(#90) The case for vertical integration

VW is considering closing a plant in Germany, for the 1st time in 87 years

Sorin Anagnoste

Sep 05, 2024

On today’s menu:

1. VW is considering closing a plant in Germany, for the 1st time in 87 years

2. on Boeing and the case for vertical integration

3. On (high) pricing with Brunello Cuccinelli

4. New Apple products

5. on US Labour Day

Strategy

🚗 Reuters: “Volkswagen considers historic German plant closures in cost drive”

I wrote extensively about the transition to electric vehicles, so to sum up:

1/ You need a new set of skills, ie. software

2/ Factories for EVs are costing 5-10x, although you have 5-10x fewer spare parts

3/ Competitive advance remains around design and distribution, but you need to consider the e-motor, the battery (50%), hypercasting, autopilot, and multimedia.

So VW did so far:

1/ Partnership with Rivian for the software development

2/ Autopilot - nothing; probably a future partnership with Google or alike

3/ Batteries - no supply chain

Conclusion: The future of EVs will disrupt the company. Essay 1, Essay 2, Newsletter 12, Newsletter 50

📱New Apple products

What Apple will announce on the 9th of September:

1/New iPhone, but nothing radical. The smartphone today means incremental innovation.

2/New watches - once you get the main market, then you focus on customer segmentation: Ultra, normal, economic, and maybe something new (ie. Apple Watch Air)

3/ new AirPods: Apple sales between 80 - 100 million AirPods annually (!)

I expect these three products to get AI as soon as possible! LINK

✈️ on Boeing

For several years the company has been run by an accountant. When you are an accountant you probably think in numbers. That’s bad, especially when running a strategic company for the USA and the world.

Now, you have the situation below:

Some insights:

1/ Boeing outsourced so much of its supply chain in an attempt to adopt an asset-light business model that its rockets stop working and the doors of its planes frequently fly off. Of course, a vertically integrated player had to step in - ie. SpaceX

2/ It will take years and billions to fix this mess and probably there will be two major consequences for the company: (a) lose to Airbus a significant part of its market share and (2) loss of money from research and space exploration to companies like SpaceX and Rocket Lab.

3/ There are industries where the only way to compete on everything is to be fully integrated, a concept that Boeing realized recently. Business Insider, QZ, Bloomberg

But you better start reading about this in the Not Boring newsletter, by Packy McCormick. LINK

On (high) pricing with Brunello Cuccinelli

Three concise conclusions:

1/ There's a growing imbalance between product prices and their perceived value, especially in luxury markets, leading to consumer frustration and potential loss of customer loyalty.

2/ Even in industries with high-profit margins like fashion, there's a need to reassess pricing strategies to maintain a sustainable balance between profitability and customer satisfaction.

3/ The rapid increase in prices across various sectors (restaurants, hotels, everyday items) is creating a sense of disconnect for consumers, even affluent ones, who need more transparent and justifiable pricing practices.

Artificial Intelligence

The rise of AI robots

Bernt Bornich from 1X:

“We'll Build 100,000 Humanoids by 2027.”

Jason Carman made a short documentary with Bornich regarding his manufacturing ambition.

1/ The development of humanoid robots represents a fascinating convergence of artificial intelligence, engineering, and human-inspired design. This documentary explores the rationale behind creating human-like machines, the challenges in transferring knowledge to AI systems, and the importance of scale in advancing robotic capabilities. It also touches on crucial aspects such as safety considerations, the diversity of intelligence, and the complexities of reasoning and learning in AI. The discussion extends into the future, considering the potential ecosystem of humanoid robots, the rapid pace of technological advancement, and speculation about what the world might look like by 2040.

2/ Beyond the technical aspects, the documentary emphasizes the importance of intuition, kindness, and individualism in technological development. The inclusion of topics like hiring practices, life philosophy, and science fiction suggests a holistic approach to understanding the implications of humanoid robotics on society and human culture. LINK

Skyfire is building a platform to allow AI to pay on behalf of humans. LINK

"AI monetization is at the top of everyone's mind," DeWitt said. "Payments have historically been 'behind the scenes' infrastructure, but with the advent of AI, many people are betting that a new monetization layer is required.”

Things Happen

Can solar costs keep shrinking? LINK

Japan built a global natural gas empire. LINK

China’s industrial strategy on ‘collision course’ with top German export industries. LINK

Switzerland to restart nuclear power plans after 13 years. LINK

The CFO of Apple manages $230 billion with 7 people. LINK

[Essay] On vertical integrators - part 1, by Packy McCormick. LINK

The Sun Cable project means building 20 GW of solar and up to 42 GWh of battery storage, and supplying Singapore via a 4,200 kms subsea cable. LINK

Saudi needs oil at $95/barrel to balance its budget or $112 if you add the domestic investments by the sovereign wealth fund. Today the barrel is at $77. LINK

[Podcast] How the White House Thinks About Economic Security with Deputy NSA Daleep Singh. LINK

“Among states with access to online betting, the likelihood of filing for bankruptcy increases by 25-30% after three to four years.” LINK

[Essay] Paul Graham: Founder mode. LINK

Industry reports

Europe is turning into an open-air museum

Be aware of IPOs

How many PhD places should a country have?
In the past, Denmark imposed strict limits on the number of PhD positions available nationwide. Many considered these restrictions to be excessively stringent. When the government decided to increase the number of available slots, an interesting trend emerged: as more students were admitted into PhD programs, there was a corresponding decrease in the average intellectual aptitude of the doctoral candidates. This suggests an inverse relationship between the number of PhD students and their overall academic achievements. LINK

Magnificent 7 capital expenditures hit ~$44 billion in Q2 2024. LINK

The solution to rent increases is to increase the supply of housing, not to control it.

Curiosity Corner

on US Labour Day, by George Friedman:

“Labor Day became an American Federal Holiday in 1894. Most other countries celebrate Labor on May 1st. That date had been a pagan celebration, but in the late 19th century, European socialists adopted May 1st as the annual holiday devoted to labor with marches and riots.

Industrialization brought labor problems to the United States with some nasty consequences. American workers wanted more money, better working conditions, and recognition. Money and better conditions were hard to give. So labor suggested a holiday, and management and Congress was enthused. A holiday not built around an armed uprising was just the thing. But May 1st was a reminder of everything they wanted the workers not to think about.

So, the first Monday in September was chosen. Being the last weekend before children returned to school, this created a three-day, family oriented holiday. Rather than marching under the red flag, families headed to the beach or lake or wherever for a last summer outing. The vendors at these places thought it was a delightful idea. And so, Labor Day didn't become a day to plan revolutions, but a time to kick back and have a beer, and for the vacation industry to have one last summer blow out.

Think about it. The threat was a European style revolution. The solution was a holiday, one the kids wouldn't let the workers ignore - so no meetings. Those making money out of summer got a three-day weekend to peddle their wares. And the workers were recognized for being workers, and at least that beef was taken care of. And some of the Christian churches who were not happy with a pagan holiday being Labor Day, were also appeased.

To get a sense of the difference between the US and Europe when facing political and economic chaos, the American solution was to turn a revolution into a marketable event, keep the churches quiet, and let the kids call off the union meeting.

Happy Labor Day, and think about its pure genius.” LINK

Ukrainian drones burn 🇷🇺Russian positions with thermite. LINK

Brain scientists finally discover the glue that makes memories stick for a lifetime. LINK

The Brutalist got standing ovations at the Venice Film Festival. LINK