Published on November 18th, 2019 | by Frugal Moogal0
Reviving The “Tesla Deathwatch” — With A Totally Different Spin
November 18th, 2019 by Frugal Moogal
After the recent unveiling of the Ford Mustang Mach-E, I feel like it’s time to revive the Tesla Deathwatch.
No, not the Tesla Deathwatch that you may have read about on this site before, where certain websites made daily updates gleefully predicting that Tesla would soon run out of money and be forced to shutter operations (more than a decade ago).
Instead, as I mentioned in my previous article, the Mustang Mach-E may end up being a Ford killer. Simply put, Ford is carrying around $100 billion in debt. If the transition to electric mobility happens too quickly, Ford could be left with a ton of debt and factories full of internal combustion technology that end up being stranded assets. If this happens, then the attempt to transition from internal combustion technology to electric propulsion may end up leading to Ford’s demise.
Anyway, in this new sporadic series, I’m going to take a look at legacy automakers to see the risks that this transition has to them and how they are coping with it. I will also try to estimate the risk that Tesla has created through its disruption.
And that’s the thing — when new technology comes along, often the most vulnerable are those companies that dominated the previous technology, as they are too invested in that technology to make a sudden change. A sudden change renders a significant portion of their business obsolete immediately, while the new technology has no guarantee of profits.
There are lots of recent examples of this that I could use to highlight the change. It was anticipated that at any time Sears could destroy Amazon, but it’s pretty clear who is winning that battle. Blockbuster Video dominated the home movie industry, and then Netflix came along. Atari dominated the video game industry, so it stopped innovating and let Nintendo — who had even asked them to release the NES in the United States under the Atari brand — to take over.
Instead, I’m going to take a quick look at a company that I think is perhaps the best parallel to what is happening with automobiles right now, Kodak.
The Kodak Story
The Kodak story is an absolutely fascinating one, and I strongly suggest if this interests you at all taking some time to really research it, but here’s the basic overview:
In 1975, a Kodak engineer by the name of Steve Sasson invented the first digital camera. He was told not to tell anyone about it, with a former Kodak vice president directly admitting that they could not sell it because they feared the effect it would have on the film market, which was Kodak’s main source of revenue.
And film sales were great, peaking in 2001 as consumers had started to purchase digital cameras. Kodak faced a problem — the manufacturing process for its film, which was truly extremely complex to make, had nothing in common with making semiconductors to make great digital cameras. Add to that the fact that companies could buy the components to make a digital camera from various providers and create their own cameras quickly, without being encumbered with significant debt and assets from businesses that were suddenly losing market share.
And market share dropped quickly. The market peak of 2001 was followed by a few years of the market slowly contracting, following by that trend gaining speed like a snowball rolling downhill. By 2010, worldwide demand for photographic film had fallen to less than 10% of what it was in 2001. In 2012, Kodak filed for bankruptcy.
Perhaps even more interesting, even before the market peaked, Kodak realized that it would need to start selling digital cameras. In 1999, Kodak held a 27% market share on digital cameras. As a matter of fact, my first digital camera was a Kodak camera.
The problem was Kodak wasn’t making money on those cameras. Indeed, this incredible article from Reuters, written shortly before Kodak’s bankruptcy, noted that in 2001 Kodak was losing $60 for every digital camera it sold. It didn’t matter that Kodak was actually doing pretty well in digital camera market share — capturing over 20% of it in 2005. The combination of stranded assets in its core business and losing money to maintain market share was unsustainable.
Kodak emerged from bankruptcy in 2013, but is a shell of what it used to be. In Q1 2001, Kodak reported revenues of $2.975 billion and net earnings of $150 million. In Q1 2019, Kodak reported revenues of $291 million and losses of $16 million.
The Kodak Lesson
It’s difficult to turn a profit when your core, established business is in free fall and the only way for you to gain market share in the future of your market is to lose money on every sale you make. After the peak of film sales in 2001, and a few years of relatively small declines, the market for film nosedived at 20 to 30 percent per year.
Kodak was still making money on its film divisions when it went out of business — it is just that the business had shrunk to a point nearly unimaginable a few years before. In reading through Kodak’s annual reports, I found that Kodak made a profit of $1.43 billion on revenue of $10.231 billion for film production in 2000. By 2011, the company made a profit of only $34 million on revenue of $1.547 billion. I feel it’s also worth noting that Kodak lost $349 million on its digital camera division that year.
There are two lessons here that are important. The first is that markets for well established goods can collapse at nearly unimaginable rates as new technology disrupts the old. In 2000, absolutely no one expected that physical film sales would topple as fast at they did. In 10 years, Kodak lost 85% of its sales to the disruptive change that digital cameras brought about.
The second thing is that as markets shrink with well-established groups, so do the profits. In 2000, Kodak earned nearly a 14% profit on it film sales. By 2011, the company was earning 2%.
To me, the lesson is clear — technology transitions happen much faster than people and companies usually expect, and once they catch on, the companies leading the prior iteration of the industry are the first to go out of business.
Tesla is the force that has created incredible disruption within the auto industry. Whether you are a fan or a short seller, Tesla has proven that electric cars can be safer, easier to maintain, cheaper to operate, better for the environment, and more fun to drive than their internal combustion counterparts. They can also use established technology for connectivity to improve the car through time.
I’m not using this article today to look at any particular automaker, but I think the parallels with some are extremely strong. We’re entering a new era, and it’s just as likely that the next generation of automakers will be dominated by newcomers like Tesla, Rivian, and BYD as it is to be generated by the prior generation’s top manufacturers. In fact, if history is any indicator, it’s much more likely that the next generation will not be dominated by the prior generation’s manufacturers at all.
After all, Ford, GM, and Chrysler didn’t start by manufacturing horse buggies.
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