Category Archives: Technology and Society

Technology and Society

The Economics of Tesla Direct Sales

BY Roger Huang

TESLA’S DIRECT SALES MODEL

This is a guest contribution from Sharon of americasstartup.com.

America’s Startup

Check out her Tumblr at americasstartup.tumblr.com.

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A LOOK INTO THE ECONOMICS OF TESLA DIRECT SALES

When I first heard that states were not allowing Tesla into the market because of their direct sales business model, my first reaction was – “whaaaaat?!” Now after some research and a re-visit of the
economics theories I learned in my UCLA days, my (now educated) reaction is –“whaaaaat?!”

To those who may not understand the situation, a quick introduction– In recent news, New Jersey banned Tesla from selling its cars directly to the consumer. One may think, that’s one state, no big deal. But it’s not just one state, it’s another state, and there’s the fear of a ripple effect with New York and Ohio possibly going in the same direction as New Jersey.

The history behind the legislation of no direct sales to the consumer within the automotive industry dates back to the mass production of cars aka back to Ford. At that time the economic model
concerning dealerships made sense from both the manufacturers’ and the consumer perspective.

It’s no secret that the automotive industry has some of the highest fixed costs in regards to manufacturing.

Tesla Direct Sales Economics with code(love) from University of Regina

Historically – a manufacturer’s perspective

It’s no secret that the automotive industry has some of the highest fixed costs in regards to manufacturing. Due to this fact, manufacturing is usually isolated to distant areas in order to drive volume (maximize factory utilization) and maximize economies of scale. One problem is solved: the per-unit cost of each manufactured
car reaches its minimum – but new problems arise.

Firstly, there is a cash flow issue. The necessary investment needed to produce the cars (cash out) and the lead-time to which the cars are sold (cash in) easily results in illiquidity without a middleman digesting the inventory in the short term.

Secondly, if the element of time is included in the normal demand and supply curves it is understandable that the delay in sales to consumers (demand) does not match the rate to which the
cars are manufactured, resulting in large stocks of inventory, which requires storage, an additional cost to the manufacturer.

Today – The Internet’s effect on industry and Tesla direct sales

Of course certain elements to the automotive industry remain the same, i.e. capital-intensive investment. However, that being said, Tesla has a different business model that threatens to challenge and disrupt this, a Dell for the automotive industry.

At the time of what is now being called the “Great Recession”, I was working on Wall Street in a bulge bracket investment bank and I understood quite clearly the factors that led to this massive balance sheet correction and re-adjustment in asset pricing. I am not arguing that the automotive industry caused the recession; however, I bring it up as a relevant point because of the massive amount of inventory that could not be sold on the dealership level when the economy crashed.

This was an operational disaster when demand shriveled to zero and the lead-time to halt the supply to the market resulted
in the need for government bail out. Fundamentally, the dealership business model is an economic inefficiency and was used at the time as a Band-Aid to facilitate mass production. But we are no longer living in the 1800s. With the easy access to information, the Internet has changed the landscape of B2C interactions.

We are no longer living in the 1800s. With the easy access to information, the Internet has changed the landscape of B2C interactions.

A “consumer’s” perspective according to the Middleman

The economic rationale for the middleman has always been the consumer’s protection from monopolistic pricing. To truly understand this point it’s important to understand the economics of a car dealership. There are two main revenue drivers within a franchised dealership, 1) the mark-up in price for service and parts and 2) mark-up in price for the car. Now consider the costs related to a dealership, there is the physical location, the labor, the overhead, the marketing and publicity, etc. All of which is paid by the mark-up.

Although slightly dated, Goldman Sachs put out a research report in 2000 regarding, savings in the “vehicle order-to-delivery cycle from build-to-order, direct manufacturer sales.” Based on an average vehicle price of $26,000, Goldman Sachs estimated a total cost savings in the order-to-delivery cycle of $2,225 or about 8.6%. Since 2000, GM has experienced great production efficiencies in its direct manufacturing sales in Brazil that also proves an interesting point in light of this topic. At the end of the day, the underlying economic principle is the consumer loses when there is a middleman.

Why would the dealership lobby their butts off to keep the status quo? I would argue – survival. Let’s think another startup—Dell. Although Apple ultimately changed the nature of the
computing demands of the World, Dell’s just-in-time model was a huge disruptor to the market that ultimately led to lower prices for the consumer, customization, and contributed to the demise of its
middleman Circuit City and Best Buy.

Tesla Direct Sales with code(love)

Concluding Remarks

Two hundred years ago Tesla direct sales to the consumer would not be possible because of limitations to technology and information. But now we have the Internet.

Technology has been the single greatest contributing factor of GDP growth within the developed world. We have seen this transformation before. My older sister bought CDs at the music store when she was young, but now she buys music online. Before computers were bought only at Circuit City and Best Buy, now computers are bought online.

In The Post, Buchwald was quoted as saying, “We shouldn’t change the rules midstream just as a company is starting out. Tesla’s goal is to sell cars, not upend the rest of the auto industry.” To this, I say maybe it is time to ” upend the rest of the auto industry.”

I support the American Dream. I support entrepreneurs. I support Tesla being able to make direct sales to consumers.

I support the American Dream. I support entrepreneurs. I support Tesla being able to make direct sales to consumers.

– Sharon
Founder | Producer of America’s Startup, LLC

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Technology and Society

A Technologist’s Take on Ukraine, Venezuela, and the Arab Spring.

BY Roger Huang

The Obama Administration and its’ allies have successfully scaled democratic ambitions, and American ideals across a variety of theatres. Jared Cohen, formerly of the Department of State and now head of Google Ideas, and Wael Ghonim, MENA manager at Google were instrumental at lighting sparks for Tahrir, and scaling the will of the people.

In Ukraine, many of the NGOs on the field were funded by US aid, and Pierre Omidyar of EBay fame. The breathtaking use of social media to quickly spread revolt from Venezuala, to Egypt, to Ukraine, tapping into the underlying wishes of the people, and multiplying it, has been a revolutionary change in how the people express themselves.

America’s support for these programs is, in turn, a revolutionary change in how America spreads its’ ideals.

Gone are the days where American soldiers died in droves to win international disapproval to “force democracy”. This new way of growing democracy organically is the largest threat to authoritarianism, and the regimes that have the most to lose know this.

The implicit threat is this: if America can help Egyptians occupy Tahrir Square, and Ukrainians occupy the Maidan, what stops her, with enough time and tech-savvy, doing the same thing for Russians in Red Square, and the Chinese in Tiananmen?

The implicit threat is this: if we can help Egyptians occupy Tahrir Square, and Ukrainians occupy the Maidan, what stops us with enough time and tech-savvy, doing the same thing for Russians in Red Square, and the Chinese in Tiananmen?

Putin may have some affinity for Crimea. The larger prize he might be looking for is drawing a red line between what is happening now and what could happen in Russia.

Technology and Society

A Letter I Sent To My Elected Official on Privacy

BY Roger Huang

With the latest revelations on the British security services tapping into webcams and storing video data en masse, I don’t think it’s acceptable that anybody can sit back and not register their voice in the face of our eroding collective privacy.

I highly encourage everybody to send letters to their elected official. Here is mine:

I’m writing because with each passing day, revelations are getting worse and worse about the surveillance capabilities of security agencies. Just today the Guardian revealed that the GCHQ, our British allies, collect webcam recordings en masse, including sexually explicit material shared between two consenting individuals.

We know the Harper administration is stuck as being part and parcel of Five Eyes, and that the CESC has conducted spying for the NSA, using Canada’s good name for nefarious purposes.

I write this in the hope that you are aware of this issue, and to inquire as to what you and your party are doing with this regards, and what active efforts you will be making in the future to shed awareness about this creeping invasion on our privacy. As Canadians, we should be protected under Section 8 of the Charter with regards to reasonable expectation of privacy, but I do not want this to constantly shift because security agencies continually push us down the slippery slope Senator Church so eloquently warned Americans about during the Church Committee:

“If this government ever became a tyrant, if a dictator ever took charge in this country, the technological capacity that the intelligence community has given the government could enable it to impose total tyranny, and there would be no way to fight back because the most careful effort to combine together in resistance to the government, no matter how privately it was done, is within the reach of the government to know. Such is the capability of this technology.

“If this government ever became a tyrant, if a dictator ever took charge in this country, the technological capacity that the intelligence community has given the government could enable it to impose total tyranny.”

I don’t want to see this country ever go across the bridge. I know the capacity that is there to make tyranny total in America, and we must see to it that this agency and all agencies that possess this technology operate within the law and under proper supervision so that we never cross over that abyss. That is the abyss from which there is no return.”

Let me know how I can contribute to any efforts with this regards. I hope you are well, and eagerly await any response you have on this topic.

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Why is this debate so important?

Technology and Society

Accelerating Forward

BY Roger Huang

Are you thinking of the day you can go online, download a set of prints for your cup, print it out, drink from it with juice you have purchased with a virtual currency generated by machines?

That day is today.

To have lived one hundred years in the last century would have been generous. The next one hundred, including the time we live in now, will be positively thrilling.

As much as airplanes were thrilling years ago, the concept of personalized genetic sequencing, and medicine, interstellar travel, and technological singularity—the evolution of smarter-than-human artificial intelligence—have been fascinating: and now, very, very realizable, with several enterprises on the cutting edge of delivery— SpaceX, 23andMe, and IBM with Watson.

As the Wikipedia entry ominously predicts of technological singularity: it is a theoretical moment in time that will “radically change human civilization, and perhaps even human nature itself.” We are going to be living through several of those moments as technology in different fields progresses. What will this mean?

Countdown the Singularity with code(love)—originally from http://www.singularity.com/

It will mean a new shift in the slow biological evolution of mankind towards an accelerated technological and moral evolution, based on knowledge. Moore’s law of doubling processing power every two years has become the norm across a variety of scientific fields.

There are reasonably few things that are near-certain in this, here are just a few:

Those who grasp how technology is advancing in different fields will not be surprised, and will benefit the most from it.

A premium will be placed on those who understand science, engineering, and technology. Learning those things and working with them is boss.

Shit is going to get real. There are going to be huge changes.

Keep calm and keep coding with code(love)

Humanity has held on by bridging the gap between cheap fossil fuels, and finite resources, and massive problems. Those are going to have to be tackled head-on soon.

The rest is very uncertain, none more than the element of what definitive path we choose to embark on together, and the classic question: will we do good, or will we do evil with our new capabilities?

The two stories that have struck me the deepest on this are when Oppenheimer took the scientific wizardly of splitting an atom, and was forced to construct a weapon that evaporated and damaged hundreds of thousands of people. Intelligence and technology do not grant immunity to evil.

The other story is about Ray Kurzweil, a fervent advocate of technological singularity, and his burning motivation for advancing technology: the reincarnation of his dead father in a virtual avatar, for one infinitely long conversation, transcending the time they had lost together parted by death. Technology is not something that cannot humanize, and be used to explore the complex emotions and motives that power human nature.

Ultimately, what we do with the possibilities afforded to us will determine whether the upcoming century will be one of the brightest or darkest in human history. The only certainty is that those possibilities are coming, faster than ever.

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You’re interested in printing out your design for a cup. Click here.

You’re interested in buying your juice with bitcoin. Click here.

You’re interested in learning to keep calm, and coding. Click here.

You’re interested in a deeper reflection on Ray Kurzweil. Click here.

Technology and Society

A Moral Opinion on Bitcoin

BY Roger Huang

Why ultimately the ideals of the system may triumph over its’ practicalities

On this, the 100th anniversary of the Federal Reserve System’s founding, it is worth remarking upon the mysterious Satoshi Nakamoto and his bitcoin creations.

Are bitcoins prone to speculative excess, are they under-regulated, do they have some aspects of a Ponzi scheme? Do they represent the same tired attitude of having to burn societal value (in this case electricity, processing power, and fans) to gain private value? Is it possible Satoshi will come back and show us all his true face, while taking the system away with him?

Yes to all.

However, the ideals behind bitcoin represent the technologist’s perspective on how to cut the bloated financial sector to size. Bitcoin allows for individuals to use digital means to escape the real pressing needs of dealing with conventional banking systems (such as privacy, and avoiding the double-count of money). On that rationale alone, I can support Bitcoin in principle. Bitcoin may have had its’ Silk Road, but Wachovia had the Mexican drug cartels.

If only the penalties for those responsible were equivalent. Wachovia, after all, was fined a small percentage of its’ yearly profits and allowed to largely maintain “business as usual”. In contrast, Silk Road was shut down, and its’ owner was arrested. It is abundantly clear where government power fears to tread. Eric Holder, attorney general of the United States, put it best when he declared that some banks were becoming “too big to prosecute”.

Major banks have been caught in the last five years laundering drug money, laundering money for terrorists, forging foreclosure documents, manipulating markets, manipulating key interest rates, pushing shoddy products on clients, taking on unneeded risk due to Excel errors (London Whale), and generating a whole host of economic bubbles that put food and commodities away from the reach of those that need them most. The most infuriating aspect of this is that most of the time, they did this while they were under taxpayer protection and funding.

The Federal Reserve System, while nominally supposed to act as a check on the banks, has become dependent upon them to a point where it is abundantly clear that alternatives to the bloated financial sector must be considered. While bitcoin may be imperfect in terms of some of its’ practicalities, ultimately the ideal behind bitcoin stands out as a laudable cause that will triumph in some form, sooner or later, if we properly apply the lessons we should have learned in the last 100 years.

Technology and Society

The 21st Century Prisoner’s Dilemma

BY Roger Huang

Decreasing labor in order to salvage profits, to the detriment of both

A prisoner’s dilemma is when two groups that would be better off cooperating in order to achieve a higher coordinated payout choose instead to sacrifice their better aggregate payouts because their individual incentives lead them to forgo cooperation.

Typically represented in a matrix form, one way to conceptualize it is to describe the following scenario: I and Stephen Colbert are both in prison for being fearless conservatives. We are given the choice to either be silent or to cooperate with the statist authorities by informing on the other. If we are both silent, we would get two years each in prison, if we both informed we would get three years in prison, and if one of us cooperated and the other remained silent, the one cooperating would be free, while the other who was silent would get five years.

It is in both of our private interests to inform on the other, because then we face a choice between freedom if the other was silent, and three years if the other informed, rather than in the case of if we choose to be silent, in which case we face either two years in prison if the other was silent, and five years if the other informed.

In aggregate that means instead of having two years in prison if we both were silent, we will both inform on one another and get a negative aggregate outcome of having three years in prison each because it is in our private interest to arrive to this equilibrium, since both of us will seek the better payoff of informing on the other. We will harm each other as we seek to help ourselves.

The 21st century’s prisoner’s dilemma will be that every firm will not want to hire workers, but will want every other firm to hire workers in order to have a consumer base for itself. This is because the private payoff of having less labor (and saving on what for many businesses is the largest cost) is such a powerful private incentive. Despite what other businesses do in aggregate, it will almost always be better for the individual firm to shed workers.

Unfortunately, this will lead to a worse social equilibrium. Castes of the unemployed, political and economic volatility, and staggering inequality may become the norm. Ironically, this economic chaos will then lead to lower profits, as less consumers will be able to buy most products. If left unchecked, lower private costs will be overwhelmed by higher social costs.

The 1950s saw the rise of the Great Society, the establishment of the welfare state, and of mass infrastructure projects that set the foundation of the 20th century. We will have to do even better to build the 21st century, and ensure a balence between private and social incentives.

(Now please help break me and Stephen out of prison!)