1/ I recently tweeted about Wright’s Law and how Tesla should be able to lower Model 3 production costs by ~23% in roughly 1.5 years. @WallStCynic brought up a few points that will help people understand the robustness of Wright’s Law
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2/ A quick recap, Wright’s Law states that for every cumulative doubling of production, costs fall by a certain percent. The Model 3 appears to be on an 85% learning curve, which means a 15% cost decline for every cumulative doubling of production.
3/ There have been ~275,000 Model 3s produced through Q2 2019. Applying Wright’s Law means costs should fall by over 23% once another 600,000 Model 3s are made, which should happen by the end of 2020.
4/ Tesla’s costs can fall so quickly because it has a relatively small production base. It’s easier and quicker to cumulatively double 275k than hundreds of millions.
5/ Questions raised:
-Does Wright’s Law apply to cars that have been produced tens to hundreds of millions of times?
-If it does, why doesn’t the Toyota Corolla (44 million produced) have 60-80% gross margins?
-What metric should you measure with Wright’s Law?
6/ An 85% learning curve isn’t novel to Tesla. Other researchers have demonstrated that the Model T from 1909-1923 was on an 85% learning curve.
Pushback: The Model T benefitted from the intro of the moving production line, so those cost declines aren’t sustainable.
7/ Forget the Model T, let’s look at Ford’s auto production from year 1. In 1903 Ford made ~2,000 Model A, which cost ~$23,000 in today’s dollars. In 2012 Ford made its 350,000,000th car. If Wright’s Law held true, then Ford should be able to make a Model A today for ~$1,500.
8/ The OG Model A had 8hp and a top speed of ~30mph. Ford doesn’t sell an 8hp car today, but look no further than the Tata Nano or Mahindra’s rickshaw, which is ~8hp, a similar weight to the Model A, and costs ~$2,100 to recognize costs have fallen in line with Wright’s Law.
8/ WRT gross margin, Wright’s Law forecasts cost to produce, not sale price. If people were still willing to pay $23,000 for an 8hp car, then Ford could very well have 90%+ margins, but the market demands better products rather than indefinite cost declines for the same item.
9/ The cars we drive today are far superior to the Model A. We enjoy features like airbags, power steering, antilock braking, radio, air conditioning, and driving >30 mph. Wright’s Law still applies, but the metric being measured needs to capture improvements in performance.
10/ A way to do that in the auto industry is to look at cost per hp. In 1903 it cost Ford ~$3,000/hp to make the Model A. Wright’s Law suggests it should have cost Ford ~$167/hp in 2012 when it made its 350,000,000th car. The average $/hp of Ford’s sedans in 2012 was ~$135/hp
11/ Back to the questions:
Does Wright’s Law apply to cars that have been produced tens to hundreds of millions of times?
Yes! It applies to the entire auto industry.
12/ If it does, why doesn’t the Toyota Corolla (44 million produced) have 60-80% gross margins?
In a word, competition. There are super cheap 8hp cars, but everyone can make them so no pricing power. Competition also led to OEMs adding features w/o raising price.
13/ What metric should you measure with Wright’s Law?
Over long periods of time, measuring something that captures performance improvements provides the most useful data.
14/ Wrapping it all up:
To think Tesla can’t significantly lower production cost of the Model 3 is to ignore the entire history of the auto industry.
(Could do a whole separate thread on Tesla's competitive advantage in the EV space & what that could mean for profitability.)
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