bizzXceleration: Performance, Value and Profit

 

The Auto Industry as Exemplar

In the readings you'll find another slew of stuff starting with starting with long-term fundamental changes in consumer spending habits ('ol hat here we know but it always bears repeating apparently). All the rest of the excerpts are specific company stories starting with Best Buy and Sony, which gives us consumers and the CPG's (of a sort), Alcoa (who had not so good results and tanked the markets themselves), and Exxon who's acquisition of XTO Energy (a natural gas firm) tells us an enormous amount about deep structural change in the Energy Sector. Then there's a slew of Auto articles followed by another chunk of Technomedia stories covering the outlook, Intel (who's surprisingly good results did NOT result in any significant market pop), IBM, patents and (indirectly) innovation and Comcast-NBC. Need we mention that the Jay/Conan screwup is more symptomatic of NBC's struggles with the new age than of anything else. When the world is changing under you well... march or die as they still say in La Legion Etranger!

The top chart pretty well speaks to the retail and consumer outlook - whether the necessary steps are being taken we're not sure (that's being polite btw. Actually we're highly suspicious that the overbuilt, over-stored and under-run Retail Industry is in deep dodo and about a 1 on the adaptation scale [1-5], and its suppliers along with it). Let's turn to the Auto Industry as our exemplar then. (The Self-Inflicted Collapse of the Auto Industry). The top chart shows Industry Sales and YoY changes - notice the big bubble in Sales after things were already headed south. Instead of adapting and adopting they choose to use special incentives to move stuff nobody wanted to buy. Our judgment would be that the US going out sales figure will be 13mil/year at best, probably take 2-3 years to crawl back that high, if it does and tells us the US industry is still about 40% over-capacity. Europe's in much worse shape.

Meanwhile the real growth opportunity is in Asia and Latin America but the Chinese have 117 manufacturers who need to shake out but will continue to be subsidized into more over-capacity by government spending to goose employment. And all that's before we raise the perennial but really critical issues about re-thinking and re-engineering product development, manufacturing, distribution and marketing & sales. Over this next decade the industry has merely survived so far though the jury's out. And, again, it's not like you couldn't see this coming as long as you didn't drink the koolaid and talked to somebody besides yourself.

So What About That Tech

Well, what about it? Well obviously Tech will save the day, right? Let's try that again by refreshing ourselves on how business makes capex decisions - rather like we did circa Jun08 when we said things were going to hit the rotary impeller real soon now and folks needed to prep right now. Needless to say nine months later there were lots of Tech execs wondering around with startled looks and meataxed labor forces.

The top chart compares YoY changes in GDP and Tech spending. Looks like an extraordinarily close fit to us. Which is born out in the bottom chart which shows the relationship over time - notice how tight the fit is and how high the R2 is! About as good as we've ever seen for any economic data.

Now Forrester tells us that worldwide spending will go up about 8.1% while US spending will increase about 6.6%. Who are we to argue with the guys who got it wrong the last time. Of course if you do the math and a 2.5% real GDP growth rate implies  a 4.5% growth in real tech spending. Not bad all things considered but a 1/3 under the analysts forecasts. That would required a sustained 3% GDP for the entire year - again not to far off and given how sharply the sector might rebound possible but, we think, unlikely. If you want some more background on far and fast the Industries are changing try: Technomediatainment Futures: Evolution, Barriers, Structure and Opportunities of a New Industry.

Reality Checks Indeed

So, there you have it. Reality checks from fundamental changes in Consumer behavior and weak employment to slack demand growth and the ripple effects across the spectrum of Industries from Retail to Manufacturing to Extraction to Autos to Tech and Entertainment.

In an interesting comment on the "perversity" of our times one of the best places to get your news and substantive discussion of serious issues is Stewart's Daily Show. Here's interviewing Paul Ingrassia, ex-WSJ Detroit reporter and editor. Paul's got a new book out on the history and performance of the Industry, how it dug itself into these holes and dodges the "what next" questions. Of course he's also the same guy who wrote a book in '94 about the recovery and bright future of the Industry. Here he admits they completely lost their way back then and took their fingers off the control levers.

How many other companies out there are in the same state today? We certainly know that the Finance Industry hasn't even repaired the balance sheets let alone started re-thinking its businesses. How many others are going to be the next Auto Industry?

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Business

Hello, frugality; goodbye, good life Now, with the bubble burst, we're worried about losing our jobs. We don't trust the economic rebound, and we're pretty sure taxes are going up soon. And we'll probably be worried for quite a while. As a result, say the experts who study such things, many of us are adopting much more frugal lifestyles. Oh, we're still spending, as the 3.6% increase in holiday shopping shows. We still splurge on little luxuries, as I suggested a few months ago. But if there's a cheaper alternative on the market, a lot of us will buy it. That brings us to the challenge facing many of the companies that used to post big profits and fast growth by selling us the good life -- a list of once-trendy or posh names including Starbucks (SBUX, news, msgs), Whole Foods Market (WFMI, news, msgs), Saks (SKS, news, msgs), MGM Mirage (MGM, news, msgs) and Toll Brothers (TOL, news, msgs). Sure, you've got some great products. Starbucks can perk a luscious latte. Whole Foods  has beautiful produce and a killer meat counter. But we're in a new age of frugality. We're adjusting. Can you? "We're absolutely finding that a new frugality has taken hold, one that seems to have some staying power," says Krista Faron of market research company Mintel, which tracks consumer spending patterns. It's playing out across all retail sectors, including fashion, food and home improvement, Faron says. "Yes, this is a new age," agrees Ken Perkins of Retail Metrics. "Consumers are much more focused on value now. Before, it was all about coming home with the latest handbag. Now it's about shopping your closet."

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Best Buy: 'The 1,000-pound gorilla' At least for now, Best Buy stands as uncontested champ. It's the last major consumer electronics retailer in the country this holiday season, after the liquidation of Circuit City earlier this year. But Brian J. Dunn, who became Best Buy's chief executive officer in June, isn't taking success for granted, especially with rising competition from nontraditional rivals such as Wal-Mart Stores (WMT, news, msgs) and Amazon.com (AMZN, news, msgs). So Dunn has ambitious plans to take advantage of Best Buy's newfound clout: He wants to go beyond the typical big-box retailer role of selling commodity products such as televisions and personal computers and become a central player in determining which products come to market and how big-spending customers choose the latest gear. The plan is already under way. Rather than waiting for electronics makers to ship Best Buy the same products that its rivals get, Dunn's lieutenants are walking factory floors with executives from companies such as Hewlett-Packard (HPQ, news, msgs) and Toshiba (TOSBF, news, msgs), influencing product development and design. The retailer is pushing suppliers to use standardized software and digital services so consumers can listen to music or watch movies on any device. And Best Buy has set up its own venture capital fund to pour millions of dollars into startups from Silicon Valley to Asia. The goal is to shape development of new technologies in promising fields such as green vehicles, digital health and home monitoring.

Sony Pins Future on a 3-D Revival With its once-revered electronics business flagging, Sony Corp. is placing a huge bet this year that 3-D technology will vault the company back into a leadership position in the living room. In his latest effort to resuscitate the struggling Japanese behemoth, 67-year-old CEO Howard Stringer has bulled past the hesitancy of some top aides to drive every unit of the company -- from TV production to the movie studio to its videogame arm -- to advance three-dimensional viewing in the global marketplace. He has pushed executives to abandon a bias against "non-Sony" technologies and to team up with other suppliers. He has evangelized about the technology outside the company, too, persuading both the PGA Tour and ESPN to begin taping and broadcasting events in 3-D.

Alcoa delivers bad news for global profits Not because global aluminum demand and prices aren’t climbing. They are. Alcoa projects that global aluminum demand will climb 10% in 2010. Spot prices for aluminum climbed from a 2009 low of $1,500 a metric ton to the neighborhood of $2,200 a ton—a 14-month high—by the end of 2009. But because higher demand and higher prices are bringing aluminum-production capacity on line far faster than demand is growing. Take the case of China. The world’s largest consumer of aluminum is projected to consume 14 million metric tons in 2010. Huge good news, right? Well, no. China has idle aluminum production capacity of 7 million tons right now. That capacity is set to come back into the market as aluminum prices climb. China imported aluminum in 2009 but will produce a small surplus for export in 2010. The idle capacity in China is only part of the problem. Other countries have been building new capacity that is set to start coming on line in 2010. For example, Abu Dhabi, started production on December 1 at what will be the world’s largest aluminum smelter when it’s finished. Qatar and Oman are building new smelters. Alcoa itself is building what it claims will be the world’s lowest cost smelter in Saudi Arabia. By 2020, the Gulf Aluminum Council projects, the Middle East will account for 12% of global aluminum capacity. Why the Middle East? After all, the region is not exactly rich in bauxite, the rock that yields aluminum after smelting. Top bauxite producers include Australia (almost on e-third of global production), China, Brazil, Guinea, and Jamaica. Because the key to profitably producing aluminum these days isn’t sitting in proximity to a big supply of bauxite, but access to cheap electricity. Lots and lots of it. The new production capacity in the Middle East all hinges on long-term deals for cheap power. That’s easy when the region sits on such huge supplies of oil, and more importantly for electricity production, natural gas. That presents producers with existing plants with a two-fold problem. First, enough new capacity is coming on line to more than off-set in increases in global demand. And second, the new capacity will have lower energy costs that will make it tough for older plants and producers to compete.

Exxon Mobil to buy XTO Energy for $31 billion Exxon Mobil will buy XTO Energy in an all-stock deal worth $31 billion as the oil giant moved aggressively Monday to capitalize on the growing supply of natural gas at home. The deal could signal a new rush to own natural gas assets by major integrated producers, and perhaps the start of a significant consolidation in the energy industry. "Exxon is the group leader and it sets the trend. I would expect more acquisitions in the next three to six months," said Fadel Gheit, senior energy analyst for Oppenheimer. "Who that will be is the $64,000 question." Exxon is closely watched in the industry and an acquisition like XTO could prompt other companies like Royal Dutch Shell PLC, BP BLC or Chevron Corp. to move. Potential targets include big natural gas companies like Chesapeake Energy, Devon Energy and Anadarko, Gheit said. XTO shows the priority that major producers are giving to natural gas as a fuel source. New technology has unlocked trillions of cubic feet of natural gas at home, meaning energy producers do not have to navigate tricky political environments overseas. That doesn't mean that those projects are being excluded. Exxon just last week gave the go-ahead for a $15 billion natural gas project in Papua New Guinea, positioning the world's largest publicly traded oil company to provide energy to a fuel-hungry China. XTO claims about 45 trillion cubic feet of gas, much of it trapped in tight formations known as shale. Shares in the company jumped 16 percent, or $6.64, to $48.13 in early trading.Shares of Exxon fell 3.5 percent, or $2.51, to $70.32. Exxon has signaled recently that it was moving increasingly toward landing natural gas assets. Once the deal closes, Exxon said it will establish a new organization to manage global development and production of unconventional resources.

Behind Exxon Mobil’s Big Bet on Natural Gas Exxon Mobil’s acquisition of XTO Energy amounts to a $31 billion wager on natural gas becoming the fossil fuel of choice for power generation in the United States. The huge deal brings the world’s largest energy company back home to focus on what could be an expensive and time-consuming effort — something it wouldn’t have considered just a few years ago. Exxon is not a company known for making rash moves. In fact, it is viewed largely as the most conservative company in what is arguably a very conservative industry. So some analysts were surprised by its decision to acquire a company that gets a large portion of its production from somewhat unconventional sources with limited export abilities. XTO is mostly an onshore domestic natural gas company specializing in squeezing gas out of very tight and expensive reservoirs. The boom in natural gas prices in the past decade allowed it to grow and expand in areas once thought to be uneconomical to drill. At the same time, advances in technology helped lower costs and increase production. Rampant speculation from financial players sent prices skyrocketing, allowing even the most unconventional of natural gas fields to be economical. But when the speculators rushed to the exits last summer, many drillers were left unable to sell their gas for market prices. Meanwhile, demand dropped as the financial crisis curbed energy use across the board. The envisioned demand for natural gas just has not kept up with the amount of supply that was flooding the market. So even with the number of drilling rigs down to half the number operating just a year ago, there is currently a record 3.7 trillion cubic feet of natural gas in storage at the moment (equivalent to the nation’s average natural gas demand for eight weeks). All that extra supply will eventually work its way through the system, but the days of $10 gas per thousand cubic feet seems to be over for the foreseeable future. But Exxon is making a bet that demand for natural gas will rebound and continue its steady march upward, especially in the United States. Rex Tillerson, Exxon’s chief executive, said Monday in a conference call with reporters that the company expected natural gas demand to grow faster than that for both coal and oil in the coming years. He also said that all of XTO’s resource base would be commercially viable.

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Auto Industry

Ford’s Bet: It’s a Small World After All HE blew into the Ford Motor Company in 2006 as an outsider from a different industry, and he was hailed as the latest in a long line of purported saviors of a faltering, century-old automotive icon. At the time, skeptics in the clubby world of auto executives whispered that the newcomer, Alan R. Mulally, would be swallowed up by the complexities of the car business, his ebullient personality smothered by the feudal infighting for which Ford had long been famous. Yet three years into his tenure as chief executive — and with a host of still nettlesome challenges awaiting him — Mr. Mulally has thus far proved to be the unifying figure that Ford has needed for decades. His vision is distilled in the laminated, wallet-size cards carried by tens of thousands of Ford employees that spell out his management principles beneath a simple heading: “One Ford ... One Team ... One Plan ... One Goal.” And on Monday, at the opening press conference of the 2010 Detroit auto show, Mr. Mulally will unveil the car that embodies his strategy for returning Ford to its status as a leader in the global auto industry. That car, the new Ford Focus, is arguably as important to Mr. Mulally as the Model T was to Henry Ford, the founder. Despite some previous efforts, the Focus is Ford’s first truly global car — a single vehicle designed and engineered for customers in every region of the world and sold under one name. It is small, fuel-efficient and packed with technology and safety features that, Mr. Mulally believes, will appeal to consumers in Europe, Asia and the Americas. The car also represents what Mr. Mulally calls the “proof point” of everything he has done since joining Ford after a 37-year career with Boeing: he hopes that the vehicle will provide a rolling blueprint for generations of Ford cars to come. “The Focus represents the first tangible evidence of a global strategy,” says Mr. Casesa. “For the first time, Ford is executing it and not just talking about it.”

GM Bets on Trucks for Recovery  General Motors Co. has freed up cash to fund a major update of its full-size pickups, a bet that consumers and businesses will resume buying trucks after a long lull in sales. GM, which had relied on full-size pickups such as the Chevrolet Silverado for a major portion of its U.S. revenue and operating profit, had put off redesigning the trucks as its finances collapsed and it underwent a government-backed bankruptcy reorganization last year. Now, unlike in the 1990s truck boom, the company plans to revitalize its pickup line at the same time it invests heavily in small, fuel-efficient cars as well as in the electric Chevrolet Volt due later this year.

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Asian automakers face battle to keep US dominance Asian automakers grabbed their biggest chunk ever of the U.S. car and truck market in 2009, but they'll struggle to build on that momentum this year as rivals in Detroit offer a fleet of efficient, small cars. All automakers that sell cars and trucks in the U.S. will try to woo cautious consumers still nervous about heavy debt, high unemployment and rising gas prices. Market share held by 10 Asian automakers -- including leaders Toyota Motor Corp. and Honda Motor Co. -- rose to 47.4 percent last year, surpassing for the first time Detroit's three players, which slipped to 44.2 percent, according to Autodata Corp. Those gains will be hard to extend this year. The struggle will center on small and midsize cars, as well as alternative-fuel models that run on electric batteries, or hybrid combinations of gasoline and electric. The rivals all showed their wares this week at the Detroit auto show. The Asian manufacturers' longtime dominance in smaller and greener cars gives them a running start this year, but Ford Motor Co. has countered with a revamped compact Focus and General Motors Co. is touting an all-electric Volt and new small cars like the Aveo, which is supposed to get about 40 mpg on the highway. GM and Ford also have strong sales in midsize cars, and the 2010 Fusion hybrid grabbed the North American Car of the Year award at the Detroit show earlier this week. That's added to growing signs of strength for Detroit, even after a tough year. But that bad year was enough to shift Asian brands into the top market share spot.That's a big reversal from 1980, when the domestics owned three-quarters of all sales and the Asians held just 18 percent. Back then, Detroit still ruled a car culture that was just starting to digest the long-term implications of two gas price spikes in the 1970s.

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Technomedia

Analysts: Tech Sector to Recover in 2010 The tech downturn is over and a recovery is on the way after a "dismal" 2009, as companies resume spending on computers and software, according to a new analysis. Forrester Research Inc. was set to report Tuesday that it expects global spending on technology products and services to grow 8.1 percent in 2010, to more than $1.6 trillion. U.S. spending is expected to rise 6.6 percent, to $568 billion. The projected increases follow sharp declines in 2009, when businesses and governments slashed their purchases of PCs, computer peripherals and communications equipment in response to the economic turmoil and credit crisis. Many large tech companies, such as Microsoft Corp., remained profitable and increased their stock prices in 2009, but often they relied on layoffs and other expense reductions to do it. Even with the expected rebound, "the level of computer equipment purchases in 2010 will still be lower than in 2008 or even 2007," said Forrester analyst Andrew Bartels. With the recession over, pent-up demand for new computers and updated software programs stands to benefit the companies that make them. The October launch of Microsoft's latest computer operating system, Windows 7, also gives companies a reason to start replacing PCs.Still, Forrester cautioned that growth will start slowly and pick up later in the year. The research firm also expects spending on communications equipment to pick up this year, partly because of demand in emerging markets that are building wireless and broadband networks. Forrester is not alone in predicting a rebound for the year. Last fall Gartner Inc. forecast 3.3 percent growth in global technology spending. Another analyst firm, IDC, said in December that worldwide tech spending would grow 3.2 percent in 2010, returning the industry to 2008 levels of about $1.5 trillion.

Intel Vulnerable as Consumers Shift to Phones to Browse the Web  Intel Corp.’s position as the gateway to the Internet will come under attack in 2010 as more consumers start going online via phones, tablets, e-readers and scaled- down laptops. Qualcomm Inc., Marvell Technology Group Ltd. and Freescale Semiconductor Inc. are among the chipmakers demonstrating new kinds of Internet devices at this week’s Consumer Electronics Show in Las Vegas. Their goal: persuade consumers to ditch their Intel-powered personal computers as the primary way of going online. “The next billion users that are going to connect to the Web aren’t going to be connected by the PC,” said Henri Richard, head of sales at Austin, Texas-based Freescale. “It’s going to be a multitude of devices.” Intel, the world’s largest chipmaker, makes more than 80 percent of PC processors -- the brains of computers. It aims to use its Atom product, which runs small laptops known as netbooks, to break into chips for wireless devices, a market IDC estimates will increase 14 percent to more than $46 billion in 2010. Its rivals are heading in the other direction: using phone chips to woo users of PCs and consumer electronics. While the PC will remain the main way for people to go online, portable devices are chipping away at that dominance -- with mobile phones leading the charge. Qualcomm, Freescale, Marvell and Texas Instruments Inc. are using chip technology developed by ARM Holdings Plc. By 2013, the number of phones regularly being used to access the Web will exceed 1 billion for the first time, a fivefold increase from 2006, according to Framingham, Massachusetts-based IDC. Over the same time period, the number of Internet-connected PCs will rise to 1.6 billion from 754 million, according to IDC.

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IBM May Not Be the Patent King After All No one beats IBM (IBM) on patents. For 17 years running, Big Blue has been granted more U.S. patents than any other applicant, raking in an ­unprecedented 4,914 in 2009. That tally is more than the number of patents granted last year to Microsoft (MSFT), Hewlett-Packard (HPQ), Oracle (ORCL), Apple (AAPL), Accenture (ACN), and Google (GOOG) combined. IBM's worldwide portfolio now covers more than 40,000 inventions for everything from microprocessors for video games to the ­erasable read-write CD. Nonetheless, a study conducted for Bloomberg BusinessWeek by Ocean Tomo, a Chicago intellectual property consulting firm, concludes that IBM's collection of U.S. patents over the past five years ranks only eighth in value. No. 1 is Microsoft, which ranked third, with 2,906 patents issued last year. "The arms race approach doesn't pay off," says Mark Chandler, general counsel of Cisco Systems (CSCO). "It doesn't do you a lot of good just to have a lot of patents." IBM may be shortchanging itself, according to the Ocean Tomo study. To determine the firepower of companies' patent portfolios, the consulting firm analyzed five years of patents awarded to the world's 1,000-largest public companies by revenue. Among the dozens of measuring sticks Ocean Tomo used to judge the significance of a company's breakthroughs were the number of prior patents cited, patent renewal payments, and litigation. In all, Microsoft's portfolio was assessed at 3.3 times that of IBM's. "This is something that IBM people won't accept, but it's accurate nonetheless," says Steve Lee, president of Ocean Tomo's patent-rating division. He says IBM's portfolio includes a large number of service-related patents, which do not command as high a price as the video-game and software patents that heavily weigh in Microsoft's portfolio.

Comcast-NBC gives regulators a key opportunity Normally, I'm rather skeptical about mega-mergers -- more often than not, they wind up reducing competition without creating anything in the way of value for shareholders. I'm even more skeptical about mega-mergers that involve monopolists, which is how most cable companies started out in life, as holders of exclusive local franchises that, like broadcast licenses, became licenses to print money. So it is particularly strange that I now find myself rather indifferent about the news that Comcast is buying up NBC Universal. To begin with, rather than combining two companies that are head-to-head competitors, this deal combines companies that are located at different points of the value chain. NBC is primarily a producer of video content -- TV news and entertainment programming, along with movies from its Hollywood studio -- while Comcast is primarily a distributor of such content, most of which it buys from somebody else.

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