Tidbits in the News: Questions for LG, Elon’s Words, The Amazon Ecosystem

Much in the news cycle, yet again. Former FBI director James Comey is on the eve of releasing his book, while the US just completed a series of strikes on Syria after reports of a chemical weapons attack by the Syrian government. All this, plus the Mark Zuckerberg congressional hearings concerning the Cambridge Analytica scandal.

And then, there are these stories.

Questions for LG

LG has taken a back seat to its domestic competitor Samsung in recent years, especially since the dawn of the smartphone in 2007. Since then, it’s been quarter after quarter of disappointing financial results, mainly due to its faltering mobile division.

All that’s about to change.

LG, in its latest press release, just announced its preliminary earnings results for Q1 of 2018, and it’s looking rather rosy. In fact, they’re expecting to make a record profit of over 1B USD — the most in company history.

But the breakdown of the details is where this gets story becomes interesting. While profits are up an astonishing 20.2% YoY, revenues have only risen by 3.2%. It’s even more interesting when you do a side by side comparison with Samsung’s numbers, whose profits and revenues both jumped by nearly 19%.

LG’s numbers, absent of details, feels to me like a lot of cost cutting at the company, as if to turn things around sentimentally. The rather paltry growth figures in revenues, combined with the spectacular jump in profits, is reminiscent of a down sizing maneuver, almost as if LG was restructuring its electronics division for a sale.

It’s a tried and true method on private equity circles — improve profitability by optimizing costs and margins, to improve cash flows, increase valuations, and make the overall enterprise more lucrative for prospective buyers. In short, natural growth for revenues, net high cost cuts, allows for improved profitability.

This is exactly what’s happening with LG. The 3.2% growth in revenue lines up almost perfectly with the 3.1% the World Bank forecast for global economic growth for 2018, proving that the LG revenue growth is all organic, and nothing out of the ordinary. If things remained as they were in 2017, the company should have had profits rise by similar rates, but, instead, they jumped by 20.2%. Cost cuts are the only way such a jump would have been even remotely feasible.

Except, based on the news cycles, I haven’t read anything out of the ordinary for LG — no massive layoffs, no factory closures, no significant cost cutting measures to take note of. That leaves two theories on the table — either LG’s marketing budget was a lot larger than I first assumed, or the company had unreconciled earnings from the sales of its businesses in the past (or any other accounting trickery that we may not find out about until the reports become final).

I have a feeling it’s a combination of all three. LG has been seen reducing its efforts in the mobile space, refraining from introducing a new flagship phone, instead opting to update its V30 flagship with nominal upgrades. That may have allowed LG to downsize its mobile division by relocating its assets, and reducing its marketing budget in an otherwise marketing driven market. It may have, also, opted to reconcile certain profits to drive home to its employees that LG is still, very much, a contender on the global stage.

Taking a look at Samsung’s numbers before moving on, we have to note a couple of things, especially when comparing it to LG. First, Samsung has a very vibrant semiconductors business, LG does not. While Samsung sources its parts in house, LG uses external suppliers like Qualcomm. Moreover, Samsung sells its semiconductors to its competitors as well, including Apple.

Samsung’s electronics business and LG’s aren’t an apples to apples comparison. In fact, it’s rather unfair to compare the two. But, in doing so, we get some interesting takeaways. First, the consumer electronics market, and the home appliances market, are almost completely saturated, at least in the markets LG is operating in. Searching for future growth in these markets is looking rather bleak.

Second, the business demand for semiconductors is highly isolated from the business cycles of its consumer counterpart. It’s safe to assume we’ll see this trend continue for the near future, especially with the proliferation of cloud computing, artificial intelligence, and automation. Robots are going to be everywhere, and semiconductors along with them.

Elon’s Words

 

Elon Musk has previously stated that his single biggest job at Tesla would be to bring Model 3 production numbers up to target. For the longest time, the company was struggling to find the culprit preventing this, but it seems Elon thinks he found it.

He says that “excessive automation” was to blame.

He went on to say that “humans are underrated”, but it’s interesting what this tweet may say about Tesla as a whole. You see, Elon Musk, and Tesla, have long been epitomized as a model for the future of factories — extreme degrees of automation, reducing the need to search for low labor costs and outsourcing. In fact, it was a huge point for the company, specifically with investors, with many seeing this as a paradigm shift in the manufacturing industry.

Turns out, we’re not quite there yet. In fact, the overambitious goals set by the firm for automation was, according to Elon Musk, adding unnecessary complications to the manufacturing process — complications that could be simplified by placing a human worker in that place.

It may be that the automation apocalypse that so many people have been talking about is still far off the horizon. It just may be that we’ve found processes that are fundamentally complex, and indivisible into simpler tasks. There just may be jobs for humans in the future, after all.

Or, maybe the Musk realized that the market may not wait for him to complete his grand vision.

The market is a cold place. It’s heartless, and doesn’t care about the long term. It cares about the short term — how well you can mitigate against short term risk; how well you can improve short term cash flows and profits; how well you can make money in the shortest amount of time possible. Unfortunately for Musk, he doesn’t work that way, and he doesn’t run his companies that way.

This is why Tesla is such a taboo topic for those in finance. When you look at the numbers, it doesn’t make sense that a company like this is more valuable than Ford. It doesn’t make sense that it’s even in business still. And yet, it still manages to survive, maybe even become profitable, if Musk is to be believed.

But this story points to an issue I’ve been having myself — how do we value disruptive technologies? How do we value things that won’t have short term, quantifiable value? How do we value things that goes against the things we’ve been taught? Every finance bone in my body tells me that Tesla’s valuation, and the hype around it in certain demographics, is unwarranted. And yet, certain parts of my brain tell me that traditional finance may not be the right way of approaching this.

This is another one of those issues. If Tesla were given more time to complete its automation process, there’s no question it would be more profitable from the point of completion onwards. But that point of completion is nowhere remotely near the horizon. And I think that’s where the market was having issues. The perfecting of the automation process was eating into potential profits the company could be making by selling and delivering the Model 3. And Musk decided that it was time to cave into the market’s demands.

The Amazon Ecosystem

Amazon recently completed its acquisition of video doorbell manufacturer Ring. Now you may be wondering how this is news, but to me, it’s huge news, especially since I like to overthink things. Most importantly, I want to focus on what this means for the Amazon ecosystem as a whole.

There’s the obvious benefits this acquisition has in bolstering Amazon’s smart home/internet of things portfolio. The very fact that the doorbell has a camera on it means there are infinite possibilities for Amazon to integrate it into the Alexa ecosystem. For example, the camera could be used to recognize faces of friends and family to allow Alexa to announce who’s at the door, and allow easier guest access. It can also be used to recognize the residents of the home to commence the most commonly used processes as they enter the home (e.g. change the thermostat settings).

Then, there’s the greater benefit that it could have for Amazon’s e-commerce business, particularly in allowing Amazon to make unmanned home deliveries. The camera could be used as an authentication gateway for delivery personnel, allowing temporary access to the home, or allow Alexa to alert the resident, create a communications channel, and allow for the resident to give specific instructions for delivery.

The message this acquisition sends out is clear — Amazon is vying for the smart home market, and it wants to dominate it. It doesn’t want to set up a platform like Apple. It wants to create devices to embed people into its ecosystem, like Google. If it wasn’t clear that Google and Amazon were competitors before, this move should make it all the more clearer just how fierce the competition between the two is going to get.

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