Way back in the olden thymes, when companies were getting on-line to sell stuff, it looked like Amazon picked a strange market to exploit. Buying books on-line was not a great leap forward, but Bezos knew something the rest of us did not. He knew that a business that flattered the beautiful people would have an army of beautiful people promoting it to the rest of us. It was the central insight of Steve Jobs. He was the post-modern P. T. Barnum, selling the glorious future rather than a glimpse of the wolf-boy or the tattooed lady.
Amazon never made money selling books, but before anyone could pay too close attention to that, Bezos moved onto selling other stuff. When that failed to turn a profit, he got into selling music, then it was movies and TV shows. Amazon eventually turned a profit, but the total profit for the firm over its history amounts to what a company like ExxonMobil generates in a good month. Now, Amazon is promising to have drone robots deliver your goods before you even decide to order them. The future will be glorious.
The key for Amazon making it all these years was to keep people focused on everything but their financials. This is not an exception. Faceberg will never have earnings to justify its share price. In fact, it will never have user rates to justify its ad revenue. It’s not unreasonable to think that everything about the business is fraudulent. That should trigger large scale audits and investigations into its business practices, but Facebook is on the side of angels in the cultural revolution, so its all good.
Probably the best example of our carny-barker economy is Tesla. To his credit, Musk has built a real factory that builds real cars. No one is going to say the Tesla is a work of art or even a practical car, but it is a car and the technology is impressive. The trouble is the company does not exist to make cars. It operates as a tax sink, where government subsidies flow into it and some portion of those subsidies turn into payments to the principles in the form of stock repurchases, debt service and compensation.
This only works if people think the venture will either one day turn a profit or the technology that it creates will result in something good down the road. To that end, Musk is regularly out doing his Lyle Lanley act, making all the beautiful people feel righteous by backing his ventures. He’s also telling Wall Street that he will soon be making and selling enough cars to turn a healthy profit, even without massive tax subsidies. The trouble is, that’s probably never happening, at least not with current management.
Tesla CEO Elon Musk said last week the company has run out of space at its Fremont, Calif., plant and is looking to build a second factory.
“There’s no room at Fremont,” Musk said. “It’s bursting at the seams.”
But that statement left plenty of industry watchers scratching their heads.
Tesla’s Fremont plant is the old New United Motor Manufacturing plant, otherwise known as NUMMI. The joint operation between General Motors and Toyota began in 1984 and was intended to help the Japanese automaker learn about doing business in America and teach GM the principles of lean manufacturing.
The plant, 32 miles from Tesla’s headquarters in Palo Alto, is large enough to handle around 500,000 vehicles a year in 5.3 million square feet of office and manufacturing space. Tesla, meanwhile, produces about a fifth of the plant’s capacity.
So what gives? Why is the electric-vehicle manufacturer running out of room?
It’s because in this temple of lean manufacturing, Tesla uses far more workers than NUMMI employed to build far fewer cars. In 1985, its first full year of production, NUMMI had 2,470 employees and produced 64,764 vehicles — about 26 vehicles per worker per year. By 1997, it had 4,844 workers and produced 357,809 vehicles — about 74 vehicles per worker per year.
Tesla, on the other hand, had between 6,000 and 10,000 workers in 2016 and manufactured 83,922 vehicles. That puts its vehicle-per-worker number between 8 and 14, about one-seventh the efficiency of NUMMI at its peak.
What we are seeing with Tesla is pretty much what we saw with Amazon. Tesla is a great show so the tax subsidies will not be shut off. Amazon avoided paying sales taxes for years this way. Rich people think Musk is cool and it is currently hip to have one of his cars as a toy, so there will be no push to cut the apron strings. That means Wall Street investors will stay in the game, even though they have people who know there is zero chance for Tesla to profitably make cars anytime soon.
In fairness, this sort of chicanery is not new. The industrial age saw similar rackets, which is how great public works projects were built. The government turned a blind eye to the cost shifting and corruption, as that seemed like a reasonable price to pay for a bridge or a hydroelectric damn. It was not just corruption. Railroads and power companies trampled on the rights of citizens to build out their networks. Despite all that, the people still got trains, electrification, bridges and roads. People can accept those trade-offs.
Whether or not that will hold in the technological age is debatable. The collapsed retail sector has left retail centers looking like ghost towns. Getting cheap stuff on-line is not exactly a great legacy, compared to rural electrification. On the other hand, maybe battery powered, self-driving cars will be seen as having been worth the massive debt and tax shifting that is so much of the modern economy. And, unlike the robber barons, guys like Bezos, Musk and Zuckerberg put on a good show, so there’s that.