Is another example:
starting a new company to produce an electric car (with all the associated R& D costs of new technologies), then setting up a production line to reliably manufacture them en masse requires deep pockets. Yet he’s done it again, at the same time setting up SpaceX! It’s widely known that he’s used government grants/loans and other incentives along the way, but the fact remains that he’s tackled a highly competitive and capital-intensive industry as a brand-new entrant and so far he looks to be successfully on his way. For Musk to have succeeded in these industries he’s not only had to have a clear understanding of the technological advantages in his reusable rocket components (SpaceX) or battery technologies (Tesla) but he’s also used finance as a strategic tool; I’d argue that his true ability has been to successfully raise the capital to fund the technologies (a trait which Richard Branson also shares – both are exceptional storytellers).
Musk’s ability to use finance as a tool to extend his competitive advantage goes further than that, as shown by his company’s recent announcement regarding t he financing scheme it provides with the Tesla Model S. Here are the core ideas:
US Bank and Wells Fargo have agreed to provide 10% down financing for purchase of a Model-S (on approved credit). These are big-name trusted banks putting their weight behind a new technology.
The 10% down payment is covered or more than covered by US Fed and state tax credits ranging from $7 500 to $15 000. New Jersey, Washington state and Washington DC also have no sales tax for electric vehicles. (These advantages are not available when leasing, so it’s also important that the contract is clearly a sale.)
When considering the savings from using electricity instead of petrol, depreciation benefits and other factors, then Tesla claims that the true net out-ofpocket-cost to own a mid-range Model S drops to less than $500 a month. In other words, he makes a strong case that it’s not a very expensive purchase, actually.
After 36 months, you have the right, but not the obligation, to sell your Model S to Tesla for the same residual value percentage as the iconic Mercedes S-Class, one of the finest premium sedans in the world, made by Daimler (also a Tesla partner and inves- tor). Here Musk does two clever things – he anchors the new Tesla brand to the well-established brand Mercedes brand, and he justifies a similar pricing range by linking the resale value directly to the S-Class.
Not only is Tesla guaranteeing that resale value, but Tesla CEO Elon Musk is personally standing behind that guarantee to give customers absolute peace of mind about the value of the asset they are purchasing.
In other words, you own the car, but you have the option to sell it back to Tesla. Simply put, you’re getting the benefits of both leasing and owning a car. In the world of finance, this is called a put option. The holder of a put has “the right, but not the obligation” to sell back an asset at a certain price. Of course, options aren’t free – investors buy options for a premium, which in Tesla will be priced into the upfront cost of the car.
Any risk that you don’t like the product shifts towards Tesla and Musk. In effect, Musk is gambling that you’ll like the car enough to keep it, but he’s also set up a financing scheme that gets the benefits of a lease while retaining the tax credits from the sale. He’s pulled off a great marketing ‘anchor’ by linking the resale value of the car to a great, established brand. How can you structure your offering to customers to offer the best financial incentives?