First Principles Thinking – Boiling Problems Down to their Most Fundamental Truths

Now let’s deep dive and understand what this First Principles Thinking is all about. First Principles Thinking is also called as reasoning from first principles. It encourages a lot of creativity. It involves breaking down the problem into the most basic elements, which are irrefutable and undisputed. Then re-assemble those ideas from ground up.

Elon Musk is one of the strongest proponents of this way of thinking and has repeatedly shown this thinking via his multiple ventures, including that of Tesla Giga factory. When the Giga factory was conceived, the cost of the Lithium-Ion battery was close to $600 per kilowatt hour. Elon asked his team to break this problem into basic constituents. Basically, a Lithium-Ion cell consists of a cathode and anode. Cathode contains metals such as Lithium, Nickel, Cobalt, Graphite etc. depending on the battery chemistry. When his engineers computed the cost of raw material, it turned out to be just $80 per kilowatt hour then. So, the cost of Lithium-ion battery at that time was $600 and the raw material cost was just $80. True to First Principles Thinking, when the Giga Factory was launched, he was able to bring down the cost to about $200 per kilowatt hour. And, since then the Lithium-ion battery cost has only continuously come down.

FPT involves the following three steps:
The first step is to identify and then challenge your assumptions. Generally, no one questions the price of rare earth materials as it is assumed that it is a very complex product and that it involves battery grade material processing which are expensive. Elon challenged these assumptions and was in fact, heavily criticized for challenging these assumptions. But Elon persevered.

And the second step is to separate the problem into its fundamental components or fundamental principles. In this case, Elon questioned this fundamental assumption and then asked the team to break the problem into its basic elements.

The third step is creating a new solution out of it. Again, creating the solution from ground-up rather than looking at how it is done elsewhere.

Now, this can be applied in several parallel industries as well. For an energy storage and battery industry, there are a few areas where this could be applied. One such area is the Copper and Nickel bus bars in the battery packs which are used for interconnecting the lithium cells. Pure Nickel, in the metal exchange, sells for about Rs1800 per Kg. Whereas for the formed interconnecting Busbar in various sizes and shapes, which is 99% nickel, the market price is about Rs4000 per Kg. Again, this is a great opportunity for First Principles Thinking. Another area is the plastic cell holders that are used to hold the cells in a battery pack. The cost of special plastics is about Rs400 per kg. But the cell holder cost, after molding and formation, costs about Rs2500 per Kg. This is the cost of value addition and conversion. It is not to say that value addition cost can be reduced to zero, but there is an opportunity for applying the FPT thinking in these areas.

Another example of First principles thinking in energy storage/battery industry is as follows: Electric power plants produce electricity they pour into grids to meet our energy needs. They come in various forms. Until recently they were either ‘heat factories’ boiling water to generate steam, or hydro stations feeding water through turbines using gravity to produce electricity. Nowadays with new forms of renewable energy coupled with battery energy storage, new ways of producing electricity is possible. Large conventional power plants take hours, even days to fire up. Hence, they have to run continuously yet only release the actual electricity the grid requires. Industries and researchers have begun to question this wasteful practice via First Principles Thinking. Battery storage power plants that store energy in large sets of chemical cells are making rapid inroads into the energy market. Battery storage is in increasing demand for short term peak power harvested from solar panels, and wind turbines. These battery energy storage also provide sterling service as frequency-response reserves preventing grid trips leading to power outages.
 

First Principles Thinking can be applied just not for the First Movers but for Late Entrants as well. Late Entrants can do more rigorous benchmarking and come up with a product/solution that far exceeds the original one available in the market. Classic example is the Google search engine. Google is not the first one to develop a search engine. Before Google there were several big players including Netscape Navigator, Yahoo etc. But when Google came up with their search engine, they applied First Principles Thinking and came up with a product that far exceeded the standards set by the First Mover.

Similar examples can be found in other industries as well. Before Apple, Sony was the market leader in the music industry. Apple looked the problem of music storage and retrieval from First Principles and came up with the digital music player iPod. iPod’s tremendous success is well known in the industry and all those features have been now integrated in the iPhone and subsequent Apple’s products.

Physics teaches to reason from the first principles rather than by analogy. In First Principles Thinking it is important to declutter oneself and look at the big issue. Under the influence of clutter, we sometime underestimate how much time we are giving to the less important stuff. When we look at the problem from first principles, it gives us a new dimension of thinking. It is important to challenge all the assumptions around any problem that is discussed, go into the fundamentals which are irrefutable and then re-assemble the ideas back again. First Principles Thinking is all about boiling problems to their most fundamental truths!

- Venkat Rajaraman, CEO and Founder, Cygni