An American Made Dream of Innovation & Design
File this under ‘it will never happen, but what if…’
An examination of two American juggernauts outlines to me some obvious challenges that, left on their own, leaves doubt as to whether they will ever be fixed. But what if they combined their power? Let’s dive in.
First up, Apple.
Self admittedly, I am not a huge fan of the current Apple strategy, as I think they are milking assets that they should have been doubling down years ago and have a massive innovation problem — Apple Pay, the watch, and signing Oprah do not constitute world-class innovation to me. The move to ‘services’ is just another head-scratcher as it fails to acknowledge that 61% of revenue is coming from a device (iPhone) that is flat, and in fact, is losing share in markets like China. The idea that Apple’s services, (currently 15% of revenue) will soon replace the iPhone is amusing considering that these services are dependant on…the actual handset that is losing share. Instead of innovating, Apple is focusing on single sign-on authentication, content deals, Apple pay/credit card (which I like but makes me wonder — what took them so long) while others like Facebook (rightly or wrongly) turn the financial world upside down with a big swing with Libra.
There is a famous debate between famed investor/entrepreneur Peter Tiel and Eric Schmidt of Google where Tiel confronts Schmidt by telling him “Google has no idea how to invest its cash into technology effectively” and finishes by saying ‘they have no new ideas’. As it relates to Apple, I would suggest the same thing. Apple has over $100B in cash, and core assets, such as the iPhone, stalling. Meanwhile, Spotify (market cap $28b) and Netflix (market cap $142b) are creating businesses right under the nose of Apple in a category that they invented. Not good. Additionally, the future after Tim Cook is Jeff Williams. If you’re saying “who”, that’s my point. Let’s replace Jobs and designer Jony Ive’s with Tim Cook and Jeff Williams. Is anyone feeling comfortable with this? Sitting on top of $100b in cash is just a bad idea as it also attracts corporate raiders like Carl Ichan who put pressure on companies to give it to investors as a dividend. Good for the stockholder but a zero for solving the innovation gap. Apple needs to spend this money on innovation as they clearly won’t find it internally. This is not about Cook — who is a world-class executive — but rather a need for a more ambitious, aggressive plan to take advantage of its cash flow before it dwindles due to loss of hardware share.
Apple has done a miraculous job of extending the life of the iPhone, but all good things have to come to an end at some point.
Next, let’s look at Tesla.
It’s fair to say that Musk is today’s Edison. Paypal, Tesla, NASA (yes I put NASA under Musk as SpaceX is now NASA). Musks impressive CV spans digital payment to batteries, cars, solar and now space. Shit, he even has a flamethrower in there. The focus in the capital markets and the corresponding media around the stock of Tesla is always on its ability to deliver vehicles quarterly (or lack thereof) and its cash burn. Musk, quarter over quarter, is constantly scrambling to deliver on vehicle expectations while also stating publically that “the company will run out of cash unless “hardcore” cost-cutting moves are made”. As I watched CNBC’s Tesla coverage the other day I kept thinking; “with this company/stock trading where it is today ($246 per share) it is going to have to go back to the market and raise a ton of cash to justify this valuation and continue their expansion”. If they continue to burn $700m per quarter there is not a lot of wiggle room for any setback. So where can Tesla get unlimited cash and operational excellence? You are starting to see where this is going, aren’t you?
One more thing before we put all of this together.
Let’s acknowledge that we are in the early innings of a new cold war, not one based on guns and nuclear weapons, but rather technology. This cold war puts the USA and China directly in conflict with one another. The USA administration has realized that their time as the global leader is fading, and they are using the fact that they have a $380b trade deficit with China to their advantage to try and cut the legs out of some of the momentum of China before its too late. This deficit is ‘house money’ and puts the USA in a good spot to extract what they need from China during this negotiation. It’s tough to negotiate a deal when you have a dependency on a country (USA) for $380b worth of goods, as China is quickly realizing, and no matter how much they devalue the yuan and add their own tariffs they have more to lose, at least in the short term. Trump knows this and is squeezing them, with China stalling and hoping Trump doesn’t get re-elected. The reality is, Trump will be elected again (by a larger majority this time) and China is going to have to change its strategy and play offense. What can they do? Well, how about following the lead from the USA. The first shot the USA placed on China was the embargo on the telco Huawei, which is backed by the Chinese government and accused of espionage. In a tit-for-tat move, what would happen if China took a shot right back at the USA and made a move to ban Apple from China? Ahh, problem. All of Apple’s (attempted) growth is coming from that market, not to mention its dependence on rare-earth materials and manufacturing capacity. Meanwhile, Huawei is now focused on selling its wares to emerging markets like Africa and others as a way around this embargo but what are Apple’s options if this happened? It looks pretty dire esp when you consider what would happen to the stock if this took place. 30% decline? Minimum.
Unless of course Apple makes a big move and purchases Tesla.
Let’s look at the numbers:
The market cap of Tesla is approx. $44b
Apple has $105b in cash on hand. That cash is earning a grand total of 0% in the bank right now and Cook doesn’t have anything to invest in because…he doesn’t have any new ideas.
Why does this make sense?
Tesla is going to continue to burn $700m in cash a quarter. They have about $2b in cash on hand. Do the math.
Apple has a shit load of free cash for the near term future while people still buy iPhones, but as the number of phones decreases so will this cash flow.
Apple purchasing Tesla solves all of the cash issues for Tesla but also gives them access to one other thing: operational excellence. Tim Cook is maybe one of the best operators on the planet. Let Cook and his soldiers take on the production issues rampant in Tesla, and let Musk focus on innovation. This allows both companies to solve their biggest challenge.
Additionally, in making this move, Apple is getting the visionary that they desperately need to take Apple to the next level (sorry Jeff Williams…you are demoted).
Musk goes back to creating and building and leaves board management, capital markets, and his Twitter account to Cook to skillfully manage.
As an aside, Trump goes all-in on this ‘made in America’ solution’ and likely takes credit for its creation.
Tesla and Apple is a USA match made in heaven. It’s the capitalist version of The Avengers when 1 + 1 = 3.
It’s never going to happen. But what if.
Over to you Tim.
Neil