My sense is that solar is structurally unprofitable in its current form, and what we are seeing play out is not necessarily uncompetitive manufacturing relative to China but uncompetitive subsidy practices in the US as opposed to foreign governments. China and Germany seem to be the primary culprits- the governments are effectively lending to these businesses in the hopes that over time efficiencies will make the process profitable. In the US, it is the shareholders who are doing most of the subsidizing, by investing in a business like Solar City despite the extremely high cash burn. Tesla shareholders are now indirectly subsidizing this via the acquisition. I hope that the markets have finally found a way to effectively match the subsidy system of China / Germany and allow a capable US manufacturer to figure out how to make money doing this on a residential scale.
Another advantage Tesla has, aside from its capital structure, is its channel into US “green luxury”- wealthy consumers willing to pay more to be perceived as working towards improving the environment by buying electric cars and solar power. This is a potentially interesting way to form a test market for the residential solar industry in the US. Finally, as you mention, Tesla is in the best position amongst any US manufacturer to be able to cobble together the manufacturing capacity to do solar on a countrywide basis- hopefully this further improves the cost equation by introducing economies of scale.
My sense here is that Constellation is right to perceive the risk to its business is relatively low. As you imply in your incredibly well-written analysis, the market has also picked up on this and the stock has done extremely well- largely due to the continued success of Corona particularly in the US.
Agreeing with ABuck above- it comes down to branding and being able to be “made in Mexico”. This has two implications- the first being, as ABuck states, that Constellation is inelastic when it comes to actually having part of the supply chain in Mexico. On the other hand, the political risk is lower that this is actually a business on “America First” high alert- it makes no sense to demand that a Mexican beer be manufactured in the US to bring jobs back to the domestic beer industry.
Since Constellation essentially has a de-facto monopoly on Mexican beer (no one drinks Sol), any tariff action taken against the business would be passed along to consumers or restaurants. There aren’t that many American competitors in the same strata in terms of flavor / lifestyle affiliations- we can assume customers aren’t likely to switch away from Constellation as prices rise.
I even go so far as to wonder whether there is a structural reason to locate manufacturing in Mexico beyond branding. The labor content of beermaking has to be extremely low on the commercial scale that Constellation is producing- this makes the labor cost arbitrage opportunity relatively low.
Another way to deal with the problem of protectionism and offshore manufacturing is focusing on automating more of Ford’s manufacturing processes. Since the cost arbitrage is largely in labor- cars require more labor content to assemble than most other manufactured goods- automation could actually bring the optimal cost structure closer to the US. This would also be an interesting side effect of increased protectionism- lower labor content overall in the system structurally eliminates US manufacturing jobs, running counter to the stated mission of America First.
Luckily for Ford, the entire industry is facing a similar decision with around the same cost-benefit analysis. Even foreign car manufacturers have in recent years shifted production to the US to minimize shipping costs and ensure timely production to be a viable player in one of the larger car markets in the world. This means that, ultimately, none of this puts Ford at a competitive disadvantage. Furthermore, the industry is likely going to just pass the additional costs in its production process along to consumers, unless certain companies are more successful than others at automation.
I’d be interested to learn more about how far along Chinese manufacturers are in implementing smart manufacturing technology- on the consumer side, I also wonder about the relative maturity of the IoT market compared to the West. My sense is that Haier is ahead of its domestic competitors in this respect, but behind some of the higher-end appliance manufacturers in the West.
In terms of the US import market for appliances, this move is a “keep your head above water” play- appliance manufacturers are doing everything they can to automate manufacturing to reduce the high labor content of production processes- as labor costs increase in China, Haier would find itself in an uncompetitive position. Moreover, the emerging likelihood of increased tariffs on imported Chinese goods would further increase the cost base. In the Chinese domestic market, however, there should be increasing opportunity to sell to the emerging middle class, as people move from first-time homeownership to being higher end consumers that see the value proposition of a connected home.
Another argument in support of the kiosk ordering system is the relative simplicity of Shake Shack’s menu options- the labor content of taking an order is extremely low (little customer confusion), which explains why much of the industry is moving in the automated direction. Also, the production process of a burger doesn’t lend itself to a production line system as opposed to chipotle, which creates your meal as you order it.
It may also be helpful to think about the digitization initiatives in terms of competitive advantage. Shake Shack largely competes against local chains like Tasty Burger or mom-and-pop burger shops- not as much against the McDonalds and Burger King’s of the world. These local chains don’t have nearly the scale to support digital ordering or customer apps- they compete based on local relationships / knowledge and food quality (arguable in the local Boston area vs Shake Shack). App-based ordering and delivery services therefore represent sustainable competitive advantages. Customers see a more comprehensive value proposition, Shake Shack realizes only the upfront fixed costs of installing these systems, and local competitors that don’t have the volume to cover fixed costs and are not as well capitalized can’t replicate any of this infrastructure.
Two more elements of this analysis to consider are the extremely low shipping density of tires and the impact automation will have in bringing down the labor content of an already commoditized good. It is reasonable to assume that high shipping costs per tire (given weight and size) make offshore manufacturing prohibitively expensive, particularly considering the just-in-time manufacturing practices of large auto manufacturers. With regard to labor content, automated manufacturing processes are likely to drive down this down to a point where structurally higher labor costs (given the union presence in US tire manufacturing) become less and less relevant. Weighing these additional benefits makes it highly unlikely that tire manufacturing would ever be offshored.