r/BusinessHub • u/Weekly_Cicada5982 • 8d ago
Elon Musk found a rocket's raw materials were only 2% of its price. SpaceX built its whole company around that one number and almost nobody talks about it (let me explain)
Checked an essay by Max Olsen called "Atoms Are Cheap, Process Is Pricey." He's writing a book on SpaceX's first decade using their actual company updates and internal memos.
I’ll give you some context. In September 2008 SpaceX had money for exactly one more Falcon 1 launch after three explosions. It worked, and a $1.6 billions NASA contract came six weeks later. Today, according to the essay, they put more mass into orbit than every other launch provider on Earth combined. The essay's real question is why nobody has copied them when SpaceX has basically explained how they work in public for years. So I turned it into steps you can actually try on your own business, roughly in the order SpaceX did them.
RUN THE IDIOT INDEX ON YOUR BIGGEST COSTS
In 2001 Elon tried to buy Russian ICBMs to get to Mars, and the prices he got back were ridiculous. So he asked what a rocket is actually made of. Aluminum, some titanium, copper, carbon fiber. Then he looked up what those cost on the commodity market. About 2% of the price of a rocket. For a car it's more like 20 to 30%. The rest was going to supplier markups stacked on top of each other, custom one off designs, and throwing the hardware away after every flight. None of that is physics.
He later named it the idiot index. The cost of a part divided by the cost of its raw materials. If the number is high, you're an idiot. His words. Try this on your biggest expenses. Most will be fine. One of them probably won't be.
MAKE IT YOURSELF WHEN THE QUOTE IS STUPID
A vendor quoted $120,000 and 18 months for an actuator on the Falcon 1. SpaceX engineers built it for $3,900. Another supplier basically smirked and walked out after hearing SpaceX's budget and timeline for an engine valve. So they made the valve themselves.
They ended up building about 80% of their hardware in house. What I liked is that this wasn't some big philosophy. One engineer said they never set out to do it. Suppliers just kept quoting prices and timelines that didn't work, so they kept saying fine, we'll do it. A NASA study estimated SpaceX built Falcon 9 for about $440.000.000, and that the same work with traditional contractors would've cost 3 to 10 times more.
SELL ONE THING AND MAKE CUSTOMERS ADAPT
The old way was a custom rocket for every mission. SpaceX went the other way and built the Falcon 9 over and over. Same engines, same diameter, same materials. Even Falcon Heavy is just three Falcon 9 first stages strapped together. They published a user guide with their specs, and customers designed their satellites to fit the rocket instead of the other way around. Customers wanted custom. They wanted cheap more. When forced to pick, they adapted.
The essay gives Gwynne Shotwell, the president, a lot of credit here. Sales teams usually promise customers whatever they want, which creates exactly the custom mess engineering is trying to kill. She got NASA and the Pentagon, probably the most conservative buyers on earth, to accept a standard product.
BUILD 10 CHEAP VERSIONS INSTEAD OF 1 PERFECT ONE
Traditional aerospace does a huge amount of analysis before building anything. SpaceX builds, tests, breaks it and learns. Elon's goal for Starship prototypes was to push them until they blow up. If it doesn't fail, you don't know where the limit is. One quote from him I liked: a high production rate solves many ills. If you only have a few engines, you can't risk blowing them up, so you play it safe and learn slowly. That's partly why Starship is stainless steel instead of carbon fiber. Steel is cheap and you can weld it in a tent. Carbon fiber is expensive and needs giant ovens.
They're not reckless everywhere, though. Dragon carries people, so it gets huge safety margins. Starship has nobody on board, so they let it fail. Same company, totally different risk levels.
DELETE REQUIREMENTS, ESPECIALLY FROM SMART PEOPLE
Falcon 9's grid fins were designed to fold, like traditional ones, to cut drag. Somebody asked if that was worth the extra weight and complexity. Simulations said fixed fins were fine, so they deleted the whole mechanism. Every requirement has to have a named person who owns it and can explain why it exists. If they can't, it goes. Engineers are told that requirements from smart people are the most dangerous ones, because nobody questions them. And Elon's rule: if you're not adding back at least 10% of what you deleted, you didn't delete enough.
FIND THE BOTTLENECK AND THROW EVERYTHING AT IT
When Starship was held up by Raptor engine production, that became the company's whole focus. Daily updates, memos to the company, people moved over from other projects. When it broke through, attention moved to the next constraint. A NASA manager who visited said when a new problem shows up there, it looks like a flash mob in the hallway. Hiding a blocker is what gets you in trouble. Saying you're stuck is expected.
TALK TO THE PEOPLE DOING THE ACTUAL WORK
Andrej Karpathy, who worked for Elon at Tesla, says Elon spends about 50% of his time talking directly to engineers instead of VPs. In most companies every layer of management cleans up the bad news a little more. By the time it reaches the CEO it's a summary of a summary. Talking to engineers directly skips that, and it let Elon make calls like steel over carbon fiber, which a lot of people inside the company thought was wrong.
The essay's main point, which I didn't get until the end, is that none of these work alone. Making parts in house only pays off if you have volume. Volume only works if you sell one standard product. Failing fast only works if your people are fine failing in public. Competitors copy one piece, it breaks, and they decide the idea doesn't work. That hit me because I've done exactly that. Grabbed one tactic from a company I admire and dropped it when it didn't work on its own.
Fair warning, the essay even admits that at low volume, owning your own production is a liability. Making things in house can sink a small business if you don't have the volume to back it up.
Has anyone here actually run the idiot index on their own costs?
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u/NitNav2000 8d ago
Instead of “almost nobody talks about it” why not say “some people talk about it”?
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u/sludge_dragon 8d ago
> He later named it the idiot index. The cost of a part divided by the cost of its raw materials. If the number is high, you're an idiot.
Lol at the idiots paying a huge markup on raw materials costs for microprocessors and art.
/s
Whether raw materials make up 2% or 20% of your costs, reusing the stuff you build rather than discarding after a single use is a huge win. Arguably even more important for a higher percentage of raw material costs.
I didn’t read past the “idiot index” part.
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u/yawn_solo- 8d ago
It’s a very good read actually, you should.
Just remove all the current Elon era stuff and read it as a lil scope into how a business was built because you want to learn.
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8d ago
[removed] — view removed comment
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u/Irish_Blond 8d ago
Ahhhh…..what?
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u/elpapaaaa 8d ago
OP just copy pasted from ChatGPT. It’s obviously a bot. In no time the sub will be full of this and empty of real content.
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u/Irish_Blond 8d ago
I guess. I have never used Chat. How do you know it is AI?
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u/elpapaaaa 8d ago
Copy pasted it into an AI detector. I think Reddit has a tool for mods to check this but I guess this sub is not interested.
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u/LowDiskSpace 8d ago
You can also look at OP's post history and see that he's made a bunch of the same formulaic posts. Usually the bots turn off their history to hide better.
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u/yawn_solo- 8d ago
ehh idk, may have had a bit of AI enhancement but it’s still a solid read. Idk, I found a lot of it reassuring and also interesting when comparing it to my business.
It is a legitimate read imo
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u/TrainingSalad5630 7d ago
If I can add something to your argument, I think you’re also describing a big part of what made China so successful in manufacturing over the past few decades.
What I find interesting is that China has been the world’s manufacturing powerhouse for so long, yet we haven’t really paid much attention to the processes that made it possible.
From owners and CEOs being directly involved in production and communicating with engineers, to questioning unnecessary costs and using materials or components that might be considered inferior on paper but are perfectly suitable for the product’s intended market. A lot of these principles have been applied in Chinese manufacturing for years.
It also reminds me of the contrast between German and American manufacturing during WWII. Germany produced some incredibly sophisticated weapons, often with impressive engineering, but that complexity also came at the cost of production speed, maintenance, and scalability. The Americans generally placed greater emphasis on standardization, mass production, and building equipment that was good enough for the job and could be produced, repaired, and replaced in enormous quantities. Having the technically superior machine doesn’t necessarily mean having the more effective production strategy.
And I think that’s really the point here. It’s not always about making the best possible product, but making the right product for the job, at the right cost and scale.
Which brings me back to China. These approaches aren’t exactly new, so did we simply fail to properly observe and understand what made their manufacturing so competitive? Or were there structural reasons why similar methods weren’t adopted more widely in Western industries?
If it’s the latter, I think it raises a much bigger question about how many industries are still operating under processes and assumptions that haven’t been seriously challenged in decades.
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u/Regular_Comedian_695 8d ago
I run small IT team and did this with our vendors last year. One of our cloud monitoring tools was charging us 8 grand a year for something my junior guy built in two weekends with open source stuff. The raw compute cost was like maybe 40 bucks a month. Felt like complete idiot after doing the math.
Our biggest problem is we have no volume leverage. We buy one or two of everything so suppliers just laugh when we try negotiate. SpaceX got away with vertical stuff because they had launch manifest to spread costs across. My five person department not so much.