Tesla: Efficiency Is Good

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As I sat down to write part three in my series about why Tesla retail investors have an advantage, I wanted to address some of the comments from part two. In attempting to do so, I found that it was difficult to try to make my point quickly without sounding overly defensive, so instead of having a pre-amble to part three that was as long as the rest of the article, I decided to break it out here.

Before I start, if you want to read those articles first, here they are:

In part one, I discussed how closely Tesla follows its mission whereas analysts are used to companies that use mostly meaningless mission statements.

In part two, I discussed how Tesla’s corporate culture isn’t what analysts are used to in legacy auto, and why that made them predisposed to believe that Tesla couldn’t compete.

The Comments that Stuck Out

When part two was published, I was a little taken back by some comments that are so distrusting of business and how those businesses are run. The arguments presented against my standpoint basically boiled down to: What I described wasn’t true since I would be shilling for management, what I was describing was called “bean counting,” any money saved would have just went to management bonuses, that 5% wasn’t really much of anything, that they hoped that my work hadn’t impacted anyone, and that innovation is the only thing that actually makes real changes.

I think it’s worth addressing this and comparing it to what we know about Tesla. I feel my experience greatly mirrors what Tesla has undertaken as part of its mission to drive down costs. I think it’s worth trying to explain why Tesla’s internal drive to cut costs could have serious and positive results for the company. So, let’s dig in.

Was My Story True?

I’m a puppet, so who knows? I mean, I think it was true, but it’s all the case of perspective, right?

But by being a puppet, and not naming the company, what reason do I have to sit here and make up stories about things? Who am I pumping up or tearing down?

I don’t know, maybe you can find some reason that I can’t think of, but I honestly don’t know what sort of benefit I would derive from going on CleanTechnica and writing a piece about false experiences.

Compared to Tesla, is it true for Tesla? I don’t know, since I don’t work for Tesla, but from what I have seen stated publicly, looking at how Musk acts in public, from Musk’s internal emails that have leaked out, and so on, it sure seems to be quite the parallel to me.

And I think I see that parallel because I tend to trust the management there. There are places that you can’t trust what management is saying because they’ll say one thing and do another — I have huge issues trusting GM for this very reason — but I don’t see that at Tesla. Maybe you do.

However, it’s fair to point out that I’m a puppet, and how many puppets do you trust in your life?

Was This “Bean Counting”?

Bean counting tends to be used as a derisive way to dismiss efficiency actions that aren’t sincere. And some companies absolutely do this sort of thing.

The company I worked for never called what we did “bean counting,” so, no, it’s not always called bean counting. We called it either “finding efficiencies” or “optimizations,” and the difference in how it’s perceived is major. If I walked up to you at work and said we needed to do some “bean counting,” you would — probably correctly — figure that whatever I was about to say was pointless. To me, bean counting is the idea that you’re going to pay someone more to count something to save on the product cost, and ignore the fact that the person counting is getting paid more than any savings you’ll get from the beans.

If I was participating in “bean counting” at the company I worked for, I would have been fired. I can’t guarantee Tesla is the same, but from where I stand, it sure seems like it.

One of Musk’s more famous emails was about productivity, and it includes true gems, like:

• Walk out of a meeting or drop off a call as soon as it is obvious you aren’t adding value. It is not rude to leave, it is rude to make someone stay and waste their time.
• Excessive meetings are the blight of big companies and almost always get worse over time. Please get out of all large meetings, unless you’re certain they are providing value to the whole audience, in which case keep them very short.
• Communication should travel via the shortest path necessary to get the job done, not through the “chain of command”. Any manager who attempts to enforce chain of command communication will soon find themselves working elsewhere.

These are three statements that in many ways argue against bean counting, not for it. From what I’ve always imagined, environments where bean counting dominates, the companies spend time focusing on those items that are of low value for significant periods of time to show their importance. Walking out of a meeting or dropping a call where you aren’t adding value isn’t about bean counting, it’s literally about making management more efficient to better operate the company.

Money Saved Just Goes to Management Bonuses

At the company I was working at, management was cut multiple times over a few year margin, by about 10% each time. Honestly, I took it personally, as they were in many cases a wealth of knowledge and incredibly good at knowing how to improve their businesses operation, but it was what it was. Our top level management had bonuses that tied directly to the company being able to turn a profit, and those bonuses were highly correlated to how much the profit was. If the company eked out a tiny profit, management was not getting bonuses worth more than the profit.

Lower level management, including the level that was regularly cut — and for that matter, myself — had a bonus structure that had been part of the business forever. It was built on how the individual locations operated, and was not guaranteed. And here is the key to this — because our business was built on this bonus structure, it allowed for the annual salaries to be lower than they would have otherwise been. We could have taken away the bonus structure, but we would have had to raise salaries then. You can decide what method is better, but since we had been founded on that bonus structure, people were confident with it.

And bonuses can be good. If you have someone contributing to the company in an extremely positive way, those are the people most likely to get offers to move to other companies. If you can provide them with a bonus, that might keep them happy right where they are.

At the company I worked at, I did get one discretionary bonus. I had written a report to better track a huge number of factors about how the company was doing at any given point in a day. Before I created that report, it would have taken someone multiple hours to hand compile it. My report cut that down to about five minutes, and worked at every location that we had. It allowed us to get a much better understanding of how the locations that could each earn millions of dollars a day were doing, and react to conditions in ways that we had been unable to before.

While it was very hard to quantify what that report saved as a company, and no savings were ever attributed to it, it’s likely that the operation of that alone may have enabled us to earn thousands or tens of thousands of dollars every day at each location by showing us strategic movements we could make.

I ended up with my name on the report, and as it got rolled out to all these other locations, I received phone calls and had to support it everywhere. I think my bonus was $5,000, or the amount my report may have swung in a single day at one of our locations. I was overjoyed, and it felt great to be acknowledged for the extra work I did.

There is scant information out there on Tesla’s bonus structure, but I found this Payscale article, which claims management can get bonuses, with the biggest ones being $16,500. Since I assume this data is user-submitted, take it with a grain of salt, but I have no issues with a company doing this. If a particular engineer for instance comes up with a way to solve a major FSD issue that moves the project really far ahead, I would hope they would consider giving them a bonus for retention if nothing else.

I’ve discussed Musk’s bonus package before, and to me it’s the gold standard in the industry — for those who don’t know, Musk gets additional stock based on the performance of the company, based upon overall market cap and revenue goals. I’ve got no issues with stuff like this, especially since to award Musk with stock like this is predicated on him rewarding shareholders. I see it as Musk getting paid more by shareholders than the company, and shareholders only paying him if the company does well enough to make it worthwhile. I’m completely fine with this

5% Really Isn’t Much of Anything

Honestly, this argument is just weird to me. The poster even said that 5% was not “bean counting” because it was too small of a savings.

Instead of going into a big thing here, let’s just look at Tesla’s Q4. Tesla earned $270 million on $10.7 billion in sales. So, Tesla spent $10.43 billion in the quarter.

If Tesla would have been able to reduce its spend by 5% without affecting revenue, the company would have earned an additional $521 million in profits in Q4 2020. Put a different way, a 5% reduction in expenses would have resulted in a 193% increase in profits.

5% is huge. Heck, a 1% reduction in expenses at Tesla would result in nearly a 40% increase in profits for a quarter.

Leaders understand this, and it’s why Musk has made the drive for efficiency such a priority.

The Savings Aren’t Worth Jobs!

My work did impact people and their hours somewhat, and we were keenly aware of this and did our best to limit that. Believe it or not, screwing your employees so you can toss a couple pennies to the bottom line leads to terrible morale, which leads to worse productivity, which makes it harder to make money. The two times management suffered massive cuts at the business I was working on, the next couple of weeks, no one wanted to do anything.

But yes, sometimes efficiency does require a few positions being cut, or hours being cut. This was always done very carefully. I would guess my work resulted in our frontline positions dropping by less than 2% overall, although I never tracked that specifically.

And yeah, that has the potential to suck for some people. We tried to limit this by transferring people to positions that were open from people leaving on their own or whatever, but I’m sure that sometimes that wasn’t possible, or that sometimes people felt betrayed or disappointed by the move.

But what can’t be overlooked, as I described before, is that we were a company fighting bankruptcy, and after I left they shortly went bankrupt. In the bankruptcy, three of our locations were closed and liquidated, resulting in the job loss of well over 10,000 people. To me, is it better to cut even 5% of positions and save the jobs of the rest? Yeah, it is.

Tesla is a rapidly expanding company. If it finds a spot where it can eliminate a job, I’m certain the company can find a new job for that person to do quickly. In Tesla’s case, cutting 5% of jobs may result in thousands of new jobs, as the profits would allow Tesla to build or expand many, many new facilities — often being able to keep the cut people for new positions at the same location.

I think everything that goes into cutting jobs is largely misunderstood, because we’re predisposed to believe that the company doesn’t care and you can be dropped at any time. Maybe some companies operate like this, but I can’t imagine it’s a successful strategy much of anywhere. The ones that truly engage in activities like this are those that are teetering on bankruptcy and doing mass closures to avoid liquidation, and by that point the writing is usually on the wall.

Innovation is the Only Real Change

This article got longer than I expected, so I’ll cover this one really quickly.

An innovation can be as small as an improvement to where you put high frequency use tools, so that you don’t have to walk a step to grab them while doing a task. It could be as large as building the largest casting machines in the world to completely streamline a huge part of the production.

A good business is going to figure out where to put the tools so that you don’t have to walk a step to grab them as often, while also changing huge parts of production when the opportunity arises. It all matters.

Conclusion

If your position is that businesses are always bad and lying, I’m sorry that you feel that way. Quite frankly, I have never felt that I’ve worked for a company that was only trying to make the people at top money. If I had, I can’t imagine that I nor most people working there would stay, or that the company would keep operating. I doubt that many companies can operate that way, without there being significant issues regarding it.

True efficiency programs are not morale killers, and can absolutely be used to make a growing company grow more and better, or help an unstable business become more stable.

After the second article I wrote, those who focused on how small cuts may have affected some employees missed what I had hoped would be the main point of the article. So, I felt that I wanted to write this article to make essentially the same point as I was trying to make initially, which really boils down to this:

In my opinion, a company’s culture is its main sign of long-term success. Unless it’s carefully cultivated, the longer a company exists, the more likely the organization ingrains “traditional” ways of doing things because doing things that way is more comfortable. Management defends those traditional ways because change is scary, and so inefficiencies become part of a cycle that is extremely difficult to break.

In the case of the company I worked for, my position was created specifically to address that inefficiency and break the cycle. They felt the only way to do so was to bring in outside consultants, hire new internal consultants, and grant us a lot of power. And, again, this was done at a time when everyone was well aware that doing nothing would result in bankruptcy — but everyone was also certain the changes that needed to happen were elsewhere in the company, not in their area of work.

In the case of Tesla, it’s clear from Elon Musk’s communications, how the heads of departments talk, and the actual changes to the products that Tesla has a solid company culture built on change.

This is a huge problem for analysts covering the automobile industry — the entire rest of the industry has been so ingrained for so long in their ways that not just are they convinced that what they are doing is the best way to do it, but they have convinced the analysts that any challenge to that structure would be detrimental. Retail investors, who don’t have the same experience with the ingrained culture, look at what Tesla’s doing and see it as a positive.

That’s it. That was (supposed to be) the point. And it’s such a big deal in my opinion that we got a whole second article about it.

Okay, seriously, I’m going to finish part 3 very, very soon …

 

*Disclaimer: I am a Tesla [NASDAQ:TSLA] shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article is published in which I discuss matters that I feel may materially affect stock price. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.