The Rapid Innovation Driving Tesla’s Success

Tesla these days, the company is a household name, and quite rightly so. They currently make four different electric vehicles, and in 2021, they sold the first and third most popular electric vehicles worldwide. What's even crazier is that now, about halfway through 2022, their order backlog is so long they're actually considering taking down the order pages for some of their cars. No doubt Wall Street has definitely clued in on their popularity across recent years too.

Despite the stock almost halving in 2022 with the broader tech sell-off over the past five years, the long-term Tesla shareholder is about 10 times richer than they were in 2017. In fact, the stock is up so much, the market is currently pricing the business at a P/E ratio of about 90. But why is that? Why does the stock market, which is literally 80 professional money managers, give Tesla such a large valuation, the largest valuation of any car company in the world? A car company that isn't even close to delivering the unit numbers of the biggest manufacturers like Toyota or Volkswagen or Ford?

The answer is Tesla and Elon Musk's unrivaled devotion to product and manufacturing innovation. We're here at the Texas Gigafactory. Help us try to picture what it would take to build a future that's worth getting excited about. I think we will have a world of abundance. Any goods and services will be available to anyone who wants them. It'll be so cheap to have goods and services; it will be ridiculous. You start to test it with the goal of persuading the world that electric cars are the future. Tesla's at the apex of electric cars right now, and a few years ago, people were laughing at you.

Now, thank you, thank you, Travis County. To explain more, here's me on the other side of the world with a lot of construction going on around me and with an insanely strong wind blowing hair into my face. I'm currently here at the Gigafactory here in Austin, Texas, and this Gigafactory is the perfect demonstration of Tesla's devotion to both self-improvement and innovation.

Elon Musk opened the Texas Gigafactory on the 8th of April this year, and with this shiny new factory also comes three major innovations that help push Tesla even further ahead of their competitors. Firstly, the factory itself. This building is the most advanced car factory that Earth has ever seen, and it'll be busy too. The capacity? 500,000 vehicles. That's what they believe they can ultimately achieve.

At the moment, this whole factory is tooled to build out the Model Y. But what's interesting is that Tesla also builds the Model Y in Fremont, Shanghai, and also in Berlin. But this factory is quite a bit different from all the other ones. Why? Because, unlike other companies that will adopt a pretty simple duplication strategy, where if they've got something that already works, why not just copy it for the next one? Tesla is always focused on trying to make their next factory more efficient, even better.

For example, I'm going to show you the floor plan of Tesla's original factory in Fremont. This is what it looks like, and now have a look at what the floor plan looks like for this factory. As you can tell, the Texas Gigafactory has a much more streamlined production process versus where they started in Fremont back in 2010. That's because, over time, Tesla has obsessed themselves with improving not only the cars but the factories that build them. The machine that makes the machine.

Relative to production, prototypes are easy; production is hard. The factory is the product, and what this means is that over time, each one of these giant factories gets more efficient, easier to build, and it costs less per unit of production volume. I mean, we have some good existent proofs, right? Like, we've built the facility here in Texas; we know how much we spent, and it's more than 5x less than prior technology installation. So we're saving huge on capex, on utilities, and personnel. We know what those loads are and how many people are needed to run a highly automated factory, and we have massive reductions in both of those.

Hear that? Five times less costly than prior factory kit outs, and the factory has higher production capacity. So that's the factory itself, but now let's turn our attention to what's being built inside. What's interesting is that most auto manufacturers, despite calling themselves manufacturers, what they really like to do is draw in thousands of different parts from different suppliers, stitch them together, and then put their own badge on the product and ship it out the door.

What does a typical car company do? Like GM? Ford? What they do is they assemble vehicles and they send them to dealers and they manage the supply chain. They typically will make the engine, but most of the parts are made by suppliers. A lot of the actual technology development is done by suppliers. They don't do sales; they don't do service.

In the case of Tesla, for example, we make the battery pack, the power electronics, the drive unit. We're more integrated in the parts we actually make. So much of the car – well, the entire global Supercharger network – and then Tesla is as much a software company as it is a hardware company. Tesla, while they still do have a lot of suppliers, don't get me wrong, has always had a very strong focus on vertical integration. Essentially, they want to control as much of the production process as they can because what that means is that they can constantly tinker with the design of their vehicles to consistently make them better.

In the Texas Gigafactory, that advantage is now really shining through because interestingly, the Model Ys coming out of this factory are not the same as the Model Ys that started production at their Fremont factory a few years ago. Tesla's focus on vertical integration has given them the flexibility to actually go back to the drawing board and redesign the entire structure of the Model Y and how it's built in this new factory.

You see, if we look at Tesla's Model 3, which is their newest car prior to the Model Y, this is what the body structure looks like. As the chart shows, there are 171 separate metal parts highlighted by the colors. But if we look at all of those same zones on the new Texas-built Model Y, they've been able to turn 171 parts into just two. Two! How's that for an improvement in manufacturing efficiency?

But you see, they didn't have to do this. The Model 3 is still a profitable car, it's still extremely safe, gets great reviews. They could have just adopted a similar design for the Model Y, but because of Tesla's relentless pursuit of improvement and greater efficiency, they went back to the drawing board and started over with a completely new manufacturing technique.

But now, in this factory, they use huge casting machines to essentially cast a solid piece of metal for the front of the car, a solid piece of metal for the rear of the car. What you're looking at are the biggest casting machines ever made. It's a revolutionary car manufacturing approach to basically make a car out of three major parts: a casper, a structural pack, and a cast front.

What this means is Tesla cuts out a massive chunk of complexity, time to manufacture, weight, and importantly, cost. Ultimately, this gives Tesla a massive advantage over other car companies as their margins are higher. You know, in 2021, Tesla's operating margin was 12; Volkswagen's operating margin was 8, and they don't expect their EV business to run at the same margins for two to three years. Toyota's was 8 percent, Ford's was 3.3.

In fact, Mercedes is the only one on par at 12, but unfortunately, again, that's based on ICE cars rather than electric vehicles. So there's no doubt Tesla's innovations in manufacturing have put them a long way ahead of all other EV programs. But as impressive as that is, that's not even the number one innovation coming out of this factory.

The number one innovation that's now coming out of Gigafactory Texas is the 4680 battery cells. What is this? That's the progress so far in the Gigafactory, the biggest cell factory in the world, capable of producing like 100 gigawatt hours of batteries a year. Since you guys put out this video, how does that speed it up? That's the slowed-down version.

Yeah, how fast does it actually go when it's running at full speed? You can't actually see the cells without a strobe light. We're building our own battery cells, the most advanced cell in the world, here at Giga Texas. As was discussed at Tesla's Battery Day in September of 2020, over time, the improvements to the cost per kilowatt hour of battery production were unfortunately plateauing.

We've given this a lot of thought over many years. The cost per kilowatt hour of batteries is not improving fast enough. Now, this was a big problem for Tesla, as the battery pack is the most expensive part of the car, and it's what's been keeping EVs comparably more expensive than internal combustion engine cars.

But seeing this, Tesla, being hyper-focused on their pace of innovation, decided to take matters into their own hands. They designed a revolutionary new tabless battery cell architecture, bigger, better cells that were 100% optimized for use in Tesla's vehicles. And the result? This battery cell architecture designed and manufactured by Tesla themselves reduces the cost per kilowatt hour by 14%. Yes, you heard correctly! Just by going back to the drawing board and designing the optimal cell form factor alone reduced the manufacturing cost per kilowatt hour by 14%.

But that's just the cell itself. When you also factor in the innovations and efficiencies in Tesla's battery manufacturing process, that adds another 18% reduction in cost. It doesn't stop there. Factor in changes to the anode, 5% reduction in cost; cathode, 12%; the battery pack now being a structural middle piece of the car, 7% overall.

The innovation and re-engineering of this whole process gives Tesla a 56% reduction in cost per kilowatt hour of battery production. And you guessed it, right now Tesla are the only ones that are making this revolutionary new battery cell. Even better, from the get-go, every single Model Y coming out of the Texas Gigafactory features these brand new cells.

So, not only do you have improvements to the factory itself at Gigafactory Texas, you also have major efficiencies in the manufacturing of the vehicle body and major innovations to lower the cost of that battery pack. That describes Tesla's fundamental competitive advantage. Elon has described himself in terms of our competitiveness.

I think it mostly comes down to our pace of innovation. Our pace of innovation is much, much faster. The most fundamental competitive advantage you can have is a higher cadence of innovation than your competitors. If you can always achieve that, then it's impossible to be overtaken.

So, while it might be a little bit boring to look at a big old car factory, this new Gigafactory in Austin, Texas really holds the secrets to Tesla's future. It's a fantastic illustration of the company's culture. It's not about doing share repurchases or finding new investors, like we normally see on Wall Street; it's really about engineering and trusting that if you stay focused on constant improvement, then everything else will follow. And so far, it's definitely working for Tesla.

But that will do us for today's video, guys. Be sure to leave a like on the video if you did enjoy it, subscribe to the channel to see more. Links to the other stuff that I get up to are down in the description below if you want to check that out. But thanks very much for watching, guys, and we'll see you in the next video.

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