First Principles Thinking: Tesla Unboxing the Assembly Line

A few weeks ago, I visited the Tesla plant in Fremont —the original NUMMI plant which was Tesla’s first production line. But actually, the plant that’s making headlines these days is the one being built in Monterrey, Mexico, where Tesla is planning to test a new way of making cars. 

This new manufacturing method was introduced at Tesla’s Investor Day 2023 event and is called the unboxed concept: 

“Tesla Inc. claims that it has developed a new assembly process that can reduce EV production costs by 50 percent, while reducing factory space by 40 percent… The “unboxed” system was outlined during the automaker’s recent Investor Day when executives talked about next-generation vehicles and manufacturing improvements. A new low-cost vehicle that's expected to cost around $25,000 will be assembled at a new factory in Monterrey, Mexico.”

My first goal for today’s article is to try and explain what this unboxed system is. Then I want to discuss how big of a change it is, compared to the existing manufacturing process, and what inspired it. Finally, we will look at its benefits and potential risks.

The Unboxed System

Let’s begin with understanding this model’s novelty. While the entire article attempts to pit this model against the traditional assembly line, it should be clear that even with this new method, the car will be assembled. It won’t be molded. It won’t be 3D printed. It will be assembled. 

But the question is: how is it being assembled, what are the added components on the assembly line, and what are the pieces built off the assembly line?

If you go to nearly any car manufacturer, cars are being assembled on what we call the moving assembly line, credited to Ford:

“On December 1, 1913, Henry Ford installs the first moving assembly line for the mass production of an entire automobile. His innovation reduced the time it took to build a car from more than 12 hours to one hour and 33 minutes.”

Rather than trying to describe the difference between the traditional moving assembly line and the new unboxed method, it’s better to watch these two videos.

The first video illustration posted on Twitter shows how Tesla, as well as other manufacturers, make cars now. Components are being brought to a moving line where they are added by employees or robots (but mostly employees): from the doors and the engine to the windshields and wipers. This is a good snapshot of the process:

In the new, unboxed system (again, I highly recommend watching the video illustration), the main difference is that the sub-assemblies brought to the assembly line will be much bigger. These bigger sub-assemblies, as you can see in the video, may include the whole left side of the car, or the middle of the car including the seats: 

Is this Method Truly New?

In the automotive industry, yes. Absolutely. 

But in general? Not so much. 

I am not sure if this is what inspired Tesla, but when I saw the unboxed system, the first thing that came to mind was the way Boeing went about building it’s Dreamliner (787):

Boeing, of course, outsourced these components (including their R&D) to other firms, so their model’s novelty (and risks) were deeper than Tesla’s. Understanding Boeing’s motivation may help us understand Tesla’s goal. But even Boeing wasn’t the first to use this method. 

So what’s the idea behind it? 

The key terms are sub-assembly and modularity. 

Modular design, also known as “modularity in design,” is a design approach that subdivides a system into smaller parts called modules or skids, which can be created independently and then used in different systems. A modular system can be characterized by functional partitioning into discrete scalable and reusable modules, the rigorous use of well-defined modular interfaces, and the use of industry standards for interfaces.

Modules are units that are self-contained with respect to certain functions they are responsible for. In some cases, they can operate independently, but typically they work best in conjunction with other modules to create a fully functioning system.

A sub-assembly is a collection of parts put together to be used as a building block in a larger assembly. It can itself be modular in design, meaning that a sub-assembly can be broken down into smaller modules, each of which accomplishes a specific part of the sub-assembly’s overall function.

In the context of a modular design, sub-assemblies are modular components that can be easily combined or interchanged. Let’s consider a computer system for example. It consists of several sub-assemblies or modules, such as the power supply, the motherboard, the hard drive, etc. Each of these parts can be developed, tested, and possibly even used independently. But when they are combined together, they create a functional computer system.

Just to be clear, assembly and sub-assembly are both critical steps in the manufacturing process of complex products. 

Assembly Process: This is where all the components of a product are assembled to form the final product. For instance, in car manufacturing, the process involves joining all the components together (engine, chassis, body, wheels, etc.) to create the finished car. The assembly process often involves multiple stages, each of which contributes to the completion of the final product, and can be manual, automated, or a combination of both.

Sub-Assembly Process: In this step, certain parts are pre-assembled separately before being integrated into the main assembly line. Sub-assemblies are often built in a different section of the manufacturing plant and then transferred to the main assembly line when needed. The sub-assembly process can also be manual, automated, or a combination of the two.

The main difference between the traditional and the unboxed system is the level at which these processes occur. Sub-assembly, which is a part of the larger assembly process, can make the final assembly more efficient, as complex components can be assembled separately and then quickly integrated into the final product. This saves time and reduces errors in the overall process. While cars have been modular (with self-contained engines) and incorporated aspects of sub-assembly in their manufacturing process, a notable change is the extent of pre-assembled work that will be done off the production line, as well as the size of the sub-assemblies. In the unboxed model, as we can see in the video, the process moves from a sub-assembly of a chassis and engine (and wiper) to a sub-assembly that is essentially half the car.

“‘To scale the way we want, we have to rethink manufacturing and make another step change in cost,’ adds Moravy, who outlined Tesla’s new concept, which involves eliminating linear assembly lines and using more subassemblies. Tesla has already experimented with new ways to produce its Model Y by using large ‘giga castings’ and seats attached to structural batteries that are inserted through the bottom of car bodies.”

So the novelty here is not in how the cars are being manufactured, but in how they are being designed to be manufactured. If the traditional method was designing sub-assemblies (e.g., engine, gear box) to be assembled on the production line, in the unboxed system sub-assemblies will be designed to be pre-assembled or pre-cast into larger sub-assemblies (which potentially can fit into multiple models). 

Why Now?

I’ve previously written about how some of the most important innovations have come from the automotive industry. The moving assembly line and the Lean operations were both introduced there, influencing almost every industry, well beyond manufacturing. But as evident from the shortage in semiconductor chips during Covid-19, the traditional automotive industry seems to be losing its leading position, and possibly its sense of innovation: 

“According to Lars Moravy, vice president of vehicle engineering at Tesla, ‘automotive assembly methods haven’t changed in the last 100 years,’ which he called “really silly.”

So why now? Or better yet, why not sooner?

There are two parts to this question. 

For as long as the combustion engine was the automobile’s central piece, this new method wasn’t feasible. Once automobiles became electric, with batteries playing such a central role, it was time to start rethinking how we are designing and assembling our cars. 

But in order for that to happen, there must be that one person who will rethink the process, and this is something that definitely impressed me when I visited Tesla (as well as any interaction I had with people there): the culture of first-principles thinking. 

First-principles thinking is a problem-solving approach often used in innovation and scientific thinking, which involves breaking complex problems down to their most fundamental parts or principles. Rather than accepting pre-existing assumptions or relying on analogies, this method encourages people to ask probing questions exposing basic truths and building up from there.

The idea comes from physics, but it has been used in a wide variety of fields. Elon Musk, the CEO of SpaceX and Tesla, is a prominent advocate of this thinking method.

Here’s a simple step-by-step process of the first-principles thinking:

Identify and define your current assumptions: If you’re trying to solve a problem or create something new, start by delineating your current understanding of the situation.

Break down the problem into its fundamental principles: This involves asking probing questions and challenging your assumptions. This step is about understanding the principles that are certain and constitute foundational truths or elements.

Create new solutions from scratch: Once you’ve identified the first principles of a problem, the next step is to create new solutions from scratch, building from these principles.

For example, when Elon Musk tried to reduce the cost of space travel with SpaceX, he could have followed the conventional path (the analogy), which was to buy components from suppliers. By applying first-principles thinking instead, he started questioning why the parts were so expensive. He broke down a rocket’s components to their most basic parts and then figured that he could build a rocket himself with these raw materials, reducing the cost drastically. The result was a lower price per pound for delivering a payload to space and making SpaceX a competitive force in the space industry.

This approach allows for a fresh perspective that can lead to innovative ideas and solutions. However, it’s also more labor and time-intensive because it requires questioning and vetting almost everything instead of relying on existing ideas and practices.

The use of this approach doesn’t mean that Tesla gets everything right, or that they re-think everything they do, and it doesn’t guarantee that mistakes will be avoided. Sometimes you make even bigger mistakes (like when Tesla ended up with too many robots on their production line), but it allows the firm to question any orthodoxy and keep innovating. The culture and permission to question everything and drill down to first principles is stronger than I have ever seen in a firm, and it clearly comes from the top (and will most likely not survive without Elon Musk).

What are the Main Benefits?

Simplification of the Manufacturing Process: Sub-assemblies can be built and tested separately, reducing the complexity of the overall manufacturing process. If an error arises in a sub-assembly, it can be fixed without disrupting the rest of the production line.

Reduced Time and Cost: With modularity, the design and production of new product variants can be quicker and cheaper, as the time and cost of developing new modules is often less than developing an entirely new product.

Scalability: As requirements change, additional modules can be added to improve functionality or adapt to new requirements, making the system scalable.

In other words, sub-assembly and modularity in design, work hand in hand to create efficient, flexible, and easily maintainable systems, whether those are consumer products, industrial machinery, software systems, or other complex constructs.

Let’s look at this more specifically with Tesla, whose main motivation is cost. The moving assembly line is not efficient as it only allows workers to add a single component at a time thus limiting scalability since each person does the same thing over and over again. Furthermore, raw materials, a big component of the cost, don’t scale well as the cost of the car is linear to these costs.

To understand this a little better, below is a breakdown of the costs of a “typical car”: 

But these are not static elements. A few years ago, there was an attempt to anticipate the cost breakdown of the Model 3, as it scaled:

While these predictions were made in 2018, the belief in 2022 was that a Model 3 costs around 28,000 to manufacture. Tesla sold 240,266 Model 3’s in 2022, which is around 4,600 cars per week (without any shutdowns), so the graph above is quite accurate. 

Let’s see how this breakdown will change when the new unboxed method comes into effect. The new concept is expected to reduce labor costs, as there will be less assembly work to be done on the production line, and also reduce manufacturing costs, as these sub-assemblies can be manufactured more efficiently in more accessible locations. For example, building part of the interior on the battery case outside the cabin, provides workers and robots better access (as seen in the image above).

The new method will possibly also reduce raw material costs, as the sub-assemblies can be used in multiple models. These benefits are going to scale better as the manual and linear work are minimized. 

What are the Risks?

“A big risk cited by Oba, an independent lean-manufacturing consultant, is what he describes as the “rigidity” of the unboxed system. … Another question is whether Tesla can produce multiple vehicle models of different sizes and body styles on the same production line with the unboxed system. ‘My guess is that’s next to impossible,’ Oba said. That is because the way Tesla has sliced or ‘unboxed’ the vehicle into several big blocks is so radical, and the dimensions of those blocks do not appear to offer much room for manufacturing variables.”

Assembling a car with the current method means making several minor adjustments —one of the many reasons we see more people than robots on most automotive assembly lines. 

The new unboxed system relies on the assumption that these big components are going to be “clipped” together and once connected, no adjustment will be required (like Legos). In other words, it trades off one type of modularity for another, but not one without risks. 

Tesla is good at many things, but quality and precision are not one of them:

“The J.D. Power 2020 Initial Quality Study (IQS), released today, places Tesla at the bottom of its quality rankings. The key metric is problems experienced for 100 vehicles (PP100). A lower score reflects fewer problems and, therefore, higher quality. Tesla received an initial quality score of 250 PP100 – or 250 problems per 100 vehicles. Tesla’s quality issues are primarily with cosmetic items, such as paint imperfections, poorly fitting body panels, and squeaks and rattles – rather than core powertrain or infotainment functions.”

Here’s an example: 

This is the 2022 ranking:

Will these quality issues be resolved? Sure. 

Will they be accentuated given the new system? Absolutely. 

This was also the problem Boeing faced and what caused many of the delays in the production of the Dreamliner. It’s one thing to have a modular solution, but it’s a different thing to have a modular solution that relies on the precision of integration. 

To summarize: 

Is it time to question the assembly line? Absolutely. It's been here for too long. 

Is the new unboxed concept an alternative worth looking into? Absolutely. 

Is the learning curve for Tesla going to be cost-free? Absolutely not.

Tesla pushes the idea of the car as a system of systems, and this is evident from the self-driving capabilities and infotainment system. Now they’re pushing it a step further by redesigning the manufacturing concept. I’m curious to see what will come next.