Wright's Law

• The Bottom Line: The more you build of something, the predictably cheaper it gets to build each individual unit, creating a powerful and compounding cost advantage for market leaders.
• Key Takeaways:
• What it is: For every cumulative doubling of units produced, the cost per unit declines by a consistent percentage (known as the “learning rate”).
• Why it matters: It is a primary source of a powerful cost_advantage, which is one of the most durable types of economic_moat.
• How to use it: By identifying industries where Wright's Law applies, you can spot future dominant companies and better forecast their long-term profitability.

Imagine you decide to start a weekend hobby baking artisan sourdough bread. The first loaf is a disaster. You use too much flour, the starter is weak, and it takes you four hours from start to finish. It's a costly, inefficient mess. But you stick with it. By your 10th loaf, you've got a rhythm. By your 100th, you're a machine. You buy flour in bulk, you've perfected your kneading technique, and you waste almost nothing. The time and cost to produce one perfect loaf have plummeted. This intuitive idea—that experience breeds efficiency—is the very heart of Wright's Law. Formulated in the 1930s by aeronautical engineer Theodore “T.P.” Wright, the law states that for every cumulative doubling of production, the labor cost per unit falls by a constant percentage. Wright discovered this while studying airplane manufacturing, noticing that as the total number of planes ever built doubled, the cost to build the next plane fell by about 10-15%. The key word here is cumulative. This isn't about producing faster in a given month. It's about the total, accumulated experience of an organization over its entire history. A company that has produced 1 million widgets has a fundamental, almost insurmountable, cost advantage over a new competitor that has only produced 1,000. The veteran company has learned thousands of tiny lessons, optimized every step of its supply chain, and engineered efficiency into its very culture. It's crucial not to confuse Wright's Law with its more famous cousin, moore_s_law.

• Moore's Law is a function of time. It predicts that the number of transistors on a chip will double approximately every two years. It runs on a calendar.
• Wright's Law is a function of volume. It makes no predictions about time, only about what happens as cumulative production doubles. It runs on a production counter, or an odometer.

> “Technology, particularly, is a deflationary force… Wright’s Law, the experience curve, is a beautiful thing. The more you produce of anything, the lower the cost.” - Cathie Wood, CEO of ARK Invest For an investor, Wright's Law is more than an academic curiosity. It is a powerful mental model for understanding how competitive advantages are built and sustained in the physical world.

A value investor seeks to buy wonderful companies at fair prices. Wright's Law is one of the most powerful tools for identifying what makes a company “wonderful” in the first place. It directly impacts a company's intrinsic_value and reinforces the principle of a margin_of_safety. 1. The Genesis of a Cost Moat: A deep and wide economic_moat is the holy grail for a value investor. Wright's Law explains how one of the most powerful moats—a sustainable cost_advantage—is created. The market leader, having produced more units than anyone else, has a lower cost structure. This allows them to either enjoy higher profit margins or lower their prices to crush competitors, or both. For a new entrant to compete, they would have to endure years of heavy losses to “buy” the experience the leader already has. This is a formidable barrier to entry. 2. A Telescope into Future Profitability: Value investing is about projecting a company's future cash flows. In industries like manufacturing, renewable energy, and technology hardware, Wright's Law provides a rational framework for forecasting future costs. If you believe a company can double its cumulative production of EV batteries or solar panels, you can make a reasonable estimate of how much its costs will decline, and therefore, how much its margins will expand. This transforms a guess into a calculated forecast, strengthening your valuation. 3. Identifying Survivors in a Price War: When industries mature or face oversupply, price wars often break out. In these brutal battles, it's not the company with the best marketing that wins; it's the last one standing. Wright's Law helps you identify the low-cost producer. This company can sustain profitability at price points that would bankrupt its higher-cost rivals. Knowing your company is on the favorable side of the experience curve provides a significant margin_of_safety against industry turmoil. 4. Reinforcing a Long-Term Mindset: Wright's Law unfolds over years, even decades. It forces you to think like a business owner, not a stock market speculator. The market might panic over a single bad quarter's production numbers, but a value investor focused on Wright's Law asks, “Is the company still on track to double its cumulative output and drive down costs over the next five years?” It helps you ignore the market's noise and focus on the business's fundamental, long-term trajectory.

You won't find “Wright's Law” as a line item on a financial statement. It's a concept you apply, a lens through which you analyze a business.

Applying Wright's Law is a qualitative and quantitative process of business analysis:

1. Step 1: Identify Relevant Industries. The law is most powerful in industries where manufacturing or process repetition is key. Think of cars, semiconductors, solar panels, batteries, 3D printing, and even genomic sequencing. It is far less relevant for service-based businesses, luxury goods (where high cost can be a feature), or industries with limited production runs.
2. Step 2: Find the Production Leader. Your goal is to identify the company with the highest cumulative production volume in its category. This isn't necessarily the oldest company, but the one that has scaled the most aggressively. Look for data on “units shipped,” “vehicles delivered,” or other physical production metrics over the company's entire history.
3. Step 3: Hunt for the “Learning Rate”. The learning rate is the percentage of cost decline for every doubling of production. Companies rarely disclose this, but you can find clues:
   • Investor Presentations: Look for charts showing “cost per unit” declining over time as volume increases.
   • Industry Reports: Analysts and research firms (like ARK Invest, who champion this concept) often publish studies on learning rates for specific technologies (e.g., “The learning rate for lithium-ion batteries is approximately 28%”).
   • Historical Analysis: You can try to estimate it yourself by plotting a company's historical cost of goods sold (COGS) per unit against its cumulative production.
4. Step 4: Ask the Critical Value Investing Questions.
   • Is the advantage sustainable? Could a new technology (e.g., solid-state batteries) completely reset the learning curve for everyone, wiping out the incumbent's advantage? This is the disruptive_innovation risk.
   • Is management focused on scale? Does the CEO talk about driving volume to lower costs, or are they focused on short-term profits? A management team that understands and leverages Wright's Law is a huge plus.
   • How much further can it go? Has the industry already matured, meaning the doublings will be slow and infrequent? Or is it in its infancy, with many rapid doublings still ahead?

The analysis isn't a single number, but a deeper understanding of the business's competitive position.

• A steep learning rate (e.g., 20-30%) in a young, growing industry is a sign of a potentially massive and durable moat. It suggests that the market leader will see rapid margin expansion and become incredibly difficult to displace.
• A shallow learning rate (e.g., 5-10%) indicates a less powerful effect. Cost is still a factor, but other things—brand, distribution, technology—might be more important sources of competitive advantage.
• The key is to understand where the company is on the curve. Early on, the doublings are fast and the cost declines are dramatic. Later, as a company goes from producing 10 million units to 20 million, the doubling takes much longer, and the cost advantage solidifies but grows more slowly.

Let's compare two fictional electric vehicle battery manufacturers in the year 2025: “GigaScale Batteries” and “Legacy Auto Parts”. Assume the industry learning rate for EV battery cells is a well-documented 20%. This means for every cumulative doubling of production, the cost per kilowatt-hour (kWh) drops by 20%. GigaScale Batteries was an early pioneer. They have been aggressively scaling production for a decade.

• Cumulative Production to Date: 8,000,000 kWh

Legacy Auto Parts has just recently pivoted to making EV batteries.

• Cumulative Production to Date: 100,000 kWh

Let's build a simplified table to see the power of Wright's Law. We'll assume the starting cost for the first 100,000 kWh was $500/kWh for both companies.

The Investor's Insight: GigaScale Batteries can produce a battery for $125/kWh. Their new competitor, Legacy Auto Parts, is stuck way back up the curve at $500/kWh. What does this mean?

• GigaScale can sell its batteries for $200/kWh, making a healthy profit, while Legacy would lose $300 on every unit sold at that price.
• To get its costs down, Legacy must produce another 7,900,000 kWh, likely losing money on every single unit until they catch up—all while GigaScale continues to scale and drive its own costs even lower.

As a value investor, you can clearly see that GigaScale has a deep, structural, and quantifiable economic moat. Legacy Auto Parts faces a brutal, perhaps impossible, battle.

• Identifies Durable Moats: It is one of the clearest indicators of a sustainable cost_advantage, a moat that is very difficult for competitors to assail.
• Forward-Looking: Unlike many accounting metrics that are backward-looking, Wright's Law helps you make rational, data-driven forecasts about a company's future potential.
• Promotes Long-Term Thinking: It forces an investor to analyze the fundamental drivers of a business over a multi-year horizon, aligning perfectly with the value investing temperament.

• Not Universally Applicable: The law works best for standardized, repeatable production. It has little relevance for consulting firms, restaurants, or bespoke luxury brands. Applying it in the wrong context can lead to flawed conclusions.
• Vulnerable to Disruption: A fundamental technological shift can make an entire experience curve obsolete. If a new, cheaper battery chemistry is invented that requires a different manufacturing process, everyone starts over at zero on a new curve.
• Data is Hard to Find: Companies are often secretive about their unit costs and production figures. An investor must often become a detective, piecing together clues from various sources, making the analysis an art as much as a science.
• Oversimplification: Wright's Law focuses on efficiency from experience, but other factors like raw material prices, labor costs, and shipping can also dramatically impact final unit costs. It is one powerful tool, not the only tool.

• economic_moat
• cost_advantage
• economies_of_scale ³⁾
• intrinsic_value
• margin_of_safety
• disruptive_innovation
• moore_s_law