Much is made of how “new tech” companies (Uber, Tesla, Amazon, etc.), often start ups from out of silicon valley, represent a new paradigm in how they do business. Its not just that they tend to be heavily dependant on the internet and new technology, but the manner in how they run their companies and pursue new business ideas is decidedly different from how other more established corporations go about things. While this can often lead to them being ahead of the curve, I worry if it also leads to them making schoolboy errors and thus much more risky firms to invest in.
Tesla under Elon Musk is a good recent example of all that can go wrong. He’s been in the wars recently, with all sorts of problems within his companies, notably Tesla. His promises to raise production up to 6,000 cars a week hasn’t been met due to production problems, with workers complaining about being over worked as it is. Ironically the production problems seem to be more related to too much automation rather than too little.
And its not just issues with the model 3, this is merely one of a long list of woes, ranging from hacks of its computers by bitcoin bugs, and fights with regulators and investors. Solar city is also causing problems, not least the addition of £2.9 billion to Tesla’s not inconsiderable debt pile. This in a company that recently reported a £700 million loss last quarter, with a burn rate of money at the rate of $6,500 a minute.
Indeed, its worth looking at Tesla’s financials. They take in $11.76 billion in revenue with 35,000 employees producing 30,000 cars a quarter. By contrast Ford takes in $156.8 billion with 202,000 employees producing 1.65 million cars per quarter. This implies that Ford produces 8 times more cars per employee than Tesla and requires a quarter the investment. Now as I discussed previously, we need to be careful comparing a startup like Tesla to an established car company like Ford, which isn’t so much a car company, but a pension fund that makes the odd car. And since we’re talking about it Ford took a $4.8 billion loss last year (which kind of puts Tesla’s losses in a different prospective). But even so, Tesla is still well behind in terms of where its productivity needs to be.
And to make matters worse, there’s the temperament of Musk himself. His decision to send his car into orbit for example (not exactly the sort of thing a sane person does!). He’s made several ill-timed statements, vetoed certain questions at a press briefing because “they weren’t cool”, even accused a member of his staff of sabotage and he’s gotten himself into a pissing contest with journalists (CEO 101, arguing with journalists is like mud wrestling a pig, you both get dirty and the pig seems to enjoy it). He also threw a strop after the Thai’s decided against using his (untested) submarine to rescue the trapped kids last week. While he’s long been known to be a bit of an eccentric, these sorts of public displays are not helping his, nor Tesla’s, image.
Ultimately I would argue the problem with Tesla and many similar tech companies is they are way too top down. With someone at the top making decisions and not enough due diligence being applied to those decisions. The normal practice in firms outside of silicon valley is to bring in a bunch of experts to scrutinise any such proposals. Engineers and scientists will work out the technical feasibility, bean counters will go over the numbers, while sales and marketing will try to establish if its a product they can actually sell and turn a profit on. But this doesn’t seem to happen in silicon valley firms, where often the desire is to be first to market and damn the torpedoes. This kind of attitude is at least partially to blame for a number of Tesla’s woes.
For example, this too many robots business. We’ve been here before. As I mentioned in a prior post, back in the 80’s Japanese car companies, facing labour shortages and high wages, went gaga for robots. They filled their factories with so many of them that the few remaining workers were afraid to go to the bathroom, least the find a robot in the cubicle ready to wipe their arse. Well needless to say, they soon discovered this didn’t improve quality as much as they’d hoped. And while they reduced the number of low wage employees, this was countered by having to employ technicians to maintain the robots and the higher capital costs of fitting out the factory. So a little bit of research by Musk or his staff would have reveals this.
Another production bottleneck at Tesla was the decision to switch from aluminium to steel for the model 3. While steel is cheaper and easier to work with (thus reducing costs), there are differences in how its worked, notably in terms of welding together joints. Indeed some experts have raised concerns about the quality of Tesla’s spot welds. Poor quality welding would not only lead to production problems, but NVH issues (rattling “tin box” sort of noise) and longer term corrosion problems. So while a good idea, it was one that should have involved a little bit more forethought as to its implications.
On a related note, Musk has also recently announced that Tesla will be opening up car production in China. Which is probably not surprising, as Trump’s tariff’s (somewhat ironically) means you don’t want to be a company that exclusively manufacturers in the US.
I’ve talked before about the issues relating to Musk’s proposed hyperloop and BFR rocket. Now this is not to say there isn’t any harm in doing research into these fields. But you’d want to test the technology first (and again establish whether there’s a market for these transport options) before say, starting to tunnel under LA. Which is the problem when you move from the software world to the real one. Screwing up in the real world costs lots more money and you can end up leaving a lot of very expensive holes in the ground.
But in fairness to Musk and Tesla, he’s hardly the worst offender. After all, he is producing cars and rockets, they have working hardware which is being incrementally improved (the question is whether he can pull it altogether before he runs out of cash). By contrast some howlers have come out of silicon valley startups that make Musk look like about as frugal as a Scottish Presbyterian minster.
In just the last couple of years or so we’ve seen the collapse of Juicero, various crypto-currency bubbles, the outright fraud that was Theranos, the infamous fyre festival, those two water woo devices I made mention of, the similarly doomed Mitte (which seems to combine the worst aspects of Fontus Fart Us and raw water), the Triton aqualung scam, the Skarp laser razor and don’t even get me started on solar roadways. And I recall a few years ago those bomb detectors that turned out to be nothing more than an aerial with a supermarket asset tag.
Other bad ideas in the works of becoming failures include Amazon’s idea of drone delivery. Which aside from a host of legal, privacy and practical problems (I live in flat, what’s the drone supposed to do? crash through a window!) its likely to come to an abrupt end after someone’s pet cat gets decapitated by one (cats, certain dog breeds and passing birds of prey, all have a high prey drive, they’ll likely try and attack any drone they see). Or Uber’s self driving taxi’s. While autonomous vehicle research has some merit, Uber’s goal is the narrow desire to avoid having to pay its drivers. Inevitably they are just moving too fast for society to keep up. And it might actually hinder or hold back development, once the inevitable regulatory crack down hits.
Clearly many of these ideas won’t have gotten funded if anyone had paused for a wee while and done some due diligence prior to signing on the dotted line. A few basic back of an envelope calculations, or a bit of basic market research….or consulting a small child and the obvious flaws in these projects would have been identified before millions of dollars were wasted. Indeed, in the case of Theranos, someone did do due diligence, warned his employers something didn’t add up, but they ignored him. What is going on here? I mean I’m assuming these companies are hiring business studies graduates, what are you doing with them, having em make the tea?
So it seems to me that there has been this cultural shift. Many people seem to treat technology as if its some sort of mobile phone app. Got a problem? Install technology. And even the CEO of tech companies seem to have fallen for this fallacy. There is perhaps a need for “new tech” to take a leaf out of the book of “old tech” companies. Basically, if something sounds to go to be true, then it might well be. Thoroughly fact checking everything, bring in neutral outside experts to analysis anything you might lack the technical expertise to do. And be wary of any charlatan who tries to sell you some sort of “black box” solution.