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The Wisdom of Jeff Bezos, Part 3

The Wisdom of Jeff Bezos, Part 3

Two words: low margins. That’s the secret to Amazon’s success. Seems crazy when you put it that way. But Jeff Bezos views it as a competitive advantage. Amazon has spent a decade and a half making low margins profitable. And, as Bezos sees it, when you aren’t addicted to high margins, there is a certain discipline inherent in how you operate. He doesn’t quite come out and say that high margins are for the lazy. But you can tell it is a point of pride. Anyone can survive on high margins. It takes a real man to thrive on low margins. Jeff Bezos is that man.

Bezos is quite clear about the high margin/low margin dichotomy. In his Wired interview he says “There are two ways to build a successful company. One is to work very, very hard to convince customers to pay high margins. The other is to work very, very hard to be able to afford to offer customers low margins.” He has chosen low margins. Why? Because he believes that offering the lowest possible price will allow you to attract the largest possible customer base. Putting on my consultant hat (OK, I never actually wore a consultant hat — but I have met enough of them that I can channel consultant), here’s the two by two matrix of margins:

      Low Margins               High Margins

      High Volume               High Volume

      Low Margins               High Margins

      Low Volume                Low Volume

Jeff has chosen to sit in the upper left corner of the matrix — low margin, high volume. He has proven that there is a big business to be built there. It is certainly better than low margins, low volume; that’s a recipe for extinction. He suggests that the tech world is focused on high margin, low volume businesses in which companies fight it out to win over customers and sell high margin software or hardware to a relatively smaller numbers of customers. His ability to show profitability with low margins allows him the opportunity to deliver rock bottom pricing and amass the greatest possible consumer base. [1] That capacity to execute on low margins has allowed Bezos the ability to broadly extend his product mix, attracting an ever larger customer base.

So what does it take to deliver low margins? Incredible efficiency. Bezos has been obsessed with efficiency from day one. And that efficiency extends throughout his entire enterprise. Bezos has built the state of the art distribution system that allows Amazon to deliver practically anything to practically anywhere (at least anywhere in the United States) in the shortest possible time for the smallest amount of money. That efficiency has made it possible for Amazon to offer Amazon Prime, providing free two day delivery while still making money (ok, Prime isn’t completely free, but it’s darn close when amortized over a customer’s ever-increasing order volume). Amazon also maniacally focuses on driving down the cost of customer support. According to Jeff, “[e]very time a customer contacts us, we see it as a defect.” That doesn’t mean Amazon ignores the needs of customers. They simply work hard to satisfy customers with the smallest amount of human intervention possible. The system appears to be working — Amazon has one of the highest net promoter scores on the planet.

Bezos’ obsession with efficiency is perhaps best seen in Amazon Web Services (AWS). AWS is an extension of Amazon’s own technical infrastructure (its development has dramatically driven down the cost of maintaining Amazon’s own web presence). Bezos has always been determined to deliver AWS the same way that he has delivered books — high volume, low margin. Moreover, Bezos was not willing to use “inferior products” to deliver the lowest possible price point. That dramatic pricing with quality components has made AWS the backbone of a stunningly large percentage of the Web today (from FourSquare to the New York Times). Jeff asserts that, “the most expensive thing you can do is make a mistake” and as a result, “[Amazon] can afford to focus on smaller and smaller defects and eliminate them at their root. That reduces cost, because things just work.” It does seem to be working. AWS has become a big business, while simultaneously increasing the efficiency of Amazon’s own infrastructure — that’s a win, win.

Low margins may not be for everyone. It is a tough business, and an unforgiving one at that. But Jeff Bezos deserves huge credit for knowing his business model from day one and executing perfectly on his strategy. By driving down costs and driving up quality through an obsession over efficiency, Amazon is able to deliver the best possible service at the lowest possible price. That makes it awfully hard for others to compete. And that is just how Jeff likes it.

[1] Of course if I am going to properly channel my inner consultant, I have to be honest and point out that the upper left quadrant is always the desired outcome. This matrix is no exception. The ability to deliver high margin and high volume is manna from heaven. There’s a reason Apple is the most valuable company in the world and has $97 Billion dollars in the bank. They’ve cracked the code on high volume, high margin. As have Google ($44 Billion in the bank) and Microsoft ($50 Billion in the bank). But when it comes to high volume, low margin, Amazon is as good as it gets.

China’s ‘Liquid Sunshine’ project demonstrates PV powered methanol

China’s ‘Liquid Sunshine’ project demonstrates PV powered methanol
Scientists led by the Dalian Institute of Chemical Physics (DICP) in China have begun a large-scale project demonstrating PV powered production of hydrogen, which is then used to convert carbon dioxide into methanol. The demonstration project was certified by China’s Petroleum and Chemical Industry Federation and is expected to run for 10 months, with plans for expansion further down the line. The “Liquid Solar Fuel Production demonstration Project” combines a 10 MW PV array with an electrolyzer and equipment for CO2 hydrogenation. The electrolyzers utilize an undisclosed catalyst developed at DICP, which it describes as a “low-cost and long-lifetime electrocatalyst for alkaline water electrolysis.” According to the institute, the facility currently has capacity to produce 1,000 cubic meters of hydrogen per hour and requires less than 4.3 kWh of electricity per cubic meter. Hydrogen is then used to convert COinto methanol, driven by another catalyst, this time a mixed metal oxide. DICP reports that the demonstration facility currently has capacity to produce 1,000 tons of methanol per year, reaching 99.5% purity. Expansion plans “Our overall goal is to eliminate CO2 emissions by utilizing CO2 as a carbon source alongside renewable energy,” DICP Professor Can Li told pv magazine. “The next plan is to expand the scale from 1,000 ton-methanol/y to 10,000 ton-methanol per year, or even a 100,000 ton-methanol per year.” Methanol produced at the plant can be supplied to the chemical industry, or stored and used to produce hydrogen again. And despite the major expansion plans, Li points out that the project is ultimately a technology demonstration, and does not come with a detailed business model at this stage. Large-scale, PV powered hydrogen production is gaining ground commercially, with projects announced recently in the Middle East and Australia, but still struggles with high costs and lack of infrastructure to make good use of the hydrogen. Using the hydrogen in COconversion to methanol meanwhile, has shown promise but remains largely in the research stage.  

To create more innovators, we need more stories

To create more innovators, we need more stories

I’ve been enthralled by the density of information that is Kurzweil’s book “The Singularity is Near”. Therein, he would lay down a quote by Muriel Rukeyser that I found powerful. It was this:

The universe is made up of stories, not atoms

There is no doubt that Kurzweil himself saw his writing as the telling of the world as he saw it. But so strong was his narrative that they turned into near accurate predictions. It didn’t end there. One can see the potency of his narrative in Elon’s ventures.

You may have heard about Neuralink’s aim to help curb the worst possible case regarding the Singularity by hastening the timeline within which Human-AI symbiosis occurs. Kurzweil may himself have borrowed this solution from transhumanists like himself. But the depth of writing that spans hundreds of pages may have been what led Elon to the founding of Neuralink in the first place.

One can look at SpaceX and see quite obviously that there may not have been the character that is Elon Musk were it not for stories that allow us to dream beyond our present reality. He is a child of sci-fi through and through.

The global phenomenon that is Bitcoin is but a mere narrative.

When speaking about Bitcoin, one rarely speaks of the Elliptic Curve Cryptography that makes it possible. One speaks of Bitcoin as being able to overthrow existing institutions and create a world in which money truly belongs to the individual. As Dan Held puts it:

You can’t kill an idea.

Bitcoin extends beyond just code, it’s a mindset.

People who understand and buy into Bitcoin have already gone down the proverbial rabbit hole. They’ve had to challenge their assumptions of money, government, and social coordination.

Money represents the stored time and energy of an individual. The preservation of that is a human rights issue. While they may give up freedoms over flying (FAA), driving (DMV), and many other aspects of their lives (Alphabet agency soup), the last freedom they will give up is their wealth.

While this may be a strong founded assumption, it is a narrative regardless. We vastly underestimate the power of stories.

Given the tumultuous year this has been I succumbed to deep technological pessimism, one I still feel justified given the circumstances (Yes a vaccine is out there; No the virus wouldn’t cease instantaneously).

I asked myself this: Why didn’t we have even more people working on the tech advances that would have so easily dispatched the virus? “Could it be due to the lack of powerful narratives?”, I asked myself. A lot of really smart people are spending their time on the gamification of human instincts to make their apps more appealing. Others are spending that time doing nothing more than moving around cash. Maybe the lack of inspiration as one grows up and the desire for stability all fuel this. Better narratives could be a cure.

How stories work.

Most thinking isn’t really thought. In many ways, thinking is the flow of emotions guided in the direction of a specific problem. It is for this reason that the Institute of Advanced Studies at its infancy, a sort of paradise for some of history’s greatest minds would give birth to some of their most unproductive years. In the book, “John Von Neumann: The Scientific genius who pioneered the Modern Computer, Game Theory, and Nuclear Deterrence, and much more”, we are told of Richard Feynman’s rejection regarding his joining of the institute:

When I was at Princeton in the 1940’s I can see what happened to those great minds at the Institute for Advanced Study, who had been specially selected for their tremendous brains and were now given this opportunity to sit in this lovely house by the woods there, with no classes to teach, with no obligations whatsoever. These poor bastards could now sit and think clearly all by themselves. Okay? So they don’t get an idea for a while. They have every opportunity to do something and they are not getting any ideas. I believe that in a situation like this a kind of guilt or depression worms inside of you, and you begin to worry about not getting any ideas. And nothing happens. Still no ideas come.

Feynman knew that good ideas don’t come by themselves. One is provoked into the creation and strengthening of ideas. For him, this provocation came in the form of students, who asked him questions that pertained to areas close to meaningful problems. Ever so humble, he noted:

It’s not so easy to remind yourself of these things

There is much wisdom to be found here, not merely for how true this was at the time. So you may ask, what could this have to do with stories and narratives? Well, what exactly are stories and narratives but the ever-living contemplations of some truly brilliant minds. These narratives provoke the emotions needed for what may be single but infinitely useful moments of brilliance. If all real thinking is emotive, good stories may be what is required to have us thinking deeply.

Upon further reflection of my pessimism/skepticism, I realize this: Yes skepticism may be right more so than naive optimism ever will be. But it isn’t pessimism that pushes the world forward. It is the belief that something is indeed possible. We need more people thinking of the possibilities that lie ahead of us. Of course, we should be mindful that our stories match their technical proficiency or they lose legitimacy.

That said, the progress of technology depends on compelling stories and we need more of them.

This blog is provided courtesy of Xergy Inc. – a global leader in integration of functional materials. To learn more about Xergy Inc. go to www.xergyinc.com. 

How to capitalize on the electric car revolution — without buying Tesla’s stock

How to capitalize on the electric car revolution — without buying Tesla’s stock

The shift toward electric vehicles is often positioned as a slow crawl, with projections typically estimating that battery-powered cars won’t outsell conventional combustion engines until 2025 or 2030 at the earliest.

But analysts who currently consider EVs as a niche product risk the same embarrassing mistake as those who panned the original iPhone as too expensive or too different. The truth is that the electric vehicle revolution is already here, and mass adoption will happen much sooner than many think.
Our World in Data has a great analysis that has made the rounds for years in Silicon Valley circles, showing how adoption rates for new technology are increasingly compressed. For instance, the combustion engine auto took about 55 years to reach an 80% adoption rate, while the cellphone took a mere 15 years to hit the same ubiquity. Through this lens, such a long glide path for EV adoption seems incredibly pessimistic.

Just look at sales growth. At the onset of 2013, a few months after Tesla TSLA, -1.28% moved its Model S into full production, the car maker was struggling to produce a mere 20,000 vehicles annually. In 2018, electric vehicle sales topped 360,000 — with Tesla models accounting for about 192,000 of that tally. And halfway through 2019, worldwide EV sales are pacing an annual rate of roughly 530,000 vehicles.

What’s more, this massive growth happened even as EVs were incredibly expensive, and the cost structure is rapidly improving; the median sales price of a vehicle in the U.S. increased slightly last year to $36,600 while the typical price of an electric vehicle dropped more than 13% from $64,300 to $55,600.

At the same time, performance is getting much better, as the median range for EVs surged from 73 miles in 2011 to 125 miles in 2018. Charge times have also dramatically improved, with BMW, +0.51% and Porsche PAH3, -1.83% POAHY, -2.20% luxury EVs boasting a jaw-dropping 15-minute charge time to get a battery from nearly dead up to 80% — blowing away Tesla’s already impressive pace of about 30 minutes. If you don’t need that much juice, a mere three minutes of BMW and Porche’s fast-charging can get you 60 miles of range.
Still think EVs are just expensive playthings for tech nerds? Then consider that according to Tesla, 69% of trade-ins for its mass-market Model 3 were “non-premium” vehicles — meaning regular folks simply buying a car that just happened to be battery powered.
As an investor, you should be in this trend — and looking beyond a fashionable play like Tesla or banking on a major auto maker to dominate this still-evolving industry.

Here are four ways to play the rise of electric vehicles:

Buy automotive power component stocks
Much like when early adopters cracked open early smartphones and get a taste for which suppliers were making the components, EV investors should consider which companies are supplying auto makers with their power solutions.

One of the leading names in this category is Dublin-based Aptiv APTV, -1.99%, a company formed in part out of the shell of bankrupt auto supplier Delphi. Key components include the charging ports, high voltage connectors, shielding, sealing and everything in between. Aptiv has forecast roughly 5% revenue growth for next year, but earnings are seen jumping 12%.

Another option is France’s Valeo FR, -4.18% VLEEY, -5.37%, which is deeply connected to key European auto makers. However, it trades in the U.S. on the pink sheets on relatively low volume so it may not be as easy to trade or follow as Aptiv.

Admittedly, original equipment manufacturers (OEMs) like these tend to have more uncertainty thanks to bigger debt loads and lower margins. But like electronics suppliers, they can offer less volatility in the long run since they don’t have to worry about an individual product being a smash hit with consumers.

In other words, whether Tesla remains dominant or not, stocks like Aptiv and Valeo will still have a crucial place in the EV industry.

Buy the batteries
The battery is perhaps the most obvious and crucial part of electric vehicles, and is where most of the cost and performance comes from. So why not cut to the chase and buy one of the largest lithium battery producers in the world via Panasonic? 6752, -0.76% PCRFY, -3.02%
While you may be familiar with its consumer electronics, Panasonic is a huge player in battery technologies — and has been since 2010. Most recently, this includes a partnership with Tesla to produce the batteries for its more affordable Model 3 line. This is only part of its appeal, however, since Panasonic also has invested heavily in Chinese battery operations to tap into that growing market as well as the mainly North American market served by Tesla.

Yes, this Japanese stock trades on the pink sheets in the U.S., but volumes typically top 100,000 shares daily so it’s liquid enough to buy into. And while dividends are a bit irregular quarter-to-quarter, the stock yields about 3.5% based on the last 12 months of payouts. That’s a nice incentive for investors who want a long-term stake in the EV revolution.
A more aggressive play would be China’s BYD 1211, 4.18% BYDDF, +9.99%, another one of the world’s top battery producers and one most closer to the Chinese market. But this stock is much harder for Western investors to have visibility into.

Buy the lithium
Of course, you could go one step back in the supply chain to invest in the lithium that goes into batteries. That way, it doesn’t matter who the supplier is — it only matters whether the vehicle is powered by a battery.

Admittedly, the share prices of lithium miners have taken a significant hit on share prices over the last year or two. But while $6 billion giant Albelmarle ALB, +0.05% is trading for half what it did at its 2017 peak, this North Carolina company is comfortably profitable and now attractively valued with a single-digit price-to-earnings ratio based on next year’s forecast. Furthermore, it yields a decent 2.4% dividend that is less than 25% of earnings. That sets a firm foundation ripe for future increases that buy-and-hold investors can tap into.

Sociedad Química y Minera de Chile SQM, +0.19%, the other leading lithium miner, is also worth a look, with a bigger dividend of around 4.3%. But over the last 12 months it has paid out more in dividends than it has forecast in earnings per share, so it could be a riskier proposition.

Buy it all
If you like the idea of looking beyond individual auto makers but can’t get excited about lithium, batteries or power solutions, then consider a diversified play across the entire sector via an exchange-traded fund.

There aren’t any funds purely focused on EVs, but there are a few that gather up emerging trends in the automobile market, such as the Global X Autonomous & Electric Vehicles ETF DRIV, -0.85%. While it holds stocks that deal in EV components and critical battery materials such as lithium and cobalt, there is also a large helping of big tech firms like Alphabet GOOG, -0.16% GOOGL, -0.25% that are investing in self-driving technologies as well as legacy auto makers like Toyota Motor 7203, -1.71% TM, -1.95% that are still very much stuck in the old structure of gas-powered car sales.

Keep in mind the inception date of this fund is a little more than a year ago, so it is young and still has relatively modest assets under management.

A little bit older and a little big larger is the KraneShares Electric Vehicles & Future Mobility ETF KARS, +0.89%, with a different list of top holdings but a similar makeup. Legacy auto stocks including General Motors GM, -3.05% and tech stocks like chip maker Nvidia NVDA, +0.28% are in the mix.