29/11/20: Bubblishiousness

 

Illustrating FOMO and Bubblishiousness vs Reality: Tesla

Source: https://twitter.com/michaeljburry/status/1333110859329990661?s=20

Ya kidding me, not... It's like 10:0 score right now...

25/4/18: Tesla: Lessons in Severe and Paired Risks and Uncertainties

Tesla, the darling of environmentally-sensible professors around the academia and financially ignorant herd-following investors around the U.S. urban-suburban enclaves of Tech Roundabouts, Silicon Valleys and Alleys, and Social Media Cul-de-Sacs, has been a master of cash raisings, cash burnings, and target settings. To see this, read this cold-blooded analysis of Tesla's financials: https://www.forbes.com/sites/jimcollins/2018/04/25/a-brief-history-of-tesla-19-billion-raised-and-9-billion-of-negative-cash-flow/2/#3364211daf3d.

Tesla, however, isn't that great at building quality cars in sustainable and risk-resilient ways. To see that, consider this:

1. Tesla can't procure new parts that would be consistent with quality controls norms used in traditional automotive industry: https://www.thecarconnection.com/news/1116291_tesla-turns-to-local-machine-shops-to-fix-parts-before-theyre-installed-on-new-cars.
2. Tesla's SCM systems are so bad, it is storing faulty components at its factory. As if lean SCM strategies have some how bypassed the 21st century Silicon Valley: http://www.thedrive.com/news/20114/defective-tesla-parts-are-stacked-outside-of-california-machine-shop-report-shows.
3. It's luxury vehicles line is littered with recalls relating to major faults: https://www.wired.com/story/tesla-model-s-steering-bolt-recall/. Which makes one pause and think: if Tesla can't secure quality design and execution at premium price points, what will you get for $45,000 Model 3?
4. Tesla burns through billions of cash year on year, and yet it cannot deliver on volume & quality mix for its 'make-or-break' Model 3: http://www.thetruthaboutcars.com/2018/04/hitting-ramp-tesla-built-nearly-21-percent-first-quarter-model-3s-last-week/.
5. Tesla's push toward automation is an experiment within an experiment, and, as such, it is a nesting of one tail risk uncertainty within another tail risk uncertainty. We don't have many examples of such, but here is one: https://arstechnica.com/cars/2018/04/experts-say-tesla-has-repeated-car-industry-mistakes-from-the-1980s/ and it did not end too well. The reason why? Because uncertainty is hard to deal with on its own. When two sources of uncertainty correlate positively in terms of their adverse impact, likelihood, velocity of evolution and proximity, you have a powerful conventional explosive wrapped around a tightly packed enriched uranium core. The end result can be fugly.
6. Build quality is poor: https://cleantechnica.com/2018/02/03/munro-compares-tesla-model-3-build-quality-kia-90s/.  So poor, Tesla is running "reworking" and "remanufacturing" poor quality cars facilities, including a set-aside factory next to its main production facilities, which takes in faulty vehicles rolled off the main production lines: https://www.bloomberg.com/view/articles/2018-03-22/elon-musk-is-a-modern-henry-ford-that-s-bad.
7. Meanwhile, and this is really a black eye for Tesla-promoting arm-chair tenured environmentalists, there is a pesky issue with Tesla's predatory workforce practices, ranging from allegations of discrimination https://www.sfgate.com/business/article/Tesla-Racial-Bias-Suit-Tests-the-Rights-of-12827883.php, to problems with unfair pay practices https://www.technologyreview.com/the-download/610186/tesla-says-it-has-a-plan-to-improve-working-conditions/, and unions busting: http://inthesetimes.com/working/entry/21065/tesla-workers-elon-musk-factory-fremont-united-auto-workers.  To be ahead of the curve here, consider Tesla an Uber-light governance minefield. The State of California, for one, is looking into some of that already: https://gizmodo.com/california-is-investigating-tesla-following-a-damning-r-1825368102.
8. Adding insult to the injury outlined in (7) above, Tesla seems to be institutionally unable to cope with change. In 2017, Musk attempted to address working conditions issues by providing new targets for fixing these: https://techcrunch.com/2017/02/24/elon-musk-addresses-working-condition-claims-in-tesla-staff-wide-email/. The attempt was largely an exercise in ignoring the problems, stating they don't exist, and then promising to fix them. A year later, problems are still there and no fixes have been delivered: https://www.buzzfeed.com/carolineodonovan/tesla-fremont-factory-injuries?utm_term=.qa8EzdgEw#.dto7Dnp7A. Then again, if Tesla can't deliver on core production targets, why would anyone expect it to act differently on non-core governance issues?

Here's the problem, summed up in a tight quote:

Now, personally, I admire Musk's entrepreneurial spirit and ability. But I do not own Tesla stock and do not intend to buy its cars. Because when on strips out all the hype surrounding this company, it's 'disruption' model borrows heavily from governance paradigms set up by another Silicon Valley 'disruption darling' - Uber, its financial model borrows heavily from the dot.com era pioneers, and its management model is more proximate to the 20th century Detroit than to the 21st century Germany.

If you hold Tesla stock, you need to decide whether all of the 8 points above can be addressed successfully, alongside the problems of production targets ramp up, new models launches and other core manufacturing bottlenecks, within an uncertain time frame that avoids triggering severe financial distress? If your answer is 'yes' I would love to hear from you how that can be possible for a company that never in its history delivered on a major target set on time. If your answer is 'no', you should consider timing your exit.

10/12/16: Roads to Polluting Hell Outside the Electric Vehicles' Backyard

The old adage that the road to hell is commonly paved with good intentions, taken through the prism of economic analysis, can often be sharpened by modifying it. In truth, more often then not, the road to hell for some is often paved with good intentions and fortunes of the others.

For an example of such modification, consider a recent NBER paper, titled "Distributional Effects of Air Pollution from Electric Vehicle Adoption" (NBER Working Paper No. w22862) by Stephen P. Holland, Erin T. Mansur, Nicholas Z. Muller and Andrew J. Yates.

In the paper, the authors looked at the distribution of gains and losses in the form of air pollution arising from the adoption of electric vehicles in the U.S. To do so, the authors employed "...an econometric model to estimate power plant emissions and an integrated assessment model to value damages in air pollution from both electric and gasoline vehicles." The authors also used the registration location of electric vehicles.

The key findings are:

1. "...people living in census block groups with median income greater than about $65,000 receive positive environmental benefits from these vehicles while those below this threshold receive negative environmental benefits" For the want of better description, the better off are dumping their pollution onto the less better off via electric vehicles.
2. "Asian and Hispanic residents receive positive environmental benefits, but White and Black residents receive negative environmental benefits. In multivariate analyses, environmental benefits are positively correlated with income and urban measures, conditional on racial composition. In addition, conditional on income and urbanization, separate regressions find environmental benefits to be positively related with Asian and Hispanic block-group population shares, negatively correlated with White share, and uncorrelated with Black share." Which means that re-allocation of pollution shifts negative externality toward urban (not rural) poor.
3. "Environmental benefits tend to be larger in states offering purchase subsidies. However, for these states, an increase in subsidy size is associated with a decrease in created environmental benefits." Or put more simply: the greater the subsidies to purchases of the electric vehicles, the lower are the benefits from electric vehicles. Although we have no idea if the associated redistributed costs of these vehicles are any less worse.

The results are pretty intuitive. To power all these Teslas and BMW i-models and the rest of the electric cars lot, one has to generate electricity. Power plants (even those based on renewables, although their social and environmental costs are not factored in the study) are based in areas where those using electric vehicles do not tend to live. So when an executive in Silicon Valley drives her/his Tesla to work, the air pollution around her/him is reduced. But the air around a power generating plant gets worse, because a plant somewhere has to burn some natural gas or captured methane etc to power that Tesla, and that somewhere ain't in the area where the Tesla-driving hipster lives or, even, works.

Hipster's good fortune is a polluting hell for someone who can't afford living outside the industrially intensive areas where hipster's Tesla gets its electricity from. Oh... and one more thing: unlike in normal cases of externalities, there is no mechanism to compensate the losers in this game, because the hipsters get tax subsidies on their Teslas. There is nothing being raised from the beneficiary of the externality to compensate the loser from the externality. Even in theory, someone loses when someone gains.