Return To Glory CoverIn early 2016, Ford was intensely preparing to stage a history-repeating assault on the 24 Hours of Le Mans in France.

With two teams and four new Ford GT race cars competing in both North America and Europe, the goal was to grab a win at the grueling endurance competition and remind the world of Ford’s 1-2-3 triumph in 1966 over Ferrari — 50 years before.

But while Ford and Chip Ganassi Racing were battling it out on the track, another challenge was taking shape.

In California, Tesla CEO Elon Musk was preparing to pull the cover off his long-awaited Model 3 mass-market vehicle — a car intended to show the auto industry that Tesla was ready to take its disruption to a whole new level.

In this excerpt from Business Insider Senior Correspondent Matthew DeBord’s book “Return to Glory: The Story of Ford’s Revival and Victory in the Toughest Race in the World” (Atlantic Monthly Press), we get a front-row seat at the Model 3 reveal, a vehicle that began production this week — and watch as Ford and the rest of the 100-year-old car business try to respond.

And so it begins …

On a balmy March evening in Los Angeles, just three months before the most advanced Ford race car ever built would take to the Circuit de la Sarthe in France, Tesla Motors CEO Elon Musk took to a stage at his electric-car start-up’s design center, just a few miles south of Hollywood and the American cinematic dream factory.

Musk was there to pull the cover off a dream that had nothing to do with movie magic. Instead, he sauntered onstage dressed entirely in black and, after some awkward jokes, made a few comments about the impending catastrophe of global warming—one of the multi-billionaire’s overriding personal preoccupations and the reason he bought into Tesla in 2004 after making $180 million when eBay acquired PayPal, the electronic payments service he had cofounded. He then proceeded to preside over the rollout of Tesla’s much-anticipated Model 3, a mass-market electric vehicle that would sell for $35,000 when it hit Tesla’s showrooms in 2017.

Tesla was already selling a pair of game-changing cars: the Model S sedan, which in its most advanced configuration, equipped with the “Ludicrous” acceleration mode, could scorch a zero-to-sixty run in less than three seconds, outrunning supercars from Ferrari and Lamborghini; and the Model X SUV, with its exotic, up-swinging “falcon wing” doors and “bioweapon defense mode” air-filtration system. But these long-range electric vehicles (EVs) sold for $100,000 and up, to a well-heeled elite, including Silicon Valley venture capitalists and titans of finance.

Tesla Model 3

That certainly created useful cash flow for Tesla (if not profits), but it didn’t suit Musk’s grand vision, which was to accelerate humanity’s transition from the era of fossil fuels—an era that had filled the atmosphere with carbon, disrupting weather patterns, and making the planet hotter. In early December 2015, Musk gave a speech at the Sorbonne in Paris, in connection with the United Nations Climate Summit, in which he called governments’ reluctance to tax the generation of atmospheric carbon the “dumbest science experiment in history” and “madness.” He went on to call for a global carbon tax, as he had done several times before.

No chief executive of a traditional automaker would even consider giving a speech like the one Musk delivered, although several have raised the suggestion that car companies—as producers of a technology that alongside burning coal to generate electricity contributes much of the carbon in the atmosphere—should be part of the sweeping solution.

The multi-trillion-dollar global auto industry has found itself smack at the center of what can’t be responsibly characterized anymore as a debate. Unfortunately, despite the fact that the majority of car executives aren’t global-warming deniers, there are more than a billion vehicles on the roads worldwide, and automakers continue to build millions of new cars and trucks every year. If they stop, or attempt to radically convert to manufacturing vast fleets of Tesla-like vehicles, they’ll rapidly go bankrupt.

They are, however, not stupid. Gasoline is simply the most convenient fuel for their products currently. Almost without exception, the world’s car companies are trying to move in a Teslaesque direction, if haltingly and on a rather small scale at the moment.

Elon Musk and his vision of the future

Elon Musk

Musk bought into Tesla, eventually displacing cofounder Martin Eberhard in an unpleasant management coup, specifically to attack what he considers to be the biggest problem facing humanity. But he didn’t want to be boring. He reasoned that a sexy, fast electric car—such as the original Roadster Tesla soon produced—would shake EVs free of their “glorified golf cart” stigma and convince both buyers and investors to fund the demise of the internal-combustion engine.

Tesla began selling stock to the public in 2010, at seventeen dollars per share. A few years later, the Model S was launched; Motor Trend would name it Car of the Year in 2013. Tesla had endured numerous near-death experiences prior to the IPO, including an episode in 2008 that brought the company just weeks from bankruptcy. But once the Model S started selling, the accolades began rolling in—the luxurious EV, with its brisk acceleration, sharply minimalist looks, and huge central dashboard touchscreen, was a hit with the automotive media. The stock went, as they say on Wall Street, parabolic; in 2014, it would flirt with $300 per share, ensuring early investors a return of around 1,200 percent.

The financials would pitch and yaw wildly over the next two years, as investors tried to figure out when, if ever, the carmaker would make money and whether its innovations, including an astonishing self-driving autopilot feature, would completely disrupt an auto industry that had been selling largely gas-burning cars, and lots of them, for over a century.

But on that early evening in March, Musk was a conquering hero, a South Africa–born heir apparent to Henry Ford and the late Apple founder and CEO Steve Jobs. Musk’s other company, SpaceX, was taking care of another scope of his vision, the effort to make humans a “multi-planetary” species with a colony on Mars, the planet to which Musk said he would retire.

It is easy to understand why Musk, then forty-four, was a model for Robert Downey Jr.’s character Tony Stark in the “Iron Man” movies. He did cars. He did rockets. He even did solar energy in his role as the chairman of SolarCity, a company started by his cousins. (And acquired by Tesla in 2016 for $2.1 billion.) He was the superstar entrepreneur of Silicon Valley. Musk attacked huge problems head-on, like a technologist of old. And he was aware of just how quixotic his ambitions were. Starting a car company, he would say, is idiotic, and an electric-car company is idiocy squared.

An unprecedented number of preorders for the Model 3

Tesla Model 3 Reveal

What got Detroit’s attention that night wasn’t the Model 3 itself; the car had been much discussed for several years, and everyone knew what to expect in a smaller, less expensive Tesla. Rather, the star of the show was the preorder counter, displayed behind a bright red Model 3 on a huge screen on the stage.

Analysts had expected something like 150,000 Model 3s to be reserved, each with a $1,000 refundable deposit. By the time I took a photo of the counter at the event, it had crossed 174,000. In a month, 373,000 reservations would be logged, creating the potential for $13 billion to flow into Tesla’s needy coffers, assuming a relatively conservative average price of $35,000 for each sale. Who knows how many of those reservations will ultimately turn into sales? Even if only a quarter or a half of them do, it is still an impressive number and a testament to the potential demand.

“So, do you want to see the car?” Musk winkingly asked, before giving three preproduction versions of the car the stage.

A better question—and one that he would ask as the preorders surged—was, “How many of these cars can we actually build?”

The traditional auto industry is secretly obsessed with Tesla (and not-so-secretly obsessed in the first six months of 2017, when Tesla’s market capitalization surged past $50 billion, topping Ford, GM, and Fiat Chrysler Automobiles — the Big Three had become the Big Four). Not since Preston Tucker, an innovator of the 1950s whose own quixotic life was chronicled in Francis Ford Coppola’s 1988 film “Tucker: The Man and His Dream,” had anyone so thoroughly captivated the iconic world of the American automobile.

The CEOs of major auto companies tend to be either hard-charging, sharp-elbowed “car guys” or technocratic bean counters. Occasionally a major change agent such as Alan Mulally will come along, but many chief executives got to the big chair after decades of loyal service.

After Mark Fields got the CEO job at Ford in 2014, he freely admitted that the company had bought a Tesla Model S, taken it apart, and put it back together again. He later said the company would do likewise with the Model X SUV.

But even by the secretive standards of Tesla fascination, the Model 3 preorder palooza was earth-shattering. From Dearborn to Toyota City, the automakers just couldn’t believe it. The astounding number of deposits showed the intense desire to join the club that the brand represented. The only meaningful comparison to draw was with Apple. In the auto industry, you could say that Ferrari held a similar mystique, but Ferrari didn’t have the ambition to dethrone the gas-burning engine or sell half a million cars a year. Tesla did, and it was sort of appalling to mainstream auto executives.

Traditional automakers work desperately hard to capture and retain customers, spending billions to convince them to stick with certain brands and to advance through vehicle hierarchies, from inexpensive mass-market cars to pricey luxury rides. What was astonishing about Tesla’s Model 3 launch was that hundreds of thousands of buyers were happy to give Tesla an open-ended, no-interest cash loan, with no meaningful guarantee beyond Musk’s word that the cars would arrive on time.

Musk’s promises had a poor track record. Both the Model S and the Model X had suffered from production delays and early quality-control problems. In fact, Musk admitted that Tesla had been guilty of “hubris” in designing and engineering the Model X, which had many complicated features that slowed the assembly line. The doors had to be completely redesigned at the eleventh hour. The second-row seats turned out to be so complicated that Tesla would eventually take the supplier off the job and engineer this component itself.

Later, quality-control glitches would appear. The entire Model S fleet was voluntarily recalled in December 2015 because a seat-belt assembly could fail. The initial production run of the Model X, several thousand vehicles, would also be recalled because the third-row seats could pitch forward in a crash.

Much earlier, there had been battery fires with the Model S, and Tesla had been compelled to design a shielding system for the bottom of the car to prevent punctures of the battery pack. Tesla’s advanced electronics and software, while game changing in many respects, were buggy in the way that Silicon Valley code typically is (the ritual is to release the software and fix it later). In an annual dependability survey by J. D. Power and Associates conducted in 2016, Tesla owners reported so many problems that Tesla finished in the bottom five, undercutting the narrative that its vehicles were redefining the ownership experience with rapid software updates.

Even though Musk admitted that the Model X SUV was so advanced that Tesla “probably shouldn’t have built it,” his boundless gumption still captivated the industry.

Musk calls his own shots

elon musk

In the traditional auto industry, Musk had only one prominent naysayer, former GM product guru Bob Lutz, who had worked for BMW and for Chrysler under Lee Iacocca before coming to GM and straddling the pre- and post-bankruptcy companies. I talked to Lutz about Tesla on several occasions between 2014 and 2016—once at the Detroit auto show in January 2016, when he was preparing to reveal a new American-made supercar venture with onetime Tesla competitor Henrik Fisker—and he was always unflinchingly equal in his praise for Tesla’s cars and his disdain for Musk’s management of the company.

Lutz’s attitudes toward global warming were controversial. While not exactly a climate-science denier, he was skeptical that taking internal-combustion engines off the road and replacing them with more expensive and less versatile electric cars was a solution. But that wasn’t what shaped his negative views of Tesla— he actually didn’t think that Tesla was doing a very good job of running its business. In a sense, he and Musk were on the same page: the cars were simply too difficult to build.

But with Ford’s and GM’s stock prices languishing, even as both carmakers notched steady and impressive profits through 2014 and 2015, executives grumbled about how easy it was for Musk to sell additional Tesla stock, which the carmaker did in both 2015 and 2016, raising almost $2 billion in the process. And even though Detroit had been sweepingly reinvented by the financial crisis, the familiar infighting and territorialism that have always defined the auto industry hadn’t disappeared.

In the 1980s, Detroit had endured the Japanese arrival in force in the U.S. market. The Big Three had been forced to adapt, to become more efficient, and to see their companies as large manufacturing and management teams, “flat structure” organizations, where the lowliest assembly-line worker had the power to stop production if he spotted a problem.

Sure, Toyota and Honda continued to be extremely hierarchical, in the Japanese business tradition. But when it came to actually building cars, the “relentless pursuit of perfection,” to borrow a famous tagline from Toyota’s Lexus luxury brand, was a mandate that Detroit had to accept. Unsurprisingly, customers preferred cars that always started, didn’t rust out in a matter of years, and could be passed down from generation to generation, Dad’s Honda Accord becoming Junior’s college car.

Musk was a different animal—a leader who called, seemingly, all his own shots. He was initially ridiculed when he appointed himself as Tesla’s product architect, while at the same time having an experienced designer, Franz von Holzhausen, from Mazda, for the real aesthetic work, and JB Straubel overseeing how the cars were engineered at the nuts-and-bolts level. But then the Model S arrived, and with it dropped jaws and widespread media accolades.

Musk didn’t have to fight through a bureaucracy—he was the bureaucracy, and at Tesla, bureaucracy was the enemy. So if Musk wanted to ignore structure, he just did. He had a hardworking communications team, but if he had something to say, he took to Twitter, often at odd hours and on weekends, sending reporters scrambling. He had hardworking engineers, but if he wanted to make a change to a Tesla vehicle, he made it.

In Tesla’s required financial filings with the Securities and Exchange Commission, the company never failed to cite the so-called “great man” risk: without Musk, Tesla would be in big trouble. The CEOs of big car companies think they have power, and they do. But Musk had power of a different order, as well as lots of stress.

Ford’s fights to keep up

Mark Fields

By the time Ford was turning practice laps at Le Mans in early June 2016, Musk was running a company that was a decade old. And he was under as much pressure to innovate as everyone else in the industry. Ironically, Ford was probably better prepared to manage the transformation in mobility that Tesla was helping to usher in.

In the face of a massive disruption to the accepted way of doing business, scale can be an invaluable asset. At base, Musk’s company was all about demonstrating that there was a paying buyership for its type of vehicle, reversing the thinking that had followed the demise of GM’s EV1 project from the 1990s, which had brought the first mass-produced electric car to market, but only in a limited way, via leasing.

When GM decided to conclude the program and crush all the EV1s, save a few historical examples, it was widely assumed that electric cars were once again going to be at best a sideline of the auto industry. (GM’s decision inspired the film “Who Killed the Electric Car?” which alleged that the carmaker had acted more to preserve itself from an electric revolution than to dispense with a money-losing experiment.)

Ford’s angle on transportation in the twenty-first century was the preoccupation of Bill Ford, who, once Alan Mulally took over as CEO, could concentrate on delivering a deeply counterintuitive message: that the company we credit with creating the mass-market automobile wanted to curtail its dependence on four wheels and an engine in the future.

The idea was really quite logical. Ford would become a mobility provider. If you needed to own a car, Ford would build one, and Ford dealers would sell it to you—and Ford would lend you the money to buy it. But if you didn’t want to own a car, Ford would provide you with transportation. And if you wanted any aspect of your mobility experience to be more pleasant or efficient, Ford would create—or partner with other companies to create—the information corridors to make that happen.

Ford began to tackle this process in earnest around 2010, and Fields made it a prominent part of his leadership pitch once he became CEO. It was a good fit. Fields had always been a forward-looking leader. (But not forward-looking enough; he would be ousted by Ford’s board of directors in May of 2017, as the carmaker’s stock price lagged. His replacement, former Steelcase CEO Jim Hackett, was a close confidant of Bill Ford and would undertake the major change in Ford’s story.)

Scale can be a strength when a company is being actively disrupted, but the classic theory on the subject—articulated by Harvard Business School’s Clayton Christensen in his seminal book “The Innovator’s Dilemma”—says that size can protect for only so long. And that’s because new entrants can innovate much more rapidly than incumbents, even if the established business is itself actively trying to innovate.

The core problem—an advantage, actually, for smaller, newer companies—is that the very things that insulate the established player prevent it from moving fast enough. The critical sticking point is failure. Big companies can afford to fail, but they can’t undertake the failure process rapidly enough. And unless their businesses don’t require much cash for research and development, as is the case with software-driven internet firms, they can’t afford to invest in hundreds of over-the-horizon efforts.

For one thing, there’s a disincentive for companies that already have scale to do small stuff; it’s more cost-effective for them to simply buy up smaller companies. And for another, they can be undermined by competitive threats that are enabled by the newest technologies.

Silicon Valley wants to eat Detroit’s lunch

<img src="http://static3.thisisinsider.com/image/57a0ad9edd08956a398b4898-2400/travis-kalani
Source: http://www.thisisinsider.com/return-to-glory-matthew-debord-tesla-book-2017-7

Advertisements