Cincinnati: Hot Days, Cool History & the Open Road

We almost went bankrupt because we didn't have the cash flow that we 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 hands 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 in that case we almost did. Hi everyone, I'm Nikola Tangyan the CEO of the Norwegian Sewing 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 coming on here. It's an honor to be on with you Nikola. 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 examples you start to question everything and because oftentimes 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 when you start to question these assumptions many of them followed by the wayside is unproven. Give me some examples some of the stuff that you questioned. Yeah so 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 question an 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 as a first-age 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 their 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 the supply chain said not a bad thing exactly 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 shoulder 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 questioning assumptions that are put in front of you what's the 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 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 so the requirement of law or regulation you said this is a great question and we asked them before let me come back to you you 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 that's in inscribed in case law around the world we don't really even need this 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 so how do you tell so how do you tell a dumb rule from a rule that makes sense rules that makes 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 yeah 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 sub-step underneath the step and then I 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 percent of the steps may not be necessary tell me about some of the some of the stuff stuff you you kept yeah so yeah there was in some manufacturing processes and some loan processing processes a quality check between each step so a person would do work you 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 it's it's ready to be passed along and therefore we don't need a pot quality check and we said to the person downstream if it's not a high quality you can pass it back and we're measuring the past backs 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 but what I think there is a quote from you somewhere the best part is no part yes clearly if you go no part you go 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 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 Tesla 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 huh you you must be impressed that I read the book yes yeah no I know it by hard job you know yes yes it's 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 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 and then start to add the four 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 faster 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 a high quality you're running high throughput and so you're actually getting cheap so we 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 what when it's simple simple enough I think in our case we tried to achieve margins that were twice the margins of the industry and so we and we started out above that we said we said 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. Instead, 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 2 and 1/2 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 aimed for great with a financial metric that the markets could understand and 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 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 introduced 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 three or model why 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 double it again to 1,000. And each of those stuff-- what's the key to get people to get the finger out? Get the finger out in what sense and just get the speed up. 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 speed helps you-- 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 One driver said that for the perfect machine, speed is a unifying force. Yes, he was either Schumacher or-- Schumacher, I think-- is-- 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 manufacturing, or a customer delivery process. Why is it so difficult to get people to hurry up? I think it's a mindset. We actually learn this from the Japanese. 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 Ys, it took us about five days from a pile of aluminum to a 15 days, from a pile of aluminum to a finished car, it took Toyota 4. 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 not mindset now the businesses that I'm involved in is the speed metric, 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 going to school on the best of the best than they went to school in their next door in New York, Japan. And so how can we replicate this? And they start with brute force with the 996. And so many-- Explain the 996. 9 AM to 9 PM, 6 days a week. That's brute force. But then they-- That doesn't really pause. That doesn't really pause labels in many of the countries we know. Exactly. So then they move to automation. But they move to perfection process before they moved 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 unless the 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 corridor on a weekly basis. I had a little mentor that said, if you want to make a corridor, 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, we're going to make our corridor. And I was certain to 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 curveballs with tariffs and with supply issues, et cetera, we were going to make our corridor one way or the other. And we were going to exceed it if we could. Last step, ultimate. Yes, this is last because automation is like a concrete that you pour over a process. And once you do, to remove, it takes a jackhammer. So you had to be very careful when you pour that automation in. And a lot of these steps of the algorithm we learned by making mistakes and doing post mortems and say, how would we avoid this? And we famously made a big mistake with the introduction of Model 3. We were talking about production hell, but production hell was largely of our own making. We had designed the most automated manufacturing line in the history of automotive manufacturing, and we designed it entirely digitally. And we designed the machines digitally and laid out the factory digitally and put all the automation in place before a single brick was laid in the factory. Then we went to install the machines on the factory floor, and I remember walking the floor with Elon. And I looked at two machines, and I literally out loud said, oh, God. And he said, what's matter, what are you talking about, what's your problem? I said, look at these machines. They have to be calibrated every hour. And that means that humans have to get in there with tools. And the machines are six inches apart. We've designed this digitally. We didn't design it in the real world. And now we're going to have to take this whole thing apart. And that was one of many examples of what went wrong on that line. That line never went into production as a result. We almost went bankrupt because we didn't have the cash flow. That we 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 and 500 a week, et cetera, 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? You've got to perfect the process before you automate. Otherwise, you just might bury yourself. In that case, we almost did. So what should be-- what should be able to make it? And what should be kept manual? I think the process-- any process that you're experimenting with, simplifying, et cetera, should be manual first. Famously, like the founders of DoorDash, five computer science graduates, or undergrads at Stanford, started DoorDash not with automation, but they started it with PDFs of menus in a telephone number at the bottom of the screen, where you could order food. And they literally went out and picked up the orders, paid for the orders, and started to plot the workflow and removed all the dumb requirements they could. And they automated last. And Joan, you'd be pleased to hear that we had the DoorDash founder on the book house. Oh, fantastic. Yes, like if-- Yeah, and so they teach this to undergraduate Stanford. Go manual before you go automation, because it's going to teach you everything you need to know about the business. And that's the key is knowing when to automate a process is when you've got that process perfected as best you can, and you've added speed. And now you're ready to add the power of automation to speed it up even further. So when you see people across the board, across the world now, adding AI automation on top of a lot of old cumbersome processes, what are your thoughts? My thoughts is this is just speeding up disaster. Because you've got these old cumbersome processes that you're now speeding up and adding expense to, versus really being thoughtful about where you apply AI, and perfecting your process first. Don't take that long. It doesn't take that much work. And then adding the power of AI on top of that. But really, challenging executives to look for the key levers in their business, and applying AI and automation to those key levers so that they have a P&L impact that they can point to. That's powerful not only for the organization, but for those providing capital to your organization. What you describe in a book helps to speed things up, produce faster and cheaper. Does it help innovate? Yeah, that was really the point of the model is that we use the algorithm to drive innovation and not incremental change but quantum change. This is really what's behind the kinds of innovation you see coming out of Tesla or SpaceX. It's a weekly process that is driven by the CEO. This I talk about secret ingredients, one of the things that I think academics, when they study Elon Musk 20 or 30 years from now and say what made this person such an effective industrialist, one of the things that's going to stand out is that he managed the key aspects of this simplification and innovation in the business weekly and drove weekly progress which adds up over time to look like huge breakthroughs. But those huge breakthroughs are broken down into a couple percent that you pick up every week that eventually you figure out how to land a rocket and catch it, eventually you learn how to produce a car twice the margin that your competitors can produce and eventually learn how to let the car drive itself? But does it help to kind of own and control the whole business and to have no labor unions? I mean, the framework, I mean, tell me about the framework. Yeah, the framework definitely favors those who control their entire production system. And you'll see that there's a lot of vertical integration once you start to innovate this way because you need to have control of the systems, a good example of that is in robotics today. And when you start to build the hand of a robot and understand that many of the actuators that you need to make that hand work don't actually exist, then the only way you can really breakthrough on that innovation is to produce your own and vertically integrate. So you do see in the most successful companies that are innovating at a breakneck pace, they're vertically integrating and that would include not only Tesla but places like BYD and Show Me in China where they are innovating this way too through controlling the entire process which includes some of the key inputs. Steve Jobs also had this reality distortion field or whatever you call it when you set totally crazy goals. How does that tie into this? I think goal setting is a key piece of this and if I had a redo on the book, I'd put another chapter in for goal setting because I think the principle is probably pretty clear. When you set a goal of 5-10% growth, you're going to get 5-10% growth. When you set a goal of 50-100% growth, people have to rethink entirely how they're doing that. You obviously can't deliver 100% growth with the same formula or system that you're delivering incremental change with with 5%. And so part of Elon's magic and part of Steve Jobs magic with the reality distortion field is to set incredibly ambitious goals not just for financial outcomes but really to change the mindset of the people that are actually doing the work. But I mean, where does it meet realism? I mean, if you say, "Hey, we're all going to be living on Mars in two years' time." How hairy can goals be before they become ridiculous or unreadelistic? I think that's a great question. I used to tease Elon that when he put a goal out there, I knew that if we had 50 or 60% of the goal, he'd be thrilled. He said, "Absolutely." "Absolutely, I will." And so that's part of it is you're setting a mindset difference. It can't be so ridiculous that people just give up from the start and say, "This is impossible." It's got to be somewhat within reach and that's a key part of that ambitious goal setting. But the whole point of the process really is to get started. And as teams start, they start to learn and the feedback loop starts to fold back on itself and you get recursive learning within an organization, which means you're getting more rapid innovation. If you start down this path of, "How could we double? How could we get to Mars in two years? How could we get a car to drive itself?" That whole process, when you begin, you start to build a compounding advantage versus your competitors who haven't yet started the journey. How much fare was there in the organization? I would say that the most common trait of people at SpaceX or Tesla is humility, believe it or not. And there's not much fear. And when Elon lays out a goal, the most common response is a response of humility and confidence at the same time. That sounds weird, but let me break that down. The first response is a response of humility. I have no idea how to do that. I have no idea how to achieve that. The second response is, "But we'll go figure it out." And that's this response of confidence that world-class people tend to have. I don't know how to do this, but let's go figure it out. And we're going to chip away, chip away, chip away at this problem until we figure it out. I think that's mindset number one. Mindset number two is just being ready. You're going to have a lot of failed launches and failed tests before you get to that final goal. That'll be able to absorb the failures, rapidly learn from them, not repeat them. But again, the progress you're making is compounding against competitors because your competitors typically are too fearful to start that journey. So just starting gives you an edge in the race. How many nights did you sleep on the factory floor? I spent probably weeks, worth of nights on the factory floor for the launch of Model 3. And that was because we wanted to show that we were in the problem with the people and that the problems that were happening at the edge in manufacturing mattered. It mattered to cash flow, and we also considered ourselves teachers of this methodology. So if something was so critical, we were trying to get the cash flow from a particular product and it wasn't coming. We wanted to show folks here is the method and the formula and the framework you can use to break through these problems and we'll be with you in the trenches as we do this. Did you work on the leadership model? Did you wife think it was a good idea to use cash flow in the factory? She did not. In fact, she would tease me and say, "I'm pretty sure the executive is a GM or Toyota or not sleeping on the floor." How sustainable is this model? How do you burn out people? It's not sustainable in the sense that when we hired people, I would tell people you were joining Special Forces, not regular army. And here's the difference in those two models. Number one is Special Forces aren't deployed continuously. They're deployed in short bursts of time for key missions. And so there will be some short bursts of time where you're sleeping on the factory floor. But those are short bursts of time. But the trade-off for that is you're going to be working in a platoon with the best and the best. You're going to do the best work of your life. You're going to be thrilled when you break through these problems. But most nights, if you came into the office at 7 p.m., you could roll a bowling ball through this office and not hit anybody because we are a Special Forces model. And we're training daily from 8 to 6. It's an intense environment and there will be these periods of intensity, but they're only periods. Because to your point of life, you'd burn people out if that was continuous. So when you look at people to recruit, how do you spot somebody who could execute properly and not just talk a good game? It's a great question. The first thing we look for is curiosity. So in interviews, we present a very difficult problem. And we watch how curiously played into their breaking down the problem and their pursuing an answer. And then we'd ask for examples where they'd done this themselves. And so first thing we look for is curiosity because people that are curious tend not to be satisfied with the status quo. And that was the first ingredient we needed. Second ingredient we look for is a bias to action. And then we would go into, we would ask them for an example of something that they had done in their career or in their academic experience that they felt like was world class. And we would break down how they got the insight, again, looking for curiosity. We would break down what first steps they took. Did they have a bias to action? And if they had three key ingredients, curiosity, bias to action and intelligence, it's a pretty good bet that they were really going to thrive in a place like SpaceX, their Tesla. So if we parachute you into a struggling company, what's the first thing you do? How do you attack it? First thing I do is I look for how the financial model, how the financial machine of the business actually works. Because what I'm looking for there is what are the two, three, or four key levers financially in this business that I need to understand. Because that's then going to tell me where to go to work, and where innovation might help this company break through. And so that's the first thing I look at, teach me the money machine of the business. Tell me where the leverage is, and then let's go figure out how we double triple or quadruple the one of those levers and make the business now in a much more strong, profitable situation that we can then further innovate off of. And what would make you think this is just beyond repair? I'm leaving. I think attitude of people who are accepting the status quo versus those who are dissatisfied and not curious and don't have a biased action. I think the culture is the first signal. that would that would tell me that it might be beyond repair, can you note change a culture? I think change a culture can happen over time, but I bet it takes in my experience longer as a time to change a culture. Why is it so slow? It's so difficult. It's embedded in the DNA of the business and most culture comes from founders. I've even seen at General Motors 150-year-old company that the DNA that Arthur Sloan put into that company still exists. That DNA is not only injected into the company by the founder. It's perpetuated over time and really becomes very difficult to shake. It's not changing cultures not for the faint of heart, nor is it for the people who are short on time. It's so interesting. Sometimes I ask people to define the co-op culture and they cope with some defining characteristics. They say, "Hey, these are just your personality traits and that's exactly what they are." Exactly. Yes, they're personality traits of the founder typically or the leader. John, what is the biggest mistake you've made in your life? Boy, where do we start? I think if we could limit it to business mistakes, I would say eating my own dog food. There have been businesses where I have gotten lazy and not sampled the product every day. It wasn't until I read Sam Walton's book Made in America that I started to appreciate sampling your own product on a daily basis. One of the things that Sam says in that book is he famously would call his customer service telephone number every day on his way into work to understand how customers were being greeted and treated. The biggest mistakes I've made when I've stepped away from the product and I haven't experienced what the customer is actually going through in using that product and whether they're experiencing frustration or joy. My biggest failures have come from that, from being disconnected. So when you're on the board of Lululemon, you run around in Lululemon stuff. I do. I'm wearing Lululemon right now. I'm going to a Lululemon store later today. I drive General Motors cars. Every day I drove a Tesla off the line because I wanted to have that experience and I would tell you, like, I've got a 20% rule that's a little different than like a Google 20% rule where you can 20% of the time work on whatever you want. I told him that 20% of my time is going to be in the front lines because I want to experience what the customer is experiencing and what are employees that are experiencing. And our front line employees, it's just one of the best hacks in management. Front line employees can tell you exactly what's wrong with the product because they're hearing it from customers all day long. They can tell you exactly what the customers want in the product. And oftentimes they give you a very quick cheat sheet as a manager to go make really effective change because when you're out on the front lines asking people, what would you do if you had my job? You don't typically get 500 different answers. You typically get like three or four of the same answers over and over again. And it's very revealing. And so I, that's helped me avoid a lot of mistakes. When I ran my own company, I called the switchboard every day to make sure it was picked up on ring number one. Yes. Yep. Very similar desk. What is something about you that most people don't know? I have just an absolute admiration, joy, and appreciation of music of almost all types. I was lucky to have a musical mother who put this love into me early on. And I almost went to university to study music. I loved it so much. But what I discovered when I got to university and got into engineering was music had taught me a base eight math system. And it was incredibly, incredibly helpful to me, understanding advanced math and engineering. So I'm grateful to it, but a lot of people don't know that I was almost a music major. So when you see a production line, do you think about it like it's infinite? A little bit. Yeah, when I see robots welding, you know, 300 robots welding a chassis, it does look like a symphony event to me. John, we have a lot of young listeners. What is your advice to young people? Grab a mentor as soon as you can. And two types of mentors. There's vertical mentors, people that are ahead of you in the journey, maybe by a generation. They can provide wisdom and experience. And then what I call horizontal mentors, grab people that are high potential that are in the similar situation that you are. Maybe your first time product manager, maybe your first time CEO. Grab five or six first time CEOs who are non-competitive in a business similar to yours size, maybe growth. Get together with them once a quarter and have a session where it's complete shadow house rules and you bring your biggest problem to that group and learn from them. But also have mentors in place that have been in that journey before who can say, have seen that movie, let me help you get through it. I wouldn't be where I am today without a half dozen mentors, some of whom I mentioned in the book, all of whom I mentioned in the acknowledgments of the book because they've made, they've made me who I am. Really a good piece of advice. Big thank you for being here today. It once again, love your book and thanks for sharing your secrets. Thank you Nicolai. It's been a pleasure talking with you. Bye guys.