How does Elon Musk apply first principles thinking to Tesla's battery costs?

Okay, explaining this isn't complicated; let's use an analogy.

Imagine you want to make a delicious "braised pork," but you don't know how.

Most people's approach (which is "analogical thinking") would be to check how much the most popular restaurants sell a plate for, say 100 yuan. Then they'd think, "Can I find a way to reduce the cost of this dish from 100 yuan to 90 yuan? For example, by using a cheaper plate or putting in two fewer pieces of meat?" This way of thinking offers little room for improvement because you're assuming "braised pork" is a whole, and its price should be around 100 yuan.

But how would Elon Musk's "First Principles Thinking" approach this?

He would directly break down the "braised pork" dish into its most basic, irreducible elements: pork, soy sauce, sugar, spices, water, gas, and labor.

Then he would check the market for:

• How much does a pound of pork belly cost?
• How much does a bottle of soy sauce cost?
• How much does a pound of sugar cost?
• ...

After calculating the cost of all these basic ingredients, he might find that the raw material cost for a plate of braised pork is actually only 20 yuan.

Now the question arises: Why do the raw materials only cost 20 yuan, but the restaurant sells it for 100 yuan?

This huge 80 yuan difference is what "First Principles Thinking" aims to tackle. This difference includes the chef's salary, restaurant rent, brand premium, inefficient procurement processes, and so on.

Now, let's replace "braised pork" with "Tesla batteries."

When Musk entered this industry, everyone thought batteries were too expensive and were the biggest obstacle to building electric cars. At the time, the cost of a battery pack on the market was about $600 per kilowatt-hour. Everyone accepted this price and then tried to make minor optimizations based on it.

But Musk didn't think that way. He started to break down the battery: What exactly is a battery pack made of? He found that it's nothing more than some metals and chemical materials: cobalt, nickel, lithium, aluminum, carbon, plus some polymers and a steel/aluminum casing.

Then, he had his team check the spot prices of these basic raw materials on the London Metal Exchange. The result was that if all these raw materials were purchased and assembled into a battery pack, the theoretical material cost might only be $80 per kilowatt-hour!

What accounts for the huge gap between $80 and $600?

It's others' patent fees, multi-layered subcontracted supply chains, inefficient manufacturing processes, middlemen's profits...

So, Musk concluded: The high cost of batteries isn't because the raw materials themselves are expensive, but because the "process" of transforming them from raw materials into a final product is too expensive and inefficient.

Once the essence of the problem was identified, the solution became clear:

1. Do it themselves! Tesla decided to build its own "Gigafactories," taking control of all stages from raw material processing to battery pack assembly.
2. Optimize the supply chain. Procure raw materials directly from mines, cutting out all middlemen.
3. Innovate manufacturing technology. Redesign battery formats (e.g., from 18650 cells to later 2170 and 4680 cells), invent new, more efficient production lines, and minimize manufacturing process costs.

Through this approach, Tesla managed to break down a seemingly "exorbitantly priced" component into several "cheap" raw materials, and then, by restructuring the entire production process, significantly reduced costs.

In summary, Musk refused to accept the industry consensus that "batteries are inherently expensive." Instead, he returned to the essence of physics and chemistry, asking "What is a battery actually made of?" Then, starting from the most basic costs, he redesigned the most efficient and lowest-cost path. This is the power of First Principles Thinking.