For a business leader who could be considered the entrepreneur of the century, Elon Musk has a strange way of running his companies. It is likely that another ordinary CEO, with the same attitudes and reactions, would have been fired long ago.
Musk is one of the extreme things, but somehow, this explosive mixture held up and worked. Fortune magazine has compiled the 10 management commandments of the CEOs of X, Tesla, and Space X.
- Enhance vision
Musk specializes in selling a vision of the future that revolutionizes the traditional profitability model of the automotive sector. In other words, it claims that Tesla’s current stagnant results should not be noticed, because they have no relation to the coming future. The ability to generate such engaging and exciting narratives motivates and inspires Tesla’s investors and financiers for its projects, from X to SpaceX. If the electric car maker’s shareholders don’t accept his forecast, the stock won’t have a non-auto valuation of $630 billion, even after the recent decline. During his 2023 quarterly results presentation, he said: “I see a path to 5x, maybe 10x value for the company.” The lower end of this forecast would make Tesla’s value 50% higher than Apple’s value today.
- Keep the promise of revolutionary innovations, just around the corner
Musk has a habit of always being on the verge of launching revolutionary new products, often on a large scale. It’s his way of convincing investors that he will continue to change the world, and of keeping his eyes on a horizon of profits never seen before. However, it keeps pushing back the release dates multiple times.
In 2019, Elon Musk said that one million robotaxis would be on the roads by the following year. It promised delivery of the Cybertruck in 2021 and then postponed it to 2022. Now it says main production will begin early next year. But the Cybertruck, made of stainless steel panels, is extremely difficult and expensive to manufacture, casting doubt on whether Tesla can produce it profitably at scale. His predictions that The Boring Company would dig a 10-mile tunnel under Los Angeles, or that Tesla Energy would produce a thousand solar panel systems a week, or perhaps even by Musk himself, have long been forgotten.
- Control every aspect of the production process
For Musk, the business is primarily about invention and engineering. His genius: After achieving an innovative design for a car or a rocket, he became an expert in making a low-cost production machine. In the words of his biographer Walter Isaacson, he is proud to be an architect who “builds the factories that make the products.”
When he took over Tesla in 2008, the engineers who created component designs worked in offices separate from the assembly lines. Musk moved them into cubicles in the factory so they could watch up close when a design issue caused a slowdown and, in many cases, a reshaping of the part in short order. Elon Musk is an expert in what is called the conversion rate, that is, the measure that shows how much the cost of manufacturing the final component is compared to the cost of the raw materials used in its manufacture. This allows you to isolate additional costs from labeling and other production chains, and if it is too much, you can find a cheaper process.
According to Isaacson, Musk requires all production and design engineers at SpaceX and Tesla to know the exact number of each part they manufacture or design. It is their responsibility to cut costs, or face the wrath of Elon Musk. SpaceX manufactures 70% of its components in-house, in contrast to the typical aerospace industry practice of outsourcing the production of most parts.
By betting big on vertical integration, Musk is also moving away from the position of his hero Steve Jobs. Like Musk, Jobs worked on all aspects of the design of his products, but outsourced the manufacturing of the iPhone and iPad parts. However, for Musk, doing everything in a closed loop is essential to controlling his destiny.
- Increase sales at any cost
For many years, the brand, its advantage in the electric car race, and Musk’s knack for organizing ultra-efficient production gave Tesla extraordinary profit margins. But now he no longer puts profitability first. As noted on Tesla’s Q2 earnings call: “Short-term changes in margins and profitability are really small in the long-term independence picture and will make these numbers look ridiculous.”
To boost sales, Tesla has made successive price cuts. In the United States, the price of the Model Y Long Range has dropped from $65,990 to $49,000 since the beginning of January. The heavy discount reduced operating margins from 17.2% in the third quarter of 2022 to 7.6% in the third quarter of this year. Musk’s bet that autonomy will generate profits similar to software may be a long shot. Get it wrong, and Tesla will be just another regular automaker, instead of having a valuation nearly three times that of Toyota.
- Ignore traditional financial metrics
Elon Musk doesn’t talk about how to develop actions that create shareholder value and that investors want to hear about. It never says how it will increase returns on stocks or invested capital, nor does it set targets for these key indicators. In fact, your financial management style may be irresponsible. In early 2021, his CFO snubbed Tesla to buy $1.5 billion in bitcoin, most of which he cashed out in 2022 for almost zero profit, and SpaceX posted a loss of $373 million over the course of 2021. The cryptocurrency earlier From this year.
According to Fortune, banks holding $13 billion in loans to Company X are frustrated that Musk provides little data about their operations. Elon Musk fired Company
- Adapt “situational” narratives for different audiences
“We may fail, as many have predicted,” Musk recently said of his adventures with X. It constantly portrays X’s financial situation in the worst possible light. Why? It’s simple: To buy X, Musk requested a $13 billion loan from a consortium of seven banks. A high interest rate paralyzes X and prevents Musk from generating the profits needed to build “the perfect app for everything.” But banks are now stuck with loans at below-market interest rates and have been unable to sell them. So, the worse X looks to the banks, the greater the chances that Musk will buy the debt himself at a deep discount or persuade creditors to significantly reduce capital amounts.
But Musk also has a list of two dozen co-investors he wants to keep happy, a group that includes Prince Alwaleed bin Talal of Saudi Arabia and Marc Andreessen. So while he talks poorly about X’s short-term prospects, he makes promises on the other hand. In May, he stated that X “may one day be worth $250 million” in a memo to employees, and in July, he posted that “X will become the most valuable brand on the planet.”
- Maximize efficiency
For Elon Musk, a workforce that does not consistently select the most competent and hardworking employees is not maximizing efficiency. Surprisingly, his approach is similar to that of General Electric Chairman and CEO Jack Welch in the 1980s, who adopted a policy of firing the bottom 10% of his workforce annually (a tactic that has since been discredited). “Elon would say it makes sense to lay off 10% of people every year,” recalls Branden Spikes, who worked as an engineer at SpaceX from 2002 to 2012. “He would say if you don’t do it, you won’t work at your company.” Complete possibility. “For Elon, it was all about the math.”
Spike remembers working for Musk as brutal and inspiring. “He never fired anyone without a good reason, and it didn’t have to be a big reason. One worker can make one mistake a year and be forgiven, but not two.
Spikes also recalls that Musk tended to trust engineers more than professionals with other expertise. “At SpaceX, nearly 100% of managers were engineers, including HR and finance staff.”
- Exclude exclude
Elon Musk disbanded Tesla’s PR department in 2019, and to this day, it is the only public company of its size that operates without one. None of its other properties have a communications team. In an interview in March, Musk joked, “Maybe we should have a VP of advertising or a VP of magic, that would be great!”
- Get a basis on short-term stock price rather than long-term performance
At the end of 2017, Tesla’s board of directors awarded Musk a massive 10-year stock options package called the 2018 CEO Performance Award. It consists of 12 tranches, each of which was invested in stages as the market value rose from a starting point of approximately $50 billion to $650 billion. Furthermore, it had to achieve progressively increasing standards, both in terms of sales and profits, to secure each grant.
And the plan designed to create a long-term incentive didn’t work that way. Tesla’s valuation rose so quickly that Musk, while also meeting most of its sales, combined EBITDA and amortization targets, took all the slices in mid-2021, just three and a half years after the program began. Today, Musk still owns 21% of Tesla shares, worth about $137 billion, and has sold millions of shares in the electric car maker to fund his purchase of Twitter and fund his other projects.
the problem? Musk will no longer receive restricted stock options as stipulated in the 2018 agreement. Therefore, his incentive to improve Tesla’s operating performance is much lower than when he was trying to obtain financing. In fact, Tesla’s profitability in the first nine months of 2023 is much lower than the levels of the same period last year.
- Fund your vision with other profitable businesses
In SpaceX, your main goal is to transport the spacecraft to Mars. But his rocket business is losing money. So Musk found a way to fund his passion by launching the satellite company Starlink, which created a satellite internet network of 4,400 satellites.
Musk intends to expand the service to 30,000 satellites. Will you get there? It’s anonymous. As long as you can keep your followers distracted with your latest innovation, no one is likely to remember the initial promise.
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