The car business is an enormously expensive place to play. Building factories can cost anywhere from hundreds of millions to billions of dollars, especially if you want to mass produce anything. In late 2008 and early 2009 at the height of the financial crash, we saw General Motors go from $16 billion in cash reserves to virtually nothing in a matter of months as they raced toward bankruptcy. Tesla Motors is now standing on the precipice of major investments to grow the company and they have been spending their reserves at such a prodigious rate that they too need to raise more cash.
In the recently released Q2 2015 earnings report, a more troubling aspect than the operating losses which have been typical of the company’s finances from day one, was the cash burn rate. Tesla went from having $1.905 billion on December 31, 2014 to just $1.15 billion on June 30. A good chunk of this went to paying for equipment in the Fremont, California factory for production of the Model X crossover and ongoing construction of the “Gigafactory” battery plant near Reno, Nevada.
However, the outflow is just getting started as the company prepares to start equipping that $5 billion battery factory (although a significant chunk is coming from Panasonic and other suppliers) as well as developing and producing the more affordable Model III. Tesla has publicly stated a goal of expanding production from 50,000 units this year to 500,000 by 2020. While selling half a million cars would raise significant revenue, they have to spend a lot of money before they ever get there.
To help keep things going in the near term, Tesla announced plans today to issue $500 million worth of new common shares in the company. CEO Elon Musk has committed to spending $20 million of his own money to buy new shares. Given the enormous investments that will be required for equipment and engineering in the next five years, $500 million seems like a pittance and it likely won’t be the last time we see Tesla going to either the equity or debt markets to raise more money. In this case, Tesla’s stock price has already taken a hit in the last few weeks dropping from a high of $282 on July 20 to close at just over $238 yesterday. Right now they are probably balancing the need for cash with not overly diluting the stock and sending the price down even faster.
These are perilous times for Tesla Motors.
The redesigned 2016 Hyundai Tucson will be hitting dealerships in the next two to three weeks but it won’t remain the smallest crossover in the Hyundai lineup forever. During a regional media preview for the Tucson, Hyundai America President and CEO Dave Zuchowski acknowledged that sales of B-Segment crossovers are growing fast and Hyundai wants to be in the segment. However, the new Creta that just launched in India is not suitable for the American market in its current form. Zuchowski didn’t say if the new U.S.-market CUV would be based on an updated version of the Creta or would be something different. He did say that the small crossover would probably arrive here in two to three years.
Upsetting the Apple car
APPLE’S ability to make desirable iGadgets designed for easy portability is beyond question. Reports emerged this week that it is planning to make a mobile device…
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As the discussion about a possible entry of Apple in the car business continues, yet another wildly premature question arises. How would Apple go about selling these totally speculative vehicles?
Developing and building a modern car from the ground up is a vastly more complex problem than anything that Apple has previously attempted. Elon Musk, Henrik Fisker and countless others before and since can certainly attest to this. However, that is largely an engineering problem with basic technical issues to address and regulations to adhere to. Aside from scale and the nature of the engineering challenges, it’s an area that Apple is somewhat familiar with.
The Franchise System
The network of independently-owned franchised car dealerships was established in the early years of the industry. In those days, it was hugely beneficial to all of the startup automakers by providing them with an inventory buffer and some extra working capital. With a system of franchises, automakers don’t actually sell product to the end consumers that drive around. Vehicles are purchased by independent dealers who maintain the inventory and sell to end consumers. Even when a customer special orders a vehicle with a particular configuration, it is still sold twice, once by the factory to the dealer and then by the dealer to the consumer.
In the early years of the industry, this system benefited manufacturers because they sold franchises to aspiring retailers and them sold them the product shortly after it came off the assembly line. It also benefited the dealers that could charge a healthy markup and also make money selling parts and service. Finally, the system benefited the consumer because with so many independent dealers that could charge whatever they liked, there was an opportunity to shop around for the best price or to find the exact car they wanted.
However, as dealers became more wealthy, they would increasingly wield their influence over state legislators to get laws passed to prevent automakers from competing by selling directly to consumers. Until the import brands started arriving in force in the 1960s, this all worked well with dealers only competing with each other for sales. However, the imports seeing the thousands of dealers selling the cars at a discount had a different idea.
While they didn’t try to go against the franchise laws, they also realized that by selling fewer franchises, their dealers wouldn’t be undercutting each other as much, selling more vehicles per store and earning higher profits. Until GM and Chrysler went through bankruptcy in 2009, all efforts by the Detroit automakers to cull their dealer networks or compete directly had been firmly rebuffed. Even now with 20-25 percent of their dealers shut down during the bankruptcy process, the Detroit three still have several times the number of franchises of their import brand competitors.
Tesla and the company store
Having seen the success that Apple had with its company owned retail outlets since the first opened in 2001, Tesla decided to eschew the franchise model for its fledgling lineup of battery powered vehicles. Starting in California and a few other states with more lenient regulations that allowed carmakers without any existing dealer network to sell direct to consumers, Tesla has opened several dozen stores modelled on the Apple boutique concept.
Unfortunately, Tesla’s attempts to expand beyond that initial retail footprint have been largely rebuffed by the legislatures and courts. In fact laws against automakers selling direct to consumers have been made even more strict in a number of states including Texas and Michigan.
So what might Apple do?
As with everything else about a potential car program, we can only speculate at this point but Apple’s history and some emerging technology provide some clues. Prior to the opening of the first Apple Store in April 2001, Apple’s products had been sold through third-party retailers including CompUSA, Best Buy and a range of independent stores. In the larger stores, Apple products were often relegated to a remote corner and rarely given much support.
Automotive retail is a very different environment where the vast majority of stores are dedicated to a single brand. However, because they are independently owned and operated, automakers have very limited control over what the stores look like or how they are configured. Automakers have resorted to a carrot and stick approach to getting dealers to follow certain guidelines, such as providing support payments to remodel or withholding allocations of certain models if dealers don’t tow the line.
In lieu of a franchise system for the computer business, Apple just went into direct competition with their third-party resellers. By providing a halo experience for customers where they could show off their latest products, Apple was able to grow their sales dramatically. While many independent resellers went out of business, most of the larger chains like Wal-Mart, Target and BestBuy saw the increasing attention that Apple brought to its products as a boon. By advertising that they had the same products, they were able to draw in consumers that also needed other products.
There was one significant distinction here from the auto industry. Apple has always sold its products at premium prices and virtually never discounted anything, thus avoiding one of the major concerns from franchised car dealers. They also discouraged third-party retailers from discounting Apple products. In this way, they avoided the appearance of undercutting third-parties and competed on providing a better retail experience.
With its huge cash horde and influence, if Apple chose to take on established car dealers to set up their own retail network, the tech company could potentially lobby and win over state legislators that have so far done the bidding of dealers. Apple already has nearly 300 stores in the U.S. and has shown a record of playing nice with those third-parties which could help if it does go after changes in franchise laws. Apple would likely have a better chance of success with its polite and well-mannered CEO Tim Cook than the outspoken Tesla CEO Elon Musk.
It’s also entirely possible that Apple could go the traditional franchise route. There is probably no shortage of potential dealers willing to put up a multi-million dollar franchise fee to give the brand a shot.
My own personal guess is that we’d actually see a mix of both independent dealers, stand-alone Apple car stores and some support from the existing Apple store network. Given that existing Apple stores largely live in malls and are often overcrowded as it is, Apple could provide a virtual reality introduction to its vehicles from the existing stores.
Imagine walking into your local Apple store, walking over to the car section across from the new watch counter and slipping on a set of Oculus Rift goggles. You could sit down in a mock driver’s seat and reach out to experience the entire Apple automotive user interface. When you are done, one of the Apple geniuses could set up an appointment for a physical test drive at a nearby Apple car store or third-party store or even pull up the loan application on an iPad and arrange for your new car to delivered right to your driveway.
If anything, Apple taking on the car buying experience may end up being far more disruptive to the industry than any Apple-branded car. As the old curse says, “may you live in interesting times.”
In an interview on Bloomberg, Matt DeLorenzo is only somewhat right that the new Tesla Model S P85D is counter to the mission of converting the world to battery electric cars.
On the surface, Matt is correct that to really fulfill Elon Musk’s goal of transforming personal transportation, Tesla needs to build huge volumes of cars that people who aren’t living off silicon valley stock options can afford to buy. However, in order to do that, Tesla actually needs a sustainable business model and so far, 11 years after being founded, the company has yet to turn a profit from building and selling cars.
That’s where machines like the P85D come in. Sure, the world doesn’t really need a 691, battery-powered sedan (not that I wouldn’t seriously consider one if I had the cash but that’s another story). But to get to the promised land of building a mainstream car, Tesla (or any other car manufacturer) needs to have sufficient cash flow to pay it’s own bills which means that margins need to go up significantly.
Developing and building cars is a hugely capital intensive undertaking. In addition, to keeping the current Model S up to date, Tesla is developing the Model X, Model 3 and whatever else it has in the pipeline. The Model X shares a platform and most hardware with the S but the Model 3 will have to be all-new in order to hit its price targets. All of this will require investment in tooling and let’s not forget the billions that will have to be spent on the vaunted Gigafactory.
So lowering cash outflow in the near term is pretty much off the table.
All of which brings us back to the P85D. With a base sticker price of $120,170, the AWD S adds nearly $27,000 to the starting price of the P85. A conservative estimate would put somewhere between $10,000 and $15,000 of that incremental cost as pure extra margin after subtracting the added equipment for the P85D.
If Tesla can move 5,000 of these high-end cars a year, it won’t have any notable impact on greenhouse gas emissions but it will add $50-75 million (and maybe a lot more) to the company’s bottom line and that’s what Tesla really needs right now in order to keep its momentum going and help fund the new products that will support Musk’s vision.
Evolution is a funny thing. One basic set of DNA can mutate and adapt to changing environmental conditions to spawn an almost infinite number of organisms. Such is also the case in automotive landscape where few people would consider that there is much common DNA between a Dodge Grand Caravan and a Ford Mustang and yet there is.
2014 marks 30 years of production for Chrysler’s minivans that debuted as the Dodge Caravan and Plymouth Voyager while the Mustang debuted 50 years ago. While the Caravan and pony car seem to lie at opposite ends of the automotive spectrum, each was derived from the affordable, compact family sedans their respective manufacturers had debuted a few years earlier and each was the progenitor of an entirely new market segment that didn’t really exist before. The Mustang was an offshoot of the Ford Falcon while the original Caravan shared its roots with the Dodge Aries K-car.
Strangely enough, the parallels extend further as both vehicles were conceived by many of the same people and for many of the same reasons, in particular Hal Sperlich and Lee Iacocca. In the early 1960s, Iacocca was president and general manager of the Ford division at Ford Motor Company while Sperlich was a product planner. Both were members of the Fairlane Committee which got together define a car that would appeal to the growing ranks of baby boomers that were then reaching driving age. The resulting product was Mustang and it inspired similar vehicles from each of the Detroit manufacturers.
A decade after the Mustang, as those same boomers were starting to get married and have kids, Sperlich and Iacocca began pushing the idea of a smaller car-based van within Ford but for various reasons it never came to fruition. Several years later, Sperlich and Iacocca had both landed at a Chrysler that had barely avoided bankruptcy. As the perennial scrappy, third-place brand in Detroit, Chrysler seemed willing to try different things and as Sperlich and Iacocca looked to expand the lineup beyond the original K-cars, the minivan concept was revived.
Much like Mustang, the minivans were a runaway success and soon inspired copy cats from Detroit and elsewhere. In yet another parallel to the pony car, the minivan market bloomed and then waned as customers eventually moved on to SUVs and crossovers. After peaking at nearly 1.4 million units in 2000, minivan sales are less than 500,000 annually. Similarly, the pony car segment reached its peak in late-1960s and early-1970s before settling down with current sales of about 250,000 examples per year.
Over the decades, the Chrysler minivans and the Ford Mustang have each stayed surprisingly true to their creators original visions over time although both have also grown bigger, heavier and more sophisticated. While Mustang has now reached the 50 year production milestone in continuous production, the Caravan is entering what will likely be its last year on the market despite still being the second-best seller in the segment behind its Chrysler-badged sibling, the Town & Country.
When Chrysler announced its 2014 five-year plan earlier this year, the Caravan missing from the Dodge brand roadmap. Instead, Chrysler has opted to consolidate down to a single minivan nameplate under the Chrysler umbrella once the new generation debuts about a year from now. Similarly, Ford long ago discontinued Mustang offshoots, the Mercury Cougar and Capri.
Although neither the minivan or the pony car are the stars they once were, both still have a spot in the automotive firmament and attract enough customers into their respective showrooms to justify ongoing development. The creators should be proud that they conceived of something so lasting.
Never heard or it? I certainly hadn’t until watching a marathon of the original Bob Newhart Show on the Hallmark Channel.
Latisse is a prime example of why America spends more on health care than any other country in the world while not having any improved outcomes to show for it. We aren’t healthier, we don’t live longer and we’re generally not any happier than people in other developed countries.
So what is Latisse? It’s a prescription drug to treat thin or insufficient lashes. Yes eye-lashes, those little hairs that emerge from the edge of your eye-lids. There are countless diseases that kill or disable hundreds of millions of people every year but I’ve never heard of anyone dying from thin eye-lashes.
So what? you might say, insurance companies probably don’t pay for it (mine doesn’t) so it’s not costing me anything. Despite patients paying for it out of pocket it still costs all of us.
We have limited financial and intellectual resources and developing new drugs typically costs well over $1 billion and occupies thousands of scientists. Even if we give Allergan, the company that makes Latisse, the benefit of the doubt and assume that Latisse was discovered by accident while looking for something actually useful, it still requires at least hundreds of millions of dollars and the time of FDA officials to run clinical trials before approvals. Those are resources that would be far better utilized elsewhere.
So why do we have drugs like Latisse on the market even though they don’t serve any useful purpose in improving human health? I think it’s because we allow companies to patent this stuff and then turn around and market directly to consumers on mass media. The entire fashion and cosmetics industry thrives on making women feel bad about the way they look. Drugs like this drive women to doctors to ask for these drugs, wasting the time of medical professionals and driving up costs for everyone.
As with most other modern drugs, the ads for Latisse outline a litany of potential side effects, any or all of which can lead to additional medical expenses. We have more than 50 million Americans without health insurance and yet we are squandering resources ridiculous drugs like Latisse.
One first step might be to require pharmaceutical companies to shoulder all of the costs of proving the safety of drugs like Latisse and Viagra that do nothing to improve health.
If we actually want to make any real progress on making health care more affordable while improving outcomes, we need to make changes to the drug patent system, get rid of direct to consumer advertising, refocus on health rather than cosmetic medicine.
Some excellent thoughts on the possible unintended consequences of the recent movement to regulate privacy online.
The cost of trying to ensure privacy could be much greater than just educating people about online behavior in some very basic ways. Let's be clear, if there are things about your life that you want to keep private, don't post them online in any way shape or form. Once something gets online, you can never truly erase it or forget.
Since the earliest days of the web, I've always used my own real name rather than pseudonyms. The stuff I don't want people to know about, I don't put online anywhere, period. There are plenty of benefits to sharing and contributing to online discussions. However, just as in the real world, we must all learn that there are consequences to what we say and do. Think before you speak/post.
We also need to expose companies that might be doing things they shouldn't such as Path uploading address books without notifying users. Thankfully, white-hat hackers and researchers are discovering these issues and triggering changes in behavior.
That said, the development of open two-way communications between consumers and companies has created unprecedented transparency in pricing and service. By using social networks like G+, Facebook and Twitter, consumers can call out companies that might have been unresponsive in the past and actually get improved service.
Let's not let a moral panic prematurely pull the plug on these benefits.
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If businesses had already been social in 2008, would the financial crisis have been less severe and crippling? And will looming changes in privacy rules interfere with the changes that might keep that kind of disconnect between businesses and their customers from happening again?
I was starting to write about Obama's Consumer Privacy Bill of Rights when it occurred to me that perhaps it might have the unintended consequence of disconnecting people further from businesses that might want to breakdown barriers.
One of the toxic and unnerving aspects of the recent foreclosure crisis was the impersonality of its customer interactions, From the shredding of mortgages into small sub-atomic particles to the disappearance of bank employees who should have been tasked to help consumers negotiate mortgage modifications and short sales, the entire process of keeping or losing one's home became one in which the customer (the homeowner) lost control, and the resulting anxiety rose to cataclysmic levels. A side effect of the crisis was that thousands of small businesses had credit lines lowered and pulled at the same time, even though their owners were not in default, in trouble, or late in paying them.
One the foreclosures began, one size fits all solutions based on too little personal information shut down the economy across the country and rippled out across the world.
In theory, the concept of social business, in which objectives are more closely aligned with customers and silos give way to transparency, should prevent something like that from ever happening again. As the enterprise slowly transforms itself from a hierarchy to a network,and the customer becomes a node on the network, things should get better, right?
I don't know. In the past few weeks, it seems as if the nascent social business initiative might get snuffed out before it even takes hold.
It's difficult not to ask how all the recent discussions about privacy — spurred by the White House's Consumer Personal Information Act and the EU's new privacy rules–are going to affect the fledgling effort toward making businesses, their vendors and suppliers, and their customers more aligned in objectives and more closely connected. Won't the hesitancy of consumers to have their comings and goings on the internet tracked limit what businesses can do to help customers they're not free to get to know? I know, I know, the act is aimed more at advertisers and marketers, spammers and retargeters. BUT…
To some degree, the discussion is a sign of the maturity and scale of online communities. When early adopters came online, they considered privacy a given, even to the point of adopting handles and avatars rather than real names. How you identified yourself on the internet was a choice, almost from Day One. It was in the hands of the user.
But Google and Facebook changed all that, encouraging millions of people to put their real names and actual personal information online in exchange for "free" services. Business models have been built around the use of consumer personal information: advertising technologies, market research, direct marketing, polling, and political campaigns have all used the information consumers innocently put online.
An entire generation has forgotten or never learned that if you want to keep your information private, you should probably not put it online in the first place.
I just wonder whether the gathering of information, and the resulting insights the could come from mining it, could not also be a help rather than just an annoyance.
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You have to give Apple credit for chutzpah. Last week they announced a new subscription system for content available on iOS devices and they are trying to grab revenues that they have no legitimate claim too. I love Apple design and I prefer to use Apple computers and iPods over any competing brands. However, I have avoided being drawn into the iOS ecosystem which includes iPhone and iPad. Apple simply exerts far too much control over these devices for my liking.
When Apple introduced the App Store for the iPhone and iPod Touch several years ago they set up a system that allowed both paid and free apps. Aside from a one-time $99 to join the developer program, developers could create and distribute apps through the store at no additional cost such as hosting fees. Developers that opted to charge for their apps would split the revenues 70/30 with Apple. This wasn’t an entirely unreasonable split since Apple provided the distribution servers and credit card processing. It’s generally been acknowledged that Apple makes little or no profit on this deal since its costs were roughly comparable to its 30% of the take. A fair deal all around.
The new subscription system allows publishers to distribute apps such as News Corp’s “The Daily” and charge a recurring subscription fee for content, just like a newspaper or magazine sub. Apple insists on take a 30% cut of this revenue which is OK if it is handling data distribution and credit card processing. However at the same time that the subscription payment system was announced, it declared that any and all purchases through apps must be handled through its in-app payment system and the subsequent 70/30 split.
This is actually very problematic for many companies. For example, Amazon offers a free Kindle e-reader app for iOS devices (and Android and Blackberry as well). Kindle users can buy books directly on their devices but on other machines, the app sends users to a mobile browser to search for books and make purchases on the Amazon web site. The books can then be downloaded through the app from their library. Nowhere in this process is Apple facilitating anything. They are not serving data or handling financial transactions, Amazon is bearing all the costs of distribution. So why does Apple deserve any payment.
This actually started when Sony submitted a reader app similar to the Kindle App that also tried to bypass the in-app purchase system and Apple rejected it. Apple subsequently told Amazon, Barnes and Noble and other distributors that they could no longer get away without paying Cupertino its due. The situation gets even worse for streaming media providers like Pandora, Rhapsody, Netlfix and Hulu.
Those companies spend a lot of money on licenses and a distribution backbone independent of Apple. Apple provides no service to them other than then customers that bought its products and want to use a variety of services. However, Apple already profited handsomely when it sold the devices. If Apple wants an ongoing revenue stream from media streaming it needs to get off the pot and open its own service.
Being forced to pay Apple 30% of gross revenue for the privilege of access to its huge customer base is just outright extortion on Apple’s part. Most of these companies are money losers already losing such a large chunk for no reason would make then totally unviable. If they raise prices to pay off Apple they will also have to raise the price charged to users on other platforms like Android and Blackberry because Apple also mandates that media distributors cannot charge its users more than any other platform.
The Federal Trade Commission and Department of Justice have apparently opened a preliminary anti-trust investigation into the new Apple practices. Unfortunately it seems unlikely that the feds will end up doing anything of significance to Apple. Given that, people should stop buying iOS devices until Apple backs down on this issue. The money grab needs to stop. Apple should not be paid for doing nothing.