I always look forward to Fritz’s observations and homespun writing style. Hope you do too. – Craig
All of a sudden storm clouds have shown up in the economic indicators
Suddenly the stock market erases gains for the year. Oil prices go down, China quits investing in capacity and overcapacity is showing up. Trade issues are not settled and the painful part of the process is about to be realized, with hundreds of bankruptcies of businesses built on the business assumption of globalization.
We have heard that the stock market decline has taken away momentum from real estate as confidence to buy at highs is diminished. New challenges are almost sure to challenge established profitability models in the automotive industry. Locally, we are certainly overbuilt on hotels and perhaps high-end home rentals. This all happened in about a month, with oil prices declining into a glut.
The U.S. President is talking down tech which has been the leading stock market element driving portfolio appreciation. You mean all this happened in a few weeks? (Think of the decline of oil field investment alone, that the new oil price it will bring about; also, we are now much more of an oil producer, so we will get hit by that cycle as all oil producers will.
Tesla, ready to rumble
Elon has largely shared the story of the difficulties Tesla faced in solving issues during the Model 3 ramp-up. It was a huge test and existential accomplishment; the outcome is clear now though, he succeeded when at times it looked like he might not. Now Elon is expediting cycles of next the target opportunities, with a clear focus on the pickup truck sector, thus attacking the huge market that is the cash cow for the traditional automotive firms. Tesla now has process mastery over rapid development and advanced manufacturing, with additional mastery over specific disciplines such as software systems, battery systems, and other key technologies.
We rate Elon’s chances of success as very high now, as compared to before Model 3 ramp-up success. Elon intends to move in fast forward to pickup truck disruption, and perhaps autonomous. Tesla sales grew by 400% plus this last year in California. California is approaching 5% penetration of electrics in terms of additions to the automotive mix. Do not underestimate Tesla’s innovation process mastery, their technology building blocks, or their execution chops working with change. Tesla intends to deliver on the next disruption faster than the market expects, with fewer unknown issues to overcome.
Automotive, restructuring and profitability negatives
We have commented about the restructuring of Ford before. Now GM is restructuring, and also lightening their portfolio of sedan production. It should be highlighted that current volume and profitability is driven by SUVs and pickup trucks. We expect Tesla to attack both, with consequences to the traditional US majors. There are costs to restructuring, now GM is going to have to contend with those. There is a variety of profitability challenges to the industry, the excess global capacity of China, perhaps the end of the automotive super cycle, competition with Tesla, trade wars and market limitations, and the threat of autonomous in new pool optimization scenarios. As the economy has a good deal of aligned negatives that came upon us rather quickly, the automotive sector has their own share of aligned challenges which make profits and revenue growth less certain.
China
Capacity is a concern as automotive market growth is hitting barriers. Stock market declines have firms cutting back on capital investment. China has demonstrated increasing tech acumen such as their market leading effort (apparently) on solid-state battery tech. Needless to say the China market will not be pulling so robustly the global economy with demand.
China is putting more purposeful intention into advancing electric cars. The global economy may fall into rationalization, as dismantling globalization unfolds more rapidly than building up capacity. China is moving to self-reliance, as they have no intention of accepting codified inferiority towards tech futures. In some cases, China has some interesting trade complaints, such as share of wealth in tech sector based on investment and effort, and dollarization of the international economy with the US being the “house” of the casino. The trade war will start to see impact on both sides of the Pacific, as US import firms begin to fail, and Chinese manufacturers begin to lay off and expect lower demand.
The first phase of the trade issue was cheap and easy for both, and mostly rhetorical. Now the next phase is likely to show real pain to important constituencies of both. The impact was padded in the first phase by larger than normal orders delaying the impact of trade actions. This actually increased business for the Chinese factories and shippers.
Note that China is showing advanced solid-state batteries in production before us, even though we have recently heard firms saying that was a decade away. This reminds me of when the big three in the US said they could not make less polluting engines, then little Honda (at the time) said, “We already did.”
Trade war, the consequences of uncertainty, reorienting from globalization, and marginalizing tech market opportunities
We routinely hear that the stock market does not like uncertainty. Now uncertainty is all around us, making business confidence suddenly nosedive. Trump is trying to rally the psychology, but the aligned indicators should lead us to more skepticism. The world was set up for globalization, the global community was set up for a rules-based framework of trade, now it is falling into the cluster of one off deals, with contingencies and uncertainties all the way around. Imagine the lack of clarity for South Korea and Taiwan, in having to work around the dance of the giants. What model do they base their forward plans on? Then, does it really help to have the main heavy lifter of the economy, routinely treated antagonistically by the administration?
Tech needs to improve and be improved by guidance; it is unclear if there are any instincts in the administration to get the nuances right on enabling tech success along with national success. Tech does not exist in a vacuum. The trade war is particularly reducing the size of market opportunities likely for tech; for example, Apple has had great market share success in China, but now what happens?
Tech
There is sentiment that tech is not delivering overall prosperity and societal benefit commensurate with their disruptive restructuring of the US economy. Tech disintermediates but then under-delivers in areas. At the same time, what else can replace tech as a force for competitiveness and advancement? Nothing.
Now the administration is talking about tech as it would a constituency of opposition. Needless to say there will be new politics, internal assessments about benefits to society, and pressures to overcome being in the doghouse with the party in power. The current administration views tech as an adversarial constituency, and that does not seem to be the best way to realize the best futures by what is almost certainly the main forward factor in the whole economic equation and in terms of realizing competitiveness. Tech needs to start thinking more in terms of societal benefit; there are growing opportunities to show that in application, as otherwise they show disruption without enough prosperity, benefit, and betterment. At the end of the day we want the success of our society. Do we really want to degrade the most potent forces currently advancing software?
CES – Trade shows as opportunity indicators
This year the keynote at CES is by Google on autonomous vehicles. That would not even be associated with the CES events of a half decade ago. Last year the main breakthrough topic was smart assistants, and the Google/Amazon contest there. At the recent Interbike show electric bikes stole the show. There are futures that look ahead coming into fruition, take for example just the cases of smart assistants, care robotics, and autonomous vehicles. This year there will be further developments highlighting the powerful changes of CES from a gadget showcase, to a fundamental breakthrough technology event.
Electric cars, electric bikes, robotics with AI, smart assistants that trigger sophisticated cloud processes. Look at how Tesla is disrupting transportation, Google transit, or the example of technologies improving the lives of the aging and disabled, such as what robotics and smart assistants are vying to beneficially change. The next billionaires will come from execution along the ripples of CES building out a new type of electric ecosystem. Bezos and Musk will show application examples; the billionaires of tech have gotten a wake-up call this last year, as the best practitioners of fusion disruption. Never have so many breakthrough elements been lined up for assembly into new solutions
Fertile opportunities for advancement, with extraordinary possibilities
Tesla and Amazon have several great things going for themselves. Leaders that have a knack for getting application right, technical mastery of the building blocks of future solutions, and identified market opportunities for disruption. Think of the breakthroughs in 3D printing, AI, smart assistants, robotics, battery tech, software technology, and ubiquitous networking. The current market “correction,” if you call it by that euphemism, is going to shake out many of the gimmicks in tech. Still, we want tech on offense, not defense. We haven’t heard the smart, nuanced go-forward from either party in terms of tech. Apple and Amazon have appeared to make up from earlier spat. Electric agriculture, electronic preventative and assistive healthcare coming from tech, autonomous transit, these are new markets as huge as imaginations with the right maturity of elements to be remade in breakthrough fashion.
Strategic thinkers on military matters now think software may win the next war
The big thinkers of military preparedness, and where that intersects with technology, now have an expectation that the great power conflicts of the future may well be decided by software superiority. You can assume that is rippling through to research investments.
It is said that software will eat the world, meaning it will become the high ground decider of contests and advantage. Of course that software will increasingly be advantaged by AI technology integral to the systems. If you want a strong military, but want to weaken our tech companies, you risk having us no longer lead some critical areas in terms of winning the future. How we shape technology on the go forward is one of the very most important things, but largely unappreciated by one or both parties.
You can bet our most likely adversaries are working on realizing this. It is hard to think a great team in Russia or China is at much of a disadvantage; there is no reason to think we have an unassailable advantage as compared to those countries which have their own very smart and capable technical and scientific folks. Perhaps our most powerful tool in this contest would be the execution of the Super Techs; it would be a shame to diminish that potential advantage.
The devil is in the details. Can we shape tech without neutering it? Tthat requires getting the balance just right. It’s not clear that the current administration gets that.
