Why Elon Musk’s crazy plans for Tesla aren’t crazy

Elon Musk recently laid out a “master plan” for where his company, Tesla Motors, is heading. The vision is undoubtedly ambitious: four new kinds of Tesla vehicles, solar initiatives, autonomous driving technologies, and a ride-sharing program.

Judging by the subsequent 3 percent dip in Tesla’s stock price, the markets don’t appreciate Musk’s vision or the promise of these technologies. They don’t understand the exponential advances in fields such as artificial intelligence, storage and solar energy, or the scale advantages that come from building technology platforms.

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Tesla may well stumble because it is trying to do too much too fast, but Musk’s vision is sound.

The most controversial part of Musk’s vision is his plan to integrate SolarCity’s photovoltaic technologies into Tesla’s Powerwall storage technology, the units that customers use to charge their electric vehicles at home. While there are valid corporate governance concerns about merging two companies with the same board members, the technology combination is a strategic winner.

At the rate at which solar technology is progressing, its cost per watt by 2022 will be less than half of what it is today. Prices of solar panels have been falling at more than 10 percent a year for the past 40 years, and their cost is now justified without government subsidies. Bloomberg New Energy Finance (BNEF) estimates that the “learning rate” of solar panels — the fall in their price for every doubling in their global installation — is 26 percent. And solar installations are doubling every year or two. At this rate, by 2030, solar capture could provide 100 percent of today’s energy; and by 2035, it could be almost free.

What has been holding solar energy production back is the cost of energy storage, which has necessitated a complex, messy substitute for connection to the grid. Tesla’s Powerwall removes this dependency and allows one company to provide an “integrated and beautiful solar-roof-with-battery product that just works,” as Musk suggested. This is the kind of advantage and elegance that came with the Apple iPhone, which integrated music, telephony, and computer applications into one device.

The cost of battery technologies is falling at a rate similar to that of solar production. According to BNEF, the learning rate in electric-vehicle batteries is 21.6 percent, meaning we can expect that by the end of 2022, these too will cost less than half of what they do today. This would give Tesla the same market leadership on electric vehicle battery technologies that Apple commanded when it first rolled out the iPhone.

With lower costs for electricity and batteries, the demand for electric vehicles will skyrocket. The nearly half-million orders that Tesla received for its $35,000 Model 3 was a clear indication of demand. As Tesla starts building vehicles at a pace to meet the orders, the price of the key component of these cars — the battery — will keep falling, and the company will be able to offer newer models at even lower prices. Imagine cars as powerful as today’s Tesla Model S, traveling 250 miles on a charge, that retail for $25,000. This is very plausible in the early 2020s.

Now add to these advancements the cars’ self-driving capabilities, which continue to improve as the machine-learning algorithms used for navigation become smarter, and you have a product that could save tens of thousands of lives in the United States alone.

It is surely possible that Tesla could fail in these efforts by thinking too big. But its grand vision may well prove to be the strategic advantage that it needs to achieve its goals.

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Vivek Wadhwa is Distinguished Fellow and professor at Carnegie Mellon University Engineering at Silicon Valley and a director of research at Center for Entrepreneurship and Research Commercialization at Duke. His past appointments include Stanford Law School, the University of California, Berkeley, Harvard Law School, and Emory University. Follow @wadhwa.