Tuesday, December 11, 2018

UK Plan to Leave EU Collapses in Pool of Recrimination

As I write this, the plan for the U.K. to leave the EU lacks support in Parliament. Vote-counters estimate that two thirds of Parliament would vote against the plan. The vote that had nearly been placed on the schedule has been canceled. A vote on a “softer” alternative plan has also been called off. As of today, the government has no plan at all. It is probably too late to approve any measures to manage the UK exit from EU before the date that is scheduled to happen. How did we get to this point?

Looking at it one way, this is a situation set up by the laws of the EU. The law does not make it easy to negotiate a phased withdrawal. In practical political terms, this requires a consensus among EU members and enabling legislation passed by the leaving country. That is a broader base of agreement that politicians are used to dealing with.

Looking at it another way, you can place all the blame on the British Prime Minister. There is only one game for leaving the EU: prepare a consensus plan from the beginning, then persuade all parties involved that it is the only possible plan. The British government did the exact opposite. It delayed for a year with no plan at all and no serious study of the issues, then presented a plan intended to abuse its position to gain advantage. By some miracle, this plan was approved at the EU level, but there was never an effort to sell it to voters or Parliament. People are just now learning the details, and when leaders ask why certain things were done a certain way, there is no explanation. That is not the way you persuade stakeholders that your plan is the only possible solution. Doing so requires being able to explain why any possible alternative would create terrible problems somewhere that no one has a solution for. If you intend to pass a plan by decree without the ability to defend it point by point, it will go badly.

I don’t think anyone knows where the “Brexit” process goes from here. There is no constructive dialog going on in Parliament that could work out the issues involved. Some observers believe that the U.K. will remain in the EU, not just because it is too late to fix the plan, but also because the referendum that approved the U.K. exit from the EU might not be legally valid. Some who support the EU exit or who worry about the EU coming apart at the next global economic crisis now think this is the wrong time. Such a complicated maneuver should not be done without leadership, and there is no real leadership in the U.K. right now.

But the other alternative is the “hard Brexit” suggested by EU law, followed by piecemeal measures after the fact to try to undo some of the damage. This remains a very real possibility, but the human impact would be severe. A large number of workers, on the order of a million, would be affected directly. These are workers with jobs in foreign countries. They could lose their jobs immediately or lose access to their jobs as soon as they travel between countries. There would be a recession in London and possibly in all of Britain as a hundred large companies move offices to other countries. The main reason this scenario remains a possibility is that under the law, “hard Brexit” is what happens by default if British policy continues its current drift and no further formal action is taken.

The statement below from EC President Donald Tusk is indicative of the state of affairs as of last night. No one knows what to do.

Monday, December 10, 2018

The Electric Truck Transition Will Go Faster Than Electric Cars

It’s taken a century for the electric car to get a good, strong foothold in the market. Electric trucks are a harder problem to solve because a truck requires so much power compared to a car. Therefore, it will take electric trucks an even longer time to start to build market share. That’s the conventional view of the upcoming transition in trucks, from the viewpoint of the auto industry. But that is the wrong way of looking at it.

The real obstacle holding back electric vehicles is the battery. For the ideal electric vehicle, the battery should be smaller and lighter than the batteries used in vehicles today — and not just a little smaller and lighter. To overtake the internal combustion engine on its own terms, batteries should be about one third smaller and one third lighter. To compete strongly in initial selling price for cars, batteries should also be about one third less expensive.

The most important point to understand about the transition to electric vehicles is that there is nothing to stop this advance in battery technology from happening. It is a simple, well-defined problem in materials engineering, so simple and so well-defined that the answer could arrive on any given day and be out on the road in prototype form one week later. How quickly it could go into mass production is a more complicated question, and experts have varying opinions, but there is a consensus that it will happen sometime between 2019 and 2060.

Note, however, that no such breakthrough is necessary for electric cars to dominate the market. As I have written before, electric cars are so much more durable than fuel-burning cars that they can eventually dominate the roads with a market share as low as 2 percent at the point of sale. It is the same way that LED light bulbs dominate home lighting even though about half of light bulbs sold are still the low-efficiency fluorescent and incandescent types. The product that lasts longer holds its space in the world for longer. The product that lasts only a few years has an exaggerated share of product sales because it is constantly being replaced.

Already electric cars are at or approaching a 1 percent market share, so the pace of deliveries does not have to pick up much for them to take over the roads in the long run.

Something that has always separated cars from trucks is market concentration. Roughly 50 well-known brands own virtually the entire car market. That has never been the case with trucks. There are hundreds of truck manufacturers. The cost of entry is relatively low. Any automotive engineer and mechanic with a drive-in warehouse space can build their first truck. Truck building does not require an assembly line or even a factory.

One way of understanding this is to look at how long trucks last. I remember being amazed at the stories of cars that ran for 200,000 or 300,000 miles. For a pickup truck to be equally amazing, it has to pass 1,000,000 miles of driving. That is because, in a practical sense, a truck can be completely rebuilt, or as much as necessary, in the repair shop. There is no part of a truck that can’t be replaced if you want to do the work.

This also implies that, with only a moderate level of guidance from an engineer, a mechanic could remove the engine and fuel tank from a truck and replace them with a battery and electric drive. This means that electric trucks could get a foothold in the market without even having a manufacturer. For all I know, there are already well-tested published designs for converting a Chevy Van or Ford F-150 pickup to electric. If those do not yet exist, they will be coming before long.

There is nothing to stop engineers from taking existing truck components and putting them together with components created for electric cars to create an electric truck. It is probably too complex a problem for a single engineer working alone, but certainly not too complex for a small number of skilled engineers collaborating over the Internet. This means that as soon as problems are solved in electric car design, the same solutions are available for use in trucks.

So electric trucks would be inevitable even if there were no manufacturers. But there are manufacturers, such as Rivian, a tiny company profiled by CNN Business. The small scale of any electric truck manufacturing operation tells you how small the cost of entry is. That means there will be many more — so many companies competing that the market leaders in fuel-burning trucks may not be able to catch up once the market starts to shift.

Companies like Ford and General Motors are starting to shift away from fuel-burning cars because it is already evident that that market is getting away from them. They will try to make the transition in SUVs and light trucks. But they will have to move quickly. If they try to manage the transition on their own schedule, they will wake up one morning to discover that that market is gone too.

Tuesday, December 4, 2018

General Motors Cuts Back on Fuel-Burning Cars

We can add General Motors to the list of auto manufacturers scrambling to catch up with the changing car market. In a series of adjustments rumored in November and since confirmed, General Motors will close half of its car manufacturing plants in North America over the next three years, and the rest may last only a few years longer. Some observers see General Motors shifting car manufacturing to overseas factories, but that is a false picture created from mistaken assumptions. The factories that remain overseas will also have to cut back in the near term and are also at risk of being shut down in the coming years as demand for fuel-burning cars dries up.

I have seen complaints that say General Motors is cutting back too much, too soon, and politicians in both the United States and Canada have suggested that the company might be persuaded to reconsider or delay its cutbacks. This shows how poorly people remember history. It was just this mistake that brought the old General Motors to the brink of bankruptcy in 2008, leading into its 2009 bankruptcy reorganization that created the current General Motors. People, I think, forget the time scales that a major auto maker must deal with. General Motors has to plan out its designs, supply chain, and manufacturing capacity three years in advance. It is far more costly if such a large and cumbersome organization has to move faster than that. What will the demand for fuel-burning cars be three years from now in the 2022 model year? To be blunt about it, there is no assurance that anyone in the world will still be buying new fuel-burning cars at that point. By then, demand for fuel-burning cars will have fallen off so much that, in theory, the entire demand could be met with used cars. General Motors is betting that many of its wealthier customers will still be buying its new cars at that point, and it seems like a good bet to me, but when you look at how much money is at stake on what is essentially a consumer whim, it is understandable if the company is nervous.

As it closes factories, General Motors is eliminating many of its car models. The list notably includes the Volt, the ill-advised hybrid design that combined an electric drive with a gasoline-powered generator. It was a money-losing proposition from beginning to end, undertaken mainly as a public relations stunt. The Volt got the attention the company was looking for, but it never gained the credibility its designers had hoped for.

Some of the auto industry speculation is that people will be less interested in owning cars as new designs make them more reliable. We may become a nation of renters when it comes to cars. This doesn’t necessarily mean that drivers will drive less, but there will be fewer total cars, with fewer cars sitting idle on any given day. This would seem to imply less manufacturing and more maintenance in the future of cars, though it is hard to be sure. The important thing to note is that fuel-burning cars will not be cost-competitive whether people are renting or owning.

Consider the risks if manufacturers cut back capacity too quickly. Some of the remaining factories might have to work two shifts to make enough cars. There could be a shortage, prompting a few buyers to go for used cars instead. This is not so bad. Balance that against the risk if manufacturers keep more capacity than they need. There could be billions of dollars in unsold inventory in dealer lots and in rented parking lots in Detroit. The auto manufacturers could go bankrupt and all their factories could close. That is a bigger problem, and that is the scenario that General Motors is trying to guard against.

While the focus is on cars right now, light trucks will follow just a few years later as battery technology advances and scales up, and heavy trucks just a few years after that. What happens to cars will eventually happen to the rest of the industry.

The political rumor machine has it that the United States will eliminate all subsidies for efficient and low-emission vehicles. That move probably makes sense at this point. Subsidies may have a place as a way to get a new approach off the ground. It hardly makes sense to use them as a way to speed the old guard into bankruptcy.

Monday, December 3, 2018

Retail Traffic Picks Up

A full week has gone by since Cyber Monday, and there are a few answers about Black Friday and the current holiday shopping season. Retail traffic has picked up since Black Friday. The Saturday that followed Black Friday was nearly as busy at retail as Black Friday itself, from what I could see, and that is a striking departure from the last few years. Cyber Monday showed a healthy increase in purchases from last year. The usual pattern of after-work shoppers was very much in evidence where I was last Wednesday and Thursday. Then Friday and Saturday, a week after Black Friday, were at least as busy as Black Friday was. On both weekends, shopping dropped off when Sunday arrived.

Black Friday, then, is a shopping holiday in search of a purpose. The gimmick of getting shopping families out in the middle of the night can’t be very profitable for the retailers who go all out to make it happen, nor could it be good for employee morale. The use of high-profile loss leaders on Black Friday isn’t working if shoppers get their purchases before 2 a.m. and head home, not to return to the same store for the rest of the year.

The idea of Black Friday won’t go away, but retailers are approaching it all wrong. Instead of trying to make a few one-off sales to the most hard-core bargain shoppers, retailers might do better to try to appeal to family shoppers on a day when students are not in school. A sensible Black Friday special might be on an item that parents will buy for their children with the children present — children’s winter coats, boots, shoes, and socks, perhaps.

Black Friday fell especially early on this year’s calendar, and that could have been a factor. Perhaps the low traffic on Black Friday reflects a growing split in Christmas shopping, in which one faction tends to complete Christmas shopping before Thanksgiving and the other postpones most purchases until the last two weekends before Christmas. If this is what is happening to Christmas shoppers — and it is consistent with what I am seeing — then Black Friday falls squarely in the dead zone between these two groups, presenting a special difficulty in appealing to either group. Looking at this trend, the prospect of renaming Black Friday as Don’t Buy Anything Day looks like it might have a chance.

Does the bleak Black Friday mean that Christmas shopping is reversing its trend of the last two decades, to shift from November to December? I don’t think that’s possible. A plurality of shoppers buy presents that have to be shipped to their recipients, and consumers have come to accept that such shipments have to be sent out no later than the first week of December to have reasonable assurance of arriving in time for Christmas. The people still shopping on December 7, then, either are buying just for their own household so that nothing has to be shipped or have decided to accept the possibility that their gifts might arrive several days late. I don’t see how either rationale for late Christmas shopping could increase suddenly or by very much. The current mail crisis in Canada, in which a job action has resulted in a four-week backlog of packages in the mail, is a reminder of the risks that gift-givers face by trying to do their shopping in December.

Another observation from the current shopping season is the large number of major retailers with extended online outages on Cyber Monday and the five days before. This comes after a relatively clean, trouble-free online shopping season in 2017. Maybe 2017 was a glitch, but the way I see it, the more likely explanation is that retailers have become overconfident after a clean 2017. One indication of this is that it appears that the cross-selling engines used by retailers provided the excess load that crashed web sites leading into Cyber Monday. On some sites, I have heard, the product pages loaded just fine at the same time that the front page, category pages, and search pages remained inaccessible for hours at a time. This is surely a sign that a cross-selling strategy that targeted users arriving at these pages was overloaded by the near-record volume of shoppers. Deciding what product to recommend to a specific known customer is a computationally intensive real-time process, but it was a mistake for retailers to lean so heavily on their cross-selling algorithms that their sites became inaccessible to customers who only wanted to buy a specific product. There is nothing commercially wrong with having such an advanced cross-selling strategy, but by next November, retailers will be looking for an approach that can fall back to something more efficient instead of shutting the site down when shopper traffic exceeds server capacity.

The disappearance of the Black Friday crowds has far-reaching implications for retail capacity. For a lifetime, retail floor size and parking area has been tuned to the Black Friday crowds. This year there were no Black Friday crowds. Few parking lots were more than 25 percent full at any point, and that means that the stores too were uncomfortably below their shopping capacity. Stores and parking lots alike could be half as large and still easily accommodate the peak shopping crowd of the year. Alternatively, we could get by with half as many stores. More retailers will be looking to emulate the small footprint of specialty retailers like Gap, Apple, and Victoria’s Secret, and that could lead to a decline in total retail real estate. Another scenario is that retail chains resist the need to slim down, leading to a parade of retail-chain bankruptcies over the next decade.

Returning my attention to the current season, my feeling is that we hit a brief early-December lull through the middle of next week, followed by more hectic after-work, Friday, Saturday, and Sunday shopping periods. Christmas Eve, falling on a Monday with many workers having the day off, could be busier than usual.

Friday, November 23, 2018

What Happened to Black Friday?

I made a point of going out shopping today, and my reaction, in a few words, is: What happened to Black Friday?

For years I have attempted to assess the mood and energy level of holiday shoppers. I have not written so much about it this year now that I have reduced my own shopping and and am not out in the stores so often. My general impression so far this season, though, is strikingly different from recent years. Shoppers are more mellow than I remember seeing. They aren’t in a big hurry, don’t feel that they need to buy anything, and aren’t expressing much financial pressure.

This kind of shopper is good news and bad news for retailers, isn’t it? These are shoppers who can take their time to look at merchandise and who are able to buy. On the other hand, they have to be persuaded to buy, and it is hard to guess how that can be done. They will be perfectly happy to walk away empty-handed.

Today is Black Friday, and I went out to the stores at 10 a.m. and a second time at 3 p.m. I made purchases at three stores, visited several more, and drove past more than 100. Things just weren’t very busy anywhere. Busy, yes, but no more so than any Saturday in October when I saw people doing their Christmas shopping early so they could avoid Black Friday. Some parking lots were half full, but most, much less than that. No one had to look for a parking space at any store I saw. Most stores had only one or two cash registers open. If the level of traffic I saw today is any indication of the shopping season, retailers in general and Sears in particular are in some trouble.

My largest purchase was at the Thorndale location of Sears subsidiary Kmart, which is halfway through its store closing sale. I was chagrined at how few people were there when I arrived at 10 a.m. and took this photo of the parking lot. Remember, this is the most-hyped shopping day of the year, and it is the middle of the biggest and last sale in the history of this particular store. Almost no one was there. There were two cash registers and very short lines.

I had heard stories about bare shelves at Kmart stores, and my visit bore that out, but not in a good way. About 10 percent of the displays were empty or nearly so. I bought the last rope and nearly the last drill bits in the store. The grocery aisle did not have much left. Yet most of the store was excessively stocked, as if the company was planning on two or three times a normal level of seasonal shopping traffic. Even with store-closing discounts, most of this merchandise cannot possibly be sold if the store is to close days after Christmas as planned.

There were hundreds of racks holding fall and winter clothing. That must be millions of dollars of clothing in the store, and I did not see even one shopper looking at the clothing. Holding so much inventory that will have to be sold to liquidators a month from now is a disaster for a company that, in case you haven’t heard, is already in bankruptcy. Sears Holdings needs every Sears and Kmart store to have an above-average holiday season to have a chance of keeping stores open, and in the Kmart I visited there was no sign of that.

Though the near-empty Kmart parking lot would shock more than a few observers, traffic was not much better in the adjacent shopping center. The area was affected by an freak cold snap with high temperatures barely above freezing today. Retailers will tell you they like cold weather and snow piles because it reminds shoppers to buy winter clothing, but the effect is lost if everyone stays home.

Traffic had picked up slightly by the time I went out again, arriving at my first stops around 3 p.m. Traffic at many stores was no more than a regular business day, but some stores were especially busy. The two stores that had heavier traffic than I would expect to see on a Black Friday were department store Boskov’s and pet-supply store Petsmart. Each, I suppose, is family-friendly in a different way. I want to be careful not to understate the importance of a shopping day on which the schools are closed and families can go shopping together. These two stores aside, from what I saw, Black Friday was more hype than substance.

Some stores I visited had no Black Friday specials at all, despite having made a practice of it in previous years. The store that put the biggest Black Friday circular in my mailbox on Wednesday was Walmart, but its parking lot was only about one fourth full when I went by around 4:15 p.m.

I made special note of Barnes & Noble, one of the largest retail chains on bankruptcy watch this season. It had shoppers when I drove by, but there were plenty of empty parking spaces too. It was no more traffic than you would expect to see on a regular weekday evening, but surely today’s shoppers were buying more.

Has Black Friday disappeared from the calendar? I wouldn’t want to hurry to reach that conclusion based on my own observations. From what people are telling me, the real action was during the night. The hard-core shoppers were out as early as 7 p.m. the night before (yes, that’s Thanksgiving Day) to shop late into the night, or all night for some of them. At the major retail chains that had the most aggressive promotions, I am told, parking lots were more crowded between 11 p.m. and 3 a.m. than they were between sunrise and sunset. Some stores had parking lots more than half full in the wee hours of Black Friday, only to see them empty out before daybreak.

Even if overnight revenue was good, this is a sad and perverse situation. Six hours of heavy breathing in the middle of the night does not necessarily make up for a lost day at retail. What does it say about the state of retail that, with a set of bizarre and unpredictable incentives, they can get shoppers into the stores at all hours of the night, but they still can’t bring anyone in to buy during the day?

So was this lackluster Black Friday the high point of the shopping season, or will shoppers who stayed home today turn out to do shopping on another day when the weather is more favorable? I don’t believe history can be a guide. It is safe to say we have never seen a Black Friday like this.