Driverless Cars

More auto marriages have ended in divorce

Auto mergers were once thought of as the best things since sliced bread. Massive operating capacity leverage, shared platforms to reduce cost and a reduction of R&D spend per vehicle. The word “synergy” gets bandied about more than Casanova whispers “I love you“on Valentines Day! Yet why is the auto industry littered with divorces from these romances?

Lets list them.

Daimler bought Chrysler in 1998. Divorced in 2007.

Daimler alliance with Mitsubishi Motors founded in 2000. Divorce in 2005.

Daimler alliance with Hyundai founded in 2000. Divorce in 2004.

Honda – Rover JV. Started 1980. Divorced 1994

BMW – Rover – Started 1994. Deceased 2000.

Nissan – Renault – Started 1999. Currently providing real headaches due to Carlos Ghosn saga. Nissan wants full independence

Ford forms Premier Automotive Group (PAG) comprising Land Rover, Aston Martin, Volvo, Lincoln and Jaguar. Set up in 1999.

Ford sells Aston Martin in 2007.

Ford sells Land Rover & Jaguar to Tata in 2008

Ford sells Volvo to Geely in 2010.

Fiat Chrysler (FCA) formed in 2014 – including Fiat, Abarth, Chrysler, Jeep, RAM, Dodge, Lancia, Maserati & Ferrari brands.

FCA spins Ferrari off in 2016.

This isn’t an exhaustive list but one can be guaranteed that more money has been lost in auto mergers in aggregate than made. Daimler paid $45bn for Chrysler. Almost all of the Mercedes profits plugged the losses of Chrysler. Mercedes quality suffered through cost cutting sending it down toward the bottom of surveys. Daimler’s shares lost over $80bn in market cap as this disaster unfolded.

FCA and Nissan/Renault have been amongst the more successful marriages but global markets have turned many a honeymoon period into separation with fights over custody.

Forming a merger at the top of a cycle seems fraught with risks. Global auto sales are slowing. Renault and Fiat bring a lot of overlap in product lines. Nissan is such an unclear part of the puzzle.

One can argue that synergies which will lower the costs of future production have merit. Investing in battery technology does make sense across multiple product lines.

The biggest problem for the auto industry is that should a slowdown hit mid-merger, which brand suffers the hits? Which marketing team gets culled? Which R&D projects get scuppered? Too many cooks spoil the broth is the end result. There is no way a merger can be locked down in a short timeframe unless one of the parties is facing bankruptcy and has no choice but to comply. That is why Nissan-Renault worked.

Renault-FCA would be better conceived after markets have imploded. Marriages built on tough times stand a far bigger chance of survival than those that are built when things are the rosiest. Shareholders will be the biggest losers if conceived now.

Tesla: Catching a falling knife

Tesla is breaking down. So many discipled pundits are looking at the company stock falling into “good value” territory. Good value is always relative. Sadly buying Tesla now is catching a falling knife.

It reminds CM of a time when Fuji Film dominated flat screen TV TAC films. It held 40% market share. Yet the market was shrinking and new competitor products were able to combine two films in one, dispensing with the need for TAC altogether. Yet analysts would crow at 40%. CM said 40% of soon to be nothing will be nothing.

Tesla’s valuation at $180 is ridiculously high compared to other auto manufacturers. Tesla still misses the two most important ingredients to profitable car companies – production efficiency and distribution. It has neither the first and has chopped back on the last. Digital dealerships are just not feasible especially given the nightmare quality or Tesla cars.

Big money is dumping. T Rowe Price has exited. fidelity following suit. Musk’s musings now carry little weight. Promises of stupendous Q2 volumes and making cars with ridiculously short ranges for Canadians to get the benefit of subsidies smacks of desperation.

This company, if it could, is running on the smell of an oily rag. The inability to rally back up above $200 with any conviction is showing the rattled confidence of existing holders. It’s like finding out you’ve been given the employee of the month award from your boss and you’re the only staff member. It carries no significance.

CM holds to the $28 fair value price from the 2017 report. That is CM’s optimistic scenario. So much for funding secured at $420.

Apple to buy Tesla? Is Tim Cook on autopilot?

If Apple truly stumped up for Tesla that would make two companies that are complete novices at auto manufacturing. It would be the Apple Lisa of the auto world.

Worse for Apple it would signal that the world’s largest company is completely out of creative ideas and its existing product line up was truly approaching stall speed. It already is but and the lack of transparency only adds to doubts.

Rumours circulated that Apple considered a $240/share purchase back in 2013. 6 years ago Tesla was full of hope. Now the stock is full of hype. It has been a litany of disasters from fatal crashes, production hell all the way to complete wishful thinking on Level 5 autonomous driving which Israeli company Mobileye, a leader in the field, believes is decades off.

Let’s assume a $240 per share deal was done. Apple would pay around $40bn and assume another $12bn or so in debt.

The most dangerous strategy for highly successful companies is to throw spaghetti at a wall and hope some sticks. Tesla is by no means an overnight repair job. It needs the skills of Toyota to turn it around. Don’t forget Apple has no manufacturing expertise as its products are all built by 3rd parties. Toyota rescued Porsche several decades back and Lockheed Martin called in the production efficiency king to help build the F-35 Joint Strike Fighter better.

It reminds CM of the time Hoya bought Pentax back in 2007. Such was the earnings dilution against the incumbent high margin business, hunting for growth sent Hoya shares down 50% soon after the deal. Hoya was completely dominant in glass photomasks. Yet the $1bn merger of a 2’d tier camera/optics maker was thought of by the founder’s grandson as a total failure and divested many divisions.

Losses continue to mount at Tesla, senior management departures are a revolving door and demand is slowing. The recent cap raise sees investors well under water. The Maxwell Tech deal looks a dud for the management to accept an all share rather than an all share deal (if the tech is so leading edge).

If Apple truly wanted a car deal, it could buy an established maker like Fiat Chrysler with decades of production expertise and global reach for half the price. Not to mention a wide choice of vehicle styles to broaden the appeal to customers.

Although the history of car mergers, even between industry players, has led to some pretty disastrous outcomes. Daimler overpaid for Chrysler so badly that its shares cratered 80%. BMW bought Rover from Honda. Fail. Even Land Rover had to be sold by the Bavarians. Ford ended up selling most of its Premier Automotive Group stable – Aston, Lincoln, Jaguar, Land Rover and Volvo. Just Lincoln remains.

Tech companies meddling in the automobile sector reveals a graveyard of sad stories. Korean analysts jumped for joy when Bosch sold out its stake in the Li-ion batteries JV SB Li-motive. How could a Korean tech company proclaim to have a better read on the global auto industry than Bosch, a supplier to the major auto makers for over 100 years? Panasonic is already kicking itself hrs over the Tesla deal and management is highly unimpressed with Musk after his disparaging remarks made about production.

Have investors ever wondered why Tesla has no mainstream suppliers? Many are obscure parts companies from Taiwan. More established auto suppliers have been burnt by experiments before and they’ll only sign up for makers who have much better prospects and track records.

If anyone thinks Apple buying Tesla makes sense they need their heads read. The last 6 years have detracted value. Pre-pubescent fund managers who have never seen a cycle might see the value of millennial nirvana but the damage to Apple would be considerable. Just because Apple has been so successful doesn’t mean it won’t make mistakes. Tesla would be a disaster. It is in the product creativity blackhole of following the path of Hoya. It would be better to flutter at a casino.

Ding dong the switch is dead

Morgan Stanley has finally lowered its bearish scenario on Tesla from $97 to $10. CM wrote in October 2017 that the shares based on production of 500,000 vehicles was worth no more than $28 (refer to report page 5). That was based on rosy scenarios. Sadly CM thinks Tesla will be bought for a song by the Chinese. Maybe $4.20 a share instead of $420 “funding secured” levels.

The stock breached $200 yesterday for the first time since late 2016.

Morgan Stanley analyst, Adam Jonas, has still kept its base case scenario at $230 per share. His bull case is $391.

Where is the conviction? To drop a bear case target by 90% must surely mean the base case is far lower than presently assumed.

Jonas must assume the bear case is actually the base case. Sell side brokers love to hide behind scenario analysis to cop out having to get off the fence. His compliance department probably prevents him from realizing $10 is his true heart.

Tesla was always playing in a market that it had no prior experience. It is not to say the products didn’t have promise. The problem was the execution. Too much senior management turnover, missed targets, poor quality and too many Tweets from Musk.

The amount of bad press arising from a lack of service centers has driven customers to moan on social media at its amateur approach. The fragile dreams of being an early adopter are being shattered. Cash burn remains high and deliveries remain low. Some pundits think Tesla orders are under real pressure in 2Q 2019.

The recent all share deal with Maxwell Technologies has seen those holders -20% since the transaction a few weeks ago. CM argued how a company with such revolutionary technology could sell itself for all shares in a debt-ridden loss making like Tesla? If the technology was of real value PE funds would have snapped it up or at the very least made a bid in cash. That none was made speaks volumes about what was bought.

All of the arguments hold true in the above link, “Tesla – 30 reasons why Tesla will be a bug on a windshield

Tesla below $200 after a successful cap raise is not a good sign. It’s the faithful slowly tipping out. Await another imaginary Musk-inspired growth engine to be announced shortly to try prop up the stock price. Yet the momentum will continue to sink. The market is losing confidence in Musk. The 1Q results were diabolically bad.

Major holder T Rowe Price has stampeded out the door. The stock is too risky. Musk is a brilliant salesman but he has bitten off more than he can chew.

CM always thought that Toyota selling its Tesla stake was a major sign. Acknowledging that under the hood the company possessed no technology that Toyota didn’t already own.

Watch the free fall. The Tesla stock will be below $100 by the year end.

(CM does not hold Tesla stock)

Mercedes – “grant us tech neutrality“

As CM has argued for over two years – let the industry have full technological freedom (point 13, page 15) to hit government vehicle emissions targets. Mercedes Benz is requesting the same as they have no plans to phase out diesel or petrol by 2039 because “no one knows which drivetrain mix will best serve our customers in 20 years”. The free market is a funny thing – it works well.

How many renewables companies were sent to the wall thanks to generous subsidies that brought overproduction to a market the government couldn’t afford to sustain?

Was Tesla/Maxwell deal smart?

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Tesla (TSLA) has bought Maxwell (MXWL) for an all-stock transaction at US$288m notional value. The question is why any company would accept an all share transaction from a chronic loss-making company to buy its supposedly “amazing” futuristic dry capacitor technology? Are shareholders of MXWL as hooked into the EV cult as those at Tesla? Clearly not all of them. A group of MXWL investors launched a class action to block the deal. Sadly they failed.

If the management of Maxwell truly believed this deal was a winner and the technology was game-changing, why not demand cash? Why didn’t Tesla invite Panasonic’s battery boffins to assess whether the technology had merit? One must question how good is Maxwell’s IP to only find one buyer and for an all share deal? Where were the private equity (PE) vultures circling? How little confidence in one’s product or how much faith in Musk’s cult-like status to fall for such terms?

Maxwell at the 9 month FY2018 stage reported US$91.6mn (-8%YoY) in revenue and a net loss of $30.2mn. Cash halved from $50.122m in 9M 2017 to $23.561mn 9M 2018. The company did sell its high voltage product line to Renaissance Investment Foundation for $55mn with a 2-year $15mn earn out. That involved an upfront payment of $48m making pro-forma cash as at Sep 30, 2018, total $69mn. The company has an accumulated deficit of $277mn.

While the two companies had been in conversation for several years, Musk seemed to get serious in December 2018.

Forget the technological merits of Maxwell. It is easy to work out the quality of the deal based on the structure and the lack of appetite from the mega battery makers or PE firms to validate it. There is no way that MXWL didn’t show its wares to the majors. Given the deal was announced in February 2019, the EV battery and PE world would have at the very least done some back of the envelope calculations to value the business.

All that Musk has done has absorbed another loss-making business into the same cult and give himself another “dream” to add to the smoke and mirrors story.

Maxwell’s management must have channeled Don Adams, “good thinking, 99” but will undoubtedly end up saying, “sorry about that, Chief!”

Japan has the best drink driving laws – socialized punishment

NSW Police will take away one’s license for breaking drink-driving laws (even at low end) after May 20.

Japan has the best method of all. The driver is fined up to ¥1,000,000 ($14,000) and up to 5 years jail. Passengers are fined up to ¥500,000 ($7,000) and up to 5 years each for allowing the same person to drive while intoxicated. Socialized responsibility!

In 1993 Japan had 1,480 excess alcohol related road fatalities. In 2017 it was 213 (-85%). Against total road deaths of 10,650 and 3,904 respectively. Therefore drink driving fell from 14% to 5.5% of all road deaths in Japan.

In 1993 there were around 80 fatalities in NSW. In 2017 it was 42. Perhaps a socialized drink driving fine schedule would cut it further than just losing one’s license. Against total road deaths NSW had 581 and 405 respectively. Or 14% to 10% of all road mortalities over the same period.