We almost went bankrupt because we didn't have the cash flow that we had predicted coming off a Model 3. And the only way we saved ourselves was to go back to the manual process. We literally built a tent in the factory outside and produced cars by hand. First 100 a week, then 500 a week, etc. until we could actually build an automated line that reflected reality. When we looked back on that and said, 'Look, we almost killed the company. What would we do differently?' We said automate last. You've got to perfect the process before you automate. Otherwise, you just might bury yourself. And in that case, we almost did.
Hi everyone, I'm Nicolai Tangen, the CEO of the Norwegian Sovereign Wealth Fund and today I'm in really good company with John McNeill. Now, John spent three years reporting directly to Elon Musk as president of Tesla, then was chief operating officer of Lyft, and now he builds companies at DVX Ventures. Lots of people have worked for Elon, but John actually wrote a book about how to do things, the algorithms, which basically lays out how Musk used to build Tesla and SpaceX. And so, today we are going to go through this, you know, point by point so that you also can sort out your business and make it a huge success. So John, big thank you for coming on here.
It's an honor to be on with you, Nikolai.
Now, step one, question every requirement. Tell us about it. What are some of the simplest examples of things you need to question?
I think the simplest example is you start to question everything. And because often times people who have been in a business or looking at a problem for a long time have not questioned the base assumptions. And so one of the first steps we took towards innovation at Tesla was look for those places that hadn't been touched in a long time by interrogation or questioning and really start to question them because when you start to question these assumptions many of them fall by the wayside as unproven.
Give me some examples, some of the stuff that you questioned.
Yeah. So like we were trying to sell 100,000 euro cars online for the first time anybody had done this in 2016 and every person that's in e-commerce knows that the more clicks you have the less conversion you have to the actual sale. We had 64 clicks when we started out. And you could design anything on the Tesla. You could pick your colors, your materials, your front motor, your rear motor, whether you wanted Ludicrous, etc. So the first assumption that I questioned was do we need a true build to order system and it turned out that when you quantified that we had over 300,000 different combinations that we were trying to build as a first stage manufacturer makes life really hard. So I went to the team and I said hey look I think we could make our lives a lot easier. I could remove a lot of clicks from the process. I think we could sell more cars if we could kind of just coalesce around the data. And what the data says is people really buy two cars from us. They buy a performance car or they buy a long range car. So, how about we just have two models. We'll let people choose the colors for sure. But then we'll be able to manufacture to scale and we'll be able to size our supply chain to scale. I had been at the company about a month when I brought this to the rest of the team and I sort of was ducking for cover as I presented it and the head of manufacturing looked up and he said, 'Do you know what this would do to me?' And I said, 'No.' He said, 'You would make my life 10x easier.'
And then the head of supply... not a bad thing. Why? Why is it so difficult for people to break rules, to change rules?
I think number one, humans are natural complicators, not simplifiers. You know, Mark Twain had the famous line, I would have written you a shorter letter if I would have taken the time. It takes work to simplify and very smart people, very bright people tend to complicate rather than simplify. And so questioning assumptions is the first step to simplification. And a lot of people avoid that and don't do it. And we just tried to build the muscle memory in ourselves and to the organization. First step is simplify, simplify, simplify. And the first step to that is question the assumptions that are put in front of you.
Was there some things that people thought were untouchable which you also touched?
We touched auto financing. So it's one of the worst parts of the customer journey but it's also one of the most complex parts and around the world an auto lease or auto loan document is about 12 pages long with dozens and dozens of paragraphs. So one day I questioned our lawyer and I said why do we need these 12-page documents? How many of these paragraphs are the requirement of law or regulation? He said, 'That's a great question. Nobody's asked that before. Let me come back to you.' He came back and said, 'Precisely none.' And I said, 'Are you kidding me? None of these are the requirement of law or regulation?' He said, 'John, it's worse. We have all the case law in place to back us up. If somebody doesn't make a payment on a car, we can go get the car. That's inscribed in case law around the world. We don't really even need most of this document.' And so I said, 'Could we have a one-page or one paragraph agreement then? I'm agreeing to pay this much for the car at this interest rate over this term and here's my monthly payment.' He said, 'We can't.' So we...
How do you tell a dumb rule from a rule that makes sense?
Rules that make sense are in our world a requirement of safety, of law, or physics.
And those are kind of immutable. So if there's an assumption based on those, it's a good one. Everything else is in the dumb category until proven otherwise.
Okay. Step number two in your book, delete every step.
So how does that, what does that look like?
So that then the practical step that we had our managers take was to literally take a wall and put sticky notes on the wall and map the entire process that we were looking at. So whether it was a manufacturing process, a sales process, map each step and then put a sticky note for each substep underneath the step and then we would ask the critical question which of these steps does the customer pay us for? They don't pay us for quality checks. They don't pay us for purchase orders. They pay us for the product. So which of these things, circle the things that are actually involved in producing the product. When you do that, it looks like about 90% of the steps may not be necessary.
Tell me about some of the step stuff you cut.
Yeah. So, there was in some manufacturing processes and some loan processing processes a quality check between each step. So, a person would do work, it would sit and wait, a quality person would look at it, it would sit and wait, it would go back into the flow. We took the quality checks and eliminated them and basically said to the person doing the work, you do not pass this along until it's ready to be passed along and therefore we don't need a quality check. And we said to the person downstream, if it's not of high quality, you can pass it back and we're measuring the passbacks and so we can tell where the good quality is and where it isn't. And that helped us eliminate quality checks which exist in every organization worldwide.
I think there's a quote from you somewhere. The best part is no part. But I mean clearly if you got no part, you got no business. So you know, examples of things where you took away too much and had to add back.
Yeah. There's plenty of those. And so that was a clue to us when we had to start adding back. We'd cut too far. But to your point, the best part is no part. What that means is can we combine things? And so for instance in an electric car you have a cooling system that cools the battery and you have another cooling system that cools the cabin for the passengers. We said hey the best part is no part can we eliminate one of these and combine it. And so Teslas today have one single heat pump system that cools the battery and cools the cabin rather than two. That's one less system that can break and one less system that we have to manufacture.
Rule three, simplify. It's good. You must be impressed that I read the book.
Yes. Yeah. No, I know it by heart, John, you know.
Yes. Yes. This is wonderful. Okay. Simplify and optimize. So, how is kind of simplification different from deleting things?
So, once you've deleted, now you've got a new process that you have to try out. And it's got a whole lot less steps and so what we do in the third step is we put that new process together. And we start to test it manually first. This is hard for technologists because we all want to put hands on keyboards especially in the age of AI. We want to rush to the digital solution. And what we insist teams do is they manually run the process first. And then start to add the fourth step which is the magic ingredient of speed because speed reveals where the process breaks. And a lot of people say you can't get good, fast or cheap. Pick two. It turns out that really great process yields good, fast and cheap. It's got to be high quality to run fast. And once you're running fast to high quality, you're running high throughput and so you're actually getting cheap. So we combine really those steps three and four to say start to run the process and speed it up, speed it up, speed it up, speed it up.
When is simple simple enough?
I think in our case we tried to achieve margins that were twice the margins of the industry. And so we started out above that. We set a goal for ourselves of gross margins equal to Apple. And Apple's gross margins are roughly 30%. The car industry's gross margins are roughly 10. And so we aimed for 30 and said if we can reach this, we're going to be world class. And for years, the gross margin hovered between 24 and 28%. So we were more than almost two and a half times the gross margin of our competitors. And that's the metric we used. We had a hard time defining what perfect looked like, but we knew what great looked like. And so we started to aim for great with a financial metric that the markets could understand, the investors could understand.
Now speed. Step four, accelerate cycle time. So first of all, why does speed come in so late in your strategy?
Basically, because you have to, if you speed up a bad process, you're just getting to the bad answer faster. This is ubiquitous with AI right now. People throw AI into an existing process. And you're not only getting to the bad answer faster, you're getting to the bad answer more expensively because you're spending tokens. And so we introduce speed after we've insisted on simplification, deleting, simplify. And now we're going to add speed to really polish this process and have it first reveal its faults. Because it's hard to get speed with faults and so naturally in any new thing you start to show faults first. You remove those and speed starts to accelerate. So in the example of like the Model 3 or Model Y when we started production we wanted to get 50 cars a week through the production line. Then we sped it up to 100. So we doubled it. Then we doubled it again to 200. Then more than doubled it to 500. Then doubled it again to a thousand.
What's the key to get people to get the finger out?
Get the finger out in what sense?
Yeah. The key is really two things. One is perfecting the, eliminating downtime in the process. So, most process speed gets lost in downtime. Just things sitting in between steps and a speed goal helps you eliminate those very quickly and so you get your biggest gains from eliminating actually where the thing's not moving. And then secondly you get a lot of muscle memory from practice and people get better with repetition and machines actually get better with repetition too.
I can't remember which Formula 1 driver said that for the perfect machine speed is a unifying force.
I think it was either Schumacher or...
Schumacher I think was, yeah, at least it gets attributed to Schumacher but exactly.
Speed is the unifying force in almost any process and whether that is a piece of software or a piece of hardware or a manufacturing or a customer delivery process speed is the great differentiator.
Why is it so difficult to get people to hurry up?
I think it's a mindset. We actually learned this from the Japanese. You know, the people at Toyota talk about a very different financial metric than the rest of the people in the industry. They talk about velocity of cash and everybody in that organization is wound around when we take a dollar in, how fast can we turn that into a dollar profit. And an example of that is when we started to produce the Model 3s and Model Y's, it took us about 15 days from a pile of aluminum to a finished car. It took Toyota four. So what that means is Toyota needs two and a half times less working capital than we needed. And that measure of speed is a mindset at Toyota and we try to make it a mindset at Tesla and I try to make it a mindset now the businesses that I'm involved in is these speed metrics especially velocity of cash is really kind of the highest level of competition in business.
How have they managed to make it a mindset in the whole of China? China, I think, absolutely understands. They're excellent at going to school on the best of the best and they went to school in their next door neighbor, Japan, and said, 'How can we replicate this?' And they start with brute force with the 996.
9:00 a.m. to 9:00 p.m. 6 days a week. That's brute force. But then they...
That doesn't really pass labor laws in many other countries we know.
Exactly. Exactly. So then they move to automation but they move to perfection process before they move to automation. So they start with brute force then they move to perfect process and then they automate. And they've got speed goals at every step of the way. And so they were able to build factories for us in less than half the time we could do it in Europe or in North America.
You went to a weekly heartbeat. What does that mean?
So, the weekly heartbeat means we wanted to know that we were going to make our quarter on a weekly basis. I had an old mentor that said, 'If you want to make a quarter, make your month. If you want to make your month, make your week. If you want to make your week, make your day. And if you want to make your day, make your hour.' And so, rather than going completely off the deep end and saying to people, 'We're going to have an hourly heartbeat,' we had a weekly heartbeat. But that meant that Elon could walk up to me on any given point in time and say, 'Are we going to make our quarter?' And I could with certainty give him an answer. Because I knew what the pulse of the business was. And so every week that weekly heartbeat was pulling together the demand side of the business and the supply side and making sure that we were absolutely in sync. Even though we were being thrown curve balls with tariffs and with supply issues, etc., we were going to make our quarter one way or the other. And we were going to exceed it if we could.
