Wright's Law

• The Bottom Line: Wright's Law states that for every cumulative doubling of units produced, the cost per unit falls by a consistent, predictable percentage, creating a powerful and durable cost advantage for the biggest and most experienced producers.
• Key Takeaways:
• What it is: A model that links cost reduction directly to cumulative production experience, not the passage of time. Think of it as “learning by doing” on an industrial scale.
• Why it matters: It helps value investors forecast a company's future costs, identify potential industry leaders, and understand the source of a powerful economic_moat.
• How to use it: By analyzing industries with high production growth (like EV batteries or solar panels) to predict which company is on track to become the lowest-cost producer.

Imagine you decide to start a side business baking artisanal sourdough bread. Your first loaf is a disaster. It takes you five hours, you waste half the flour, and the final product is barely edible. The cost, in terms of time and materials, is astronomical. You don't give up. By your 10th loaf, you've got a rhythm. You're faster, cleaner, and the bread is consistently good. By your 1,000th loaf, you're a master. You operate with unconscious efficiency. You buy flour in bulk, your process is perfected, and you can produce a perfect loaf for a fraction of your initial cost. This intuitive process of “learning by doing” is the very essence of Wright's Law. Formally, Wright's Law observes that for every cumulative doubling of production, the cost to produce one unit declines by a constant percentage. This percentage is often called the “learning rate.” Let's break that down:

• “Cumulative” is the magic word. We're not talking about how many units a factory produces in a year. We're talking about the total number of units ever produced by an industry or a company since the beginning of time. It’s about accumulated experience.
• “Doubling” means the gains are exponential. The cost drop from producing the 1st unit to the 2nd is the same percentage drop as from the 10,000th to the 20,000th, or from 1 millionth to the 2 millionth.
• “Constant Percentage” means there's a predictable rhythm to this cost decline. For example, in the aircraft industry where the law was first discovered by Theodore “T.P.” Wright in 1936, he noticed that for every doubling of total planes produced, the labor cost to produce the next plane fell by about 15-20%.

It's crucial to distinguish Wright's Law from its more famous cousin, Moore's Law. Moore's Law states that the number of transistors on a chip doubles roughly every two years. It's a function of time. Wright's Law is a function of experience. A technology can exist for a decade, but if no one is producing it at scale, the costs won't come down. Wright's Law says that progress isn't automatic; it must be earned through the hard work of production.

“The great engine of human progress is the accumulation of experience. In industry, we give this a name: Wright's Law. It's the simple idea that the more you do something, the better and cheaper you get at doing it.”

For an investor, this isn't just an academic curiosity. It is a powerful lens for viewing the industrial world, allowing you to see the future of competition and profitability before it becomes obvious to the market.

A value investor's job is to buy a business for less than its intrinsic_value. To do this, you need a reasonably confident estimate of a company's future earnings. Wright's Law is a formidable tool in this endeavor because it helps you understand one of the most powerful drivers of long-term profitability: a sustainable cost advantage. Here’s why it's a cornerstone concept for value investors:

• It Uncovers Emerging Economic Moats: The most durable competitive advantage a company can have is being the lowest-cost producer. Wright's Law shows you how that moat is built, brick by brick, with each unit produced. A company that aggressively scales production is not just gaining market share; it is “learning” its way to a cost structure its smaller rivals can never match. This isn't a temporary advantage; it's a structural one built on cumulative experience.
• It Improves Intrinsic Value Calculation: When you analyze a company, you are forecasting its future. If a company operates in an industry governed by Wright's Law and is the volume leader, you can project its costs to decline over time. This means its profit margins are likely to expand, or it can lower prices to crush competitors while maintaining its margins. This insight leads to a more optimistic—and more accurate—forecast of future cash flows, which is the bedrock of any intrinsic_value calculation.
• It Protects Against “Value Traps”: A value trap is a stock that looks cheap on paper (e.g., a low price_to_earnings_ratio) but is a terrible investment. Often, these are companies in industries being disrupted. Wright's Law helps you spot the disruptor. You might see an old, established company trading at 8x earnings, which looks cheap. But if a new competitor is scaling production of a new technology and is rapidly descending the cost curve, the old company's profits are about to evaporate. Wright's Law helps you focus on the company with the superior learning curve, not just the one with the backward-looking cheap multiples.
• It Reinforces a Long-Term Mindset: Wright's Law doesn't care about next quarter's earnings report. It's a force that plays out over years and decades. Embracing it forces an investor to think like a true business owner, focusing on long-term competitive positioning rather than short-term market noise. This is the very heart of the value investing philosophy championed by Warren Buffett and Ben Graham.

Ultimately, understanding Wright's Law gives you a more robust margin_of_safety. When you invest in a company that is the clear leader on its industry's experience curve, your confidence in its future viability and profitability is much higher. You aren't just betting on a good product; you're betting on a relentless, learning-driven cost-reduction machine.

Applying Wright's Law isn't about plugging numbers into a simple formula; it's a mental model for industry analysis. It requires detective work and a focus on the physical reality of a business.

Here is a step-by-step guide for using Wright's Law to analyze a potential investment:

1. Step 1: Identify Relevant Industries. Wright's Law is most powerful in industries where there is a complex, repeatable manufacturing or assembly process. Think of it as industries where “practice makes perfect.”
   • Prime Candidates: Semiconductors, solar panels, EV batteries, aircraft manufacturing, DNA sequencing, industrial robotics.
   • Poor Candidates: Restaurants, consulting firms, oil and gas extraction (where costs are dominated by geology), luxury goods (where high cost can be a feature).
2. Step 2: Hunt for the Data. This is the most challenging step. You need to find data or reasonable estimates for two key variables over time:
   • Cumulative Industry Production: How many total units (gigawatts of solar panels, megawatt-hours of batteries, etc.) has the entire industry produced since its inception?
   • Unit Cost (or Price as a Proxy): What was the average cost to produce one unit in a given year? Since true cost data is often proprietary, investors frequently use Average Selling Price (ASP) as a stand-in. While not perfect, it's often the best data available.
   • Where to look: Company investor presentations, industry analysis reports (e.g., from BloombergNEF, Gartner), academic studies, and government agency data.
3. Step 3: Visualize the “Experience Curve”. To see if Wright's Law holds, you need to plot the data on a special type of chart called a log-log plot. On this chart, both the horizontal (x-axis) and vertical (y-axis) are scaled logarithmically.
   • X-Axis: Cumulative Production
   • Y-Axis: Cost per Unit
   • If Wright's Law is in effect, the resulting data points should form a relatively straight line sloping downwards. This line is called the “experience curve” or “learning curve”.
4. Step 4: Determine the Learning Rate and the Leader. The steepness of that downward-sloping line tells you the learning rate. A steeper line means a faster rate of cost decline and a more powerful dynamic. More importantly, you must ask: Which company is contributing the most to the cumulative production? The company with the highest cumulative production is the “experience leader” and will almost certainly have the lowest costs.
5. Step 5: Formulate Your Investment Thesis. Use your findings to ask critical questions:
   • Who is the current scale leader, and how fast are they growing production relative to competitors?
   • Based on the learning rate, what will their cost structure look like in 3, 5, or 10 years?
   • Will this cost advantage allow them to capture more market share, enjoy higher margins, or both?
   • Is the current stock price reflecting this future reality?

Let's travel back to 2016 and use Wright's Law to analyze the emerging Electric Vehicle (EV) battery market. The Scenario: The world is just beginning to take EVs seriously. Two main players are emerging:

• “Gigascale Motors”: A pure-play EV company (let's think Tesla) that has publicly committed to massively scaling battery production at its own “Gigafactory.” Their entire business model depends on driving down battery costs.
• “Traditional Auto Alliance”: A consortium of established car companies. They are cautiously entering the EV market, mostly by outsourcing battery production from various suppliers and planning for modest volumes.

The Analysis using Wright's Law: As a value investor in 2016, you do your research. You find data suggesting that historically, the lithium-ion battery industry has had a learning rate of about 15-20%. This means for every doubling of cumulative gigawatt-hours (GWh) produced, the price per kilowatt-hour (kWh) has fallen by 15-20%. You realize the critical question is not “who has the best battery technology today?” but “who is going to produce the most batteries and accumulate the most experience over the next decade?” The answer is clear. Gigascale Motors is building a factory designed to produce more batteries in a single year than the entire world produced in the previous year. Traditional Auto Alliance's fragmented, slow-moving approach means they will accumulate experience at a snail's pace. You can create a simple forecast:

The Investment Insight: By 2022, Gigascale Motors' aggressive scaling strategy has given them a massive, almost insurmountable cost advantage. Their $40/kWh cost advantage ($160 - $120) on a 75kWh battery pack is a $3,000 structural advantage per vehicle. They can use this to start a price war, fund more R&D, or simply bank higher profits. The Traditional Auto Alliance is now in a classic value trap—their business looks solid based on their legacy gasoline car sales, but they are fundamentally uncompetitive in the future of the industry. A value investor who used Wright's Law in 2016 could have foreseen this outcome and understood the deep economic moat Gigascale Motors was building long before it was reflected in their quarterly financials.

• Focus on Fundamentals: It forces you away from market narratives and towards the physical reality of production. It's a powerful antidote to speculative mania, grounding your analysis in the mechanics of how a business generates value and lowers costs.
• Superior Predictive Power: In the right industries, Wright's Law is a far better forecaster of long-term costs than simple time-based trend extrapolation. It correctly identifies the cause of cost reduction (experience) rather than just observing the effect.
• Highlights Durability of Moats: A cost advantage gained through Wright's Law is exceptionally difficult for a competitor to overcome. A new entrant can't just raise capital and buy a low-cost structure; they have to painfully earn it by producing millions of units, often at a loss, to catch up on the experience curve.

• Data is Hard to Find: This is the biggest practical challenge. Companies guard their cost and production data closely. An investor often has to piece together a mosaic from various sources and make educated estimates, which introduces uncertainty.
• Not a Universal Law: It's a common mistake to apply Wright's Law to every industry. In businesses driven by brand, location, raw material costs, or network effects, it has little relevance. Applying it outside of its proper context (manufacturing-intensive industries) will lead to flawed conclusions.
• Learning Can Plateau: The “constant” percentage is an idealization. A mature industry may see its learning rate slow down as it exhausts the most obvious process improvements and approaches the limits of physics or material science.
• Price is Not Cost: Investors almost always use selling prices as a proxy for costs. But prices are also affected by supply/demand dynamics, brand value, and competitive intensity. A company could be lowering prices aggressively to gain market share, making the “learning curve” appear steeper than it really is.

• economic_moat
• economies_of_scale ¹⁾
• moores_law
• disruptive_innovation
• intrinsic_value
• margin_of_safety
• circle_of_competence