<![CDATA[Perezonomics - Home]]>Wed, 18 Apr 2018 21:46:17 -0500Weebly<![CDATA[Elon Musk Admits the Model 3 Has Failed]]>Thu, 19 Apr 2018 02:22:31 GMThttp://perezonomics.com/home/elon-musk-admits-the-model-3-has-failedThe Production Rate Is Now Irrelevant
​This has been an absolutely amazing week for Tesla watchers. For months now, everyone has been saying that pretty soon either the bulls or the bears would start to be proven right. Well, all the news has been going the bears’ way lately. 
​First, Elon Musk makes the startling admission that the production line was all wrong. It was over-automated. Coming from the man who said the following:
  1. They didn’t need to do practice runs on their proposed production line because they learned so much when they did their Model X line. They were going to dive head first into production. 
  2. Tesla was going to show those stodgy automakers how manufacturing would be done in the future. They were going to “productize” the factory, as Musk called it.
  3. The automated manufacturing line with its non-existent headcount was going to allow Tesla to achieve profitable gross margins on the cheaper Model 3. 
 
In one fell swoop, Musk disavowed everything he previously promised. Instead of showing everyone else how it’s done, Musk admitted he was wrong about “productizing” his plant and is going to do it Toyota’s way instead. Also, instead of reducing his head count, he’s going to greatly increase it. 
 
This is devastating news for his financial forecast. When I was working at both Gateway Computers and Batesville Casket Company, we did a great deal of analysis on how much money we could save if we could increase productivity in order to get rid of a shift. Why? The cost of benefits is huge. Health care, workers comp, and unemployment insurance all add up to a 40% premium per person. Whenever you go up or down in the number of shifts, you greatly expand or reduce your overhead. 
 
At this point, the Model 3 production rate is irrelevant. Musk just admitted that their plan to achieve profitability has been thrown out the window. The Model 3 is a failed project. Tesla will eventually iron out the wrinkles with production, but it’ll always be a money-losing drag. Which is also a big problem for investors. 
 
So why is Tesla willing to add a shift, giving up on their profitability plan? The current consensus is that they are hemorrhaging deposit holders. 
 
Technology Equity Strategies has the following take:
 
Let’s be clear. Tesla is pulling out all the stops, costs be damned, to ramp production.
 
Why?
 
Because customers are canceling. Reservations declined in the first quarter, a fact that is concealed by Tesla having kept reservations on the books despite customers asking for refunds. Moreover, reservations are being further pressured by all the crappy quality, delays, poor product reviews in the press and in Tesla sites, competitive introductions and the looming shadow of FIT subsidies being exhausted are causing further reservations to be cancelled this quarter.
 
 
If Tesla doesn't come up with production quickly, cancellations will accelerate and will likely hit a negative inflection point. And let’s face it, when that happens, we will all hear the giant sucking sound that has always been inevitable.
 
I said in my book, The Tesla Bubble, that the Model 3 was going to kill Tesla because it would be a low-margin drag on the company. I also stated that skipping their production line verification would result in costly delays and major quality problems. Everything is following the script. If you chart Tesla’s stock price and compare it to the path that Enron took, they are very close. I think I’ll take my bow right about now. 
]]>
<![CDATA[The Apple Pencil Sells the iPad]]>Sat, 14 Apr 2018 13:21:08 GMThttp://perezonomics.com/home/the-apple-pencil-sells-the-ipadBringing the Apple Pencil to the Low-Cost iPad Was a Shrewd Move
​Apple made the right decision when they chose to expand Apple Pencil usage to the low cost iPad. If I had to pick one feature from the iPad Pro to move to the cheaper iPad it definitely would have been the  ability to write and draw with the Apple Pencil. 
 
I’ve been using an iPad Pro on a daily basis at work for about two years. It’s an indispensable tool which replaced my Moleskine notebook. Over that time, I’ve sold 4 other iPad Pros to co-workers who saw how I was using mine. 
In every case, what triggered these co-workers to either upgrade or buy an iPad was seeing the possibilities of migrating to electronic notes taken with the Apple Pencil. Screen display quality didn’t matter. ProMotion didn’t matter. Camera quality was irrelevant. IOS multi-tasking was a non-issue. But when people saw how writing on the iPad was as good as paper there were many Oohs! and Ahs! But writing with an Apple Pencil alone may not been enough to make them spend hundreds of their own dollars. That makes for a great party trick but the real kicker was this, it was searchable and backed up to the cloud.
 
Every Moleskine user knows what it’s like to flip through hundreds of pages trying to find a note that you wrote a few months ago. It’s not fun and potentially embarrassing if you have people in the room waiting for the info. With GoodNotes on the iPad, that is a thing of the past. The handwriting recognition intelligence is amazingly good. Just open a search box and enter a few key words and the app will show you all the pages where you wrote those words highlighted. 
 
But wait, it gets even better. If you don’t have your iPad with you, you can find all of your notes on your iPhone since they are stored on the cloud. Who hasn’t wished they had their notes and realized that their Moleskine was sitting back at home or left on their desk somewhere else? With the iPad/iPhone combo you get the best of both worlds. A big screen for taking notes and a small portable screen that you’ll probably always have with you. Unlike a Moleskine, the iPad doesn’t have to be with you in order for you to access your notes. 
 
I could go on and on about how enjoyable taking notes with the Apple Pencil is but I’ll try to keep it brief. It’s so handy being able to write something down and then later move it from one part of the page to another. Or being able to erase text and change colors. Also, the undo button is such a nice touch for when you accidentally wrote the wrong letter. It’s like all the modern advantages of word processing finally applied to written text. Only it’s better with text. Because you can also draw diagrams, circle text, and write in the margins.  
 
I love all the little things about the iPad Pro that make it the best tablet on the market today. The low-reflectivity screen, the super fluid 120hz ProMotion video, and the beastly 6-core A10X Fusion chip that can crunch through iMovie renders like nothing. But it was always the Apple Pencil that stole the show. 
 
Bringing the the Apple Pencil to the $329 iPad was a shrewd move. It helps Apple move the narrative of the iPad being a productive device that you could take to work and not just a time-suck entertainment machine. It’s a flashy function that everyone around can’t help but notice and it arouses the “I want one too” response that ignited the iPhone phenomenon. 
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[The Tesla Conspiracy]]>Fri, 13 Apr 2018 03:28:14 GMThttp://perezonomics.com/home/the-tesla-conspiracyThe Timeline Has Echos of Fraud Past
​Tesla’s recent announcement that they’d suddenly achieved an over 2000 units/week rate on their Model 3 was met with a great deal of skepticism.
​I had stated recently that it is odd for a company to lose so many high-level accounting personnel. The fact that Tesla is losing high-level executives isn’t necessarily the alarming part. It’s the fact that they are specifically leaving from accounting and the timing of their departures.
 
Tesla announced that they magically crossed the 2000 units/week threshold in the last week of 2018’s first quarter. Perfect timing when they’d been struggling with Model 3 production since forever. Second, Tesla stock had been crashing as investors started realizing that the Tesla ship was heading straight for an iceberg of debt repayments. Tesla announced that they didn’t foresee any need to raise capital in 2018. Never mind that Elon Musk made the same pronouncement last year and raised more capital only a few months later. 
 
I can’t stress how important Tesla’s stock price is to their survival. In the past, Tesla has been able to deal with convertible bonds by repaying them with stock. This only works if the price of the stock is greater than the value of the bonds. If the stock price is too low, then Tesla has to write a check for cash. In late 2018 that bill would come to approximately $1.2 billion. Coupled with an expected cash burn of $2 billion, this could be catastrophic. Elon Musk’s number one job is actually pumping the stock price. That’s the real reason he sleeps in the plant and makes a big show of it.  
 
Now before I go on, I have to explain one thing. A company’s production rate is how many units they can transition from work-in-process (WIP) to finished goods. This metric can be skewed by how a company manages their WIP. For example, I’ve been in plants where a key component was missing, so partially assembled units began to stack up in the warehouse. During the period the partially assembled units were accumulating, the plant looked horrible because they were showing excess labor and overhead for relatively few units. However, when the needed component arrived, the plant looked like a superhero because they could take credit for finishing partially finished WIP units all at once. 
 
What does this have to do with Tesla? It’s relevant because Tesla didn’t gradually ramp up to 2000 units/week but made a big jump in the final week of the quarter. That means that the week after this single heroic week wouldn’t get any coverage. Also, there were some peculiar items of note preceding this big week. 
 
The order of events at Tesla is in a pattern which is familiar to me. With my background in manufacturing accounting and knowledge of how Gateway committed fraud, a few things jump out at me in Tesla’s timeline.
 
Feb 20 - 24:         Tesla suspends Model 3 production
Mar 7:                 Tesla’s Corporate Controller and Chief Accountant quitsfor “personal reasons”
Mar 13:      Tesla announces that their corporate treasurer and VP of finance has left
Mar 29:      Tesla shifts workers from Model S and X to the 3
Mar 31:      Tesla magically crosses the 2,000 units/week production rate
 
 
I was working at Gateway when Ted Waitt made his return to the company in the aftermath of a big accounting scandal. The CEO, CFO, corporate controller, and others left the company after the SEC charged Gateway with fraud. 
 
In a nutshell, here’s what Gateway was guilty of. At the end of the quarter, if Gateway was going to miss their sales revenue goals, they would build computers that they didn’t need and “ship” them to a warehouse down the street from the plant. After the quarter was over, they would process a return for all of these unneeded units. The SEC got wind of what was happening and formally charged the chief financial officer and corporate controller with fraud. 
 
Executive churn is usually triggered by a difference of opinion between the CEO and a particular VP. That’s not uncommon when it comes to engineering or marketing. But in accounting? It’s usually a non-issue. You have to follow U.S. GAAP (Generally Accepted Accounting Practices) or there will be criminal consequences. If the CEO is pushing the accounting group to do something against his better judgement, then you either resign or get fired. It’s better than facing fraud charges as in Gateway’s case.
 
Back to Tesla. If they wanted to partially “pre-build” units to supercharge a future period, you would have to do exactly what Tesla did. Announce a shutdown period because the plant would get no credit for this labor if they aren’t completed and transitioned into finished goods. This would swell Tesla’s WIP with units that are partially or maybe even mostly completed but waiting for the final assembly. Then you would have to get more workers to work on an alternate line or at an alternate location to finish these partially assembled units. You can’t use the workers from the main line because they’re busy with the current orders. 
 
The red flag with Tesla’s production spike is the fact that they used workers from the Model S and X lines. If their Model 3 production line was operating at an improved rate, no additional workers would be necessary. That’s the whole point of a highly automated line. Tesla supposedly shut down their Model 3 line in February in order to improve it. That would show up in improved parts/person metrics. They need to get out more cars with no additional people. 
 
I’ve worked around manufacturing plants for many years. I recognize what triggers moving workers from other lines. Setting up an auxiliary line to blow through accumulated WIP. It sounds to me like Tesla’s uptick in production was due to a big push that can’t be sustained. Even if Tesla wanted to operate a highly manual auxiliary line on the side, the sheer cost of the inefficiency would sink the Model 3’s gross margins. The Model 3 production rate becomes irrelevant if Tesla is selling at low margins. Investors will abandon Tesla if this happens. 
 
You’d end up with a one-time spike of production that is bogus because you’re taking credit for partially built units from a prior period. Did Tesla do this? I have no idea. But if they did do it, everything lines up. The timeline is exactly what I’d expect to see. 
 
It also comes to mind because of the exodus of the accounting personnel during this same time frame.  If Tesla did do this, I’m not sure it’s necessary illegal. But it would come dangerously close. Close enough that the accountants would be forced to decide whether to leave the company rather than acquiesce to a stubborn boss hell-bent on raising the stock price.
 
The accountants at Gateway objected to the operations managements scheme to goose sales at quarter-end. But in the end, they went along with it and signed off on the financial results. Ultimately, they were held responsible for reporting fraudulent revenue on the income statement. 
 
Why did Tesla’s accounting executives leave in between the time that the line shut down and Tesla reported their quarter-end production spike? I don’t know. But I do know this. By leaving when they did, they didn’t have to sign off on the Q1 financial statements.

Now available in iBooks —> The Tesla Bubble

]]>
<![CDATA[iPads are Superior to Laptops for Students]]>Sun, 08 Apr 2018 03:22:27 GMThttp://perezonomics.com/home/how-ipads-are-superior-to-laptops-for-students
​For the last two weeks, I’ve been listening to pundits talk about how Chromebooks are superior to iPads in a school setting because they have keyboards and are easier to manage. What a crock. And this is coming from someone who thinks that Apple should get out of the education market. Apple should let Google have this low-margin business. But…what is best for the students?
The basic argument for keyboards is that they’re necessary for writing papers. Which I agree with. However, the error is in estimating how often students write papers as opposed to taking notes or reading books. 
 
If being a school student was like the life of a novelist where students would write for hours and hours each day, then I’d agree that laptops are superior to iPads. But that is so far from the school experience it’s ridiculous to say that students need laptops. Students spend far more of their time reading their text books and taking notes than they ever do actually typing out papers. They are supposed to be learning after all. It’s not like they leave the house every morning to crank out articles for a newspaper. 
 
I purchased my daughter the original 9.7” iPad Pro when she went off to her freshman year in college. I gave her the choice of getting a MacBook Air or the iPad Pro and she chose the iPad. She had never owned a laptop before in her life and didn’t see why anything would be any different going forward. I also purchased her a new backpack because that’s just what you do when your kid goes to college. 
 
When she came back for Thanksgiving, I asked her how she liked her new backpack. She said it was fine, but it was overkill when 90% of the time the only thing in it was her iPad. I was dumbfounded. I had so many memories of my friends and I in college lugging 50-pound backpacks filled with huge text books and spiral notebooks for each class. When I asked her why she wasn’t packing her text books, she replied that they were all ebooks on her iPad. But what about taking notes? Don’t you need notebooks for each class I asked, to which she replied that she used the GoodNotes app and had separate notebooks for each subject on her iPad and by extension even her iPhone. The college backpack has also now become obsolete. 
 
All students, from the college level on down to grade school, spend a huge amount of time reading books and absorbing data. Even the most ardent laptop enthusiasts will grudgingly admit that reading books for a long period of time is superior on a tablet over a laptop. There’s something about holding your tablet like a book and flipping the pages with your finger that feels more comfortable than reading a book on a laptop screen. 
 
And writing notes on an iPad Pro with the Apple Pencil is sublime. It’s way better than paper in that you can undo strokes, move your text, or change colors on the fly. Also, being able to search your notes for key words or mirror everything to your iPhone is a lifesaver. I’ll never go back to writing notes on paper again. And it seems that I remember things better when I write things out by hand as opposed to typing them. An iPad is superior to a laptop when it comes to writing notes. Of course, a student could have a notebook next to their laptop to write out their notes, but then they have to use more desk space and they lose the search ability and cloud backups.
 
So back to keyboards. There’s no way to get around needing them to write papers. But that’s the beauty of the iPad. You can add a keyboard when you need one and remove it when you don’t. You can choose a keyboard that suits your needs. Do you want a numeric keypad? No problem. Want a narrow keyboard with a small footprint, even better. And spilling your drink in your cheap keyboard won’t ruin your expensive iPad. The critics will say that it’s a hassle to have to keep track of another item. However, kids using laptops already have to keep track of even more. They have to juggle their laptop, text books, and notebooks. Sometimes on their desk simultaneously.  That’s an even worse situation. 
 
And I haven’t even got to the creative advantages of an iPad over a laptop when it comes to shooting pictures, video or utilizing augmented reality. The bottom line is that laptops are a pain in the butt when you walk around with them. The keyboard is in the way. 
 
So, if iPads are superior for reading books and taking notes and allow students to lighten their load, what’s the problem? The tablet wins in two out of three categories. Tablets are better for students and yet schools pick laptops because they are better for…administration. 
 

Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[An iPhone X Price Drop May Have Been the Plan All Along]]>Tue, 27 Mar 2018 02:40:36 GMThttp://perezonomics.com/home/an-iphone-x-price-drop-may-have-been-the-plan-all-along
​An analyst from RBC Capital Markets has made the case in in his investor memo that Apple may drop the price on the successors to the iPhone X. This has led to a lot of speculation that perhaps Apple is retreating from higher prices in the face of unexpectedly low demand. That’s too big a leap to make from my viewpoint.
Anyone who’s been watching iPhone prices for the last few years, and that includes analysts within Apple, has noticed that scalpers are skimming the cream in the first few weeks or even months after launch. If I was working for Apple, I would have been making the case that Apple needed to do exactly what they just did. Raise the price while their new technology is in limited supply and drop the price at a later date when economies of scale are achieved. This is nothing new. Apple itself does it all the time with their MacBook product lines. I would only advise a strategy like this when they are offering a new technology that is in limited supply.
 
Apple made an unprecedented move by forking their iPhone product line in two. They also knew that they didn’t have enough iPhone X supply to sell in the same numbers as the iPhone 7 of well over 200 million units per year. You could make a great case that Apple intentionally hamstrung iPhone X demand through pricing because they figured it was better to err on the side of letting demand be the constraining factor versus supply. Apple would have been in a much worse position if they could only produce 80 million of the iPhone X in an entire year when there was demand for 150 million or more.
 
If Apple reduces the price next year, I’m guessing there will be a rush of demand. Apple wins again. And this could have been the plan all along.
 
There was one group who got screwed with how Apple handled iPhone X demand this year. The eBay scalpers. For the past few years, people have been willing to pay $1000 to $1300 to get the top iPhone at launch. This year, Apple reaped that premium and scalpers had a harder time getting people to pay $1500-$1800 per unit. Further, the window of opportunity was much smaller this year because supply didn’t seem to be too far behind demand. Apple did an almost miraculous job of guessing how many units they’d need. Better than any previous year…ever.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Crypto Currency Mining Illustrates the Fallacy of Net Neutrality]]>Tue, 20 Mar 2018 02:37:17 GMThttp://perezonomics.com/home/crypto-currency-mining-illustrates-the-fallacy-of-net-neutralityNet Neutrality is Communism Applied to the Internet
​The supporters of net neutrality have tried to portray their opposition as being simply big greedy telecoms who want to squeeze more profit from consumers. This is a lie which doesn’t make any sense. 
First, most people in business, outside of the media, are against net neutrality. It’s not just the big telecoms. Why? Because it is anti-capitalistic. I have twenty-five years of cost accounting experience which cuts across many industries, both retail and manufacturing. One principle which I’ve found applies to all business is this: everyone tries to match their costs with that which drives those costs.
 
In the business world, it is crucial to know who or what is driving your costs. That is because you need to make sure that you are getting enough revenue to offset them. Businesses don’t do anything for free. If they need to spend extra money for maintenance or safety inspections then they need to add that to their price. This is something that all businesses do. Big or small. There is nothing inherently “greedy” about matching your revenue with your costs.
 
A false argument that supporters of net neutrality seem to parrot without thinking is that the internet is like electricity. They say that the electric providers don’t care what anyone does with electricity and that everyone pays the same rate. But that isn’t true. Check out this article by CNET regarding how New York is trying to get a handle on cryptocurrency miners by raising their rates:
 
Power companies in New York can charge cryptocurrency companies in the state higher electricity rates, the New York State Public Service Commission ruled Thursday.
 
"The ruling was needed to level the playing field and prevent local electricity prices for existing residential and business customers from skyrocketing due to the soaring local demand for electricity," the commission said in a statement. The website Utility Dive reported on the ruling. —Ashlee Clark-Thompson, CNET
 
It isn’t uncommon when you have a limited resource and a few exceptionally large consumers to try to match your development costs to the people who are driving your need to expand. If the electric grid is getting sudden spikes in demand from a relatively few cryptocurrency miners, why should everyone have to pay for the cryptominers? Raising rates on the miners does two good things simultaneously. It helps to lower peak demand, and it also funds investment in new capacity.
 
California had the same problem with their water supply and almond farmers a couple of years ago. Almond farmers had a grandfather clause which exempted them from any state restrictions on water usage. While everyone else suffered water rationing, they were pumping it from the ground like there was no tomorrow. California wanted to charge almond farmers an extra fee for their outsized demand on the state water supply. This would have both lessened the demand on the water supply and given California more funds to deal with their water crisis.
 
These situations are very reminiscent of what’s going on with broadband availability. Over half of all broadband is consumed by two very large companies, Netflix and YouTube. Telecoms are simply asking for the same freedom that every other industry has in matching their revenues to their cost drivers.
 
Net neutrality is communism applied to the internet, and it’ll bring about the same results as communism. Mediocrity for the masses in equal measure. Anyone familiar with the realities of actually running a business is able to see through the net neutrality propaganda.
 

Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Why Musicians Gravitate Towards iOS, and not Android]]>Sun, 18 Mar 2018 02:10:05 GMThttp://perezonomics.com/home/why-musicians-gravitate-towards-ios-and-not-android
Ryan Waniata at Digital Trends took the lack of a headphone jack as a sign that audiophiles need to switch to Android.
For audio geeks like myself, September 9, 2016 is a day that will live in infamy. Apple’s presentation that morning was supposed to be about the iPhone 7, but all I heard was “no more headphone jack.” Apple’s choice to go all wireless for headphones forged a new mold and cemented a headphone-jackless future for the iPhone. Was the company nuts? Of course not. Apple doesn’t make mistakes, it innovates … and never looks back.
 
While most of the world looked on in relative apathy, sound enthusiasts like myself saw the writing on the wall: Nixing the heaphone jack was the latest move in Apple’s feature-evisceration strategy. — Ray Waniata, DigitalTrends
 
Ryan hangs his hat on the fact that Android allows you to choose any corded headphones you want and that volume gradation is finer. I wonder if he’s noticed the 10ms audio lag yet? Or the fact that USB audio hardware manufacturers all tailor their hardware to iOS? And woe to the Android music lover who tries to use Bluetooth headphones on a regular basis. There’s a reason why the music scene is thriving on iOS and almost non-existent on Android.
 
I wrote about the state of Android audio here. It’s a mess.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Why LTE on the Apple Watch Has Become So Important to Me]]>Wed, 14 Mar 2018 01:51:57 GMThttp://perezonomics.com/home/why-lte-on-the-apple-watch-has-become-so-important-to-me
​Ever since Apple released their LTE-enabled Apple Watch, it has become more apparent to me than ever that this is the future of communications. Adding a cellular connection to the Apple Watch is like breathing life into a lump of clay. Not having to rely on my iPhone for data truly brings the Apple Watch to life. Here are my two favorite scenarios where this is the case. During my work day when I leave my desk and after work when I exercise. 
​A few years ago after I upgraded my iPhone 5 to the 6, I started taking my iPhone out of my pocket and docking it at my desk. Not because I needed to charge my phone but because the phone had gotten large enough that it was more comfortable out of my pocket. Which is all well and good, except for the fact that any time I left my desk I had to remember to put my phone back into my pocket. Anyone who works in a large building knows how frustrating it can be to walk off and leave their phone behind.
 
But now with my LTE Apple Watch, I am free to roam freely anywhere in the building without having to bring my iPhone. My Apple Watch transitions seamlessly from being iPhone-tethered to grabbing notifications over cellular. I love it. Gone are the days when I was sitting in a conference room and I suddenly realized that I had left my phone on my desk.  I knew I was either going to miss any important messages or excuse myself to go retrieve my phone.
 
The other situation I knew right from the start this watch would revolutionize was exercise.  I’ve always hated running with my iPhone. There is no good way to carry a Plus-sized iPhone other than an elastic waist belt over my shorts. But that is bulky and can be awkward at times. Many people simply run without their phone, but I’m not comfortable with that. Besides, I constantly use my watch when I run. I’m always adjusting my music volume, setting up reminders, or replying to text messages. I can now do all of that without a bulky waist pouch.
 
There is another time I love my LTE Apple Watch even though it isn't very frequent. It's on those rare occasions that I leave my house and go somewhere, not realizing that I’ve left my iPhone behind in the house. I inevitably realize I’ve forgotten my iPhone when I reach into my pocket to grab it in order to text someone. Now, I simply shrug my shoulders and dictate a text message to Siri on my watch.  Depending on the situation, this can be priceless.
 
So, there you have it. Three reasons that I would recommend people get a cellular Apple Watch and not buy the non-cellular Series 3 or 2. My experience has reinforced my belief that the Apple Watch is the most important single device that Apple sells. It will gradually take on more and more functionality from the iPhone and will be the premier showcase for an enhanced Siri in the future. 

Now available in iBooks —> The Tesla Bubble

]]>
<![CDATA[Tesla’s Accountants Say Tesla Has No Future]]>Fri, 09 Mar 2018 23:46:37 GMThttp://perezonomics.com/home/teslas-accountants-say-tesla-has-no-future
​I’ve been meaning to write a post about how many high-profile Tesla executives have essentially said that their Tesla stock options are worthless. How so? They walk away from them. Here is the latest disillusioned Tesla insider.
Brevity, the soul of wit, is perhaps the specter of foreboding in this case. Branderiz was hired from SunPower Corp. in October 2016 to be Tesla's corporate controller and chief accountant. His base salary was $300,000 a year, but the real draw was a $5 million equity grant to vest over four years. To be clear, I don't know what his personal reasons are. Regardless, that vesting schedule suggests he's leaving a chunk of money on the table. – Liam Denning, Bloomberg
 
It’s one thing for a short-seller to say that Tesla has no future. But it’s entirely a different matter when Tesla executives behave that way. I especially find the accountants who jump ship interesting. There’s typically not a lot of drama in accounting. Unless there is a lot of meddling by management in how the numbers get presented. At some point, high-level accountants have to either resign or risk getting frog walked out the front door. Last year, Tesla’s chief financial officer Jason Wheeler left and now their chief accounting officer is gone. Is something going on with Tesla’s financials?
 
Noted Tesla watcher CoverDrive came out with his 2018 full year forecast for Tesla and it’s not pretty. It’s hard to see how Tesla can continue much longer. The more Model 3s that they sell, the more money that they will lose. The people inside Tesla know this, especially the numbers guys, hence the mass  exodus.
 
I think at this point Musk is simply building a brand he can hopefully sell to someone with deep pockets. That will bail him and the investors out. If there are no buyers then the company will cease to exist within 18 months of the final investor cash infusion. Tesla has no future as a stand-alone company.

UPDATE 3/13/18 - I originally posted regarding Tesla's Chief Accounting Officer leaving Tesla on March 9th. Now four days later, Bloomberg is reporting that Susan Repo who is Tesla's Corporate Treasurer and VP of Finance has left! Folks, something is going on at Tesla. I can't stress how unusual it is for all of a company's high-level accounting officers to leave the company. The only other time I've heard of this happening was at Gateway Computers in the early 2000's. The CEO, CFO, and Corporate Controller were all charged with fraud by the SEC. 
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Did the 12" MacBook Fail?]]>Sat, 03 Mar 2018 20:09:20 GMThttp://perezonomics.com/home/did-the-12-macbook-fail
​Ming-Chi Kuo of KGI Securities came out with an investor note predicting that Apple would update the MacBook Air in the April to June timeframe. This would be quite the unexpected move if it happens. 
It seemed like the 12” MacBook was the perfect successor to the MacBook Air. It split the size difference between the two MacBook Air models and had the retina screen that Air lovers all clamored for. It also beat the 13” Air at it’s own game by being both smaller and lighter. So what happened?
 
If Apple does update the Air, I’m guessing Apple is changing their game plan to deal with unforeseen developments. Here is one big thing that had to happen in order for the 12” MacBook to kill off the 13” MacBook Air. Profit margins had to improve on the 12” MacBook which would allow Apple to lower the price. Which in turn would generate more volume.  Eventually the 12” MacBook would have been the $999 value leader. If Apple’s plan to replace the Air was derailed there could be two potential reasons.
 
First, the cornerstone of any profit improvement plan would be steadily increasing unit sales. This would allow for the reduction in fixed overhead costs per unit and reduced material costs via better pricing. But what if the public remains lukewarm to the MacBook? What if Mac users weren’t ready for a small laptop with only one port? I wrote last year that the 12” MacBook was the worst of both worlds when you compare tablets to laptops. I suspect many others agreed with me.
 
Second, unexpected support issues can break a product line. One of the keys to making the 12” MacBook so slim was redesigning the keyboard. However, this new design seems to be so finicky that even small pieces of dust can render a key inoperable. It also sounds like repairing this flaw is extremely costly to Apple. If the MacBook keyboard has a fatal flaw that is ridiculously expensive to repair, Apple may not want this model to ever reach mass acceptance. That could lead to service costs exploding in the future. And remember, service and support issues don’t show up in gross margin. They are down below in selling expenses.
 
I’m still convinced that Apple intended for the MacBook to replace the MacBook Air within 2 to 3 years. But business plans are like game plans. Sometimes the events on the field force you to improvise. Luckily, the MacBook Air still has a strong enough user base that it can help minimize any damage until Apple can redesign the MacBook or increase iPad Pro versatility.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[The Hamilton Effect]]>Thu, 22 Feb 2018 04:13:54 GMThttp://perezonomics.com/home/the-hamilton-effectHistory Should be Understood, Not Distorted to Confirm Pre-Existing Beliefs
Senator Mike Lee from Utah wrote a great piece about how Lin-Manuel Miranda’s musical Hamilton has distorted history to confirm a big-government bias. It’s a shame really. Hamilton has done much to re-kindle an interest in America’s history. Now everyone has to explain all the inaccuracies contained therein.

I highly recommend reading this article which sets the record straight on Hamilton. And share it with your friends.

How the ‘Hamilton Effect’ Distorts the Founders
]]>
<![CDATA[It's Time to Short Tesla]]>Fri, 16 Feb 2018 01:51:06 GMThttp://perezonomics.com/home/its-time-to-short-tesla
​I agree with Montana Skeptic that Tesla (TSLA) is quickly getting into juicy short territory. I highly recommend reading his great summary at Seeking Alpha.
Tesla is “structurally bankrupt”, meaning that they run out of money on the average of every 8 to 14 months. The people who keep predicting that Tesla is “going bankrupt”… are essentially correct. It happens quite regularly but the investors keep stepping in to provide a fresh cash infusion.
 
This is why you can't compare any of Tesla's products to the iPhone. The iPhone was never sold at a loss. There was sufficient market demand to allow Apple to charge prices to make it a profitable product from the very beginning. It was a self-sustaining product unlike anything that Tesla has ever sold except for maybe their Tesla branded iPhone cases. Apple's brand is so strong that even Tesla is able to make a buck off the iPhone.

The following two statements can't be said about the same company. They're contradictory.
Company X has a strong brand.
Company X has been selling their products at a loss for a decade.


As I explained in my book, you can't compare margins for the Model S to companies who use dealerships. Wholesalers vs retailer is an apples vs oranges comparison.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Tesla’s Journey to Oblivion]]>Fri, 09 Feb 2018 20:09:42 GMThttp://perezonomics.com/home/teslas-journey-to-oblivionThe Q4 2017 Results and Panic at Tesla Central
Tesla just released their Q4 2017 earnings and as many expected, it’s more bad news. Even the “good” news was hiding more bad news beneath the surface. Improved cash flow? Not really, Tesla hoarded ZEV credits and cashed them in all at once and they have deposits on the money-losing roadster and semi-truck.  For the non-accountants in my audience, deposits actually are liabilities on the balance sheet. 
What I found the most entertaining about all of this didn’t even have anything to do with Tesla per se. It was how Elon Musk timed the launch of his Falcon Heavy rocket right before Tesla reported all the bad news. The desperation at Tesla central must be getting thick. Thick enough for their Chief of Sales and Service to call it quits. How many high-ranking Tesla executives have quit in the last 12 months? I may have to go look that up and write a post about it. The insiders know the full picture of what’s going on and they’re voting with their feet.
 
I don’t blame Elon Musk for pulling such a blatant stunt at misdirection. With the tide of public opinion turning against Tesla, what else can he do? By now everyone pretty much expects Tesla to simply go bankrupt at some point. It’s an easier prediction than ever to make. The Tesla defenders seem to be fewer and fewer these days. We’re all just waiting to see who’s the most accurate at pegging the timeframe.
 
Tesla’s downfall isn’t without grace.  The rocket launch/earnings release reminds me of Buzz Lightyear falling in the original Toy Story kid’s movie. Yeah, Musk’s auto empire is falling, but at least it’s falling with style. And how fitting is the sight of a Tesla roadster getting jettisoned out into the cold vacuum of space to be destroyed by radiation? That about sums up Tesla’s situation back here on Earth.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Thoughts on Apple’s Q1 2018 Earnings Release]]>Sun, 04 Feb 2018 16:28:41 GMThttp://perezonomics.com/home/thoughts-on-apples-q1-2018-earnings-release
IPhone Sales Volume
 
There’s no other way to describe Apple’s (AAPL) iPhone sales volume in Q1 other than they were great. The first wave of articles written about Apple’s earnings release all dwelled on the fact that iPhone sales volume was down year-over-year. However, the major fact about there being one less week in 2018 (13 vs 14) was relegated to a quick footnote. 
​Here’s why I think iPhone unit volume was amazingly good. This is what Apple’s financial analysts would have done last summer when they were setting up their 2018 budget. First, they would have created a baseline target based on Q1 2017. So they would have taken last years iPhone unit volume of 78.29 million and divided by 14 for an average weekly volume. Then they would multiply the weekly volume by 13 to create an apples-to-apples comparison.
 
This brings you to a restated Q1 2018 target of 72.7 million iPhones sold based on 13 weeks. Any internal target negotiations would have began at this 72.7 million starting point. The iPhone beat this revised target by over 4.6 million units to achieve sales of 77.3 million units. That’s amazing considering that the average selling price was UP over the Q1 2017 quarter.
 
In all of my years of observing large manufacturing companies, I’ve developed one hard and fast rule. Which is this. All things remaining equal, as prices go up, volume comes down. If a company wants to defy this rule, it needs to create additional perceived value. Which Apple appears to have successfully accomplished.
 
IPhone X Profitability
There was some conjecture, which I rejected, that the iPhone X was going to be much less profitable for Apple despite the higher price tag. The theory was that the iPhone X was so expensive to manufacture that even with the price increase Apple wasn’t going to to recoup all their additional costs. Apple doesn’t release gross margins by product line so it’s kind of hard to definitively say what happened.
With a Q1 2018 gross margin average of 38.4% they are down from 38.5% in the previous year. However, I continue to believe that the Apple Watch is a low-margin product for Apple. And the Series 3 Apple Watch made huge sales gains this Christmas quarter which would bring down Apple’s average gross margin.
 
It looks to me like the iPhone X is just as profitable as any previous iPhone model if not more so. With a big increase in Apple Watch unit sales, any degradation in iPhone gross margins would have resulted in a much larger drop in gross margins. The iPhone made up 70% of Apple’s revenue mix this quarter so any hiccup would have been impossible to hide. Even if high margin services were up, it wouldn’t be enough to offset any downturn in iPhone margins. In fact, Services and the Apple Watch seem to cancel each other out. They’re both growing but impact the average margin in opposite ways.
 
Q2 Outlook
Even at Apple’s “reduced” Q2 guidance of $60-62 billion Apple is still looking at double digit growth year-over-year. Considering that is up from $52.9 billion in the same quarter in 2017 this actually a pretty healthy increase. Even if you take the lower end of Apple’s guidance of $60 billion that is still over a 14% increase YoY.
 
If you look at Apple’s previous Q2s to see what previous increases or decreases were like it puts the guidance into a much better light. Last year, Apple had only a 4.4% YoY revenue gain. The year before, it was actually a YoY decrease of -14.7% when compared to the iPhone 6 Super Cycle. 
If Apple hits the upper end of their guidance to achieve $62 billion, they would have nearly an 18% revenue jump. That is very close to the 2015 iPhone 6 “Super Cycle” level of a 21.3% jump. It looks to me like reports of the death of Apple’s 2018 Super Cycle are premature.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Remember All Those Dire Predictions of iPhone X Scarcity?]]>Thu, 01 Feb 2018 02:14:20 GMThttp://perezonomics.com/home/remember-all-those-dire-predictions-of-iphone-x-scarcityThere's a Connection
​Mikey Campbell had a great report on how Apple's iPhone X is successfully beating back Samsung in the US. 
"During Q4 2017, all the three new iPhones were strong sellers — the three were the top three selling phones in the U.S. market," Shah said. "However, since its launch on Nov. 3, the iPhone X outsold the iPhone 8 and iPhone 8 Plus by a 2:1 margin. What this means is the super-premium segment (above $800) has grown from almost 0 percent in previous years to 25 percent share of the total smartphones sold in USA during Q4 2017, which speaks volumes for the potential of USA market and the U.S. consumers' buying power."
 
Adding color to the hard data, Research Director Jeff Fieldhack noted Apple grew its sell through by 20 percent in a U.S. market that grew only 2 percent over the same period.
 
"This means Apple has been successful to take share away from Samsung in the premium," he said.— Mikey Campbell, AppleInsider
 
Does anyone else remember all the doom and gloom predictions regarding how difficult it would be to find the iPhone X? The fact that things didn’t turn out that way is directly related to the rumored “production cut backs.”
 
Both the Nikkei Asian Review and the Wall Street Journal wrote stories within the last week about how Apple is slashing production orders due to weaker than expected demand. Something seems off. They’re interpreting their data based on an out-of-date manufacturing model.
 
The part that none of the financial journalists seem to be taking into account is the extra manufacturing capacity that Apple would had to have put into place this year to deal with two major iPhone models.
 
Creating new product lines to target new customers is great, but there are significant additional costs to doing that. You need more inventory, more manufacturing capital, more employees, etc. If the volume isn’t there, it could end up being a losing proposition. That’s why the operations guys are usually pushing aback against the sales and marketing guys about how they need to consolidate their product lines.
 
So, what am I getting at? Apple was probably forced to fire up many more manufacturing lines than they have in previous years. This would directly lead to a larger than usual drop off after Q1 was over. It’s possible that both Apple’s production cut backs are bigger than usual and that sales are higher than ever.
 
Apple had no way of predicting what the breakout between the iPhone 8 and X was going to be. Therefore, the safe option was to pad the ramp-up capital for each model since it would be better to have too much capital than too little. If Apple has too much inventory, they can sell it in Q2. If they have too little, they could lose the sale forever. My guess is that the “production cut backs” were in relation to both the 8 and the X. Possibly even mostly the 8. However, headlines about iPhone 8 production cut backs are a lot less juicy.
 
A bigger than usual production cut back doesn’t necessarily mean that sales were disappointing, it just means that they built more inventory up front. When both the iPhone 8 and the X were launched, I was surprised how readily available both models were. Within 3 weeks the iPhone X was available for pickup at just about every Apple Store around me. The iPhone 8 didn’t even have lines. This further supports the thesis that Apple simply built more inventory up front than usual.
 
I had written a while back about how Apple could lose over 10% of their unit volume and still make just as much money due to the more profitable iPhone X. The fact that they’re actually selling more iPhones than ever means they’ve hit the jackpot.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Why the HomePod Isn’t Too Late]]>Sat, 27 Jan 2018 14:45:53 GMThttp://perezonomics.com/home/why-the-homepod-isnt-too-lateNo One Makes a Good Personal Assistant Yet
​The Amazon Echo is not a personal assistant. It is a community assistant. There’s a big difference between the two. And as of yet, no one in the world is making a good countertop personal assistant.
Calling the Amazon Echo a personal assistant is a misnomer. It’s a community assistant. Anyone in a household, whether they actually live there or not, can trigger Alexa to accomplish various tasks. Setting timers, turning off lights, or reading you the news. The Amazon Echo is no more your personal assistant than your living room light switch is your personal device.
 
One of the reason that HomePod skeptics are down on the HomePod is because they perceive Apple as being late to the intelligent assistance game. I disagree. Apple has been steadily positioning its pieces on the battlefield for the last three years. Further, Apple may have more physical assets in place than anyone except maybe Amazon. Apple has sold far more Apple Watches than Amazon has sold Echos. But Amazon has been licensing Alexa for use on many other devices such as thermostats and cigarette lighter adapters. So it’s hard to say how many distribution points Amazon actually has.
 
But intelligent assistance is less about a specific hardware factor and more about convenience. It is also  more about software and microphones. Amazon itself has proved that point. That’s why Alexa is now in car stereos and refrigerators. The physical base station appeals in certain use cases, but otherwise the base station has a lot of drawbacks. It can’t follow you through your day the way that your Apple Watch can. It can also get confused if you have two base stations in your house and you’re in the middle. And who wants to upgrade all of their base stations when a better unit is released?
 
But Amazon has convinced Apple that there are some households for whom a base station makes a lot of sense. Some people hate wearing watches, and if there is one place in the world where you’re likely to leave your phone laying in another room on the counter, it’s at your home. So Apple finally relented and is now selling their own countertop music device. But this is not Apple’s answer to the personal assistant that everyone is asking for. This is Apple’s latest Trojan Horse in their future personal assistant push.
 
Amazon proved that there is a time and a place for the home base station. But they’ve also proven that this is only a subsegment of the greater movement. In the near future, most people who use Alexa may not even own an Echo. This may even be why Amazon gave Alexa a name that was separate from the device (Echo). The two don’t necessarily go together. And Amazon still hasn’t figured out a way to migrate from community assistant to be everyone’s personal assistant.
 
Apple has believed all along that the Apple Watch is a superior solution to Amazon’s Echo from a hardware perspective. It’s both mobile and personal. That’s why the Apple Watch has received much more attention that the HomePod. The HomePod coming out three years after the Apple Watch shows where Apple believes it ranks in importance. And I don’t disagree with them. Intelligent assistance is more about software than hardware, and Siri isn’t ready for a device whose whole reason to be is to know what you want or do what you need.
 
Even Apple will concede that Siri has a long way to go to match Alexa’s growing skill set. But the software part is something that Apple has always been good about keeping a secret. The tech world was shocked when Apple unveiled that they had invented the Swift open source programming language. No one saw it coming. Likewise with Apple’s big Augmented Reality addition at WWDC last summer. We heard Tim Cook drop little tidbits about how augmented reality would one day be a really big thing. But no one expected the depth of Apple’s commitment when iOS 11 was unveiled.
 
Apple is missing two pieces from really beginning their assault on intelligent assistance. First, to migrate from a community assistant to a personal assistant, Siri needs reliable voice recognition. Second, Siri needs to expand greatly as a platform.
 
Apple recognizes that a community assistant is better than nothing but still a sub-optimal solution. I think Apple is unwilling to offer an Echo-like device with Echo-like flaws. They want a superior solution that makes everyone say that someone finally got it right.  Unlike Google, Apple wasn’t willing to offer FaceID until they had a reliable solution. I predict that Apple will follow the same pattern with intelligent assistance and stun the world with VoiceID. This will allow mom, dad, or the kids to ask Siri to read their most recent iMessages without confusion. Siri at that point could become the personal assistant to everyone in the house.
 
So, is the HomePod too little too late? Absolutely not. It’s not too little because the main job of fighting the Amazon Echo will fall to the Apple Watch. The HomePod is more like a supporting cast member. And it’s not too late because Apple is still working on making Siri more powerful. 
 
In fact, the HomePod is either right on time or early. Siri isn’t ready for prime time yet, and Apple is already prepositioning their countertop devices all across America. At some point in the future, Apple will release a new and improved Siri that won’t have a ramp up period. There will already be millions of Apple Watches and HomePods out there ready for an infusion of new intelligence. My guess is that if Apple is now willing to sell their HomePod that the more powerful Siri isn’t going to be too far behind.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[When a Large Acquisition Makes Sense for Apple]]>Thu, 25 Jan 2018 02:40:34 GMThttp://perezonomics.com/home/when-a-large-acquisition-makes-sense-for-appleWhat Horace Dediu Gets Right...and Wrong
​Horace Dediu of Asymco had a great FAQ regarding Apple’s (AAPL) $268 billion cash horde. I highly recommend reading it if your wondering why Apple takes out loans when they have so much cash or why they buy back stock.
 
I especially liked this part from his article.
Question:   Why does Apple need to pay shareholders?
Answer:      
Because it’s their money.


Simple and to the point. If there’s one thing that bugs me about tech writers, it’s how many of them speak about Apple’s shareholders as if they are some kind of parasitic drag on the company. To the contrary, they own the company. Tim Cook is no more the owner of Apple than the guy who takes your order at McDonald’s owns the restaurant. Okay, I’m exaggerating a bit here, because Tim does own stock in Apple. But his percentage of the total is so small that the shareholders could still fire him and shut down the company if they chose.
 
Apple exists for the shareholders. Just like the corner dry cleaners store exists for its owner or your eBay business exists for you.
 
The only part of Dediu’s article that I have a disagreement with him on is the question and answer section on acquisitions.
 
Question: What about acquisitions?

Answer:  Why not buy other companies?It buys companies but usually small ones which are essentially acquisitions of teams and their intellectual property. Apple does not buy “business models” or customers or cash flows which is what large companies are valued for. Operationally, it’s also because Apple has a strong culture and it wishes to preserve it. Acquisitions dilute culture which is why integrations often fail. Statistically, large acquisitions are value destructive and the larger they are, the more likely they are to fail. Incidentally, when a company is acquired with cash that hole in the balance sheet is filled with something called “goodwill” which reflects some intangible value of the new asset. If and when the acquisition is deemed to have failed the goodwill is written off and so is shareholder equity. That’s how shareholders are robbed.

 
There are two different reasons for an acquisition of another company that is as big or bigger than your own. One is to boost profitability, the other is to solve a problem.
 
Dediu is making the assumption that Apple doesn’t need to do a large acquisition because they don’t need to boost profitability. That is because large acquisitions are often about boosting synergies and lowering costs. For example, two small auto companies merging would be able to get a better price on steel and would be able to lay off redundant head count. A good example of this would be the spectacularly successful merger of HP and Compaq. Contrary to what many of the naysayers said during Carly Fiorina’s unsuccessful run for the Republican nomination, the merger was a home run.
 
I agree with Horace that Apple doesn’t need to spend its money on a large acquisition in order to cut costs or boost profitability. But that’s not the only reason to do an acquisition. Often, these large acquisitions are more about solving a problem or shoring up a weakness. For instance, Bass Pro Shops recently purchased Cabela’s. Why? Because Bass Pro Shops didn’t invest in a vibrant online internet store like Cabela’s, and they don’t have anywhere near the catalog business that Cabela's has. This merger/acquisition helps to fill a hole that Bass Pro has because they don’t have time to build their own solution while Amazon happily poaches more of their customers.
 
Further, if a large acquisition is not about boosting synergies and cutting costs, integration doesn’t have to happen. To say that Apple’s culture would be diluted is not a given. In fact, the opposite could happen. If Apple’s executive management team starts to get distracted by launching a new media business, their current hardware business could suffer. Tim Cook, Eddie Cue, Phil Schiller, et al, only have so many hours in the day.
 
Apple could potentially acquire a large company with media experience and let them handle getting this new media business off the ground. This would free up Apple’s executive team to do what they’ve always done, design great hardware. Apple could leave the acquired company a wholly owned subsidiary and not integrate the two. But they could still take what they need from their subsidiary since they own it.
 
Apple seems to be gearing up for some kind of foray into video streaming. So now they have a need for media. Both original new media and perhaps a back catalog of movies and shows. Looking at a Disney acquisition would give them access to a lot of media. The Pixar team has a proven record of cranking out hit after hit and the Star Wars franchise would be wholly owned by Apple. This would solve a big problem for Apple.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Jordan Golson On Tesla’s Amazing Decade]]>Sun, 21 Jan 2018 18:33:27 GMThttp://perezonomics.com/home/jordan-golson-on-teslas-amazing-decadeIt’s the Investors Who Are in the Spotlight
​Jordan Golson of Ars Technica began his review of the Model X by unintentionally calling attention to something that actually isn’t very flattering for Tesla (TSLA). Of course, he’s trying to put Tesla’s progress in as favorable a light as possible but there’s one big problem with what he said, which I’ll cover after his quote.
It’s been quite an unexpected decade at Tesla. In 2007, if you said that the EV company would release an all-electric sedan that became one of the fastest accelerating vehicles of all time and sold tens of thousands of units with numerous hardware and software improvements along the way, you’d have been sent to the loony bin. And if you then predicted the company would release an all-electric SUV that would do the same and develop and release (sort of) an affordable, stylish, and long-range EV... well, maybe you’d have been mistaken for a member of the Musk family.—Jordan Golson, Ars Technica
 
Here’s the problem. The reason that no one would have predicted that Tesla could ever crank out all these cars is because everyone would assume that Tesla would have to find a way to turn a profit at some point. In the real world, all investments demand a return. Preferably within about two years.  It never occurred to anyone that Elon Musk would be able to sell a vision that is ever on the horizon and never getting much closer.
 
GM and BMW have been stuck in EV limbo for years because their shareholders expect a decent return on their investment. So they invest what they can without endangering their company’s respective financial health. If GM and BMW were free from the pressure to build EVs profitably, they could create some amazing pieces of machinery. And they would be much higher quality than what Tesla is churning out.
 
Ultimately, Tesla is losing money because the demand for their vehicles isn’t strong enough. But wait! At this point the Tesla apologist brings up the fact that there are plenty of rabid Tesla fans out there. Yes, but Tesla is discounting their inventory to get even these fans to buy their inventory.
 
Capitalism works like this. If market demand for a product exists, a company will fill that demand and their customers will compensate them for their costs plus some profit. That’s why 42” plasma TVs used to cost $5,000. There was enough market demand for these amazing new pieces of technology that people were willing to pay whatever it took to get one. No one planned to sell them at a loss. Gateway did sell their plasma TVs at a loss but it was by accident. They didn’t realize the extent of the service and support costs involved and it eventually killed the company.
 
If there is not enough demand, companies have to lower their prices to move inventory. This is why Tesla is perennially losing money. There is some demand for their EVs, but not enough to pay for their costs. So Tesla sells at a loss to move their inventory. Tesla’s average selling price needs to go up by at least 30%, but Tesla won’t raise prices out of fear that their sales will implode. If customers won’t cover your costs plus profit, there really isn’t “demand” in the capitalistic sense of the word.
 
Tesla apologists cling to the hope that as volume goes up, costs will go down, and in the future Tesla will be self-sustaining. However, the opposite has been happening over the last few years. Tesla’s losses have been widening and they’re now burning through cash at a faster clip than ever before. The Tesla pessimists have been proven right at every turn so far.
 
At their current clip, it’s estimated that Tesla will be completely out of cash by this August. If investors don’t hand over billions more, that’s the end of the show folks. I do think that investors at this point are still willing to fund operations but in the future it will come to an end. The million dollar question is when?
 
So back to Jordan’s point. Yes, it is amazing that Tesla has manufactured and sold all of these cars over the past ten years. But what makes it amazing is that Tesla’s investors still have hope in the face of a consistently deteriorating financial position.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Apple Is Preparing for War]]>Sun, 21 Jan 2018 14:32:00 GMThttp://perezonomics.com/home/apple-is-preparing-for-warThis Is Starting to Look Bigger Than Apple Music
​Anyone paying attention to what Apple (AAPL) has been doing behind the scenes with media has been astounded over the last 6 months. Between hiring heavy hitters and purchasing video with impeccable pedigrees, Apple has been making some great moves. The most recent announcement is the purchase of an epic drama “See” by the director of the Hunger Games and the Oscar-nominated screenwriter of Peaky Blinders. If the whole video streaming industry is a battle right now it looks like Apple is amassing a huge army on the border and about to go to war. 
But the question on everyone’s mind is “What is Apple’s plan?”. Are they wanting to augment Apple Music which is available to both iOS and Android? Are they after more service revenue? Or do they want to bypass Apple Music and make their media exclusive to iOS?
 
I had written only a few weeks ago that Apple was making slow methodical moves which indicated that perhaps they were more interested in diversifying their risk and going after more service revenue. But with more purchases and hires in only the last 3 weeks I’m coming around to the view that maybe Apple is wanting to make a big splash.
 
Looking at the money they’re spending on new employees and content thus far I’m now leaning towards the idea that Apple is more interested in the higher profit option of boosting their hardware sales and making all of this content exclusive to iOS. Why? Because they’re investing so much money so quickly.
 
Corporations typically like to see at least a two-year payback on investment. With the amount of money that Apple is spending on media it seems doubtful to me that Apple could ever get to a two-year payback or less by only growing streaming revenue. The investment payback period on going only after additional streaming revenue is much longer than if they were also modeling a boost in high margin hardware. But the hardware boost only comes if they make the content exclusive to iOS.
 
Even if gross margins on Apple Music was in the 80% range (which I doubt it’s that high) it would take over 18 new music subscribers in a quarter to equal the sale of just one additional iPhone X. If Apple was truly interested in only boosting service revenue and trying to make the company less reliant on hardware sales, I wouldn’t expect them to be spending this much.
 
But I could be wrong. Perhaps Apple is more patient than the typical company and willing to wait longer for payback on their investment. If there is one thing that Apple doesn’t have to worry about it, it is how to finance their projects. There are very few companies in a cash-rich position anywhere near Apple’s so it’s interesting to watch how they handle their investment decisions. I suppose we’ll just have to stay tuned and see.
 
Now available in iBooks —> The Tesla Bubbl
]]>
<![CDATA[Could Apple Learn from BMW’s Naming Woes?]]>Sat, 20 Jan 2018 15:42:09 GMThttp://perezonomics.com/home/could-apple-learn-from-bmws-naming-woesThe Oldest, Clearest, Most Logical Model Designation in the Auto Industry
​Apple (AAPL) seems to find itself in an increasingly difficult position when it comes to naming their iPhone models. This is a situation that will only get more sticky if Apple continues to expand the iPhone line as rumored. Ben Lovejoy wrote a piece that I mostly agree with on how Apple needs to segment the iPhone into distinct models to make things a little clearer.
I actually think it’s time for Apple to leave behind the numbering of iPhones – once you hit double-digits, it just feels too untidy. Let’s just stick to the product names, and prefix with a year if necessary, exactly as the company does for its Macs.
 
So, I’d suggest something like this:
iPhone mini (for SE 2)
iPhone (for LCD model)
iPhone Pro (for X successor)
iPhone Plus (for larger model of X successor)
 
We’d then have a logical range in terms of size and price, a single design – and a meaningful set of names. —Ben Lovejouy, 9To5Mac
 
I read Ben’s article while in the middle of reading Bob Lutz’s excellent book on leadership Icons and Idiots. It struck me how similar Apple’s iPhone name problem of today resembles BMW’s name problem of the 1970s. Bob Lutz was BMW’s Executive Vice President of Sales and Marketing when this issue came to a head and here’s an excerpt from his book where he discusses it.  
 
“Another set of turbulent discussions took place over the proper badging of BMW cars. Back in the 1960s, it was simple: the various body sizes were each equipped with one engine size. Thus, the smallest BMW (abandoned in the ’60s) was the 700, its engine size in cubic centimeters. The high-volume sedan was the 1600, and the largest car was the four-door BMW 2000, so named for its two-liter, four-cylinder engine. But the complexity generated by offering larger engines in the smaller cars soon reared its head. What to do when you put the two-liter engine in the 1600? Call it the 1600-2000? The 1600 Two-Liter? That conundrum was resolved by the designation 2002, which became a wildly popular car and perhaps the most iconic BMW ever. Although that fix worked, we could see that the designation system was doomed. With the new midsize BMW sedan (now called 5 Series), we had a real problem, for it was later to be offered with the six-cylinder engine of the large (now 7) series. These were named by their engine size, 2500, 2800, and a slight departure, 3.0. So, what to call “a midsize BMW with the 2800 cc six? The 2000-2.8? 2.0-2.8? The organization was churning, trying to find a solution, and the decision deadline for tooling the badges was fast approaching. I was wracking my brain for a logical answer as well, to no avail.”
 
“The solution presented itself quietly and unexpectedly in the form of Oskar Kolk, my quietly professional, self-effacing domestic sales manager. He had asked to see me after hours and now sat facing me across the desk. He apologized for the intrusion and explained that all of this really wasn’t any of his business, he knew he wasn’t in Marketing, that his suggestion probably was worthless, etc. He then unfolded a carefully handwritten sheet upon which, in 100 percent detail, was contained BMW’s brilliant model designation, the oldest, clearest, most logical in the industry.”
 
“My thought,” Kolk said, “was to call the smaller cars the 3 Series, the midsize ones 5 Series, and the big ones the 7 Series. That would always be the first, identifying digit. The second two digits would connote engine size, so you could have a 316, 318, 320, 325, even a 330 with the big six. The upcoming midsize car would start with the 2-liter four, so it would be the 520. Later, when it gets the 2.5-liter six, it “becomes the 525, and nobody would confuse it with the big, current 2500, because that one becomes the 725!”—Bob Lutz, Icons and Idiots
 
The brilliant part of BMW’s segmentation is that it doesn’t preclude the lower series from getting premium options if the customer is willing to pay for it. Just because a car is a 3 series doesn’t mean it will cost less than a 5 series. Likewise, I think Apple could use this same flexibility. An iPhone Mini with dual camera’s and 3D Touch would be awesome for some people.
 

Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Thoughts on BirchTree's watchOS 5 Wish List]]>Thu, 18 Jan 2018 14:53:10 GMThttp://perezonomics.com/home/thoughts-on-birchtrees-watchos-5-wish-list
​The Apple Watch is the most exciting device made by Apple over the last 3 years. The performance jumps are huge, and it’s constantly gaining new abilities. But everything can be improved, and I appreciated Matt Birchler’s great write-up on suggestions for watchOS 5 at his BirchTree blog. I’m linking to it here and expounding on the suggestions that I liked the best. His suggestions are below in bold.
Siri should always be listening for “Hey Siri,” thereby removing the need for me to raise my wrist to ask a question or make a request. Since Siri can now talk to you (at least on the Series 3) then it should be able to answer me without the need to ever look at the watch face.
 
This may be the most important suggestion of all. One of the biggest drivers behind Amazon’s Echo sales success is that Alexa is always standing by waiting for your orders. Siri isn’t quite there yet on the watch. You don’t have to touch your watch to call Siri, but you do have to turn your wrist so as to trigger your watch screen. Having an LTE-capable Apple Watch strapped to your wrist with an always-listening Siri would finally turn Siri into the omnipresent assistant we’ve always wanted.
 
The Apple News app is nice, and I love its integration into the Siri watch face, but it does not let me read entire articles on the watch itself. I know it’s a bit odd, but it would be nice to be able to read more than just the first line of some articles without having to get my phone.
 
In contrast, the news app Flipboard will put articles in their Apple Watch app, at least the first 4 paragraphs, and I actually like using it. It used to be that using the app was far too slow on my Series 0 or 2, but on the Series 3 it’s fairly quick. I’ll read articles on my watch any time I don’t have my iPhone or iPad with me and I feel like scanning the latest headlines. This is where the genius of the Apple Watch crown really shines. You can scroll through the text without blocking the screen. I don’t see why Apple News feels that they can’t add text to their articles. Flipboard already does, and it works just fine.
 
My final want is a crazy one, but I’d like the ability to watch YouTube videos on my watch. yes, this is stupid, and yes this is definitely not happening, but every once in a while I would actually like a video to play on my wrist and I can’t do it today. This would require Apple to make it possible and for Google to make it actually happen, and neither of those are likely, but hey, what are wishlists for?
 
This actually makes a lot of sense. I often like to listen to YouTube videos when I’m doing chores. I’m listening much more than I’m watching. Especially if it’s a daily vlog from someone who’s basically just talking into the camera. I don’t really need to see every second of the video. I’d like to play the video on my watch and listen to it on my AirPods. I’d love to have my YouTube Watch Later playlist on my watch ready to go at any time.  
 
Now available in iBooks —> The Tesla Bubbl
]]>
<![CDATA[Crunching the Math on Electric vs Gas Forklifts]]>Sun, 14 Jan 2018 14:52:42 GMThttp://perezonomics.com/home/crunching-the-math-on-electric-vs-gas-forkliftsWhere Business Insider Gets EVs Wrong
​Business Insider’s Matthew DeBord made the amazing claim that there is currently no debate over how electric vehicle’s are more cost-effective than gas vehicles.
On average, running a vehicle on electricity is over 50% more cost-effective that running a car on gas. There's really no debate about this, and the simple fact was recently backed up in a University of Michigan study by Michael Sivak and Brandon Schoettle. —Matthew DeBord
 
Corporate America seems to disagree with his assessment. The problem with the study that Matthew tries to hold up as his evidence is that it primarily is measuring the difference between electric and gas as fuel and doesn’t take into account the long term fixed costs.
 
For instance, most corporations have been crunching the math on using electric versus gas forklifts for many years now. Unlike most consumers, corporations DO make their decisions based on the most cost-effective solution. And for the most part, gas usually wins. Even when you take into account the lower maintenance and fuel costs for EVs it is still cheaper to own gas forklifts.
 
Last summer I had to go through the financial analysis on whether to convert our forklift fleet in Louisiana over to electric. The appeal of electric forklifts was plain to the warehouse manager because he hated dealing with the hassle of downtime and scheduling maintenance and repairs.
 
However, when we quantified the cost of electric forklifts over the next ten years it wasn’t even close. EVs were 30-40% more expensive than gas forklifts. The problem was higher initial vehicle cost, battery pack replacement costs, and charging station replacement cost.
 
Most people are aware that electric vehicles cost more up front. But not everyone is aware of how expensive battery replacements can be. Further, even less are aware that the charging stations you pay a lot of money for also have a limited life. For electric forklifts the charging stations need to be replaced every 6 years.
 
When faced with the total cost of conversion over to electric vehicles, my warehouse manager balked at the cost and chose gas forklifts. How could he justify a nearly 40% increase in costs? Yes, maintenance and fuel are cheaper, but battery and charging station replacements kills that advantage.
 
There are some companies that have already started using electric forklifts but it’s not because they’re cheaper. Let me explain why.  In those cases, the 40% premium on EVs is weighed against the cost of downtime. For instance, if it’s Friday afternoon and you don’t get every truck loaded because one of your forklifts blew a transmission, that may cost you in other ways.
 
If you are a company that doesn’t compete on price and is willing to charge a higher price for superior service, you may be willing to pay more for forklifts that won’t go down for repairs. This is the same rationale being used by companies who are signing up for electric semi-trucks. It’s not that they think they will be cheaper to operate, it’s that superior service trumps low-cost.
 
The study from the University of Michigan that Matthew DeBord holds up as evidence that no one quibbles with the fact that EVs are cheaper is flawed. If it was true, corporate America wouldn’t overwhelmingly still be using gas forklifts. If it was truly cheaper to use electric, American business would have already converted their forklift fleets.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Google Agrees That Apple’s Chip Advantage Is a Threat to Android]]>Sat, 13 Jan 2018 20:44:06 GMThttp://perezonomics.com/home/google-agrees-that-apples-chip-advantage-is-a-threat-to-androidThat’s Why They’re Poaching Apple’s Chip Engineers
​Chance Miller writes for 9to5Mac on how Google is poaching Apple (AAPL) chip engineers and recently scored a huge win with hiring away John Bruno. 
At Apple, Bruno was responsible for the silicon competitive analysis group. This group is Apple’s way of ensuring it stays ahead of other chip makers in terms of performance. Bruno also served at AMD and was one of the lead developers of the Fusion processors for PCs. –Chance Miller, 9to5Mac
 
Back in April of 2017, I had written about how Apple’s huge advantage in processor power could translate into real trouble for Android if they don’t pick up the pace soon. Judging by the moves that Google is making with stealing Apple’s chip designers, it appears that Google agrees with my thesis. Here’s an excerpt from what I wrote last year:
 
If iOS devices continue to pull away in terms of processing power, I could see a scenario where software made for iOS and Android are no longer equivalents. Right now, even though the iPhone 7 is significantly faster than the fastest Android phones, there is still a lot of overlap between the two platforms. If you’re wanting to include the iPhone 5C and up, there are a lot of Android phones that fit into that spectrum of capability. But what happens if the oldest iPhone that developers are targeting is more powerful than 80% of the Android installed base?

We’ll end up with software made for iPhones and iPads that is significantly more powerful than the Android equivalent. Not just better designed, but more features and more capable. Gaming is already so much better on iOS than Android that many Android gamers are either switching to iPhone or tempted to take the plunge. – Perezonomics, April 22, 2017
 
Apple is currently over two years ahead of Android when it comes to processor performance. That’s due largely to the fact that they have what could arguably be the most talented chip design team in the world. It makes sense that Google would go after Apple’s chip designers because there is a very limited pool of experienced engineers in this area.
 
Perhaps soon we’ll start to see Android phones get a little more competitive to iPhones when it comes to power, configurability, and energy management. Because thus far, they’re falling further behind every year.
 
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Android Performance Is Two Years Behind the iPhone]]>Tue, 09 Jan 2018 02:16:38 GMThttp://perezonomics.com/home/android-performance-is-two-years-behind-the-iphoneThe Real Reason Android Doesn’t Need to Throttle
In the face of Apple’s criticism for throttling old iPhones with worn out batteries, Samsung came out and stated that they didn’t do that with older Samsung phones. Which I found to be quite hilarious.
First, Samsung is admitting that they don’t have deep hardware and software integration the way that Apple does. Apple controls both sides which is one of the reasons that iOS is much more power and memory efficient than Android.
 
Second, Samsung’s mobile phone chips are so much less powerful than Apple’s custom designed chips that there is no need for throttling. Look at the table below of single core benchmarks from the Geekbench website and what jumps out at you? Single core performance on iPhones blows away any Samsung or Google phone. In fact, the Galaxy Note 8 still isn’t even to the level of the iPhone 6s which came out in 2015.
And make no mistake, single core performance is what makes a phone feel fast or slow. It dictates how quickly your phone can get through the myriad of mundane things it has to do. It’s analogous to torque in a car motor which is what makes your car feel fast or slow. Multi-core performance is like high-rpm horsepower, it’s there to provide power when you really need it but it doesn’t affect how your device feels in day-to-day use.
 
Comparing iPhone processors to Samsung’s processors is like comparing a supercharged Corvette Z06 to a Toyota Corolla. If GM said that after a few years when the rings started to develop blow-by that your top-speed would be reduced from 180mph to 150mph via the computer to prevent further damage. There might be an outcry. But if Toyota said that they would never limit their Corolla’s top speed to 150mph everyone would just laugh. That’s because everyone knows those weak motors would never come close to 150mph.
 
Same with Android phones. The iPhone 8 has over twice the single core power of the Galaxy Note 8. Android phones don’t ask nearly as much from the battery as iPhones do. In fact, Apple could throttle the iPhone 8 by 40% and it would still be faster than the Galaxy Note 8. So when Samsung says that they don’t throttle their Galaxy phones all we can do is smile. Because Android single core performance is so weak it’s like they come from the factory permanently throttled.
 
And the thought that Apple is somehow deliberately sabotaging their products to make people upgrade is absolutely ludicrous. I’ve worked in many Fortune 500 companies and that’s just not how anyone operates.
 
Now available in iBooks —> The Tesla Bubble
]]>
<![CDATA[Where Brooke Crothers Gets Tesla Wrong]]>Mon, 08 Jan 2018 17:44:10 GMThttp://perezonomics.com/home/where-brooke-crothers-gets-tesla-wrong
​Writing for Forbes, Brooke Crothers closes his eyes and puts his fingers in his ears when it comes to all the financial forecasters who warn that Tesla (TSLA) has arrived at the beginning of the end.
The daggers are out after Tesla reported Q4 vehicle production and delivery numbers.
But the long, tortured analyses are getting stale. All of the Model 3-centric stories say pretty much the same thing: Tesla is toast and here's the math to prove it. And every story insists: "This time it's really serious."
The problem is, people have been saying the same thing about Tesla for years. And financial blogs rehash the same the-end-is-nigh drivel every day.—Brooke Crothers, Forbes
 
Brooke’s thesis reminds me of an old joke about a man who jumped off a high rise building with a parachute strapped to his back. On his way down, people in the windows asked him when he was going to pull the strap. He responded “Well, I’ve fallen over 50 floors and so far so good”. In fact, Brooke’s piece is a good summation of where the bull case for Tesla is nowadays. It’s been reduced to the fact that they haven’t gone bankrupt yet. Well, the skeptics were right about Saturn, Suzuki America, and every other EV maker to date. So their batting average is pretty good.
 
Here’s what Brooke doesn’t get. The financial guys are worried because Tesla is pivoting away from higher priced cars with higher margins to lower priced cars with lower margins. This is very different. Making matters worse, the capital requirements of the lower margin Model 3 are much higher than what are needed for the S or X. Things have changed greatly, by Elon’s doing. And so far, the financial doomsday sayers are proven right every 3 months when exactly what they predicted happens.
 
Were it not for the Model 3, Tesla could have limped along for a while making the Model S and X at little to no profit. But now that they’re dumping money into the Model 3 they’re going to hemorrhage cash like a deer with an arrow in its neck. Tesla is investing enough money into the Model 3 to produce 5,000 vehicles per week. At that pace, the Model 3 would outsell the Ford Fusion in the US.
 
Tesla isn’t going to make up the Model 3s lower margin in volume. For starters, the Model 3 price is too low, no amount of volume is going to help them ever turn a profit. Second, unlike other automakers, their selling costs are huge and they’re variable. That means the more cars that they sell, the more that they lose on battery charging infrastructure costs, warranty repairs, and customer service and support. Other automakers don’t deal with these costs because independent business owners (dealers) invest a lot of their own money to deal with these. But not Tesla, as their sales grow, so do their expenses in lockstep. This alone makes Tesla’s business model unsustainable.
 
But Tesla has 350,000 reservations cry the Tesla bulls. That’s true, but what happens if Tesla invests the capital required to sell this level of Model 3s, and the demand turns out to be a one-time spike by the curious? It’s going to be big trouble for Tesla. Or if a good amount of those fully refundable deposits turn out to be speculators who cancel their deposits when resell value isn’t where they thought it was going to be?
 
I’ve watched the hype surrounding the Model 3 and Tesla in general and noticed something curious. By and large, the Tesla fans are not what you would call “car people”. Tesla fans are not the automotive tastemakers. That is part of the reason why Tesla customer satisfaction surveys come back with glowing reviews when their cars are much more shoddily constructed than cars made by GM or Toyota. Real car people have high standards and know what to look for in automotive quality.
 
When it comes to the traditional automotive tastemakers, the “car guys” among us, the reaction to Tesla ranges from non-plussed to overtly hostile. Tesla investors are hoping that the 350,000 Model 3 reservations are a sign that the public is ready to accept electric cars for their daily transportation. However, if these 350,000 are simply a new addition of non-traditional car people who are willing to buy the Model 3, Tesla is in big trouble.
 
Tesla can’t gear up for this level of sales only for a one-time blip at the beginning. Tesla needs a sustained shift in national attitudes towards EVs. And that’s not happening within the next 5 years.
 
But just for the sake of argument. Let’s say that demand for the Model 3 is exactly where Tesla hopes into the forseeable future. What happens then? Well, Tesla will continue to lose money as they sell their cars at a loss. Tesla investors will eventually get disillusioned after two or three years.  They’ll lose faith that they'll ever see a huge bump in stock price and stop handing over cash a billion dollars at a time. At which point, Tesla will begin their downward spiral of bankruptcy.
 
And that’s the best-case scenario.
 
Now available in iBooks —> The Tesla Bubble
]]>