2017 Investor Roundtable:General Discussion

[Ichabod]

You’re wrong. Failure to succeed most definitely has a benefit. If fact it can have several benefits none of them inherently ‘bad’.

BMW is free to be a vulturous company benefiting from other’s hard work and not giving a damn if one fails trying to fatten BMW. Tesla (and SpaceX and TE and TS...) are showing there’s another, better way. It’s long overdue for the world to be a community and understand that by helping each other we strengthen everyone.

In business, investing in something that ends up losing money is bad. On a personal development level, sure, let's all agree that failure is a good teacher. When trying to make money, I think we'd prefer that we just go ahead and do that, not entertain ourselves with failures.

As far as BMW being a vulturous company, blah blah blah, all I can say is, "huh?" I haven't seen even the slightest suggestion that Tesla is some kind of corporate do-gooder helping other companies through their challenges with gentleness and love. Wasn't Elon's strategy to hire multiple contractors and then just fire the ones that don't perform as well? And if noone could do it well enough, just fire them, bring it in house, and sue? Maybe I remember a different X ramp than you do. I'm not criticizing this. This is business not circular series reacharound time.

 

[sub]

Tesla could always just join the Germans in colluding to slow or stop innovation. Part of the problem is the 3rd party suppliers are to damn slow to innovate at Tesla's pace.

 

[dennis]

So my upstart in Slovenia can't be competitive, even though one innovation that gives it an advantage opens up a market for 10s of millions of parts per year, while Esla can bring it completely in house, has only one customer, but yet they are going to lead the pack in innovation and efficiency?

Yes they will lead in innovation and efficiency for two reasons:

- The captive supplier is able to optimize for their single customer's requirements. Serving multiple customers with different requirements dilutes that ability.

- The CEO's mantra is innovation and efficiency. Therefore all parts of the organization will focus on innovation and efficiency.

 

[Waiting4M3]

Perfect example. For Tesla to get improvement, you believe Tesla employes multiple teams to do things that others just outsource. If some random seat builder in Slovenia goes under trying to innovate seat making in a flawed way, BMW won't even know about it. If they succeed, they reap the benefits from the lower cost and/or better price. To get a similar benefit, Tesla must bear the cost themselves, and if it doesn't succeed, they don't get any benefit, just cost.

Except the supplier will recoup the development cost of that seat from BMW indefinitely. If BMW wants to double source (single source is too risky), then they'll pay this hidden development cost to each supplier they choose. Or if BMW has specific requirements, they need to work with supplier(s) NRE upfront to develop those, and again, each supplier requires separate NRE payments. BMW doesn't save significantly. If you plan to make a million of these cars, each front seat costs $500, a supplier will charge you 15% margin over material cost, plus labor, the 15% overhead alone comes to 1 million * 2 * $500 * 15% = $150M. I think you can finance a lot of seat development if you pocket that margin.

 

[RobStark]

First of all, I only chose seats because I was tired of referring to widgets. However, your example is perfect. First, that 10% not held by the big 5 is an array of small companies trying to innovate like crazy to be a big boy.

No, it is not.

It is seat sales from government companies and/or to government companies in China, Vietnam,Iran, Turkey etc.

They don't innovate like crazy and they don't try to. They make economic rents by having access to government insiders.

BTW Futuris was not part of the Big 5 because they were an Australian company that served Australian auto manufacturing with Australian subsidies. When Australian auto manufacturing shut down they moved to California with a contract from Tesla. They also opened an office in Detroit. They couldn't compete and were purchased by Adient.

 

[Waiting4M3]

In business, investing in something that ends up losing money is bad. On a personal development level, sure, let's all agree that failure is a good teacher. When trying to make money, I think we'd prefer that we just go ahead and do that, not entertain ourselves with failures.

As far as BMW being a vulturous company, blah blah blah, all I can say is, "huh?" I haven't seen even the slightest suggestion that Tesla is some kind of corporate do-gooder helping other companies through their challenges with gentleness and love. Wasn't Elon's strategy to hire multiple contractors and then just fire the ones that don't perform as well? And if noone could do it well enough, just fire them, bring it in house, and sue? Maybe I remember a different X ramp than you do. I'm not criticizing this. This is business not circular series reacharound time.

Tesla's mission is not to be nice to suppliers, but to foster industries and infrastructures that help moving to electrification and reducing green house gas, being nice to suppliers that matter to that mission. So helping companies like Panasonic and Samsung bring up their battery cell production is part of that "being nice" because it contributes to the mission. Being nice to a substandard seat supplier, for example, is not. If the supplier is bottlenecking EV production, then it's just in the way. Same with battery/solar installation companies, if they do a good job Tesla will throw them plenty of business, if they suck (or price gauging like some in Florida after the hurricane), they're in the way of the mission and need to go.

 

[Ichabod]

No, it is not.

It is seat sales from government companies and/or to government companies in China, Vietnam,Iran, Turkey etc.

They don't innovate like crazy and they don't try to. They make economic rents by having access to government insiders.

BTW Futuris was not part of the Big 5 because they were an Australian company that served Australian auto manufacturing with Australian subsidies. When Australian auto manufacturing shut down they moved to California with a contract from Tesla. They also opened an office in Detroit. They couldn't compete and were purchased by Adient.

Well, it sounds like you have it all figured out. I guess all the seat people have been just sitting around waiting for Tesla to show them how it's done. The same must be true of injection molding, stamping, die casting, and touch screen manufacturing. I am obviously not going to convince you of anything regarding seats. Pick any component. I can guarantee you that over any period of time greater than a couple of years, a multitude of companies competing for business will out innovate any large vertically integrated company that makes the same thing in house, regardless of the brilliance of the CEO. Can an in-house shop make a great breakthrough once in a while, just like anyone else? Of course. You are free to believe that Tesla can do everything better than anyone else, but you believing it doesn't make it true.

 

[Ichabod]

Yes they will lead in innovation and efficiency for two reasons:

- The captive supplier is able to optimize for their single customer's requirements. Serving multiple customers with different requirements dilutes that ability.

- The CEO's mantra is innovation and efficiency. Therefore all parts of the organization will focus on innovation and efficiency.

As usual, good in theory, but I don't necessarily agree. First, your optimizing for a single customer is countered by my cross learning from different customers with unique designs and ways of doing things. Second, I don't think Elon is breaking any new ground with a mantra of innovation and efficiency. If CEO mantra was all it took to bring innovation and efficiency to the organization, bankruptcy would be far more rare than it is.

 

[RobStark]

Well, it sounds like you have it all figured out. I guess all the seat people have been just sitting around waiting for Tesla to show them how it's done. The same must be true of injection molding, stamping, die casting, and touch screen manufacturing. I am obviously not going to convince you of anything regarding seats. Pick any component. I can guarantee you that over any period of time greater than a couple of years, a multitude of companies competing for business will out innovate any large vertically integrated company that makes the same thing in house, regardless of the brilliance of the CEO. Can an in-house shop make a great breakthrough once in a while, just like anyone else? Of course. You are free to believe that Tesla can do everything better than anyone else, but you believing it doesn't make it true.

Everyone is free to believe whatever they wish. And in democracies they are free to express those beliefs.

But I digress. I guess you have everything figured out. And know everything about all components. In every industry. And can gurantee it.

Look in the mirror and repeat "You believing it doesn't make it true."

 

[Ichabod]

Tesla's mission is not to be nice to suppliers, but to foster industries and infrastructures that help moving to electrification and reducing green house gas, being nice to suppliers that matter to that mission. So helping companies like Panasonic and Samsung bring up their battery cell production is part of that "being nice" because it contributes to the mission. Being nice to a substandard seat supplier, for example, is not. If the supplier is bottlenecking EV production, then it's just in the way. Same with battery/solar installation companies, if they do a good job Tesla will throw them plenty of business, if they suck (or price gauging like some in Florida after the hurricane), they're in the way of the mission and need to go.

No disagreement on any of that. The point was just that outsourcing specialized tasks is often beneficial. Your examples are good evidence of this. Tesla knows how batteries are made. However, someone there was smart enough to realize that there is institutional knowledge in companies that have been manufacturing batteries for years, so better to rely on that knowledge rather than try to replicate it. Good decision by Tesla, and perfectly in line with my argument that vertical integration is not always the best way.

 

[Ichabod]

Everyone is free to believe whatever they wish. And in democracies they are free to express those beliefs.

But I digress. I guess you have everything figured out. And know everything about all components. In every industry. And can gurantee it.

Look in the mirror and repeat "You believing it doesn't make it true."

I take no offense to your believing what you do. And yes, for all components, in all industries, many minds will do better than one. I guarantee it.

 

[RobStark]

I take no offense to your believing what you do. And yes, for all components, in all industries, many minds will do better than one. I guarantee it.

Omniscient with absolute confidence.

 

[Ichabod]

Omniscient with absolute confidence.

You might look up omniscient. Or I can save you the time. Understanding that more than one of something has more power than one of those things will not be found in the definition. I can guarantee that too, and still won't be omniscient.

 

[tander]

Yes, his point is to take away the tax incentives from the filthy rich so that they can be redistributed to those who are not because those filthy rich people didnt earn it.

Devils advocate; let’s say back in 2009 and you’ve saved enough to build your dream house, but a friend asks you for money to save his startup making electric cars, he won’t be able to pay the bills soon. So you forgo the house gave him a big chunk of your saving figuring you’ll probably lose it all. Well it 2017 and you decide to sell your shares, you are now “filthy” rich. According to the irs that is unearned income and you pay 20% tax on it. But that was a pretty gutsy investment, and you sacrificed building your dream home at the best time to build a home in decades. So was it earned ? Are you “filthy” rich? Would you baulk if you had to pay 40% tax + fica on it?

 

[RobStark]

You might look up omniscient. Or I can save you the time. Understanding that more than one of something has more power than one of those things will not be found in the definition. I can guarantee that too, and still won't be omniscient.

Knowing all companies in all indsutries and all components in those industries requires more than one human mind.

That encapsalates all human economic activity.

It requires omniscience.

BTW My last post on this. Not going to pollute this thread with any more.

 

[Waiting4M3]

No disagreement on any of that. The point was just that outsourcing specialized tasks is often beneficial. Your examples are good evidence of this. Tesla knows how batteries are made. However, someone there was smart enough to realize that there is institutional knowledge in companies that have been manufacturing batteries for years, so better to rely on that knowledge rather than try to replicate it. Good decision by Tesla, and perfectly in line with my argument that vertical integration is not always the best way.

Institutional knowledge sometimes also leads to institutional complacency/inertia. NVidia and Mobileye are examples of where a supplier is capable, but may not see eye-to-eye on roadmaps with Tesla on roadmap, so Tesla instead of waiting for supplier to come to their side, chose to go it themselves. By having better feature/performance than the off the shelf stuff you get from Mobileye or NVidia, Tesla can stay ahead on technology/features, it may cost more, but it adds to the value of the car, and also adds to intangible value in the brand, so financially it could also be beneficial, but won't show up directly in the balance sheet.

I'm not arguing that Tesla would and should in-source everything, but whatever they choose to in-source, benefits them either technologically, financially, or logistically, or a combination of these. And how they choose to balance between these factors is dictated by the mission. Better technology helps spread adoption of EV, helps making more EV's quicker. Better financial results help drive down the price, provide more cash, which funds more expansion and helps making and selling more EV's quicker. Logistic improvement reduces product ramp time and manufacturing cycle time, improves capital efficiency, allowing them to grow faster and sell more EVs faster. I feel like we're talking about in-sourcing like it's a binary issue, but really it comes down to a combination of numbers, I trust that Tesla has crunched the numbers.

 

[mongo]

Pick any component. I can guarantee you that over any period of time greater than a couple of years, a multitude of companies competing for business will out innovate any large vertically integrated company that makes the same thing in house, regardless of the brilliance of the CEO.

Former Tier-1 here, gonna disagree with you.
Change creates risk
Change cost money
Change requires more expensive engineering resources
If you have 5 suppliers and none are at risk of going out of business, they may optimize some internal processes, but they are not going to jump tracks. Racing toward 0 doesn't do them any good (OEM wants the cost saving passed on to them), and if they upset the status quo, there is no guarantee that another supplier won't undercut their cost downs and put them in a worse position than when they started.
Or, they all form a gentleman's agreement in violation of anti-trust laws.

Denso to pay $255 million in antitrust case settlements to dealerships, consumers

 

[Ichabod]

Knowing all companies in all indsutries and all components in those industries requires more than one human mind.

That encapsalates all human economic activity.

It requires omniscience.

BTW My last post on this. Not going to pollute this thread with any more.

Thanks for your mercy. I didn't claim to know all companies. Only that I know a principle that applies regardless of the industry. I also know that selling things for less than they cost loses money. In all industries. Still not omniscient, just stating the obvious.

 

[dmckinstry]

I take no offense to your believing what you do. And yes, for all components, in all industries, many minds will do better than one. I guarantee it.

Unless they form a committee.

 

[Ichabod]

Former Tier-1 here, gonna disagree with you.
Change creates risk
Change cost money
Change requires more expensive engineering resources
If you have 5 suppliers and none are at risk of going out of business, they may optimize some internal processes, but they are not going to jump tracks. Racing toward 0 doesn't do them any good (OEM wants the cost saving passed on to them), and if they upset the status quo, there is no guarantee that another supplier won't undercut their cost downs and put them in a worse position than when they started.
Or, they all form a gentleman's agreement in violation of anti-trust laws.

Denso to pay $255 million in antitrust case settlements to dealerships, consumers

I don't disagree with anything you say in principle. The facts remain the same. Change creates risk for a vertically integrated company too. Change costs money for a vertically integrated company too. The difference is that competitors have economic motivation to do those things that is clear and well defined. Gains in efficiency and quality yield real, quantifiable benefits to the supplier. Yes, there are things that get in the way, your are right. The problem is that when vertically integrated, those extrinsic motivations disappear to the mid level manager in charge of what is now an internal department rather than a stand alone entity that must make a profit on its own. To get the innovation and efficiency, you are entirely dependent on having all the right people who are always motivated, aligned with company goals, etc. Tesla no doubt has good people, but the bigger and more vertically integrated you are, the more you are vulnerable to the inevitable bad apple.

And since you are a former Tier 1 supplier, I'm curious if your company was a spinoff of a larger organization. If it was, do you think your company was more innovative when part of a larger organization? If it wasn't ever part of something bigger, do you think innovation would increase if you were purchased by your largest customer?