Finance: 'Do you want to see the car?': The story of the day that Tesla stunned the world (TSLA, F)

In this except from Matthew DeBord's book "Return to Glory," we get a front-row seat at the Model 3 reveal — and witness Detroit's reaction.

In 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.

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

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

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

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

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

It’s this second threat that was generating the biggest risks for Ford and its rivals in 2016.

The ride-sharing service Uber, founded in 2009, came on the scene with a brash, sharp-elbowed CEO named Travis Kalanick aiming to eliminate the taxi business in big cities.

By the time the Ford GT race cars were getting their first taste of the Circuit de la Sarthe, Uber was valued at a staggering $65 billion and had just taken a $3.5 billion investment from Saudi Arabia’s sovereign wealth fund, as the oil-rich nation sought to diversify beyond the natural resource that had transformed it into one of the world’s most influential and richest countries. (Tesla staged an impressive debit of self-driving technology in Pittsburgh in 2016, but in 2017, the company slid into crisis as workplace-culture issues dogged the startup and Kalanick was caught on video arguing with an Uber driver; the CEO later apologized, admitting that he need help overcoming the drawbacks his harsh style.)

Tesla shook up the traditional carmakers. But they could still figure out what Tesla was: an automaker with some high-tech credibility and electric motors, plus a charismatic leader. Uber was much harder to figure out. Pundits began to argue that with Uber, nobody—except for Uber drivers—would ever need to own a car again. And as self-driving cars accelerated their development, the drivers started to drop out of the picture. The future would consist of autonomous vehicles, owned as large fleets, appearing and disappearing as needed, dispatched by software.

Design, horsepower, speed, the automobile as an icon of freedom— that would all be relegated to the misty past, like stagecoaches and Conestoga wagons. All that would matter is that your pod-mobile appeared when summoned and that it moved you from point A to point B.

Automakers were far from sure that this—for them—dystopian future would come to pass, but they were determined to avoid a slide into irrelevance. GM began to move very aggressively in 2015 and 2016, investing $500 million in Uber’s competitor Lyft, buying up the assets of a mobility start-up called Sidecar, which had gone bankrupt, and most dramatically, buying an obscure self-driving outfit, Cruise Automation, for nearly $1 billion. By the end of 2016, Cruise’s self-driving technology would come to market under the GM banner, as the automaker began selling its Bolt EV, beating Tesla’s Model 3 by at least a year.

But Ford wasn’t hanging back. It created a small fleet of self-driving cars to perfect the technology, which by 2016 was mainly capable of letting drivers take their hands off the steering wheel for freeway driving, as long as they continued to monitor their vehicles. It was widely expected, however, that over the next decade, higher levels of autonomy would be rolled out, leading ultimately to the end of drivers behind the wheel.

The traditional auto industry is, in fact, pretty good at assessing risks. And the broadly held notion that it just wants to stick to the same old, same old, year after year, is simply false. The industry is far too competitive for anyone to avoid innovation; the carmakers that struggle to sell cars are the ones that are forced to starve their research-and-development budgets for too long.

The internal-combustion engine, introduced in the nineteenth century, had been perfected by the early twenty-first, through a process of continuous innovation undertaken by the global auto industry (the gazillion patents related to the internal-combustion engine were one of the reasons that critics often accused the industry of stalling on change).

In fact, a few start-ups in the early 2000s and 2010s were even trying to push the internal-combustion engine to breakthrough levels. A company called Transonic Combustion, which failed because it couldn’t make its technology adequately reliable, developed a fuel-injection system that upgraded gas-burning efficiency to unheard-of levels, with engines delivering 100 miles per gallon.

By early 2016, Ford felt awfully good about where it stood, in terms of preserving itself and embracing the future. The company even had an in-house futurist on staff, and had since before the financial crisis, to spot important trends before they became existential threats—or massive missed opportunities.

But as someone who had covered the company for a decade, and who had a front-row seat for everything happening in Silicon Valley thanks to my job at Business Insider, a website that obsessively monitors, analyzes, and reports on technology, I could tell that the pace of change and the multiplication of risk were picking up speed.

Ford had the right overarching idea, as expressed by Bill Ford. It had the right messages, as expressed by Mark Fields (and later, by Jim Hackett). And it had the right people: designers, engineers, and managers who were technologists at heart. Ford even set up shop in Silicon Valley, to be closer to the action.

But this was a global enterprise that employed tens of thousands—and that had to keep its core business cranking. That meant building a million F-150 pickup trucks every year, no small task. Even if 100 percent of the company knew that enormous disruptions were afoot, at best only 10 to 20 percent of the company could focus on Ford disrupting itself.

Detroit tries to disrupt itself

The scrappy companies that were undertaking the disruption, of course, could go all out on the effort. For them, there was no point in striving to survive—the only acceptable outcome was to make it big, to hit the jackpot, or to vanish completely.

In late 2015, I went to Detroit to interview GM CEO Mary Barra. The first woman to lead a major automaker, Barra said all the right things about how the 100-plus-year-old carmaker, and by association the industry that it was part of, would ride out all the new threats.

At GM headquarters in the Renaissance Center in downtown Detroit, sitting in Barra’s large and gracefully appointed but far from ostentatious office, I listened as she accepted the deluge of risk that was sweeping through the industry. Barra had spent her entire life at GM—her father had worked there, and GM was the only place she had ever worked.

"I can’t tell you what technology is going to exist in five years," she said. "All I can tell you is that if we sit here five years from today, it will be something that’s dramatically impacted the industry that we can’t even name right now."

I thought I was being lightly irreverent when I said to Barra that I hoped we could make a date to talk again then. But although she was amused, she wasn’t prepared to make light of what she was up against.

"We’re going to disrupt ourselves, and we are disrupting ourselves," she said, her voice unwavering after a nearly hourlong interview. "So we’re not trying to preserve a model of yesterday."

Ford’s Mark Fields unhesitatingly echoed Barra’s message. He came to Business Insider in March 2016, right before the New York auto show, and in an interview came right out with it. "There’s a lot of talk around technology companies disrupting the auto industry," he said. "Our approach is very simple: we’re disrupting ourselves." Before the year had ended, he would pledge Ford to get a fully self-driving car on the road by 2021.

To have the CEOs of the two largest U.S. automakers saying exactly the same thing within months of each other might sound like groupthink, but it isn’t. The auto industry has been unique not just in declaring a self-disruption and getting out ahead of the curve rhetorically, but in enacting that disruption as enthusiastically as possible, embedding a positive attitude toward new technology in everything it does.

For example, when Fields presided over the reveal of the new GT in early 2015, he stressed how advanced the supercar was—and that it was technology joined to emotion and history. Disruptive technologies made the new GT possible.

Don't forget the allure of an amazing car

And for what it’s worth, the GT is the pinnacle of Ford’s automotive technology. It is designed to go fast in the straight line and through the corners; crafted almost entirely from carbon fiber, the most advanced material in the carmaker’s manufacturing playbook; and powered by one of the most sophisticated engines Ford has ever built, the race-proven, turbocharged EcoBoost V-6. Styled to turn heads, on the street and on the track, it as an emblem, a new icon. Its reveal provided stirring evidence that Ford was back, and better than ever.

But it was also the culmination of a century of one type of thinking about cars. The GT was glorious. But all around it, the idea of a person in a machine going fast—the idea that was the animating spirit of the multi-trillion-dollar global auto industry—was being discarded.

In August 2016, Fields announced that Ford would have a small fleet of fully autonomous vehicles on the road by 2021, leapfrogging the more incremental approach to self-driving technology that Tesla and others were embracing. Both the established automakers and the newest of the new entrants anticipated that the driver would exit the stage in the future; at around the same time that Fields made his announcement, Uber rolled out its own driverless test fleet in Pittsburgh.

At one point, a year before the GT hit the floor at the 2015 Detroit auto show, I went on a drive with a company that offered seat time in some of the world’s most exotic and exciting cars. I sampled a Lamborghini, a Porsche, a Ferrari, a Maserati, an Aston Martin, and a Mercedes. My partner for the event was a former Ferrari owner, a young guy who knew and loved high-performance cars. We stopped several times during the day to switch vehicles. At around noon, the gorgeous machines were all lined up in the parking lot of a grocery store in the New Jersey suburbs. My partner had made money when a tech company he was part of was sold. He understood how fast things could change in the new century.

"Look," he said, gesturing toward the supercars, a few million bucks in the best the auto industry had to offer. "We aren’t going to see that for much longer."

Was he right? I wasn’t sure, even though I knew he was without question onto something. Everyone who built and sold cars for a living was trying to figure out what that something would mean. But for twenty-four hours in June 2016, we were going to forget all about disruptions and electric cars and self-driving vehicles and the twilight of the supercars. The best racing teams in the world were headed for a showdown at the toughest race in the world, and I knew I wasn’t the only one still excited by the raging machines, at an almost primordial level.

Read more about "Return to Glory" at matthewdebord.com.

Buy the book at Amazon.com.

In this except from Matthew DeBord's book "Return to Glory," we get a front-row seat at the Model 3 reveal — and witness Detroit's reaction. Read Full Story