Yeah, that was a mistake. It should be $670B. I should go to sleep.
I'm on record saying I don't think an upgrade will do too much to the stock price, so I think the movement is fairly irrelevant. That said, if one agency increases their rating and the other doesn't then you end up with what is known as a "split rating". This may preclude investors with an investment grade requirement to invest until both agencies reach investment grade but will likely be dependant on the specific rules of the investor.
split rating
Yeah it's all incestuous. Moreover, many of the ratings agencies have their position legislated into existence as only certain agencies are acceptable for certain bank and institutional capital benefits - so it forces debt issuers to use them if they want these banks and investors to buy their debt. It's essentially a legislated oligopoly on debt issuance.
Tesla Lease Securitizations are rated by Moody’s. The volume of Tesla ratings is small but not zero.
The reason I have avge revenue per vehicle (ARPV) declining is that I anticipate the introduction of a 2/Z class compact (and derivatives) at approx $30k >> $28k, and a rather utilitarian van (and derivatives) entering at $40k >>$28k. I also have Cybertruck and Semi entering at higher price points by the way. The underlying point is that I am more conservative than you are in anticipating what may come. This is in part because I think that the "mission" will logically lead Tesla to bring in these lower price (and cost) vehicles with (in absolute terms) slimmer gross profit per vehicle (GP/V) so as to satisfy the needs of the market. It may be that I am wrong on timing of these new model introductions but in my opinion one day they, or something much like them, will come through. In this may I gently suggest that it helps to see the global perspective, not just the USA-perspective. Also there is the issue of reversion-to-the-mean which is a strong pattern in human history even when paradigm shifts occur, and I don't think it is done with humanity yet. So yes, whilst I see and honour the ongoing GP/V and ARPV short-term surges based on excellent 3/Y and S/X performance, so too do I see and respect the strong and persistent longer term trends that Tesla also exhibits of declining ARPV and declining GP/V.
Tesla thinks so, although other variants will end out being used too. After all long life, easy tolerance of full charging and continuous use will demand robust cells, but weight is mostly unimportant.
Depending on what you mean by ‘absolute terms’ this is reasonable. However, the cheaper products may well have equal gross margins as do the more expensive models. There are fours reasons: First manufacturing efficiency couple with product simplicity to improve gross margins. Second, subscription revenue is already rising rapidly. Third, cheaper vehicles will tend to use more Supercharging than others. Fourth, The great myth is that cheap cars sell mostly as ‘strippers’ but that is not true,nat any level, including even ultra cheapies like Alibaba and Tata Nano. The cheap ones tend towards well equipped, higher profit terms.
On the product side I assume that in the automotive division %GM is held steady at 30% or so due to strong management pricing discipline. Therefore as the cheaper models come onstream (which the mission implies they will, unless one assumes FSD-Robotaxi magic) then the inevitable result is that as ARPV declines, so too does average GM per vehicle (GM/V) decline in absolute ($$$) terms. Yes there may be individual islands of better or worse %GM but on average I assume that Tesla will take the view that the mission is not accelerated by being too pricy.
Tesla, Toyota, and The Next Generation of Lean Manufacturing
The Toyota Production System and the Toyota Way revolutionized not only the automotive industry but also the entire global manufacturing sector. I've worked as a quality engineer at Boeing and another major industrial company in a different industry. Like many companies, my employers designed their own production systems basically as rebranded variants of the TPS adapted for their own purposes. In manufacturing, it is common to use Japanese words taken straight from the TPS, like andon, poka-yoke, kanban, gemba, kaizen, muri, and muda. The propulsion shop at my Boeing plant even had posters on the wall of Taiichi Ohno and some of his most famous sayings. The prosperity we live in today is in no small part due to the contributions of the Toyota Production System and the Toyota Way to changing the way businesses are run.
The fact that Tesla is now blowing the TPS out of the water is, therefore, astonishing. However, most of what Tesla is doing in their manufacturing efforts is not really new fundamentally (and the same goes for SpaceX and Boring). Tesla's production system is based on the same principles established in the TPS and Toyota Way and raising the standard of execution on them in practice to new levels never seen before, while massively amplifying the effect with modern computer technology. I don't know if Tesla is intentionally copying Toyota and pulverizing them at their own game, but in effect that is what's happening. There has been no sign of Tesla using Toyota's terminology and they've never said they're learning from Toyota, so it's quite possible Elon has reinvented the wheel on a lot of this by failing a bunch and learning quickly from his mistakes, but in the end it doesn't really matter why he follows the principles because either way the principles work and the outcome is the same.
Elon came up with some catchier phrasing for the principles but the foundations of Lean Manufacturing have been known for longer than he's been alive. For instance, compare Toyota's "8 Wastes" to principles Tesla uses for industrial engineering.
Reducing these forms of waste is the first principle of industrial engineering. This is self-evident. If you expend valuable resources doing any these 8 things that the customer doesn't value (or values negatively), then by definition you are wasting resources. An effective organization transforms inputs of a certain value into outputs of a higher value.
- Waste of overproduction (largest waste)
- Waste of time on hand (waiting)
- Waste of transportation
- Waste of processing itself
- Waste of excess inventory
- Waste of movement
- Waste of making defective products
- Waste of underutilized workers
The key problem with adopting Lean and attempting to reduce waste is not in understanding the framework, but rather the problem is, and always has been, psychological factors, especially within management and even more so in top management. Ego, fear, lack of teamwork, arrogance, laziness, greed, distrust, resistance to change, short-termism, and other age-old human flaws stand in the way of the right stuff happening. I believe that this is fundamentally where Tesla and Elon Musk excel, and why they are now stomping on Toyota. Manufacturing will be Tesla's long-term competitive advantage and in this essay I want to summarize my thesis for why.
After WW2, American armed forces and other Allied powers continued occupying Japan, helping rebuild Japanese society and industry, in part due to a desire to increase American influence in East Asia and prevent Japan from descending into communism under Soviet shadow control, as eventually happened in North Korea, China, Mongolia, Vietnam and many other Southeast Asian nations. In 1947, General Douglas MacArthur requested that a statistician named Dr. William Edwards Deming be transferred to Japan to help the government census in Japan and to help with rebuilding Japan in general. Deming had an academic background in physics and mathematics at Yale and prior to his first trip to Japan he had been working for the US Census Bureau helping them implement much better internal quality processes and statistical sampling techniques.
Twenty years prior, Deming had learned radical new techniques and management frameworks while working at Bell Labs with Walter Shewhart, a fellow physicist who had pioneered modern statistical process control. As physicists who came of age in an era during which the very philosophical foundations of science were being questioned question as theories like Relativity and Quantum Mechanics were coming into vogue, both men had a keen intellectual interest in epistemology, the study of where knowledge comes from. As scientists by training, both also possessed the skills and mathematical understand to actually apply the Scientific Method correctly. They transferred this knowledge and mindset into their ideas for improving organizational processes with rigorous empirical techniques. Deming was enamored with Shewhart's ideas and helped Shewhart develop them further. By the time the war happened, Deming had gained a substantial reputation, especially within the federal government after having improved efficiency at several departments and especially during the war when he trained many American workers on quality improvement.
At the time, Japan had a well-deserved reputation for producing junk. They had serious problems with quality and low productivity, and so the Japanese Union of Scientists and Engineers had keen interest in improving. Meanwhile, North America was the only area of the world with advanced industrial capacity that hadn't been damaged by the war, and America in particular had undergone a revolution in quality management and statistical process control in the years leading up to WWII and then especially during the war when production was mission-critical and they had to figure out how to quickly get women trained and up to speed on the production lines. Many of the techniques of acceptance sampling and statistical process control developed during this period are still in use today, and I personally used them while at Boeing. Deming himself was quite influential in the spread of these techniques for supporting the war effort. The Japanese, humbled after losing the war, were ready to learn from what others, particularly the Americans, were doing so much better than they were. Meanwhile, the Americans took a turn away from what had helped make the war production effort so successful, and they began focusing less on quality and more on piece cost reduction and cranking out maximum production quantity at the expense of everything else. This appeared to work for a while, largely because of the USA having overwhelmingly the best postwar industrial capacity which fed the immense demand from American allies whose factories and roads had been leveled by bombs, and also because of the cheap domestic American oil and coal of the 20th century. Japanese engineers and industrial leaders frequently visited America during this time and absorbed knowledge from industrial titans like Ford, Bell, and Westinghouse, and even American retail and grocery stores.
So, while working for the US government rebuilding efforts in Japan, in 1950 Deming received requests from the Japanese Union of Scientists and Engineers to give lectures and hold seminars on quality and statistical process control with engineers and leaders of industry within Japan. The lectures were a smashing success and demand for his services within Japan continued to grow throughout the 50s. Deming's teachings ended up being extremely influential in shaping the postwar Japanese economy and business culture and he became a national hero. Joseph Juran had a similar story a few years later, and he too taught the Japanese novel management techniques for quality management after receiving an invitation from JUSE. Deming and Juran's work was a crucial factor in Japan's post-WW2 economic miracle from 1950 to 1980, during which Japan rose from a disgraced and demolished nation to having the world's 2nd largest and most productive economy after the USA. Among the people enthusiastically following the advice were the leaders of Toyota.
Taiichi Ohno was the industrial engineer and later executive who was the primary architect of the Toyota Production System. While there is no evidence of a direct link between him and Deming, the TPS clearly came from the quality culture within Japan that Deming fostered almost single-handedly, and we can see that in the clear links between the principles Ohno inculcated into Toyota employees and managers. Additionally, Toyota has directly said that they were implementing Deming's teachings during their spectacular, disruptive rise to the top of the automotive industry. According to the Deming institute (link), "Years later, in 2005, Dr. Shoichiro Toyoda, Chairman and former President (1982-1999) of Toyota, accepted the American Society for Quality’s Deming Medal. In doing so, he offered: “Every day I think about what he meant to us. Deming is the core of our management.” In that speech, Toyoda also said:
The revolutionary changes within Toyota in the 1950s transformed the company from a nearly bankrupt manufacturer of unreliable junky cars to the global champion of the automotive industry and arguably of the entire manufacturing sector of the global economy.
Notably, Ohno pushed Toyota to operate much like Tesla operates today, as illustrated by his "Ten Precepts":
This has clear parallels with how Tesla operates. For example:
- Sleeping at the factory, putting all engineers next to the production line, requiring everyone to spend less time in meetings and more time directly engaging with the product
- "I'd rather be optimistic and wrong than pessimistic and right."
- "Optimism, pessimism, f*** that; we’re going to make it happen. As God is my bloody witness, I’m hell-bent on making it work."
- "I don't ever give up. I mean, I'd have to be dead or completely incapacitated."
- Jumping right into trying ideas immediately, almost pathologically impulsive innovation and impatience (e.g. Deciding to start the Boring Company, immediately planning for buying a boring machine and digging in the SpaceX parking lot, then actually starting work just five months later.)
- Use of relatable analogies, humor, and repetitive mantras like "Prototypes are easy. Manufacturing is hard."
- "Don’t delude yourself into thinking something’s working when it’s not, or you’re gonna get fixated on a bad solution."
- "The worst mistake smart engineers make is optimizing something that shouldn't exist"
- Continual optimization, making changes at astonishing rate
- Empowering all employees to make suggestions, decisions and actually be heard by management
If Deming were still alive and could tour Giga Texas, I think he would be delighted beyond measure to see what Tesla has done and even more delighted to see it happening in America. After the war, Deming had been mostly ignored, shunned and scoffed at by leaders of American industry. 30 years passed after his first trip to Japan in 1950 until Americans finally were starting to panic about Japanese competition taking over. In 1980, NBC broadcast a highly influential documentary called "If Japan Can, Why Can't We?" that changed everything. If you only check out one video in this essay, this is the one I recommend the most. They talk specifically about Deming's role in part IV.
The credit Deming received from NBC for transforming Japan led to a surge in interest for his services in America and throughout the West and also led to his being hired at Ford, where a young tool-and-die maker named Sandy Munro was working. As it turned out, Sandy Munro ended up being directly mentored by Dr. Deming when both of them were employed at Ford in the 1980s. Few seem to understand the profound influence that Dr. Deming had on his protégé. In 1988, Deming directly recommended to Sandy that he leave behind Ford and its clueless, stubborn, arrogant managers and start his own consulting company, and thus Munro & Associates was born.
History Of Lean Design® - Munro & Associates Inc.
History of Lean Design® In The Beginning Lean Design® has had decades of success helping companies achieve redesign, weight, time to market, and cost savings goals while increasing quality and innovating industries. Sandy Munro already had many years under his belt in manufacturing starting off...munro.leandesign.com
Hear Sandy himself describe meeting Dr. Deming and what he learned when he became a self-proclaimed "Deming disciple":
So Munro and Associates was formed because of Deming's recommendation, with the explicit purpose of spreading Deming's message far and wide. Sandy basically copied his entire playbook from Deming’s principles, which are almost universally accepted as self-evident but which are, in practice, rarely executed with perfection. Here are some more Munro Live videos discussing Deming's influence on Sandy.
Elon & Sandy: Design Philosophy Parallels | PART 2
Deming's philosophy was foundational for building the Toyota Production System and Munro & Associates, and now the Munro team and the man himself are gushing with praise for Tesla's design for manufacturing and overall corporate management and culture.
Think about that.
These are obviously not just hollow opinions, because the Munro team have visited hundreds of factories and are tearing apart the cars and painstakingly reverse-engineering them, so they have all the experience and all the data needed to form an informed opinion. The fact that Sandy Munro is saying this is a primary reason why I'm confident in saying that Tesla is following the same timeless principles that other champions like Toyota have used, except Tesla has raised the bar for execution in a way nobody even thought was possible, making Tesla the new gold standard for quality control and lean manufacturing. Sandy (along with the late Joseph Juran) has been the American champion of Deming/Japanese-style lean design and quality engineering for the last three decades since Deming's death, and he is explicitly telling us that the way Elon does it at Tesla is the best example of quality engineering ever. This matters.
Some of Dr. Deming's final words on his deathbed in 1993 were, according to a USA Today article quoted by Wikipedia, "When asked, toward the end of his life, how he would wish to be remembered in the U.S., he replied, 'I probably won't even be remembered.' After a pause, he added, 'Well, maybe ... as someone who spent his life trying to keep America from committing suicide.'[41]" Sandy Munro, like his mentor, has been pleading for American industry to change and implement these principles for decades and has been mostly ignored or scoffed at until gaining celebrity and influence in his old age.
Let's examine more specifically why Tesla's principles align with Toyota's, and how Tesla is crushing Toyota and everybody else on execution.
Relentless optimization was championed by Taiichi Ohno and Toyota and is known today throughout industry by the Japanese word kaizen, which means going to the source of problems to see for oneself what is going wrong and always trying to implement improvements on a daily basis. It also involves grassroots improvement efforts coming from the people actually doing the work instead of command-and-control projects forced down from upper management onto the subordinates.
Tesla definitely does kaizen, whether or not they label it as such.
At Tesla they leverage their software prowess to dramatically magnify the usefulness of kaizen. Tesla's two decades on infrastructure investment in automation and simulation tools have made what Joe Justice aptly calls dev ops for manufacturing. Design changes can be implemented on production vehicles quickly, in some cases almost immediately, because of simulation software has pre-validated that the change is likely to work.
Artificial intelligence using neural nets is fundamentally just fancy inferential statistics, because AI involves drawing inferences about a population based on a representative sample. Tesla's use of AI in the production As an outsider and a non-expert in AI, I'm limited in how much I can know about this. The difference is that neural nets can use brute force computation to run models that are vastly more sophisticated than what can be solved with classical statistics. The statistics of Deming and Shewhart still has a place for solving simpler problems, but for some more complicated challenges, we need machine learning. I speculate, as a company outsider, that Tesla is making extensive use of AI for end-item inspection and efficiently feeds that data back into machine learning models for. Joe Justice has claimed that Tesla does so as part of their digital self-management, but he's the only inside source I've heard it from.
They also benefit from having a leader who is autistic and trained in economics. The autism helps him not care much about saving face to maintain a high status position within a social hierarchy. The economics training helps him know to avoid the sunk cost fallacy and properly understand tradeoffs. Thus Elon is able to admit he is wrong easily, change direction when needed, and get everyone else at the company to follow his example.
One of Steven Mark Ryan's earliest YouTube videos captured this well in 2019.
Tesla: The Optimization Machine (why Tesla will win)
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Tesla's kaizen efforts are also more productive due to compound effects of other aspects Tesla is getting right, including colocation of all factors of production into one gigafactory, vertical integration, and nearly zero inventory. More on this in later sections of this essay.
Tesla's goal is to minimize the amount of distance each atom travels from raw material extraction from ore to the customer receiving delivery. Even the selection of Austin for the new Tesla headquarters was partially because it's close to Boca Chica, so Elon doesn't have to travel as much.
Vertical integration allows Tesla to produce everything in one location, and a huge benefit of this colocation is that Tesla's people and material flow requires less transportation. For instance, Gigafactory Austin makes its own plastics, batteries, die castings, and seats all in one building. The pieces travel on the order of 1-100 meters to the subsequent production step. I mean, just look at the glorious efficiency in the factory layout shown below. Elon said while presenting this at the Cyber Rodeo Keynote:
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Giga Texas also has four floors. Most car factories have one floor. Multistory designs have been attempted before. For instance the Lingotto factory in Turin (link), Italy which made the first Fiat 500s. Ultimately the concept has not been successful, but when orchestrated well with robust software control, it can fundamentally improve production efficiency by reducing transportation waste. Building upward does increase construction cost, but it saves on land cost and allows more production capacity in a given site size. This speeds up pace of innovation due to proximity effects, and this is most important in the long run. Another simple advantage of going multistory is employees don't have to waste as much time walking between their parking space and their workstation. Less sprawl is better. The Boeing factory I worked at had this problem. Building jumbo jets inherently requires sprawl and going multistory would be total nonsense. The product is just huge and there's no way around it. But this unfortunately makes for a 7-15 minute walk for most people each way. That's a significant amount of time each day not used to its maximum potential.
Some companies ship their supplies halfway around the planet, or in some cases, as Elon has said is the case with some minerals like nickel, the material is shipped enough distance to circle the Earth multiple times over. Tesla will be getting lithium from places like Nevada and North Carolina and nickel from Brazil and Canada. Tesla will build some kind of battery or vehicle factory onsite in Indonesia using lithium from Australia and China. Etc.
Reducing part count in a design typically results in reducing the total processing required to produce a manufactured object, because each part has associated process steps for ordering, fabrication, transportation, storage, installation, quality verification, and nonconformance rectification. Tesla has been drastically reducing non-value-added processing by reducing non-value-added part count and design complexity.
Examples:
- Gigacastings replace hundreds of stamped parts and machining operations with two monolithic chunks of metal and a structural battery pack.
- Munro & Associates teardowns have revealed a continual trend of simplification and part count reduction of Tesla vehicles, and as a result the amount of processing required is coming way down.
- In response to chip shortage, Tesla has been rewriting firmware to reduce chip count and combine features into fewer microcontrollers.
- Octovalve and heat pump cuts out unnecessary hoses, clamps, bottle, etc. for thermal management
The ideal stated by the TPS is to have a "pull" demand system with "just-in-time" logistics instead of a "push" supply system, meaning that there should be a cascading signal from the end customer upstream to the supply chain all the way down to Tier 3 suppliers, inspired by the way a grocery store restocks shelves in response to customer demand--but no more than that--then places orders for shipments of just what they need. The idea is that everything should be synchronized to customer demand. The opposite is a push production system that makes a certain amount of inventory and pushes it onto customers (internal or external), even if that means offering discounts to get rid of supply gluts or having shortages when demand gets high. The goal is also to avoid overproduction in individual process steps in the value stream, because if the next process downstream can't handle the output, then inventory piles up, cluttering the factory or causing an increase in scrap, interest and/or warehousing costs.
Tesla takes just-in-time to the extreme, but for one exception: that their customer order backlog is months or years long, forcing the customer to wait. This is temporary though, because Tesla can only scale so quickly, but eventually they will reach a scale where they can catch up on orders and deliver a completed car to a customer within days of them ordering it. Tesla's online, haggle-free, software-heavy approach to vehicle configuration, production and delivery drastically cuts the minimum lead time possible. This is how Tesla avoids inventory costs and write-downs on overstock and doesn't have to own a giant portfolio of real estate for traditional dealership parking lots.
Tesla has just 4 days of sales' worth of completed vehicle inventory on hand. No dealerships, customer order fulfilled within days of vehicle leaving factory.
In Q2 '22, Tesla had $8.1B in inventory on their balance. Tesla's 10-Q filing (link) for Q2 showed that the majority of the inventory was raw materials.
This is shockingly low, because their quarterly gross profit from operations was on average $4.8B in the first half of 2022. $8.1B / $4.8B * 3 months = 5 months of total cash flow from operations worth of inventory. This is very impressive when you consider that Tesla manufactures a lot of parts from scratch in-house and also owns their own distribution and service network for the customers, all of which means a significant amount of raw materials and work-in-process.
By comparison, Toyota's Q1 report showed they had a staggering $34B of inventory! However, this shot up recently due to supply chain shortages, so let's use their prior average inventory level of $23B. Toyota's quarterly revenue is usually ~$65B, so this is 23/65*91 = 32 days of sales' worth of total inventory for Toyota. This seems better than Tesla until you realize Toyota outsources a bunch of their raw material and work-in-process inventory cost to suppliers and doesn't have the dealership inventory.
I wrote about the benefits of Tesla's inventory minimization earlier this year.
Tesla had a rough start with vehicle build quality but now leads the industry in the parts where it matters, and this is mainly due to radical simplification, design for manufacturability and ever-improving software and global team. As Elon has remarked, the tendency is for companies to slow down their rate of innovation as they scale, whereas incredibly Tesla's rate of innovation is increasing as they scale and it seems like they're just getting started.
There's not much to add to this section that I haven't already written about, because all of the wastes we want to reduce in lean design are connected. Deleted parts and processes can't be defective, because they don't exist. Quality is about reducing variation, and nothing can reduce variation more than eliminating a part or process. For the rest, the Tesla Automation team helps by making much of the production process be performed by reliable machines.
- Gigacastings have millimeter-level precision and consistently produce structures within tight geometrics tolerances because of lack of machining and lack of tolerance stackup of multiple small parts joined together. It's physically impossible to match this precision with traditional techniques.
- According to an interview with a local Tesla China executive from Giga Shanghai, all of Tesla's wrenches are digital to ensure correct torque and recording data when it's applied.
- Dry battery electrode deposition eliminates solvent and high heat in evaporation ovens, which should improve yield for that production step after the process is honed.
- Tabless electrode design eliminates possibility of defects from traditional tab welding
- Structural battery pack design allow for much easier and more ergonomic general assembly for the cabin.
- Octovalve and supermanifold thermal management system architecture deletes a bunch of hose routing, clamping and termination operations
- Munro teardowns have shown continual removal of screws and other threaded fasteners, increasing usage of plastic snap-fit parts, and in general lots of clever poka-yoke (mistake-proofing, designing part to be physically impossible to be installed incorrectly)
- Tesla latest generation of motor and battery pack assembly almost entirely automated
Back in the 1950s school of management thought, it was commonly accepted that labor relations conflicts were an unavoidable part of the manufacturing industry, that injuries were the unavoidable price to pay for production, and that manufacturing technicians were to do exactly as they were told and follow orders, just as their supervisors were expected to obey orders and so on up the "chain of command". People at the bottom were often berated and openly disrespected by management. Supervisors blamed employees for problems caused by variation, even though most the variation was caused by the system and the product design.
I think the greatest irony in this story is how the United States of the early Cold War years was obsessed with preserving free-market capitalism with generally free social policies, yet in that same era Americans tried to run their own private companies like miniature communist economies complete with centrally planned top-down control, suppression of opposing thought, enforcement of social conformity through at times arbitrary and capricious rules, and poorly aligned incentives that failed to encourage workers to give their best work, Big industrial companies also usually made the people working there feel like mindless drones whose ideas didn't matter and whose creative instinct was worthless, even though they were the people closest to the work with the best understanding of the processes. People didn't have authority to make decisions directly related to their work and there was a communication bottleneck caused by the chain of command edict that all communication to other managers should go through one's own manager. From a modern perspective we can easily see the obvious negative consequences that such poor management would have on safety, quality, productivity, employee retention rates, and most of all innovation, but in the 50s this was generally accepted as the normal way to run a company.
Toyota and the other Japanese industrial rising stars of the 1950s started looking at management differently. At Deming's recommendation, they started viewing their workforce as competent human beings who had ideas about how their work should look and what investments should be made to improve it. They believed if people were treated well and given room to improve their work, they will come up with ideas management never could have thought of. Managers offer ideas to, but it's much less about command and obedience than it was about collaboration. Controversially, Toyota even gave individual line employees the authority and responsibility to hit a button to stop the line whenever a quality issue arose, and then teams would swarm to solve issues directly on the production line. Taiichi Ohno would take chalk and draw a circle on the shop floor and instruct managers and engineers to stand in the circles for hours and observe production until they developed an understanding of what was going wrong for their team. Toyota also avoided having any layoffs for decades. On the technical side, they began capitalizing on Deming and Juran's methods for richer data collection and statistical analysis for root cause corrective action, prioritizing what to go after in kaizen efforts based on frequency of occurrence and magnitude of problem. This system inspired incredible employee loyalty and devotion, and it unleashed their creativity in the most efficient way possible because of the prioritization aspect. As a result, Toyota's pace of innovation, especially in manufacturing technology, dramatically outpaced everyone else in the car industry and they reaped the rewards of having more satisfying work that had fewer problems and earned big profits.
Elon spends the vast majority of his time these days right on the line with production teams, and observing for himself what was going on and how to help fix it. This is a very good sign. The Vice President of Tesla China also has said he spends a big portion of his day walking the line first thing in the morning after getting off the 6 AM call with the North American team. This is exactly what I want to see Tesla executives doing. There is no substitute for actually being next to the action. The amount of information you can absorb and process efficiently with your own senses is much greater than the information you can get from secondhand communication. The job of the plant management team is to set the team up for producing quality with systematic elimination of waste. So it's fundamentally better for the management team and other support teams like engineering to be at the production line where the poor quality and waste is happening and also where they can get rapid empirical feedback on whether their attempted innovations actually were working as hoped or not. This practice speeds up the maximum possible rate of innovation. In other words, it is waste of underutilized talent both in management and employees if employees are not authorized to make substantial decisions affecting their works, and also a case of underutilized talent in support groups wasting precious time and opportunity sitting in an office instead of being lineside. Since Tesla overwhelmingly avoids BS wastes of time like low-value email, useless meetings (most of them) and PowerPoint presentations, Tesla uses their talent to its maximum productive capacity.
Tesla empowers all the employees to make changes. Elon has mandated that the organization is flat and that everyone has an obligation to solve problems with their own brains and an obligation to speak to whomever is necessary for solving the problem. Also Tesla employees are required to experiment with changes in an attempt to innovate or else they will be fired, but on the flip side there's little to no punishment for sincerely trying to innovate and failing. This simple incentive structure produces a lot of extrinsic motivation for a ridiculous amount of innovation and unleashes the potential of the workforce, making them want to work long, hard hours because they're having fun and solving important problems at ludicrous speed, which generates excitement. The Tesla Anti-Handbook Handbook (link) emphasizes this point:
Elon has also said everyone is supposed to think as though they were Chief Engineer. Workers don't waste time waiting for authorization to do things, and their ideas can be experimented with immediately instead of percolating through four layers of management in the "chain of command". They also minimize time wasted in meetings, even developing a new social norm of getting up and quietly leaving a meeting if you think you can add more value to the company by not being there. Joe Justice has harped on this point repeatedly.
Here's an excerpt from a big leaked email from 2018 sent by Elon to all employees (link):
Toyota is still the most profitable manufacturing company in history other than Samsung and TSMC, but Samsung and TSMC make their money selling high-margin semiconductor chips that require extremely advanced fabrication techniques and heavy capital investment in R&D and facilities. The semiconductor fabrication industry, unlike the car industry, has always tended towards having a couple dominant players making almost all the profits. TSMC and Samsung make gross margins of 40-50%. Toyota gets gross margin of more like 17-20%, which is exceptionally good for a manufacturer in a competitive industry selling their kind of volume.
Toyota has been an outlier in the global manufacturing industry for decades, but the days are numbered for Toyota's reign. Toyota epitomized the Japanese quality revolution and transformed how the world thinks about manufacturing and many other industries. Yet now, Tesla is mere months away from permanently surpassing Toyota in net income, despite Toyota having 5x greater unit volume, a 69-year head start, and much more old vehicles past their warranty expiration date generating high-margin sales for replacement parts. Tesla is beating Toyota by an enormous margin, and as they scale production in the next few years this gap will become ever more apparent.
Meanwhile, it appears that Toyota has calcified, lost their innovative edge, and are being mismanaged by their current CEO who probably was selected based on nepotism (considering that he is the grandson of Kiichiro Toyoda, the founder of Toyota's car division). As an outsider, I can only speculate. Perhaps complacency and haughtiness crept in over time. Akio Toyoda blamed it on excessive focus on growth in the 90s and early 00s (link). Overall, it seems to me that like so many individuals and organizations, Toyota has gotten away from disciplined application of the principles that made them successful in the first place, and they now find themselves in Stage 3, "Denial of Risk and Peril", of Jim Collins' organizational decay arc described in How the Mighty Fall.
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What's even crazier is that Tesla is accomplishing this with only two products pulling almost all the weight, Model 3 and Model Y, and these are arguably just two variants of the same product, considering that they share 75% of their parts in common. The $65k+ Y is soon going to be outselling the Toyota Corolla, which has firmly held the top spot for half a century. Toyota has a diverse product portfolio serving a wide variety of market segments. Tesla still hasn't even begun to sell their best product, the Cybertruck, which is going to knock another half-century king off the throne: the Ford F-150. This all means that Tesla still has plenty of room to expand their range of offerings over time. Therefore, Tesla has a clear path to leveraging their design, manufacturing and distribution advantages across at least 10x as many car deliveries, because the S3XY lineup only addresses ~10% of the car and light truck market. Tesla's automotive division, excluding the FSD wildcard, is likely to be at least 10x the money-printing behemoth that Toyota has been.
The disruption that Toyota, in its heyday, brought to the automotive industry ended up radiating out to the entire global economy. What then will happen when Tesla makes an impact that dwarfs what Toyota did in the 20th century? Everybody eventually copied Toyota, or at least tried to, or failing that, at least paid lip service to trying. Toyota's success was too undeniable to ignore, and most people are followers anyway, including many of those who like to fancy themselves as leaders and independent thinkers. People, and especially kids, look to the high-status winners on top and attempt to emulate their behavior, often without even conscious awareness of the emulation. Tesla's success will be an order of magnitude more undeniable just on the car manufacturing business, not even counting the potential of FSD, Energy or Optimus. As the leader to whom everyone will be looking, Tesla will actually start influencing the entire macroeconomy, like Ford and Toyota before them. We can already see the beginnings of this with Ford and Volkswagen admitting that Tesla is kicking their asses and they need to copy Tesla as fast as possible. I expect this will eventually spread to all manufacturing companies.
Bernie and AOC will want to keep it going and pay for it with taxes on the fossil fuel industry.
I believe the 15% is on global profits as per the 10k/10Q (book income not tax income). Since Tesla already pays about 11% globally, the increased taxes will only be about 4% for Tesla. However, there are some deductions that will be allowed which can bring this additional 4% down.
I have a question for @The Accountant or anyone else who might know.
www.teslarati.com
www.teslarati.com
Toyota's keiretsu partners (Denso etc) do build the machine that builds the ... etc.
As far as I know, Toyota uses a lot of ma and pa single purpose manufacturers as suppliers (e.g. they have one machine to make one part). I believe Toyota supplies the equipment (on terms) and the equipment is only useful for Toyota. This locks them into Toyota, what Toyota is willing to pay for the parts, and when Toyota no longer needs that particular part, it's a big problem. What I don't know is the percentage of this kind of small manufacturing supplier is compared to the total number of parts. Also this information is somewhat dated, so I don't know the current status.
I agree there may be some tracking on Cost of Sales, but negative expense doesn't make sense to me.
