Ben Gilbert: evaluation

Transcript context

…Elon, of course, starts asking questions. People in this industry aren't really used to questions being asked of them. He starts figuring out that some of these components, whether it's part of the shelf, the fuel tank on the rocket, or some of the avionics in the components that contractors are charging multiple hundreds of thousands of dollars apiece, that they can just manufacture them either in-house—fab them in-house—or use off-the-shelf consumer-grade electronics and computers for 1% or less of the cost that these contractors are quoting them. He says all right, it's good. Just like Tesla, we're not going to take the Detroit approach to this. We're going to vertically-integrate. We're going to make 90%+ of this rocket in our own factories. Which is wild. SpaceX coyly talks about how raw materials roll in one side of the factory and rockets roll out the other side. They always talk about it. Minerals show up on the left side and rockets show... It's not quite that. They do have a network of suppliers. I think the number is 3000 suppliers and 1100 supply them products every week. The way to think about it is those suppliers are just way lower level. They're more the raw material. Think about sheet metal and wiring rather than fully assembled motherboards and fuselages. It's kind of a crazy undertaking. Really in business, the theory is only to take your core competency in-house and outsource everything else. Outsource everything that can be a commodity. There were so few players in this industry and such a limited number of customers on the demand side, there was a very specific way that it was done. That way just involved this wild scattering of subcontractors, each of which had to make their own profit margin. You end up with this stacked margin, margin, margin. As someone who will talk about here shortly, brings up in a speech, her quote is, "It's exponential GNA that you get when you have multiple layers of integration." I've never heard someone describe it aptly, that of course this is exponential. Every time somebody needs to make their 30% or whatever it is, that's on the previous person's 30% or whatever it is. I bet it's a lot higher than 30%. Yeah. Let's think about who the end customers were in the space market, mostly pre-SpaceX. Even now post-SpaceX, they were governments. Primarily, the US government but also other governments around the world. These are entities like all these contracts are done on a cost-plus basis. By the way, side note, playbook theme, if you ever, as an investor or an operator, encounter a situation where there's a cost-plus contract as a way of doing business, you need to either, if you're an entrepreneur disrupt them as soon as possible, or if you're an investor run the other way. With the cost-plus, there's the cost of what it costs to make something, then the contractor makes a percentage profit on the cost. The incentive of the contractor is to make a cost as much as possible so that their absolute dollar profit as a percentage of the bigger number is bigger. It's nuts.…

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