Chinese innovation, Tesla’s profitability, the migrant caravan and the market plunge

Did I ever mention that the South China Morning Post is one of my favorite reads? You’re going to see a lot of articles from it into today’s daily post because it is a great source for information about China. And today, it had a few tech stories as well. So, let me lead off with one that was particularly interesting.

This driverless tech start-up aims to replace 15 million truckers in US, China

Chinese artificial intelligence (AI) start-up TuSimple has deployed autonomous trucks on commercial runs between Tucson and Phoenix in Arizona and Las Vegas, Nevada, as the company prepares to ramp up its operations in the world’s two largest economies by next year.

That trial programme in the US, where its two trucks transport consumer goods at speeds of up to 104.6 kilometres per hour on their routes, is generating about US$6,600 a week in revenue and given TuSimple a toehold in the vast US freight market, according to Chen Mo, co-founder and chief executive of the AI firm.

“Scaling up our operations boils down to two factors – capital and talent,” Chen said in an interview at his office in Beijing.

He said TuSimple, which has more than 150 employees in China and the US, plans to gradually expand its autonomous truck fleet to a total of 500 units between the two markets, which would enable the company to generate about 100 million yuan (US$14.4 million) in revenue from next year.

My take: This is what technology, entrepreneurship, and venture capital are all about. But the elephant in the room is the 15 million people losing their jobs. The co-founder of TuSimple says “If we succeed, about 15 million truck drivers in China and the US will be initially freed from their strenuous and dangerous work.” Okay. But do they want to be freed? And when they are freed, what do they do to put food on the table? Maybe they still operate the vehicles but with less mental strain and greater safety?

Right now, the US is talking about a shortage of skilled truck drivers. Moreover, I see driverless technology in trucking as much more interesting than with cars because of the potential to add safety to the highway. But, this article highlights the dilemma: technology is replacing so many people, so quickly, it is hard to believe that this progress will occur without significant disruption to people’s lives and livelihoods.

That leads me into the next SCMP story with a similar theme but different angle.

China’s Uber for trucks close to securing US$1 billion in funding round to jumpstart driverless technology

Full Truck Alliance Group is close to securing as much as US$1 billion in new funds to replenish its war chest and jumpstart an expansion into driverless technology, according to people familiar with the matter.

China’s biggest online marketplace for long-haul deliveries is in advanced negotiations with new and existing backers, including SoftBank Group Corp and Tencent Holdings, on a funding that could hike its valuation by as much as 40 per cent to US$9 billion, the people said, requesting not to be named discussing private deals. But that is lower than an initial target of US$10 billion, reflecting cooling sentiment toward technology companies, the people added.

Truck Alliance, created by the merger of Huochebang and Yunmanman last year, is building up its marketplace to connect millions of mostly independent truckers. Led by chief executive Wang Gang — an angel investor in ride-hailing giant Didi Chuxing — it is trying to bring a fragmented, 5 trillion yuan (US$720 billion) arena into the smartphone age. It now wants to get into autonomous vehicles: Truck Alliance recently invested in plus.ai, a Silicon Valley-based driverless truck start-up valued at almost US$1 billion and backed by Sequoia Capital, one of the people said.

Thought bubble: Maybe China is better positioned to deal with the disruption associated with this kind of innovation. Their command and control-style activities certainly filled a lot of ghost cities that were built late last decade and early this decade. Ordos is a perfect example of what appeared to be a monumental bust whose future is still undecided. Could the same happen regarding technological displacement?

Here’s more technology from SCMP.

Shenzhen’s all-electric bus fleet is a world’s first that comes with massive government funding

In China’s accelerated drive to replace petrol-engined cars with battery-powered vehicles, Shenzhen has secured not just a front seat in the mainland, but also a world’s first as the only city with an entire bus fleet that runs on electricity.

At the end of 2017, the city operated more than 16,000 electric buses and by the end of this year, all 13,000 taxis would be electric vehicles (EV).

Shenzhen’s claim to fame is a result of heavy Chinese government policy and funding support – namely subsidies to public transport companies.

Its success bodes well for Beijing’s “Made in China 2025” industrial strategy in which new-energy vehicles and EVs – passenger cars, SUVs and commercial vehicles – are a key area of focus, with the ambition to produce 3 million cars by 2025 among other targets.

My take: This “Made in China 2025” stuff is interesting. There seems to be a flurry of technology innovation coming out of China as a result.

Let’s stick with SCMP’s website, but move west to the UK.

Sick of your Tesla? Dyson promises an electric car that won’t suck

James Dyson, the billionaire British inventor of the bagless vacuum cleaner, has chosen to build his electric car in Singapore to be close to Asian customers, supply chains and a highly skilled workforce.

The 71-year-old entrepreneur, who backed Brexit in the 2016 referendum, is pumping £2 billion (US$2.6 billion) into the launch of an electric car, with a 400-strong British-based engineering team working in secret for the first two-and-a-half years on the project.

Dyson is looking to exploit his company’s expertise in solid-state battery technology and electric motors that are found in his innovative vacuum cleaners and other products, such as bladeless fans and air purifiers.

Speaking of Tesla, did you see they turned a profit in Q3? I am not a Tesla hater. I’m a Tesla sceptic. And I love that the SEC has forced Tesla to get Elon Musk out of the chairman’s position. This was a much needed change at Tesla. I think it’s a start, but there is work to be done.

Tesla posts profit with Model 3 surge, shares jump

The Silicon Valley electric carmaker said on Wednesday that it made a net profit of $311.5 million in the quarter and had free cash flow of $881 million.

Musk had said in May that Tesla would be profitable in both the third and fourth quarters and as a result would not need to raise new capital from financial backers.

Tesla, U.S. Auto Makers Fall in Consumer Reports’ Latest Ratings

Electric car maker Tesla Inc. tumbled in Consumer Reports’ latest reliability rankings, along with several other domestic brands, as the U.S. auto makers rush to roll out new technologies that have made their vehicles more glitch-prone than rivals.

Tesla slid six spots, landing it third from the bottom of 29 brands this year, in the magazine’s closely watched new-car reliability survey.

The company’s newest, plug-in vehicle, the Model 3, earned an “average” rating—consistent with last year’s prediction—but Consumer Reports yanked its recommended endorsement from the Model S sedan for the second time in four years, citing owner-reported issues ranging from problems with the door handle to the newly standard air suspension.

My take: Not good. This is what happens when you ramp production and need to meet targets. Also see the story below.

Tesla adds $1,000 to price tag of midrange Model 3 that was announced last week

Tesla has bumped the starting price tag of the “midrange” Model 3 from $45,000 to $46,000 less than one week after the new version of the car was announced. The change was first spotted earlier this morning on the company’s website.

A spokesperson for Tesla confirmed the company “made a slight adjustment” to the pricing, but they did not offer an explanation for the change. They added that Tesla will honor the $45,000 price tag for any orders that were already in progress before the increase.

Sticking with cars, here’s Tesla’s US competition in driverless technology.

GM’s self-driving car reportedly has trouble recognizing pedestrians

It seems that General Motors’ self-driving car unit, Cruise, is running into major difficulties, and will likely not be able to hit its late 2019 launch target. Sources close to the project have told Reuters that engineers have been hitting unexpected technical challenges, like being able to detect objects if objects are in motion. For example, vehicles would hesitate or stop when passing a row of parked bicycles, would mistakenly see “phantom bicycles” that caused jerky stops, and would even fail to recognize pedestrians. “Nothing is on schedule,” one GM source told Reuters, as Cruise has already missed mileage targets and milestones.

OK. So, let’s move away from tech now. I want to talk about a wedge issue, the migrant caravan. Here’s how I’m thinking about it: immigration is a complicated and emotional topic. And people have a lot of differing opinions on the issue. However, most people accept the existence of national borders as a way to keep undesired people out.

The question then is who’s undesired. As I said, in terms of legal immigration, there are a thousand different opinions about who should be allowed to immigrate and who shouldn’t. But this assumes a legal framework, meaning that illegal entry is always undesirable. And that means people entering a country illegally are not wanted.

Are the migrants from Honduras in the caravan coming to the US illegal immigrants or are they refugees escaping crime and war?

My personal opinion is that they are economic migrants, not refugees, no matter how difficult the gang violence in Honduras is. And so, they should not be allowed to stay in the US as refugees. Should they even be allowed to enter and claim asylum though? These are very emotional topics and I think it’s definitely going to impact the midterm elections.

I would love to hear your opinions on this issue.

Here’s the story I saw on it.

How the migrant caravan became so big and why it’s continuing to grow

Edith Cruz was sitting at home in central Honduras, scanning Facebook on her phone, when she saw the post about the caravan on a community news page.

It was Oct. 12. She and her cousin had just opened a small business selling tortillas when they were confronted by a gang, threatened with death if they didn’t hand over half of their profits. She looked at the Facebook post: “An avalanche of Hondurans is preparing to leave in a caravan to the United States. Share this!” Within three hours, her bags were packed…

“Right away, I knew I would go,” said Irma Rosales, 37, from Santa Ana, El Salvador, who saw images of the caravan on television and bought a bus ticket to meet up with the group in Guatemala last week.

“I had been waiting for a way to get north, and then I heard about the caravan,” said Ediberto Fuentes, 30, who had fled Honduras for southern Mexico but was stranded for months, without the money to pay for a smuggler to travel to the United States.

“I packed my bag in 30 minutes,” said Jose Mejia, 16, from Ocotepeque, Honduras, who heard about the caravan when his friend knocked on his door at 4 a.m. and said simply, “We’re going.”…

By the time Irma Rosales heard about the caravan in El Salvador, the migrants were already nearing the Guatemala border. Her husband had been murdered a year earlier, she said, and after she reported the crime to the police, the MS-13 threats began naming her.

“I didn’t have the money to pay for a coyote, so the caravan was the only way,” she said.

After she saw the images of the group on television, she typed “caravana migrante” into Google and saw that the migrants were expected to reach the Guatemala-Mexico border in two days, on Oct. 19. She paid about $10 for three separate bus tickets, traveling for 16 hours, making it to the border on time to catch the caravan.

Then she bought a Mexican phone card and texted her cousin in Chicago.

“I’m coming,” she wrote.

I have a few other tech stories I will save for tomorrow. So I am going to end with the market plunge. My view here is that Trump is looking to pin the blame for market jitters and a potentially weakening economy on the Fed. And I think he has a good case, regardless of whether you think the Fed is right to raise rates. The reality is that the US economy is doing well. And the only reason there’s any prospect it will do less well in the immediate future is because of rising interest rates. That’s all about the Fed.

Trump Steps Up Attacks on Fed Chairman Jerome Powell

 

President Trump escalated his attacks on Federal Reserve Chairman Jerome Powell, saying the head of the nation’s central bank threatened U.S. economic growth and appeared to enjoy raising interest rates.

In an interview Tuesday with The Wall Street Journal, Mr. Trump acknowledged the independence the Fed has long enjoyed in setting economic policy, while also making clear he was intentionally sending a direct message to Mr. Powell that he wanted lower interest rates.

“Every time we do something great, he raises the interest rates,” Mr. Trump said, adding that Mr. Powell “almost looks like he’s happy raising interest rates.” The president declined to elaborate, and a spokeswoman for the Fed declined to comment.

But note the following two articles

US inflation is set to rise. The Fed must act now

The current tightness of the US labour market is problematic for two reasons. The first is a nascent increase in long-dormant wage pressures.

Moreover, there are signs that wage gains are now broadening out, with the balance tilting away from low-wage-inflation industries such as manufacturing, health care, and education into higher-wage-inflation industries such as finance, the information sector, and professional and business services.

At the current sub-4 per cent unemployment rate, overall wage inflation could easily move into the 3.5 per cent zone by mid-2019.

The second conclusion is that, unlike earlier periods of low unemployment when domestic wage pressures were constrained by global value chains, today’s mounting wage inflation will be tempered by a smaller global value chain offset.

Absent an unlikely acceleration in productivity, it is the confluence of these two forces – a tight domestic labour market and new global pressures – that spells trouble on the US inflation front.

Fed funds rate rises to important threshold

The market interest rate targeted by the Federal Reserve when it sets monetary policy has risen to an important threshold, highlighting the challenges for the central bank in controlling the level of short-dated interest rates between the current corridor of 2 per cent and 2.25 per cent.

The effective fed funds rate rose to 2.20 per cent on Tuesday, touching the ceiling that is supposed to be provided by another important interest rate known as interest on excess reserves.

Since late 2008, the Fed has paid interest on excess reserves deposited by banks, intended to prevent the effective fed funds rate drifting above this level. But pressure in the government repo market, as well as an increased supply of short-term Treasuries as the Fed reduces the size of its balance sheet, have helped push the effective fed funds rate upward.

My take: I am sceptical of Stephen Roach’s arguments about inflation. Part of the reason is that I see wage increases as less inflation and more standard of living increases that fuel consumption. I am not enamoured of the “Fed-engineered unemployment” argument Roach implicitly supports.

Roach is  basically saying, “People can make more money, sure. But when people make more money too quickly, it’s bad. It causes inflation to rise and we need to create some unemployment to keep those wage increases in check because that will keep inflation in check.” That’s perverse. It’s a point of view that aids and abets inequality. And I can’t get onboard with it.

I would rather see some inflation and deal with it if and when it comes. Instead, we are forever in fear of a repeat of the 1970s. And that keeps regular people in a constant state of living close to the edge, rather than seeing their standard of living rising. Roach’s approach is directly responsible for some of the stagnation we see in the middle class.

As for the market drop, I think it will pass. This is October, after all. Market jitters happen frequently at this time of year. I am not too concerned yet.

P.S. – Note the part below about algos adding to downside volatility. It will be much worse when the real economy goes south. Also note the political angle at the end.

Dow plunges more than 500 points in another day of losses, officially wiping out its 2018 gains

The Dow Jones industrial average bobbed in the red during most of trading Wednesday as another wave of volatility swept through U.S. markets.

The blue-chip index was dragged down more than 500 points by a weak housing report and a beleaguered technology sector that continues to show weakness. Tech stocks are down 7 percent this month.

The Dow’s drop was a sharp reversal from its upward early-morning momentum that came off of a strong earnings report from aircraft maker Boeing.

A negative close Wednesday would be the Dow’s 13th in 15 sessions.

The Standard & Poor’s 500-stock index was off 2.1 percent in afternoon trading. The tech-heavy Nasdaq was taking heavier losses, down 3.2 percent. It is in correction territory, down 10.3 percent from its September 2018 high…

Nancy Tengler, chief investment officer for Heartland Financial USA, said several things are at work driving down prices, one of which is the lack of buyers jumping in to the market to scoop up deals on stocks.

Some of those buyers are the companies themselves.

“You have all these buybacks, but right now is a blackout period, so these great companies and insiders can’t buy their own shares,” Tengler said. “There’s no offsetting buyer. So when the algorithms drive the sell programs, it feeds on itself. The same thing happened when the market dropped in January.”…

Tenlger said current sell-off will likely end in a 10 percent correction prior to the upcoming mid-term elections.

“After the elections, the buybacks will be allowed and kick in,” she said. “We will see a bounce between then and the end of the year.”