Saturday, April 29, 2017

The Tech Crash of 2020?

The bankruptcy of Tesla will be merely a part of the tech crash of 2020.

Tech is going to crash in a few years.  Why do I say that?  Well, it crashes every decade or so, and we are about due.  It takes a long time for companies to fail.  I was blogging about Sears closing its doors back in 2010.  Well, seven years later, they still teeter on the brink of bankruptcy.  Maybe this year.... But you know it will come, eventually.

It took a long time for GM to fall, and in retrospect, we all saw the signs.   We knew that schemes like the Elio 3-wheeler wouldn't make it, but enough people bought the stock, loaned them money, and put down "deposits" that they are technically still in business today, although insolvent.   Radio Shack took forever to topple, was bought out in bankruptcy by private equity, and toppled yet again.  These things take time, be patient.

The problem for Elon Musk is that he is a visionary and visonaries, as I noted before, are often failures in their own lives even if they inspire us to greatness.  Mark Zuckerberg, in contrast, is a schmuck, and schmucks always make a lot of money, at least for themselves.   

Yes, Tesla turned a small profit in the last quarter of 2016, but that wasn't due to the sales of cars, but to the sales of emissions credits to the State of California.  Now, don't get me wrong, as an Automotive and Electrical Engineer, I want to see the electric car succeed on its own merits - and it will, eventually.   But it is likely that it will succeed under a GM, Ford, BMW, Mercedes, Toyota, or VW nameplate.

The problem for Tesla, is that he is literally re-inventing the wheel here, starting a car company from the ground up, a visionary idea that has bankrupted many people in the past - if they weren't just scams from the get-go.   Tesla is demonstrating there is a demand for electric cars, and other manufacturers are rushing in to join the party - nearly every manufacturer in the world has some sort of electric car for sale in showrooms right now.   Granted, not many are as nice as the Tesla or have the range, but many are also a lot cheaper, and range is really not as much of an issue as people think.   It is nice to be able to go 300 miles in  Tesla between charges.   But no, that isn't enough to make it a practical car to take a long trip in, as you will likely go more than 300 miles when you drive to Disney World.

The big problem for Tesla is Trump.   Trump will drop EPA CAFE requirements from the staggering 50 mpg slated for as soon as 2021 (which is not far away!).  Electric cars allowed manufactures to reach this goal, as they had an "equivalent" MPG in the hundreds.   Take away the CAFE requirement and you take away the need for electric cars.

The one-two punch will be low oil prices.  With new pipelines going in (and don't believe the press about "protests" stopping them - look at standing rock, it accomplished nothing) and the oil sands from Canada and Bakken reserves from America, we are poised to be awash in a sea of cheap oil.   Venezuela will keep exporting oil to prop up its sagging economy.  And our friends in the middle-east are desperate to pump, not to mention Russia.   Short of a major war in the region, an oil shortage does not look likely.

It is hard to sell electric cars in an era of $2 gas - particularly a stable era of $2 gas.

Now look, I'm not saying this is right, just the way it is.  I would prefer to see a world with electric cars being recharged at home stations from solar panels and wind energy.   That would be nice.  It will happen, and maybe if Hillary were President it would have happened soon.  But Trump is now President, and a lot of subsidies for electric, solar, and wind power will go by the wayside in favor of subsidies for the oil and gas industries.

The other problem for Musk is that like any good visionary, he has his hands in a lot of pies - a lot of money-losing pies.  Hyperloop sounds like a great idea, but the amount of money to build it would be staggering - in the trillions.   Whether private capital could even afford to do this is questionable.  It is hard to see how Musk can make a profit at it.   Or his space exploration dreams.   Again, visionary.  Profitable?  Only so long as NASA pays for launches.   If the ISS is decommissioned as scheduled in the 2020's, well, there maybe a big drop in launch demand.

But enough about Musk.  What about the rest of the tech sector?   What about it?  The big problem for tech is there is no compelling new product coming out.   Smart phone saturation is near 100% - there are no new customers left and that leaves only replacement and conquest sales.   I'd buy a new smartphone tomorrow, but my Galaxy S4 does everything I need it to.  Why risk hundreds of dollars on a new phone?   Like the PC market, it has matured, and sales will plateau from now on.

Pundits posited that wearables or 3-D VR would be the "next big thing" that everyone would have to have.  But while "everyone" needs a smart phone today (it has gotten so you have to have one to interact in society anymore) you don't really need a fitbit or a Oculus headset to get along.   And VR, like 3-D before it, will turn out to be less than what people expect.   Zuckerberg envisions a society where everyone will interact in 3-D VR (read:  VR porn) and thus will have to have this technology.

Two problems:  First of all, this VR crap is basically already included in most new phones.  You snap the phone into a headband and you're there.  So companies like Oculus will have a hard time selling a standalone VR headset that is just a headset and not also your phone.   The second problem is that not everyone will want to live in a VR world, just as a lot of people found 3-D movies and television (remember that?) to be a hassle and disorienting.  It simply isn't as compelling as basic tech like the smart phone.

And we've seen this before in tech, many times.  When Windows 95 came out, the industry geared up for everyone to dump their old PCs for new Windows-compatible units.   Problem was, a lot of people were still happy with their old Windows 3.1 machines, and some even running on DOS just fine, thank you.  The big market hit turned out to be nothing - there was no compelling need to upgrade, when old technology worked just fine.   People do make rational economic choices with technology sometimes.

But what about social media?  Won't that continue to be profitable?  Well, to begin with, it really isn't very profitable.   And people are starting to discover how odious it can be.  Twitter is admitting that millions of its users are fake accounts set up to "follow" people and make their comments seem more popular than they are.  Facebook is grappling with the same issue and admitting their platform is being used by Russian trolls to influence public opinion.

Again, we saw this all before.   In the DOS era, we would access "news groups" (the source of the "alt." nomenclature used by the alt.right) to go online and interact with other people.  So long as it was just computer nerds, it was just the usual sort of time-wasting on the computer.   But I recall vividly seeing the first SPAM on a usenet newsgroup.  It was like a shell-shock, as I realized there was really nothing anyone could do to prevent spam on these open forums.   And within a year or so, the SPAM and trolls outnumbered real postings by 2:1, then 10:1 then 100:1 as more and more people fled these groups and went to privately run websites to discuss various topics - websites that were moderated or charged a fee to join.   Newsgroups were dead.  Oh, they're still there, just as Second Life and MySpace still exist.  Just no one goes to Newsgroups anymore and they are just full of SPAM.

Many online forums became ghost towns the same way.  People migrated to new forums, leaving old ones behind, as flame-wars and troll-wars erupted.   AOL "Newsgroups" were once wildly popular, but fell by the wayside.  This is not ancient history, either, but things that happened only a decade or two ago, and continue to happen today.
So Zuckerberg has to figure this out and fast.  The problem is, to moderate all of Facebook will require some really clever bots, or a lot of human beings working in real-time.  We are already seeing that it takes them nearly a day to take down suicide or murder videos - the most outrageous of content.  How can they hope to stop Fake News?   They can't, without moderators, and that costs money.  Bots don't cut it, as trolls learn what the bots are looking for and then spoof around them, sort of the same way con-artists on Craigslist get around their bots and list the same trailer for sale in all 50 states

I got off Facebook when I saw the potential for evil in it.  Even regular postings by regular people turned into an exercise in narcissism.   I didn't like who I became on Facebook - and no one is like their profile on Facebook.   Similarly, I stopped reading Reddit when it became a toxic mix of alt.right, Trump supporters, Russian trolls, and "red pill" idiots.   Reddit just left me depressed, no matter how much they tried to cheer me up with cute cat pictures.   And Twitter?  Two words: Donald Trump.   That, and the fact that only the media uses Twitter.  I've never been on Twitter, but read the tweets all the time in "the News" - how does this business model make sense?  I mean, it is losing money like mad.

So it is possible we could even see "social media" become a thing whose time has come and gone - maybe replaced with something else.  Or at least, maybe a few players go by the wayside.  Maybe it will even replaced with - dare I say it? - reality.   But regardless of popularity, profitability will remain the big problem for many of these social media platforms.  Even Facebook, with a 2016 P/E ratio of 40, is overpriced, even if it is profitable.  Projections of future P/E ratios are, of course, speculation.  Facebook might see a huge drop in stock price, if the P/E predictions turn out to be premature.

Then there is Toshiba.   I sold my Southern Company stock, even though utility stocks are generally seen as safe, boring, investments.   Southern Company owns Georgia Power, which is building two new nuclear plants here in Georgia.   Toshiba bought Westinghouse, which was contracted to build these plants,  (along with one in China and two in South Carolina).   Like so many nuclear projects (e..g, Niagara Mohawk Nine Mile 2), the plants end up way over budget and behind schedule.  At this point, Westinghouse is bankrupt, and Georgia Power is trying to figure out what to do - take over construction on its own, convert the plants to cheap natural gas?  Or go bankrupt itself?

Meanwhile, Toshiba, once the powerhouse Japanese tech company, is facing bankruptcy itself, trying to sell off the jewel in the crown - its memory business - to pay for the disaster.   Good thing seppuku is no longer in fashion in Japan!  While nuclear power is really not "tech" related, it ends up taking down a tech company.  A big tech company.

When these plants were designed and construction started, electrical costs were high and these nuclear plants appeared to be profitable ventures.  Cheap natural gas ended up undercutting nuclear power, and cost overruns sealed the deal.   While this may appear to be limited to something as minor and esoteric as the nuclear industry, think about how this will also impact solar and wind power.    Again, will Musk be able to sell us on solar panels and storage batteries for our homes, when cheap electric power from natural gas floods the market?  Stay tuned.

Of course, things will turn around eventually.   Bankrupt Tesla might be bought up by one of the smaller car companies that can't afford the R&D to develop their own electric car.   Oil prices will eventually go back up (they always do) which might send us back to the electric car drawing board (these things seem to go in cycles!).  Crashes are always followed by recoveries.

But I am not sure that the euphoria about today's stock market is entirely justified.  I mean, I made $20,000 last weekend, just sitting in my camper in Florida.   I'll take the money, thanks.  But I realize that volatility, particularly based on projected future growth and earnings is often a dangerous thing.  What goes up, must come down.   And it may be we see some down in the near future.