Thursday, November 16, 2017

Rocket Jesus

Is the adulation of Elon Musk perhaps a little overstated?  Perhaps.

One aspect of the next tech crash will be Elon Musk and Tesla.  Musk has his share of supporters and detractors.  I am kind of neutral about him, personally.   Technology and investment should not be based on a cult of personality, but rather on the underlying fundamentals.

And coming from the car industry as a kid, I saw firsthand how ruthless a business it can be.   Margins can be razor-thin.  And capital costs can be staggering.  You invest billions of dollars in factories, equipment, and worker training, spend tens of thousands of dollars per car in labor, parts, overhead, and marketing, and sell a car worth $40,000 for a paltry profit of a thousand or two.   You'd be better off buying government bonds, in some cases.  Ask Henry J. Kaiser how simple it is to break into the car business.

Of course, for GM, Ford, and Chrysler, they can make up for this with $10,000 profit on a pickup truck or monster SUV - people pay a lot of money for empty steel boxes.   But even that strategy can backfire, as evidenced by the bankruptcies of GM and Chrysler in 2009.   What about Tesla?  Can they buck the trend of the last 70 years or so and become the independent carmaker who is not left in the dust behind the big-3 and foreign competition?

That is the conundrum.   There is no magic sauce in an electric car - Musk isn't selling something that other carmakers can't and aren't already copying.   Maybe he can sell the model S based on exclusivity and luxury - and indeed, in rich neighborhoods, you see them parked out front of the tony restaurant at the valet stand, next to the Porches, BMWs, and Mercedes.

But the model 3?  A car that looks and is priced like a Toyota Camry?   That is a car that has to compete on its economic merits, not on cache or perceived status.   And it is here that Musk may well fall down.  BMW is the most profitable car company on the planet as they are not just selling cars, but selling status and exclusivity.   Just as a befinned Cadillac in your driveway in 1959 showed everyone you had "made it", a trim 5-series sedan today says the same thing - that you have money to spend and are (allegedly) smart about how you spend it.

Take away that status and exclusivity and the BMW or Mercedes is as pedestrian as a police car or taxicab - indeed, what they are often used for in the rest of the world.  And that is not the only problem for Musk.   If he really attempts to "mass market" an electric car, he will need dealers and service centers to service them.  They just opened a Tesla service center in Jacksonville.  I drove by it the other day on the way to the wholesale club.   Maybe it was the hurricane, but it now says "ESLA" on the front, which is not a good sign.

When I drove by one Tuesday, it said "ESLA"

Mass-marketing cars is a whole different ballgame.  Sure, you can sell "boutique" cars with dealers only in limited areas.   Rich folks don't mind having their Ferrari flat-bedded to the dealer for an oil change - in fact, they get off on that sort of shit.   But for the rest of us?   There is a Chevy dealer in nearly every damn town we drive through.   You'd better be prepared for that kind of infrastructure, if you want to sell hundreds of thousands of cars.  GM, Ford, Chrysler, Toyota, Nissan, et al., already have this infrastructure in place.   When they get in the electric car game, it is game over for Tesla.

Of course, the big problem for Rocket Jesus is money - or the lack thereof.  He isn't making any, but rather has been hemorrhaging cash since the get-go.  Tesla was poised to make money there for a while, but then the model-3 came out, along with the purchase of solar city.   Both could be smart moves, I guess, if they made money for the company.   And in order to make money, you have to sell product.   And they aren't selling many model-3's because they aren't making many of them.  And solar city seems to have gone dark, other than some grandstanding operations in Puerto Rico.

And as I noted before, we have an administration who would rather see cars powered by coal.   It is not going to be a friendly regulatory environment for electric cars or solar panels.  The new tax bill could roll back or eliminate many tax credits and other incentives.   The ITC has found that Chinese companies are "dumping" solar panels on the marketplace, and now it is up to President Trump (I throw up in my mouth a little bit every time I say "President Trump") to decide what tariffs should be applied to solar panels.   If he goes along with the complainant's suggested import duties, many suggest that solar installs, which are already slowing in the United States, will grind to a halt.   The purchase of Solar City will start to look like a bad bet for Tesla.

And questions will be asked - pointed questions - as to why Tesla bought Solar City when Musk and other insiders had investments in Solar City.  The specter of self-dealing will be raised and shareholders might be more than a little miffed.   A shareholder derivative suit may ensue - well, it already has ensued.

But what about Space-X?  Is that making a profit?  Bloomberg claims so, back in 2015.  Others are guessing at the answer - using "scenarios" to calculate potential profits, as Space-X keeps financial information pretty close to the vest.  The folks at Motley Fool can't figure it out, either - guessing at profits based on scant information the company provides.  As a privately held company, they don't have to disclose their finances.

Frankly, I think these "analyses" are rather optimistic.   Space travel is staggeringly expensive.  Space-X has been stealing launch business by undercutting industry giants like Boeing.   In other words, they are likely losing money on each launch, just to get their foot in the door - hoping later to bring costs down through re-usability of the components and eventually make a profit.

A nice theory, but it won't work - or work as well as they'd like.   In space travel, every system is mission critical.  We stopped flying to the Moon, even though we had several Saturn-V rockets and Apollo space capsules laying in wait (which were later used for Soyuz and our first ill-fated Space Station, Skylab).   Why?  It was incredibly fucking dangerous and we nearly lost two crews.    People forget that Neil Armstrong took manual control of the LEM at the last minute, and landed the craft with seconds of fuel to spare.   It could have turned out very, very badly if circumstances were different or if he had hesitated a moment longer or his landing skills weren't up to snuff.   And then there was Apollo 13, which illustrated dramatically how one tiny flaw in a wiring harness can cause all sorts of trouble.

So, if you want to re-use a rocket component, that is fine and all - the Space Shuttles did it for decades.  But  you end up inspecting, adjusting, fixing, and replacing every damn millimeter of the thing, in order to insure it is safe.   And as we learned from the Space Shuttle, twice, sometimes that's not even enough.   The end result is, re-usability or not, the costs of going into space are pretty staggering.   And you can only sell launches for below cost for so long.

Now don't get me wrong, I am not anti-Musk or anti-Tesla.   I think the entire concept of electric cars recharged by the sun is a great idea.   And eventually, I think it will happen.   But first to market is often last in the marketplace, and Musk is basically being the sacrificial lamb here - prodding more mainstream manufacturers to move forward into this electric and solar era.   And once Trump and his cronies are out of office, maybe this idea will have legs.   In the next few years, however, it will be tough sledding.  As a personal investment, I don't think Tesla stock is a good buy for the small investor.  If you buy this stock, it is for emotional reasons not logical ones.  Even Musk is embarrassed by the stock price!

I think also that I am not fond of the idea of these "Tech Messiahs" who the press puts forward as the mythical gatekeepers of the future.   We are told that Bill Gates, who once said the Internet was a fad, has some special insight into technology and futurism.   He doesn't.   But if you want to sign a licensing agreement, you might want to run it by him.   The deal he made with IBM was what made him rich.   He is not a "tech guy".

It is sort of like how the press hangs on every word Stephen Hawking (whose personal life is a bit of a train wreck) says about futurism - as if every scientist knows everything about every technology.   Granted, the guy is a genius in the physics business.  Ask him about quantum gravity.   I am less sure he is an expert in "AI" (whatever the hell that is - it seems to be a catch-all phrase these days, like "block chain" - repeat it often enough and you will sound smart).   But the press reports breathlessly that Hawking is warning us about "AI" or global warming or whatever - things outside of his purview.   It is sort of like these Einstein "memes" that are bandied about, where poor old Albert is said to give his views on everything from economics to your sex life.   Most of these are things he never said, but even if he said them, what does a theoretical physicist bring to the table here?

Worse yet are the mere business-people who are hailed as "tech geniuses" such as Zuckerberg, Bezos, or that crazy guy who started Uber.   These are mere merchants in the marketplace, but we are told they are "tech" people and have special insight into everything from robotics, to "AI" (again) to politics, economics, futurism, global warming, or whatever.  And I guess you could argue that Musk, who made his money in PayPal (a mercantile endeavor if there ever was one) is part and parcel of this group - but at least he has earned his chops in the space and electric car business by actually doing things in these areas.

Put not your faith in Rocket Jesus - or any of his modern-day disciples.   Worshiping famous people or rich people is to worship a false God.   This is not to say these are bad people or that they have bad ideas, only that we should not place them so much on a pedestal.

Because unlike Gods, humans have a tendency to fall off.


UPDATE:  Some people like to hero-worship too much, and apparently my blog entry upsets their world view.  Surely these great men of our era are Ayn Rand style gods, right?   A reader writes that he read a book by Bill Gates, and in it, he says he foresaw the importance of the Internet.  Bullshit.  Sorry, but I was there, as were a number of other people.  Microsoft dropped the ball on the Internet, but of course, later on, put Netscape Navigator out of business by making IE part of Windows (just as the put WordPerfect out of business by bundling Word with Windows, originally).

Of course, maybe our reader read the revised edition of Bill Gates' book - where he suddenly has a road-to-Damascus experience and decides the Internet is the next big thing.


1 comment:

  1. A reader writes that Teslas don't need service very often as they don't require oil changes or other maintenance that internal combustion engines require. But today, oil changes are the least aspect of owning an IC engine - indeed you can get a change in 10 minutes at a quickie-lube place for $30.

    The real problem is electronics, esoteric failure modes, safety recalls, and other problems which often don't manifest themselves until a year or two after you've bought the car.

    As consumer reports found out, the Tesla can be a real nightmare to repair, when the electronic gizmos fail and there is no local dealer to take it to.

    ReplyDelete

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