When economics professors explain the concept of an industry with high “barriers to entry,”

the examples they usually reach for are automobiles and space flight. Setting up a lemonade
stand (or, these days, a software company) may be child’s play, but the complexity and
massive capital requirements of the “metal-bending industries” have kept them more or less
closed shops for as long as they’ve existed.

So, how did two spunky startups come to dominate these two impenetrable industries within
the space of a few years? Many have pondered this question, and several plausible answers
have been found — most having to do with disruptive technology. However, innovative
technology, or an innovative business model, will only take you so far. One of the reasons
it’s so hard to challenge the Toyotas and Boeings of the world is their economies of scale.
You may be able to build a great car, or a spaceship, in your garage, but you’ll never be able
to sell it at a reasonable price unless you can build thousands of cars, or dozens of spaceships.
s Enrique Dans writes in a recent piece published in Forbes, for Elon Musk and his fellow
visionaries at Tesla and SpaceX, economies of scale don’t represent an obstacle, but rather an
integral part of the companies’ respective business plans.

Economies of scale are what allows SpaceX to put satellites, and now human astronauts, into
orbit at a fraction of the usual cost. By making its booster rockets (and other components,
such as fairings) reusable, the company is able to reduce not only the hardware costs of
launching payloads into space, but also the turnaround time between launches.
SpaceX’s Starlink project, which may involve deploying as many as 42,000 satellites to
provide global internet access, would never be viable without keeping the cost of each launch
to a minimum. More launches translate to lower costs per launch.

SpaceX’s sister company, Tesla, also relies on economies of scale. Elon and his merry men
and women understood from the beginning that the only way to get battery costs down would
be to manufacture lots of them — that’s why Tesla started building the Gigafactory well in
advance of beginning volume production of Model 3. Believe it or not, economies of scale
represent one reason that Tesla is beating the much larger legacy automakers at their own
game. (Oh, the irony!) Whereas Tesla enjoys healthy profit margins, at least on its higher-
priced models, other carmakers complain that they can’t make a profit on EVs. Tesla
continuously upgrades its production processes to improve quality and squeeze out costs, and
most of these innovations rely on economies of scale to make them feasible. When it started
out with the Roadster, the young company had no choice but to follow the usual auto industry
practice of relying on other companies for key components, and even for vehicle assembly.
Once it started building Models S and X, Tesla soon found that outside suppliers weren’t able
to keep up with its rapid innovations, and it gradually brought more and more operations
under its own roof. Tesla is said to be the only auto firm that makes its own seats; it
dropped Mobileye as a supplier of the computer that powers Autopilot, and now makes the
necessary computers in-house; and it is widely believed to be close to making its own battery
cells.

Identify the strategy in the above case and explain it with respect to the case.