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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Highest Level Takeaway:
1)There is a wide range of possible outcomes for nuclear from game changing cost declines to status quo.
2)Solar's trajectory is pretty clear, it's declining in costs (maybe not declining so much relative to what's possible for nuclear) and growing.
Keep scrolling for nuance...
2/Had we not over regulated nuclear it may have been the lowest cost source of electricity today.
BUT, that's not the world we live in. Nuclear costs skyrocketed while solar kept declining.
Now we are at an interesting point in time where regulation headwinds could become tailwinds.
3/If just comparing capital cost, even if nuclear costs had continued to fall in line with the trend in place before regulations derailed them in the 1970s, a quick glance would suggest that they still would not be as low today as solar on a cost-per-watt basis, but...
2/One instructive analogy could be a Hollywood Studio vs Amazon Prime.
Hollywood studio needs hits b/c that's its whole business. Looks at Amazon Prime spending as irrational on cost per viewership. But Prime is part of a suite of services.
3/If Prime video content attracts and retains marginal customers across its entire suite of services, which extend far beyond video streaming, then Amazon’s content spend—seemingly unprofitable from a Hollywood mogul’s perspective—is entirely rational.
The University of Michigan Consumer Sentiment Survey asks: Do you think the next 12 months or so will be a good time or a bad time to buy a new vehicle?
More people than ever said "Bad Time" going all the way back to 1961.
2/But automakers claim demand is strong and point to low inventory on dealer lots.
But is inventory on dealer lots? How much inventory is in people's driveways after buying a car to avoid public transport during COVID?
3/As semiconductors arrive, can selling a low number of cars quickly be linearly extrapolated to selling a high number of cars quickly?
There is also a shift in consumer preference towards electric vehicles. Will the incremental buyer want a gas-powered vehicle or an EV?