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Future Tesla is a company that integrates vertical manufacturing, software and hardware, energy production and charging network, and travel technology.
Next, let’s break down the possible factors that could support the long-term steady growth of Tesla’s manufacturing, supercharging, and smart/autonomous driving businesses over the next decade, and keep them competitive during this time.
First, the manufacturing sector.
Elon Musk often says in various occasions that in the field of automobiles, the real challenge is not to design and assemble a car, but to mass-produce it. Moreover, it is even harder to achieve positive gross margins in large-scale production. These are the real challenges.
In my previous articles, I carefully analyzed the priority of Tesla’s product design: safety first, energy efficiency/practicality second, followed by performance and price. The argument process can be found in the past articles.
From the priority ranking of product design, it can be seen that Tesla’s products are not the cheapest in absolute value, but they have been most frequently reduced in price after entering China for a year. This wave of price reduction can mainly be attributed to the localization of the supply chain, and Tesla chose to pass the benefits of this price reduction directly to consumers through product discounts.
Thinking of this, I have a question in my mind. Since the current localization rate has exceeded 90%, it basically means that the benefits of this wave of price reduction due to localization have already reached its limits. So how should Tesla respond to global commodity inflation in the future? For example, the price increases of basic raw materials such as car bodies, batteries, cables, and chips. The price increases of these raw materials mean that the basic raw materials used by domestic suppliers to produce parts will also increase in price, which will increase Tesla’s procurement costs and subsequently lead to product price increases.
At the same time, when Tesla’s team made forward-looking predictions of financial data for the future at quarterly earnings meetings, it repeatedly mentioned that the “gross margin” of products is expected to continue to rise. The gross margin of Tesla’s vehicle department has reached 30% at present.
Combining the two above factors implies that Tesla’s team needs to continue to expand the gross margin while the benefits of localization are exhausted and the cycle of rising commodity prices is underway.
To achieve the continued expansion of product gross margins, there are only two ways: one is to increase product prices; the other is to use technology to hedge against the cost brought by the rise of raw materials, and the speed of technological iteration to reduce costs must be faster than the speed of raw material increase.
It is certainly “easy” to increase product prices, but often, the path that seems easy is not suitable for long-term success, and the path that seems more difficult is actually the key to long-term competition, because the fewer people who can compete with it as it goes down.# Tesla’s Mission
Tesla’s mission is to accelerate the world’s transition to sustainable energy. Since this acceleration cannot be limited to the affluent class, in order to achieve a larger user base, Tesla needs to maintain its product prices within a range that the vast majority of people can afford.
For Tesla, the three-step plan of its mission has already demonstrated its ambition: “First, produce a sports car; Second, use the earnings to produce an affordable car; Third, use the earnings to produce an even more affordable car.” In other words, Tesla aims to be as cost-effective as possible within its capabilities.
Therefore, faced with the choice, Tesla naturally cannot choose the “easy” path. Since Tesla chooses to “offset cost increases with technology”, how does Tesla’s team achieve this?
“First Principles”
Elon Musk’s incredibly powerful mode of thinking has been deeply ingrained in Tesla’s DNA.
It is important to note here that I first proposed the hypothesis of the existence of this mode of thinking, meaning that this mode of thinking permeates every aspect of Tesla. However, since you and I are not Tesla employees, it is impossible for us to prove the existence of this mode of thinking through a first-person perspective as participants. Nonetheless, this does not prevent us from indirectly proving this hypothesis through third-person observations. The following are a few examples:
(1) Why are warehouse locations fixed in factories?
At the Shanghai Gigafactory, the fixed warehouse is replaced with an “instant loading container warehouse” that is close to the corresponding assembly line. The benefits of doing this are:
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Reduce factory floor space
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Pre-shipment quality inspection eliminates the need for secondary inspections after arrival
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Instant loading and unloading minimizes parts sorting and reduces assembly movement distances
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Multiple containers correspond to a single production process, ensuring continuous inventory and production rhythm
(2) Why are there so many parts and processes involved in manufacturing a car?
By developing the Giga Press, a super large die-casting machine, and a special aluminum alloy, the vehicle’s parts 70 into 2 integrated parts. The benefits of doing this are:
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Dozens of parts need to be assembled together with complex riveting, welding, and adhesive processes. Fewer parts mean fewer assembly processes, as well as a decrease in quality control processes.
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The integration of dozens of parts at the source reduces the possible range of cumulative errors statistically and increases the accuracy of the entire part.
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Reducing welding, riveting, and adhesive processes not only reduces the weight of parts and the consumption of accessories but also increases the reusability of corner materials due to the characteristics of die-casting.- To maintain the high-speed production pace of the production line, nearly 1000 robotic arms need to collaborate, but using the Giga Press to produce vehicle underbodies can reduce this number by 300, saving the cost of purchasing and maintaining robotic arms, while also saving the floor space for placing these robotic arms.
（III）Why is the cost of batteries decreasing so slowly?
Optimizing the design and production of batteries from top to bottom: cell design, assembly process, positive electrode material, negative electrode material, and structural design, the benefits of doing so are:
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Redesigning the 4680 cell with fewer current collectors to reduce resistance, losses and heating during current flow.
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Applying current collector-free technology eliminates the process of interrupting winding to add current collectors, greatly increasing the production speed of individual cells.
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Applying dry electrode technology reduces the time and equipment scale required for the wet process of producing electrodes, reducing the number of processes and equipment to 1/10 of the original process and equipment scale, greatly reducing capital investment.
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Applying the technology of directly making electrodes from “ore” materials eliminates the process of refining lithium ore, reducing costs and alleviating supply bottlenecks.
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Applying cell chassis integration technology allows the cell to become a core part of the vehicle structure, reducing the structural components of the battery pack and reducing weight, while increasing the capacity density of the battery pack for a given volume.
With the above optimization actions for Tesla’s battery design and production, the expectation is to reduce the cost of batteries by 56%, reduce capital investment in battery production by 69%, and increase the single-vehicle range for a given volume by 54%.
Moreover, the Tesla team emphasizes that this battery optimization plan does not rely on a single unpredictable technological breakthrough or research project that may never be realized. This plan is based on engineering and industrialization, spanning every aspect from raw materials to finished products, from cells to battery packs, from design to production.
In other words, this is a completely feasible plan.
Because of the observations of the examples given above, I believe that Elon Musk’s advocacy of first principles thinking is really present in Tesla and may even be flowing in the blood of the Tesla team.
First principles thinking refers to re-examining things from the smallest units that can be disassembled and finding better ways of doing things. And all of Tesla’s actions can be traced back to first principles: reducing transportation, reducing processes, reducing losses, reducing investment, saving time, all of which point to the optimization of overall costs. It is precisely this way of thinking that has created Tesla’s unparalleled engineering and industrial capabilities.
Technology will always become outdated, but this underlying way of thinking will never do so. Only by grasping immutable things can one transcend time. Therefore, I believe that the powerful force of this culture will continue to drive Tesla to lead for another ten or even dozens of years.Back to the beginning, this is why Tesla is able to predict its ability to continue to expand product gross margins in a period of rising bulk raw material costs despite the end of the domestication dividend. It’s not so much because Tesla has advanced technology as it is because of its powerful thinking mode behind the advanced technology, which enables it to sustainably hedge this magical real world.
Choosing a difficult but correct path will eventually reap the greatest rewards, which may be the motto of Long-termism.
(to be continued)
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.