Tuesday, May 28, 2019

Bayer Fades After Monsanto Acquisition

Could Bayer face bankruptcy because of its acquisition of Monsanto? There is reason to consider that as a possibility. The stock has suffered this year, so that the entire company is now worth less than the $60 billion it paid for Monsanto last year. The most obvious risks relate to corrupt practices in Europe and illnesses caused by the herbicide Roundup in the United States, but problems run much deeper than that.

It was a $2 billion verdict in favor of two people who got cancer after exposure to Roundup that made the biggest headlines, but there are thousands of lawsuits on behalf of people sickened or killed by Roundup. Facing a likely liability of millions of dollars per case, the lawsuits already in the courts might be enough to bankrupt the company. And virtually every person and animal in the world has some degree of Roundup exposure, so the civil liability could be thousands of times larger, and one has to wonder how long it will be legal to sell Roundup over-the-counter. The desperation in Bayer’s position is easily seen in its public statements, in which it says its plan is that all of the Roundup cases will be overturned on appeal, an outcome that legal observers say is unlikely.

In Europe, the company collected files on p.r. targets with detailed information that appear to go beyond what European law allows. An investigation is underway in multiple countries. That is, it looks like the company was preparing to bribe and blackmail journalists, scientists, and others and may indeed have done so already. Though Bayer so far has been able to distance itself from what it says was a Monsanto initiative, Bayer’s own history is dodgy enough and there is no telling what an investigation might turn up.

Roundup and blackmail are not two isolated problems at Bayer. Roundup is certainly not the only toxic product Bayer sells. Toxicity is inherent in the fields it works in. So too, apparently, is deceptive marketing. The agribusiness sector that Bayer tries to dominate uses, to cite just one example, pictures of cows in fields to sell milk from cows kept in concrete cells. When examined, this will likely be found to be illegal in countries like the U.K. that have truth in marketing laws.

Even in the absence of scandal, Bayer may have accumulated so much market clout that it works against the company's fortunes. Bayer depends on national laws to protect its exclusive rights to product categories at the same time that it wields its clout against those countries’ national economies. Countries are likely to respond defensively with technical legal changes to reduce the risks. Technical changes in the legal status of seeds would be too obscure to explain to the broader public but could pull the rug out from under Bayer’s dominant market position in one country after another.

No one disputes that Bayer blundered badly in its acquisition of Monsanto. Is it too late for the company to recover? Maybe not, but I don't think anyone can say with confidence.

Saturday, April 13, 2019

When Cars Are Mostly Electric

What will it look like when most of the cars are electric? That’s a threshold that seemed unimaginable to most of the auto industry — until it happened.

It happened last month in Norway. Car buyers bought more electric vehicles than fuel-burning vehicles. From NPR:

The 58 percent share for electric vehicles in March was a bit of a fluke, with a flurry of car sales after a period of limited supply that kept buyers waiting. Don’t expect electric cars to take a 50 percent share again in April or May — but it will happen again, and within a year or two, it will be the norm. Electric vehicles had a 30 percent share in 2018, and that number will grow in 2019.

That’s a far higher level of adoption than in the United States, where electric cars are likely to reach a 5 percent share for the first time in 2018. The U.S. market is almost 100 times the size of Norway’s, so that means more electric cars are sold to U.S. drivers. Still, the experience in Norway is important in making the idea of having mostly electric cars look attainable and familiar.

Wednesday, March 27, 2019

Replacing with the Same Model

I think it has become a trend: consumers replacing broken appliances and computing devices with the same model they had.

This is hardly the behavior that manufacturers and retailers expect. They expect shoppers to be looking for the latest, most advanced designs. But this isn’t always what shoppers want. The same way that you might postpone the purchase of a replacement for a device until the device actually fails, you might choose to replace the device with the design that you are already used to.

The purpose is to minimize the disruption. You don’t have to learn something new when you replace a device with another one that is exactly the same. There are no new processes to learn, no working habits to change.

There can be emotional reasons to keep things the same. In a world of constant change there is some relief when even one small change can be postponed. On two occasions I remember making a dumb mistake that destroyed a kitchen device. I bought a replacement that was not just the same model but the same color so that I could pretend that the error and damage had never happened.

It is the resistance to learning that seems to be the deciding factor, though. Since last year, iPhone sales have been sluggish because potential buyers were put off by the large number of new features. When combined with an ultra-high price and a high degree of uncertainty about the usefulness of the new features, people decided to hold on to their old phones for a few more years.

The same effect can be seen with devices as prosaic as coffee makers. I just today sold a coffee maker online, and I got a higher price than I would have guessed, comparable to the prices shoppers paid for them when first released five years ago. It surely helped that I am not a coffee drinker and had never used the machine I was selling. The most likely reason for the purchase is that the buyer wanted to replace a broken machine with a new one that was just like it.

I can relate to that kind of thinking when I look at my desktop computer, a Mac Pro made around 2010. That makes it nine years old as I write this. A more efficient Mac Pro was introduced just three years later, but the difficulty in configuring it, along with a new higher price, dissuaded me and most of the computing world from buying it. Instead, millions of computer users are waiting for the new-generation Mac Pro to be introduced next, probably this year.

When the 2013 Mac Pro came out, I was working on one of the original 2006 Mac Pro designs. Those became obsolete around 2015, and I have upgraded by buying old machines on the used market. It was an easy adjustment for me to make. I could literally slide the hard disk drive out of the old Mac Pro and into the new one, then carry on almost as if I were working on the same computer as before.

This approach has its limits. Eventually, Apple’s macOS will no longer support the 2010 Mac Pro I currently use, and it has the other problems you would expect in a nine-year-old computer. Last week I had to replace the optical drive after it failed. One of the chips, a memory chip I think, has become unreliable when the computer is cold, and I am working around that problem by never turning the computer off or allowing it to sleep. That is hardly an efficient strategy, but the energy costs are lower than those of buying another computer, even another 9-year-old computer on the used market.

Similar problems arise with the old coffee makers. A coffee maker is not so sturdy that it is likely to keep running for another five years, but if it does, it will eventually become hard to find the supplies for it. But even a few years of postponing an inevitable change may be worth it if it allows the user to skip an entire generation of technology, so that a whole set of skills never has to be learned.

Manufacturers gain more sales by introducing new models and new features every year than they lose by turning away potential buyers who would rather have the same thing as before, so the regularly scheduled design upgrades are not about to go away. Buyers who want to replace a broken device with something identical will mostly have to navigate the used market. In the bigger picture, this is a good thing. Fewer raw materials are needed for factories and old equipment is delayed in getting to the landfill.

In some cases there are market opportunities to provide devices that mimic popular designs that are no longer available. The most popular iPhone form factor ever was that of the iPhone 5, 5c, and SE. Now that the iPhone SE has been discontinued, there is an opportunity for a manufacturer to provide a product that resembles the discontinued phone as closely as possible. Consumers might choose that product if they believe they can avoid the learning curve that goes with finding their way around a new design.

Or maybe not. Maybe phone users who break their iPhone SEs will buy used iPhone SEs as replacements. Maybe Apple will fill this niche itself with a new model that copies much of the look and feel of the iPhone SE.

Products are more diverse and complicated than ever, and the complexity is a burden on consumers. It is no surprise if they are responding by looking for ways to reduce the complexity.

Wednesday, March 13, 2019

Lumber Liquidators Settles Over False Statements to Investors

At the height of its formaldehyde scandal, Lumber Liquidators issued a blistering public denial. It said that its flooring materials passed tests. It said workers at the factory where the flooring was made had nothing to do with its manufacturing. It said it had stopped purchasing flooring from the factory at issue. The denial sounded unlikely at the time, and we now know none of it was true. Virtually the entire statement contradicted what company officials had known all along. The lies were intended to mislead investors, the SEC ruled, and the company has now agreed to pay a $33 million fine.

The fine is nearly the same amount the company paid in settlements with consumers who faced a risk of various illnesses including cancer from the chemical exposure. The proportions reflect the priorities of U.S. law, under which misleading investors is every bit as serious as intentionally harming public health.

Friday, February 22, 2019

Playing Catch-Up at Kraft Heinz

Analysts today are comparing Kraft Heinz to Anheuser-Busch InBev. In both cases, conglomerates of high-chemical consumer brands are trying to compete by cost-cutting.

I don’t drink beer so I can’t vouch for the aptness of the comparison. I have seen my beer-drinking friends switch almost entirely from factory-made beer to local craft beer over the last twenty years, and it is a transition that has happened without much discussion. From the outside, it looks as though factory beer got so icky that drinkers went looking for any available alternative.

The story with Kraft Heinz’s packaged food brands in categories such as sausage, pickles, ketchup, and cheese sauce is similar. The general strategy of the conglomerate is to homogenize a product as much as possible, add as many low-cost chemicals as they can get away with, and present it in a package that can be kept on the shelf for years. It is not the way most consumers these days would ask you to manufacture a packaged food.

The Kraft Heinz brand that is losing ground the fastest is Oscar Mayer, and I can easily imagine why. I remember in my childhood getting the chance to try out this brand, and no one could explain to me how it could be a food that people would select voluntarily. Kraft and Heinz, though, were two of my go-to brands for many years, and then I raised my sights at the same time that the factories were lowering the quality of their recipes. Heinz has fallen to about sixth place on my list of preferred ketchup brands, but I see Kraft as a brand of last resort, a product I probably haven’t purchased in ten years, though I would still eat it if I had nothing else to choose from. In both categories, ketchup and macaroni and cheese, my own personal consumption fell by more than half perhaps five years ago as I opted for more fresh and nutrient-dense foods. Even if the Kraft Heinz brands could somehow hold their market positions, they are selling into a declining space.

Other food shoppers are making this same journey now, it seems, looking for better food choices and trying new brands. Kraft Heinz is trying to adapt, but slowly, without doing anything sudden. It must now contend with several newer brands that have more credibility in niches like ketchup and macaroni and cheese. It is trying to catch up, yet is unwilling to change as quickly as its competitors can.

The news from Kraft Heinz today is complicated, to say the least. There are multiple accounting controversies and investigations, all seemingly unrelated to each other and to the company’s core problems. An eye-catching $15 billion write-down that surely looks scandalous to the casual observer and must have been the main thing prompting a 27 percent decline in the stock today doesn’t seem to connect to the larger trend, in which more supermarket shoppers are trying to stay away from the traditional high-chemical approach that has dominated packaged food since the 1980s.

In a way, Kraft Heinz is another HP-Compaq story — major brands combining just so they can decline together. In a few more years, Kraft Heinz’s total sales could be about the same as either of its two predecessors, only to go down from there, the same thing that happened to HP and Compaq.