Updates on previous posts

In previous articles we’ve discussed Tesla’s innovative use of financing to help sell its products, and also how Apple have managed to pay an effective tax rate of under 1% on their foreign earnings, both of which are updated below.

Apple goes to congress & the scale of tax minimisation schemes amongst big tech companies:

A few weeks back I described Apple’s use of an innovative corporate structure that allows it to pay very little tax on offshore earnings, as long as the profits aren’t repatriated to the USA. The structure they use to achieve this is a called a ‘Double Irish with a Dutch Sandwich’ which refers to the use of 2 Irish companies and a Dutch offshore company to minimise taxes on foreign and EU earnings. Calculations show that Apple are paying an effective tax rate of <2% on their offshore earnings.

What’s emerged recently is that they’re not the only ones taking advantages of these loopholes. The list of companies that have more than $5B (i.e. ZAR 50,000,000,000) or more kept ‘offshore’ includes Apple, Microsoft, General Electric, Cisco, Google, Oracle, J&J, Pfizer, Amgen, Qualcomm, Coca-Cola, Wal-Mart and many others.

What’s most interesting to me is that these companies typically hold 80-90% of their cash reserves offshore.

If you think about it, what’s really happening here is a power-law in capitalism: the big global companies can afford to invest in such structures. This means that they get to pay far less tax and retain far more earnings than those that don’t. This means they can invest more and grow far faster. With strong balance sheets they can borrow more and pay less for their debt, so they can grow even faster. It’s probably unfair not so much because they avoid taxes, but because by doing so they have such a competitive advantage: it’s easier for them to outspend or simply crush smaller companies that may emerge.

My guess is that congress tolerates this because although these companies pay less tax, the same system has allowed these big American firms to dominate their respective global markets. Congress has probably figured out that removing these loopholes would get them a larger share of a much smaller pie…

Tesla’s battery economics get questioned:

A core concept in strategy consulting is the experience curve. While I’ll get to cover the full workings in a forthcoming article, the core concept is that costs of producing units (or more or less anything) come down as the cumulative number of units produced by the industry goes up. Note: defining the units against which ‘experience’ accumulates is the tricky part. In some industries learning is slow and the prices fall slowly. In other industries the slope of the curve is steep. Competition tends to accelerate the fall in costs. As long as your selling price is above the cost then you’re probably ok. With some analysis, these cost curves become predictable and this allows brave companies to price now based on where costs will be in future. They do this often to win market share that allows them to learn faster than competitors and drive their costs down faster than the industry. For example, when Amazon launched its S3 service (whereby anyone could store data on Amazon’s infrastructure), they priced at a rate many believe was below their actual costs at the time.

Something just like this is going on in the Electric car industry, where Toyota, Nissan and Tesla seem to make all the headlines. Its important to note that Toyota and Nissan have sold far more of the Prius or the Leaf than Tesla – they are much further down the curve (and these 3 companies are further down the curve than the rest of the industry combined).

Tesla shares have done well lately. So it’s worth noting that while Tesla has a stated aim to slash the cost of their cars by half by 2016, the core cost of these cars is their battery. If you think about, electric cars differ from petrol cars only really in their motor and their fuel source. Electric motors have been around for years and are unlikely to suddenly get more efficient. Batteries are the single place where technologies have to advance to make the cars more affordable and more useful – their limited range is the biggest issue at the moment.  The problem for Tesla is that few experts believe the cost of the battery will drop by more than 30% in this time. So Elon Musk needs to take care that his cost curve (which falls at only 30%) doesn’t end up higher than his price curve (which he wants to fall at 50%). The bottom line is that savvy analysts are urging caution about the bet on falling battery prices that Tesla shares represent…