wrights_law

• The Bottom Line: Wright's Law states that for every cumulative doubling of units a company produces, its cost per unit will decline by a predictable, constant percentage, creating a powerful and widening competitive advantage over time.
• Key Takeaways:
• What it is: It's an observation that experience breeds efficiency. The more you make of something over its entire history, the better and cheaper you get at making it.
• Why it matters: It is a primary driver of a cost-based economic_moat, allowing an investor to predict a company's future profitability and staying power. It separates fleeting growth from durable, fundamental improvement.
• How to use it: Identify the cumulative production leader in a manufacturing-heavy industry (like EVs, solar panels, or semiconductors) to find the company most likely to become the long-term, low-cost producer.

Imagine you decide to start a craft bakery specializing in artisanal sourdough bread. Your first loaf is a disaster. You use too much flour, the oven temperature is wrong, and it takes you three hours. The cost, factoring in wasted ingredients and your time, is absurdly high—maybe $50 for a single, barely edible loaf. Undeterred, you bake your second loaf. It's a bit better. By your 10th loaf, you have a rhythm. By your 100th, you're efficient. You know the feel of the dough, you've optimized your oven time, and you buy flour in bulk. Your cost per loaf has plummeted. By your 1,000th cumulative loaf, you're a master. You're producing a superior product at a fraction of your initial cost. This intuitive process of “practice makes perfect” is the very essence of Wright's Law. Formally stated, Wright's Law (also known as the Experience Curve or Learning Curve) observes that for every cumulative doubling of production, the cost per unit declines by a consistent percentage. This percentage is called the “learning rate.” Let's break that down:

• “Cumulative” is the magic word. This isn't about how many units a factory produces in a single year. It's about the total number of units a company has ever produced in its entire history. The experience is baked into the organization's DNA—its processes, its workers' skills, its supply chain relationships.
• “Doubling” is the milestone. The cost savings aren't linear. The most dramatic improvements happen early on (going from 1 unit to 2, then 2 to 4). The cost drop from unit 1,000,000 to 2,000,000 will be the same percentage drop as from unit 1 to 2, but much smaller in absolute dollar terms.
• “Consistent percentage” is the predictor. For a given industry, this learning rate tends to be stable. For example, in the automotive industry, it might be around 15%. This means for every time the total number of cars ever built by a company doubles, the inflation-adjusted cost to produce each car falls by 15%.

This concept was first observed in the 1930s by Theodore Wright, an aeronautical engineer who noticed that the cost to produce an airplane decreased reliably as the total number of planes produced increased. The most famous historical example is Henry Ford's Model T. By simplifying the design and perfecting the assembly line, Ford harnessed Wright's Law to make the automobile affordable for the masses, crushing competitors who couldn't match his scale and experience.

“The competitor to be feared is one who never bothers about you at all, but goes on making his own business better all the time.” - Henry Ford

For an investor, understanding this is like having a crystal ball that looks at a company's cost structure instead of its stock price. It's a fundamental law of operational reality.

A value investor's job is to find wonderful businesses at fair prices. Wright's Law is a powerful tool for identifying the “wonderful business” part of that equation. It cuts through the noise of quarterly earnings reports and market sentiment to reveal a company's underlying competitive strength. Here’s why it's a critical concept in the value_investing toolkit: 1. It Builds and Widens an Economic Moat:

  Wright's Law is the engine behind one of the most durable competitive advantages: **low-cost production**. A company with the most cumulative experience (the "experience leader") will, all else being equal, have the lowest costs. This allows them to do several things competitors can't:
  *   **Undercut on Price:** They can lower prices to gain market share, squeezing the margins of higher-cost rivals.
  *   **Absorb Shocks:** During a recession or price war, the low-cost producer is the last one standing. Their lower cost structure provides a buffer that allows them to remain profitable while others go bankrupt.
  *   **Reinvest More:** They can reinvest their higher profits back into R&D, marketing, or further process improvements, which accelerates the learning curve and widens the moat even further. This creates a virtuous cycle.

2. It Helps You See the Future Intrinsic Value:

  Many of today's most innovative companies (think Tesla in EVs or solar panel manufacturers) are unprofitable in their early years. A surface-level analysis would dismiss them as speculative money-losers. But an investor armed with Wright's Law can see a different story. They understand that the company is "investing" in experience. Each unit produced, even at a loss, is a down payment on future, lower costs. By projecting how costs will decline as production doubles, you can more accurately forecast future cash flows and arrive at a more insightful calculation of a company's [[intrinsic_value]].

3. It Demands a Long-Term Perspective:

  Wright's Law is a slow, compounding force. It doesn't show up in a single quarter. It reveals itself over years and decades. This naturally aligns with the patient, long-term mindset of a value investor. While Wall Street is obsessing over next quarter's sales figures, you can focus on a far more powerful and predictable driver of long-term value: the relentless march down the cost curve. It helps you hold on through volatility, knowing that the company's fundamental competitive position is actually strengthening with every unit it ships.

4. It Provides a Margin of Safety:

  When you invest in an experience leader, you're not just buying its current assets and earnings. You're buying its accumulated, hard-won knowledge—a unique and valuable asset that doesn't appear on the balance sheet. This deep-seated efficiency provides a fundamental [[margin_of_safety]]. Even if your growth projections are slightly off, the company's rock-bottom cost structure gives it a resilience that protects your investment from permanent loss.

In short, Wright's Law helps you distinguish between a company that is truly getting better and one that is just getting bigger. For a value investor, that distinction is everything.

You don't need a PhD in industrial engineering to use Wright's Law in your investment analysis. The goal is not to calculate the learning rate to the fifth decimal place, but to understand the strategic implications.

Here is a step-by-step framework for applying the concept:

1. Step 1: Identify a “Wright's Law Industry”.

The law is most powerful in industries where manufacturing or process repetition is key. Look for businesses involved in producing complex, standardized units.

• Good Candidates: Semiconductors, electric vehicle batteries, solar panels, aerospace, hard drives, DNA sequencing.
• Poor Candidates: Restaurants, consulting firms, luxury fashion brands (where high cost can be a feature), commodity extraction (where geology, not experience, dictates cost).

1. Step 2: Find the Cumulative Production Leader.

This is the most important step. Don't look at last year's market share; look for the company that has produced the most units in history. This data can be hard to find, but you can triangulate it.

• Look in annual reports, investor presentations, and industry-specific publications.
• Search for phrases like “cumulative units shipped,” “total installations,” or “fleet size.”
• For a company like Tesla, they regularly report total cumulative vehicles delivered. For an older company, you might have to do more digging into historical reports. The leader is often the first mover or the one that scaled production most aggressively in the industry's early days.

1. Step 3: Guesstimate the Learning Rate.

While you won't be able to calculate it perfectly, you can get a feel for the industry's learning rate by looking at historical product pricing. If the price of a solar panel has fallen by 90% in the last 15 years while cumulative global installations have soared, you know you're looking at a steep learning curve.

• 10-15%: A typical rate for mature industries like automotive manufacturing.
• 20-30%: A steep rate, often found in new, dynamic technologies like lithium-ion batteries or genomics.
• Read analyst reports and academic studies on your industry; they often contain estimates for the learning rate.

1. Step 4: Think Through the Strategic Implications.

Once you've identified the leader and the likely learning rate, ask yourself:

• How much further can cumulative production double? If the industry is still young, the leader has a long runway to press their cost advantage.
• What are competitors doing? Can a new entrant realistically catch up, or is the leader's experience gap already insurmountable? Catching up requires a competitor to produce units at a loss for years just to get on the same cost curve.
• How will this cost advantage translate into future profits? Will the company pass savings to customers to gain share, or will it hold prices steady and expand its margins?

The analysis isn't about a single number but a qualitative judgment. You are trying to build conviction that the company has a durable, structural advantage. A company in a steep-curve industry (25% learning rate) with double the cumulative experience of its next-closest competitor is in an incredibly powerful position. This is the hallmark of a potential long-term compounder. Conversely, if you find that costs in an industry aren't declining with volume, it tells you that the economic_moat must come from somewhere else, like a brand, patents, or network effects. Wright's Law is a lens; if it doesn't reveal an advantage, you know to look elsewhere.

Let's imagine a new industry: advanced robotics for home assistance. Two companies, RoboCorp and FutureBot, are the main players.

The industry has a well-documented learning rate of 20%. This means for every doubling of cumulative production, costs fall by 20%. Analysis: RoboCorp, the first mover, has an enormous head start. They have produced 8 times more robots than FutureBot. Let's trace their cost journey.

• When RoboCorp had produced 125,000 units (where FutureBot is today), their cost was also $2,441.
• When they doubled to 250,000 units, their cost fell by 20% to $1,953.
• When they doubled again to 500,000 units, their cost fell another 20% to $1,562.
• When they doubled again to 1,000,000 units, their cost fell another 20% to its current ~$1,250. ¹⁾.

Let's update the table for accuracy.

The Moat in Action: Look at the devastating competitive dynamic. RoboCorp is making nearly 8 times more profit per unit than FutureBot. What can RoboCorp do with this advantage?

1. Start a Price War: RoboCorp could drop its price to $2,000. This would still net them a healthy $750 profit per robot, but it would force FutureBot to sell at a loss of over $400 per unit. FutureBot would burn through its cash and likely go out of business.
2. Out-Invest in R&D: RoboCorp can take its massive profits and pour them into developing the next generation of robots, extending its technology lead while FutureBot struggles just to break even.

For FutureBot to simply match RoboCorp's current cost of $1,250, it needs to produce another 875,000 units, doubling its cumulative production three times. During that time, RoboCorp will have produced millions more, driving its own costs even lower. FutureBot is on a treadmill, running faster and faster just to fall further behind. As a value investor, even if both companies' stocks were priced the same, Wright's Law makes it clear that RoboCorp is the vastly superior long-term investment. Its moat is real, measurable, and widening with every robot it sells.

• Forward-Looking: Unlike most financial metrics that are backward-looking (like last year's earnings), Wright's Law helps you project a company's future cost structure and competitive position.
• Focuses on Fundamentals: It forces you to ignore market noise and concentrate on the core operational reality of a business: how efficiently can it create its product? This is a bedrock principle of value_investing.
• Identifies Durable Moats: It is one of the most powerful frameworks for understanding and quantifying a cost-based economic_moat. A lead on the experience curve is incredibly difficult for a competitor to overcome.
• Explains Market Dynamics: It elegantly explains why some industries consolidate into a few winners (or a single monopoly) and why being the first to scale is often a decisive advantage.

• Data is Hard to Find: This is the biggest challenge. Companies are not required to report cumulative production volumes or unit costs. Investors must often use estimates, industry data, and historical pricing trends as proxies.
• Not a Universal Law: Applying Wright's Law to a luxury goods company or a restaurant chain is a mistake. Its predictive power is confined to industries with repeatable production processes. Using it outside of your circle_of_competence can lead to very wrong conclusions.
• Vulnerable to Disruption: Wright's Law operates within a specific technological paradigm. A new, superior technology can create a completely new learning curve, making the old leader's experience obsolete. For example, the experience leader in vacuum tubes was wiped out by the invention of the transistor, which started its own, much steeper learning curve.
• Easily Confused with Economies of Scale: The two are related but different.
  • Wright's Law: Cost falls with cumulative (historical) volume. It's about knowledge and experience.
  • Economies of Scale: Cost falls with current production rate. It's about spreading fixed costs over more units in a given period (e.g., running a larger factory).

A company can benefit from both, but they are distinct forces.

• economic_moat
• economies_of_scale
• competitive_advantage
• intrinsic_value
• margin_of_safety
• disruptive_innovation
• circle_of_competence