What’s Up Wednesday 5/15/19

Tariff Problems for Tesla – Part 2?

In last week’s “What’s Up Wednesday”, we speculated that perhaps Elon Musk really doesn’t desire for the new Tesla FSD (Full Self-Driving) technology to be deployed across the entirety of his EV lineup.  If he doesn’t want it at this time, or in as ubiquitous a fashion as he champions, he’s now got Donald Trump to point the finger at (somebody who by historical standards isn’t particularly popular – and that’s being generous – despite having a decent economy – but then, didn’t Hillary Clinton have Obama’s decent economy to run on, and still end up losing); Trump is someone whom Elon can single out as a factor in his own failure to deliver Tesla’s FSD technology, and as a barrier to the overall breadth of Tesla vehicle production – if that’s what he wants to do and if it becomes necessary.  In the meantime, Elon supplies a handful of EVs with the state-of-the-art driverless feature he’s been touting as complete (even as efforts to test or perfect it continue) – we’ve seen the guinea pig approach used by companies (including Tesla it can be argued) before.

That’s conjuncture.  Let’s focus on what we know, what’s tangible regarding Tesla’s inclusion of this autonomous driving technology in its vehicles – amid the Trump administration’s denial of an import exemption related to perhaps the most critical piece of the system.  The hardware that Elon demonstrated at his “autonomy day” event two weeks ago is called Autopilot 3.0 (it’s Autopilot 3.0 that is (or was) slated to be standard equipment in all Model S, Model X, and Model 3 units moving forward; for an additional $6,000.00, that Model S, Model X, or Model 3 would include the updated chip or software enhancement that’s been designed to bring FSD capabilities a little closer to reality).  The ECU (engine-control unit, something which all contemporary autos possess) manages the autonomous driving feature, and it’s this crucial part of the FSD system which is currently assembled by Quanta Computer, based in Shanghai.  Tesla sought (and has failed to receive) a trade exemption for its ECU from the Trump Administration.  The denial is all part of Trump’s plan (hope? prayer? It’s fair to ask where Trump’s plan resides at this point) to eliminate or to at least improve the U.S.-China trade imbalance.

Tesla has implied that it may need to stop manufacturing in China the ECU-chip that is integral to fully-autonomous driving.  I’m guessing that this wouldn’t hurt Trump’s feelings too much; on the contrary, it may be exactly what he wants (for instance, he’s been known to favor big oil over green-energy alternatives, like Tesla).  Tesla has blamed Trump’s position on the trade exemption for a potential delay in rolling out the FSD feature in its vehicles, and has even hinted that the decision could reduce vehicle safety – this because, according to Tesla, no other company or entity exists in the world advanced enough or with enough production capacity to manufacture these ECUs (nobody except Quanta Company in Shanghai).

In denying the exemption request, general counsel of the United States Trade Representative (USTR) wrote that the request by Tesla “concerns a product strategically important or related to ‘Made in China 2025’ or other Chinese industrial programs”.  To me, the phrase “other Chinese industrial programs” indicates that you can forget about garnering any sort of exemption for any product or product component if you’re a technology company – it implies that the administration and its trade representatives aren’t even examining or evaluating the request – if it involves a technology company, any technology company, they’re often just killing it (let’s face it, these technology gurus are not Donald Trump supporters – so for him, affecting them or their operations is relatively painless – if the economy remains intact).  It’s also true that the red base isn’t notorious for driving alternative-energy vehicles.  As a matter of fact, it seems that Ford, which will (apparently) be manufacturing a battery-powered pickup (good news), has found that the demand for it isn’t as strong as hoped (many old-timers in rural areas simply don’t understand or trust this EV technology – they may never reach a point where they do).

“Made in China 2025” is a strategy by the Chinese government (a tangible real strategy that China is pursuing, not something to be fair that the administration is making up) to augment the country’s production of the low-end items you’ll find in Walmart and other discount stores (don’t expect that kind of production to go away unless this trade war demolishes it; the manufacture of low-end articles creates way too many jobs over there) to higher-end items (such as Tesla’s advanced CPU) and other components related to the production of electric vehicles, robots, and artificial intelligence systems (which would bring higher-paying jobs, jobs requiring greater levels of skill to the Chinese market at a more rapid and sustained pace than has yet been accomplished).  Presumably the White House considers the China 2025 program to be detrimental to United States technology companies and vehicle manufacturers.  My question is: if that’s true, why are so many technology companies and American vehicle manufacturers voluntarily doing business in China, manufacturing parts and components over there, selling their products there?  Quanta Computer, at the center of the White House’s Tesla exemption denial, has worked with Amazon and Apple.  It’s worked with Verizon.

Below is a list (heavily abbreviated) of some other companies that manufacture components and/or finished products in China:

AT&T

Acer Electronics

Adidas

AIG Financial

Analog Devices, Inc.

Apple

AutoZone, Inc.

Best Buy

Black & Decker

Campbell’s Soup

Canon Electronics

Caterpillar, Inc.

Checker Auto

Citigroup

Cisco Systems

Coca Cola

Colgate-Palmolive

Compaq

Craftsman Tools (I only include this because I had a former customer who, after snappishly eschewing a Chinese product, asked me if I could sell her a Honda or a Craftsman – both also made in China)

Cummins, Inc.

Dell Computer

Del Monte Foods

FedEx

Fisher Scientific

Ford

Frito Lay

General Electric

General Motors

Google

Harley Davidson

Home Depot

Hewlett Packard

IBM

John Deere

Lowe’s Hardware

Mattel

McDonald’s

Nabisco Foods

National Semiconductor

Nike

Nokia Electronics

Northrop Grumman Corporation

Pepsico International

Pfizer, Inc.

Proctor & Gamble

Qualcomm

Samsung

Sony

Stanley Tools

Starbucks Corporation

3M

Yahoo

Tesla argues that it cannot find another manufacturer in the world capable of providing the expertise and the output capacity to produce its FSD ECU units.  The company has an additional point to make in favor of receiving the trade exemption; 75% (according to Tesla) of the circuit board used by Autopilot 3.0 is being manufactured right here in the in the U.S., in Austin, Texas – by Samsung (a company, as you can see from the above list, that also routinely manufactures its goods in China).  Slowing down vehicle production with tariffs could put these manufacturing jobs in Austin in jeopardy.  China (if you believe the propaganda) has a goal of producing 80% of electric vehicles by 2025 (just one in a wide-ranging scope of ambitions that define the “Made in China 2025” strategy).  Apparently the administration has justified its decision regarding the exemption for Tesla by claiming that the technology in question is part of China’s EV domination effort.

You need to question if the goal of 80% electric vehicle production in 5 1/2 years is even possible, for China or anybody else.  It sure sounds like fancy – but apparently Trump believes it.  One thing that China has done (that U.S. companies haven’t and it could end up paying big dividends later) is to invest in the mining of lithium – for the manufacture of lithium-ion batteries needed to power EVs – to help ensure that a continuous supply of the element will be available.  We’ll see how this move (on paper, sure looks smart) plays out.  It will take years to determine.  One of the reasons that China keeps getting the better of us, it seems to me, is that it can afford to be cautious, it can afford to adopt a much longer-term view respecting just about any issue it faces – while leaders here need to be eyeing the next election just about as soon as the last one’s been won or lost).  The cautiousness of China’s culture and people (only echoed by its government) is one reason I can’t see it making massive capitulations in a trade war, especially in a precipitous manner or by a knee-jerk reaction (what Trump seemed to be hoping for during last week’s last-minute negotiations).  Unfortunately, Trump doesn’t seem to understand the Chinese; he doesn’t seem to have a deep appreciation for Chinese culture (an example of why poor or nonexistent preparation by a U.S. president entering important discussions can be a real disaster – there have been plenty of experts and pundits to point this out, but it bears repeating).

Tesla has already warned investors that the Trump tariffs might prevent it from reaching gross margin targets on its electric vehicles moving forward (after recently reporting a $702 million loss in the first quarter of 2019).  Even if you dismiss the company’s safety concerns when it comes to changing suppliers from a known entity like Quanta Computer in Shanghai to somebody else, presumably somebody located here in the United States, there’s little doubt that the result would have a dramatic effect on the price you or I would pay for a new Tesla vehicle.  Today manufacturing in the United States is about as expensive as it gets; and there’s really no way around that aside from gutting the minimum wage law – and while the White House – I’m guessing – would favor such an idea, there’s no support anyplace else for it – yet).  As long as the minimum wage is where it is, manufacturing on a voluminous scale, the manufacturing of a wide range of products at multiple price levels, is not returning here to the United States.

Tesla can foresee the Trump Administration’s tariffs impacting its research in other areas (like AI for instance).  That’s the automaker’s story.

Tesla wants us to believe that it stands to be absolutely cremated by a Trump Administration decision in the escalating trade war.  In other words, another tech company is being sideswiped by Trump.  But here’s what happened to another of Elon’s enterprises, The Boring Company, when it made a similar request of the U.S. government for a trade-war related product exemption (and I’ll give you a conspiracy theory for this one too).  It seems that the USTR granted The Boring Company an exemption for tunneling equipment sourced from China.  The Boring Company currently creates tunnels for underground transportation systems (and has several projects in the offing in U.S. locations, including a tunnel that, when finished, will connect Washington D.C. with Baltimore).  Donald Trump has proven to be the king of conspiracies.  He hasn’t trusted his own government since before he even assumed office.  But that’s nothing.  I’m not sure that anybody in this country trusts (at least) the federal government anymore, and we’ll see where this level of distrust goes when Trump’s been jettisoned from office (especially since these investigations into his seedy conduct are virtually sure to follow him into private life), but for now the private distrust in public institutions rests squarely on him.

When you think about tunneling in relation to Donald Trump, one thing always comes to mind: coal.  Could The Boring Company’s tunneling technology be applied to coal mining?  If you examine the technology, it sounds that way.

While all of this is theoretical, one thing seems increasingly obvious: Trump’s combat against the Chinese (if not against certain United States companies) is getting personal, more and more personal it would appear as time passes – and that’s a terrible position to assume if you’re serious about negotiating something critical with somebody.  It becomes all about giving in – or NOT giving in.  And the costs of giving in or not giving in are sort of lost in the dusty weeds beside the road.

It should be obvious by now that the Chinese are not chopped liver.  They’re tough, they’re shrewd, they’re cautious and they tend not to get ruffled.  Likewise it should surprise nobody that the Chinese delegation left U.S. soil last Friday without any sort of deal.  The tariffs went into effect as promised Friday at midnight.

It’s also true that the red base needs to be far more realistic about the types of manufacturing that can be done profitably here in the United States.  Stoneware dishes, ceramic mugs, diecast toys and figures, plastic pitchers and squirt bottles, dolls, child ride-on toys, kitchen tools, shop tools – and plenty more low-cost items are never going to be produced in high volume at our manufacturing facilities – that would simply make them too expensive to sell for a price that consumers would accept, and that at the same time could provide enough profits to float a business.  The same might end up applying to companies peddling more costly wares – companies like Tesla.  It has been the contention (and concern frankly) of our staff that Tesla is in a precarious position heading into the next global recession.  Trump’s expanding trade war may facilitate the onset of that recession, making it tougher not just on Tesla but a host of American companies big and small, even what have been Wall Street’s technology darlings – the likes of Apple, the likes of Tesla, the likes of many others.

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