that it is not a consumer market. Normal people don't buy rocket launches. Governments buy rocket launches and they don't care about price nearly as much as people since it's not the decision-makers money. The US Air Force, for example, decides they need to launch a certain number of satellites

10:22each year for national security reasons and they'll pay whatever it takes. But Elon Musk's life goal is to get humanity to Mars. That's why SpaceX exists and he needs money to do it. Lots of money. So, SpaceX is getting into the internet business. The company is actively developing a satellite constellation that would provide high-speed internet to anywhere on Earth. Thousands of small satellites would be put into low Earth orbit and then anyone worldwide could hook into the network using an inexpensive ground receiver. If SpaceX got just 50 million users out of the 7 billion in its proposed service area, this business could bring in $30 billion a year. Since SpaceX would be building and launching the satellites themselves, costs would be dramatically lower than the competitions. The whole commercial aspect of SpaceX essentially exists to fund Musk's future space exploration projects. For that reason, SpaceX is not a public company like Tesla.

11:23Elon Musk does not want to make money with SpaceX. He wants to get to Mars. He does not want to be beholden to shareholders and profitability. Musk has therefore publicly said that SpaceX will not go public until the company achieves regular flights to and from Mars and thanks the entrepreneurs understanding of basic economics that might not be too far off. If you're looking to start a company, you'll need not only an understanding of basic economics, but also a domain. Hover makes finding and purchasing your domain super simple. They have over 400 domain extensions that let you create unique domains like mine, when-over dot productions. It literally takes minutes to find and buy your domain. But if you do ever have an issue, they have amazing, best-in-class customer support that will help you with anything and everything. If you have a name for your business, your YouTube channel, or anything else, you should buy your domain now before it's gone. You can also set up custom professional email addresses using those domains for very reasonable

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