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syria, warmongering, various

Arg! another snowstorm! what’s going on?

UPDATE- Aaand we pretty much skipped spring and had a couple days of almost summer weather. Feel much better now. Tho the teevee says it was snowing in a neighboring town ~1hr away. Upstate NY microclimates :-\


First, link to Richard Falk on the syria strike. Well articulated, as always.

Next, we have another move in congress to hand over another blank check on war powers to the executive branch, but this time with no time limit. Article from the American Conservative. Why conservative? Because this s**t is bipartisan and conservatives appropriated the remaining popular opposition to militarism. Oh and Democratic sponsor of the bill is none other than Tim Kaine, the vice presidential nominee in 2016. Total screwage on both sides.

The grim reality of the whole thing kind-of struck me today. Foreign policy is now somehow made by a combination of trash-talking tweets, generals, two of our most notably conflicted international allies, and representatives of Boeing, Lockheed Martin, and the oil industry. The latter group just in case their interests are involved, which they always are because (1) it’s the middle east and (2) things don’t just blow up for free.

It also struck me that top leadership in all the external security cabinet departments now have individuals who, in a better world, would face examination by the ICC. No, really. CIA deputy director Foss – overseeing site systematically engaging in torture. Secretary of State Bolton – leading promoter of Iraq war, vehemently anti-UN. Secretary of Defense Mattis – Fallujah.

And then the various FBI figures, Comey and Mueller being perfect examples, who pretty much consider themselves to be a 4th branch of government at this point. Trying to act as the check and balance that Congress has long given up in any meaningful sense. Except that unlike Congress, FBI officials have no real accountability to voters, or really anyone outside their own department. And of course Trump’s corners of the executive branch fight back, so they’re in all likelyhood having a sprawling 300-way fiesta of blackmail, the end of which will just be a distillation of leadership into whoever is the best at playing this game. Most recently, Giuliani appears to be joining this circus, and he’s got to be about the last person I’d want involved.

And then we have multiple weekly escalations of the “soft” conflict with China. Just step back for a second — in the last 30 years, every single American- like every last one, had a counterpart in China, a personal peon for every single person in the US, working 12 hour days in a factory for dogfood – So that we could buy all of life’s conveniences cheaply at Amazon or Target or Best Buy or Walmart. In that context, talking about the unfairness of terms of trade and “forced technology transfer” looks very different. Right now they’re gritting their teeth and smiling but probably they’re really thinking how much nicer the world would be without the US, being so consistently obnoxious. So probably there’s going to be some shipbuilding or other form of military buildup there. Which is similar to saying they did a little urban construction in the early 2000’s. So that’s just what we need to cap it all off.

Well, they can’t all be positive happy blogposts, can they?

Happy spring! oh wait, it’s snowing.

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Tesla: inspirational company email

email… a mild warning sign? IMO rather a sign of more cash burn. I’m giving this one a 4.0 on the Richter scale. Link to the email below:

https://electrek.co/2018/04/17/tesla-model-3-production-goal-6000-units-per-week/


The headline of the email reads “Progress, Precision and Profit”. Translation: Faster, Better, Cheaper. That appears to be the order of priority.

There’s a nasty special variant of the better-cheaper-faster rule. Normally it’s 2 out of 3, if you try for all 3, you get none. The variant is when you’re behind and trying to catch up, facing not only an increased amount of work left in the same time, but also the likelyhood of your future estimates being under, considering your estimates up to this point were under. So when a project is behind, you only get to pick 1 out of 3. If you pick more than one, you get none. Is this the case with the Model 3 manufacturing?

Musk is going for faster. As long as everyone is clear on that, it should be fine. I think they have a good shot at making their production goals, in which case there’ll be much praise and much credit availability.


Highlighting some points:

(1) going to fire suppliers who can’t deliver at 6000/month rate … ok. You go to a new supplier and quote a job on super short notice, with everyone knowing you’re squeezed for time? Here’s what will happen – anyone who gives you the quote you want is desperate and BSing you. Anyone who’s competent will drag out the quote process knowing that you’ll pay anything once you’re down to your last month of slack in the timeline. Anyone who’s already your supplier will offer “expediting fees” and so on to actually do what you want. Translation: we are prepared to pay $$ to speed up our suppliers.

(2) tighten tolerances to 10x industry standards. Translation A: directly throwing $$ at the problem. If they already tooled up their production, tho, and it is the production equipment which is driving the design changes, then the alternative may be even more costly. In any case, reliable designs and cost-effective designs both have to breathe to take up variation, figuring this out is at least half the work of the design engineering, and far more than the effort it takes to realize function/performance. Applies to both the product and the tooling/automation. Translation B: Design is not completely finished. Tooling/Automation not reliable across batches of parts. This is common, however, everyone goes thru this phase. Batch adjustment is an ok way to build too, you just need really big batches, like old school made-in-China style, or the way semiconductors are made.

(3) personally approve capex etc etc – totally common for VC-funded businesses when they’ve burned thru 80% of the $$. Translation A: In the name of time, the other items above are giving blank checks to more people than management can track, and I (Musk) recognize that, and am kindof scared but dealing with it. Translation B: Board is giving me sh*t. Anyways, this doesn’t qualify as “cost cutting” – that would involve layoffs. That would be the 8.0 on the Richter scale.

(4) going to 3 shifts – sensible move, given the goal. However… lots of new staff. The managers, engineers, and experienced techs holding their operations together are going to be working crazy hours and burning out. If they’re smart, they’ll be threatening to quit and asking for raises. (Tesla can’t afford to say no. But they will anyway to the first few, as a symbolic effort to make a stand. so if the staff looking for a raise are smart, they’ll get someone else to “go first” there.) Actually the email sort-of alludes to this – i.e., “what can we do to make you keep wanting to come to work”. Nice of them to offer. Translation: again, prepared to throw $$ at the problem.

(5) Productivity recommendations – standard business fluff. Relevant and good to know they’re trying, but utterly universal, so nothing different than any other big company.

 

Trump is in trouble

In foreign policy, counterparties are starting to call his bluffs. The military is starting to say no to him pretty much directly. Republican support weakened noticeably after Trump took actual steps to threaten imports from China – a chunk of business worth almost as much as the military budget – to put it into perspective. As a reminder, whether Trump stays or goes is up to Republicans. Also, strangely, Speaker of the House Paul Ryan just retired – not sure what that’s about. At a minimum, a bad day for Wisconsin’s hair gel industry. Finally, Trump’s opponents in the FBI etc continue to go after his legal representation, which will eventually work if sustained long enough. That might be the actual angle for the investigations to have their effect. And as usual there are long term side effects – it adds a tool to the toolkit that will be in the hands of Trump himself if he survives this, and if not then his ideological successors. Look for them to go also go after the opposition’s lawyers more aggressively.


In other news… war in Syria? Or not? I’m going with not….

And an update with Tesla: stock rebounded to $300 ish. I don’t know why I find it so fascinating…

Trade War?

This week we had round 2 of announcements of actual or “planned” tariffs between the US and China. (and it’s only Wednesday)

As threatened/promised recently, the Trump administration released a list of 1300 items or roughly $50B worth of imports that would face 25% tariffs pending a comment and approval process. The justification is infringement of copyrights, patents and other IP in prior years. This list is a broad variety of manufactured items, electronics, and chemicals.

China responded with a list of 106 items also worth about $50B of imports there and also to face 25% tarriffs, if the US ones go through. It is primarily agricultural items, animal feed, tobacco, whiskey, but also chemicals and automobiles. The last item on the list, probably symbolic of what round 3 will go to for China, is: aircraft in the size range of the Boeing 737.

Like most things with Trump, we have to discount the huffing and puffing somewhat. These are not a done deal at this point. Further escalation, though, would really make waves on the business side, and could cause the return of price inflation in everyday products.

TESLA manufacturing issues?

In this post I want to comment on recent concerns about Tesla’s ability to ramp up manufacturing of its Model 3.

(1) Is the the quarter-million-per-year production capacity goal appropriate?

As with any pure EV, the ideal use case is: The second of two vehicles for a comfortable suburban household, for use in daily commute and charged overnight at home, while the other conventional or hybrid vehicle can be used for trips that are longer or break the daily pattern.

The price/prestige level of the Model 3 seems to straddle the bottom end of the aspirational-luxury category, and the top end of the sensible-car category. Despite statements to the contrary, it’s definitely a kind of status symbol for a middle class buyer, like the Iphone was when it was new.

The brand appeal is key – buyers motivated strictly by utility have more economical options, both in pure EV’s and even more so in hybrids. Car buyers with a single vehicle (i.e., single people or households with 1 vehicle) are going to be few and far between.

Point being, even though it’s clearly not as broadly useful as a liquid fueled or hybrid vehicle, the market for a premium EV is more than big enough to absorb a run of several million of these things over the life of the vehicle design (nominally 5 years between “major” redesigns in the auto industry). So I think their production capacity goal of a quarter to half a million per year are entirely appropriate.

(2) Was the decision to go with the robot-porn approach too much?

I’d argue that for a US company, extensive automation is the way to go. US management is really not good at handling relationships with workers. Too often it becomes abusive, in which case quality goes downhill. Nasty as it is, making gigantic investment in all-seeing all-knowing automated production systems is a good fit for how we do business in this country.

The other thing that has to be there is quantity. As a rule of thumb, quantities of 100k assemblies per year don’t quite justify custom tailored end-to-end-full-automation level of investment. At that level you would automate individual process steps and have operators fill in the gaps where it’s more economical. At a million per year, you talk about true full automatic. With a product as complicated and oddly shaped as an automobile, the industry doesn’t even do it at that level. But Tesla and Elon Musk being who they are, it’s go big or go home. With a premium product, you can get away with it.

Also keep in mind that most of the labor actually isn’t in the final assembly anyway, it’s in the myriad of subassemblies. We don’t see or hear much about how the battery packs or drivetrain components or electrics or accessory assemblies or wire harnesses are put together. For all we know, the wiring and seats and climate control parts are made in the same shops in Mexico that makes them for all the other North American built cars.

What we are shown are shiny new robots picking up car bodies and moving them around and installing doors or windshields. That’s nice, and maybe a bit of an impractical show-off move. But I have a feeling that the “production hell” isn’t actually due to getting the shiny new robots to pick up and put down parts in the right place.

Not that it’s trivial- I participated in an automation project that had a couple of robot arms at the center of the whole mess. There’s a lot of fudging and tweaking to get the robotics right — the nominal specs the manufacturer gives you make some subtle assumptions that have to be wroked through by the automation engineers doing the initial set-up of the automation. The production engineers or techs operating the system then have to know enough to understand which of the resulting fudge factors to touch when the system needs to be tweaked 6 months down the line.

I think Tesla is well equipped to overcome the technical/engineering challenges, and I suspect they are NOT the main part of their current struggles. It’s just something a journalist will focus on because a misaligned door or body panel is easy to understand, compared to a logistical SNAFU that involves 3-4 tiers of suppliers, managing phase-in of engineering change orders, mixtures of old and new parts, long lead times, unwieldy quality/information systems, personnel changes, project (mis)management and development resource (un)availability, hardheaded procurement departments, and so on.

In other words, it *is* the “machine that builds a machine”. That machine isn’t a robot, it’s a living breathing business, a tech development, manufacturing, documentation, logistics, and quality organization. And besides that, a social organism. They’re building a business. That’s what is not going as fast as they hoped. Of course adding an entire additional layer of automation to this already major challenge doesn’t help.

(3) Will Tesla overcome its manufacturing capacity shortcomings in a timely manner? Would it be a good thing if they did so at all costs?

Depends on your definition of timely, eh? In practice, that means before the financial pressure becomes too great, and before their brand value erodes – a thing of tremendous value Tesla has right now. In terms of financial pressure, they have a good 12 to 18 months to get to 5000/week??? Just based on looking at their debt schedule (see previous post). As long as they make steady progress to that, if they are selling at that pace a year from now, they’ll be able to borrow more and keep going just fine. If they make un-steady progress, the market will punish their stock, and in turn the media will punish their brand image.

Potential damage to brand value is by far the deadlier killer. They need to maintain the reputation of their product. I think slowing down production is the lesser of two evils in that regard. Of course having the autopilot crash a car into a large non-moving object is a painful blow there. But that aside, for a half-finished automated manufacturing situation, increamental steps are the way to go.

Since they planned their product flow for full auto from the beginning, they already have the process broken down into well sequenced steps. To build up the rate of final assembly to their target rate, they do this: Some of the steps, you pull the robot and put in workers. Maybe the whole line slows down a bit. You eat that for a while. One by one, you get the stations to work as originally intended.

However, I don’t think it’s a matter of final assembly anyway. As I said above, it isn’t getting the robots to work together, it’s getting the *company* and the supply chain and the design / manufacturing / quality / docs / management / change / project-management parts of the organization to work together. Oh and very likely, getting the product design itself right.

In all of the above, I think Tesla has 3 advantages over their competitors, and 1 disadvantage. The first advantage is again the prestige of the company name. They will actually be able to hire an “A” team. A lot of manufacturing organizations get “B” level tech staff just because the work isn’t sexy. The second advantage is they’re starting from scratch. They poach experienced staff in positions where they want that, they can hire young-innocent-and-enthusiastic staff in positions where that is beneficial. Clean slate. The third advantage is they can throw money around like they’re a silicon valley startup. That helps in the beginning (at the risk of developing some really bad habits).

The big disadvantage is also one of the advantages. Starting from scratch. Big car companies had decades to “build the machine that builds the machine” (not a robot, remember). Often growing it organically.

(4) Uneducated gut feel

I think Tesla will continue to ramp up production and reach their goals. Late. But they will get there.

If you see them “aggressively cutting costs” *before* they had a chance to borrow more money and expand the service side of their business, you know they didn’t make it.

As an aside, about “building the machine that builds the machine”. If you are deep in chronic crisis-mode when building your organization, your organization will not come out healthy. That is a risk for them, but it would be something that manifests itself in future generations of product.

(5) Postscript : Do I even like Tesla?

Kindof yes, kindof no. They made EV’s cool for the luxury car buyer, and therefore for the entire market. That’s a huge accomplishment. On the other hand, the use case for the EV’s they’re building is suburban commute but better for the environment. There is already a solution to that: multi-occupant vehicles. Buses. Vans. Trains. Park-and-Ride’s are especially perfect for suburban life. These could exist in both luxury and unwashed-masses mode. No new tech required. So I’m constantly disappointed by the opportunity cost to our society, by hyping a solution to a problem that’s already been solved. But this post isn’t about that, it’s just about whether I think they’ll make it business-wise and manufacturing-wise.

(6) Additional Resources

Review of the Model 3:

https://www.caranddriver.com/reviews/2018-tesla-model-3-test-review

Current rate of Model 3 manufacturing:

https://www.bloomberg.com/news/articles/2018-03-23/tesla-shows-signs-of-a-model-3-surge

https://www.bloomberg.com/news/articles/2018-03-29/tesla-urges-workers-to-prove-haters-wrong-ramp-up-production

Video, Tesla Model 3 production promo:

Video: Model S production (mostly body, not much final assembly shown, unfortunately):

Video: Nissan Leaf production promo:


Disclosure- I am neither long nor short Tesla or any of its competitors, partners, suppliers etc. – in any form including stocks, bonds, options, business relationships etc. This is an unpaid piece.

TESLA bonds

As a little procrastination project, I’m going over the car company Tesla’s financial situation since it was in the news this past week. NB- i’m an engineer, not a financial advisor! Please don’t go gambling based on anything you read here.

Here’s a dump of the bonds, which you can access here: http://finra-markets.morningstar.com/BondCenter/Default.jsp  (click on the search tab and enter the associated stock symbol). Data retreived as of today 20180331.


CUSIP: 88160RAA9
TESLA 6/1/18 1.5% convertible (TSLA @ $124.52)
outstanding <$60 MM ish (mostly converted, orig $660 MM)
last trade yield: n/a, it’s way ITM, basically a stock, mostly redeemed

CUSIP: 83416TAA8
SOLARCITY 11/1/2018 2.75% convertible (SCTY @ $61.67)
outstanding $230 MM
last trade yield: 5.9% ish
notes: deep OTM for SCTY

CUSIP: 88160RAB7
TESLA 3/1/2019 0.25% covertible (TSLA @ $359.87)
outstanding $920 MM
last trade yield: 1.5% ish

CUSIP: 83416TAC4
SOLARCITY 11/1/2019 1.625% convertible (SCTY @ ??)
outstanding: $566 MM
last trade yield: 6.9% ish

CUSIP: 88160RAC5
TESLA 3/1/2021 1.25% convertible (TSLA @ $359.87)
outstanding $1380 MM
last trade yield: 1.6% ish

CUSIP: 88160RAD3
TESLA 3/15/2022 2.375% convertible (TSLA @ $327.50)
outstanding $977 MM
last trade yield: 1.332% ish

CUSIP: U8810LAA1
TESLA 8/15/2025 5.3% senior unsecured
outstanding: $1800 MM (?)
last trade: $87 -> yield to maturity ~7.5% ish?

So what I really want to do is say a few words about Tesla’s situation with regards to ramping up its manufacturing (I think they do have a good shot at reaching  their capacity on the model 3, in terms of technical challenges. I’m hoping to write a blogpost on why). However, this post is about the very real (but at times exaggerated) financial pressure the company is under. I want to get that out of the way first, hence this post.

So what’s going on here?

First of all, lets talk about convertibles. Most of the Tesla debt is convertible bonds. The way that works is there’s a strike price (I listed in parentheses). Generally, the bond holder can trade their bond in for stock at that price. Obviously it only makes sense to do so if the stock is over that price, otherwise you keep the bond and collect the coupon.

Sometimes there are other limitations, in particular on when the redemption can be made – somewhat akin to the difference between American and European style options. I’ll gloss over that here. However, it is very significant that a convertible has some option-like characteristics.

You’ll notice the yields are way lower than one would expect for a plain corporate bond. That’s because the conversion option has a value associated with it, even if it is out of the money. 2 observations on that value: (1) the more risk the company takes, the more value the conversion option has (and also the more value the stock has, as is universally the case for indebted companies with a potentially moneymaking future). (2) The value of the conversion option decays with time, as the maturity date approaches.

Another thing having lots of convertible debt does to a company: it makes future cash  needs uncertain. Take for instance the 3/15/2022 2.375% bond. Will Tesla need to refinance the $977 million principal payment in 4 years, or won’t it? It totally depends on how well their stock does – if the stock rises above the $327 strike price, they’ll be paying it back in the form of equity, not debt. We won’t know which until the moment is much closer. The effect of this is that when the business case looks plausible, the robustness of the company’s finances is doubly boosted. When the future business prospects falter, the finances plunge doubly fast.

Last week there was a scare that this might happen. A bit too soon, IMO. All in all, the TSLA balance sheet has something like $10 billion in debt. In the process of ramping up Model 3 production, their burn rate is way up. As of now, it looks like the 3 convertibles with the over-$300-strike have a real good chance of finishing out of the money. So that’s an extra $3.3 billion in principal payments coming down the pipe.

Meanwhile, Tesla will presumably need a lot more capex, not just to finish fleshing out its manufacuring operation (which I think they can do, actually), but also to build out a national network of proprietary high-speed chargers — that’s one of their selling points, to both consumers shopping for an electric vehicle, and to investors in their business. That’s where the problems are going to come from.

A petrol pump flows at 5 gallons per minute typically (10gpm is max allowed). 120 million Joules per gallon. That’s 10 MegaWatts of energy transfer rate.

An EV charger that is even 10% of that transfer rate has to have some monster electrical service. Putting that in at chargers across the country costs big bucks. If Tesla can’t come up with the capital to do that, they will either (1) have to adapt to “generic” chargers and share those with GM, Nissan, etc. Possibly at a slower rate. Or (2) de-facto restrict their drivers outside of their home turf in southern California, to using the charge-at-home-at-night scenario. Hurts the business case.

So they’ll be raising money. I’m certain of that. There are too many incentives to continue to double down and add more risk. They won’t get away with making 2% coupon payments on their debt anymore, but you can get many more years of a company operating, paying “high yield” rates of 5-7%.

Ok, I’m off to enjoy the sunshine. Next up, will talk about their manufacturing situation and why I think it’s not as bad as some people fear.


Disclosure- I am neither long nor short Tesla or any of its competitors, partners, suppliers etc. – in any form including stocks, bonds, options, business relationships etc. This is an unpaid piece.

Big Brother Isn’t Watching You, You’re Watching Him [Tom Engelhardt / Counterpunch]

link: https://www.counterpunch.org/2018/03/29/big-brother-isnt-watching-you-youre-watching-him/