Murray's Week in Review.
Beyonce to the rescue....
What follows was written by Matt Murray, former editor-in-chief of The Wall Street Journal. It’s a review of the week’s top stories in business and finance. It arrives in your in-box most every Friday at ~noon.
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1. Tesla's first quarterly sales drop in four years underscored continuing challenges for the vaunted EV transition in the US. The outlook is far tougher than the industry expected just a few years ago, when inventories were tight, enthusiasm for emission goals was high and Tesla's valuation was soaring. Overall EV sales grew last year, but more slowly and below industry expectations, feeding worries about demand and making the US a global laggard. (Look at Norway, for instance.) EV sales grew just 2.7% in the first quarter compared to a year ago. The trajectory is well short of EPA mandates. A top Toyota executive says the transition will take longer than expected and requires new technologies. Ford is delaying the rollout of an all-electric UV to focus on hybrids. The early adopter era is over, affordability is an issue, batteries weigh too much, Americans still like big cars, government credits in the US and Europe have expired and the Biden plan to roll out 500,000 EV charging stations is 499,993 stations short. To quote Marin Gjaja, COO of Ford's Model e EV division, per The Detroit News, "I don't have a lot of patience for us getting the forecast wrong, but the reality is we all sort of got it wrong." Hertz's "catastrophic" bet on electrification makes for a haunting business-case study.
Then there's China. After years of subsidized spending, it is the world's largest producer of EVs and hybrids, which will account for half of new cars sold there as soon as this year, helped by plunging prices for battery components. But consumer demand in the Chinese market, while up 17.4% in the first quarter for pure plug-ins, is slowing too. Consolidation is expected. BYD ceded its crown as the world's top EV seller back to Tesla after just one quarter, though sales were up in March, albeit it with steep discounts. But the story in China is also one of competition and fierce price wars, fed by new entrants like Xiaomi, whose new debut EV sold out of 2024 inventory in 24 hours. Overcapacity will drive more exports. Indeed, after China challenged US subsidies at the WTO last month, Janet Yellen, en route to China for talks, this week reiterated a desire to nurture EVs and batteries here due to concerns over China's massive investment.
Against this backdrop, Tesla's first quarter was an "unmitigated disaster," and "a train wreck into a brick wall," in the words of one analyst who is a longtime bull. The 387,000 cars it delivered worldwide was down 8% from a year ago, below expectations and far fewer than it produced. Tesla partly blamed production setbacks and a model changeover. But it has some unique risks for a mass audience, such as its minimalist design (have you ever tried to find the door handle inside a Tesla?) and largely online dealer model. Price cuts in the face of competition have hurt margins. China volume is down amid the competition there. Rivals like Kia, Toyota, VW and Rivian, while far smaller, are growing as they focus on developing more appealing models. Some argue (inevitably) that Elon Musk's higher-profile taste for controversy has hurt too. Shares have plummeted much more than 30% this year. But Musk also has been central to Tesla's rise. JP Morgan warns they have more room to fall. Cathie Wood stands pat. Robert Armstrong points out that the market is inherently unstable and immature but maybe EV demand comes and goes.
2. Now that Disney CEO Bob Iger has fended off Nelson Peltz's proxy effort to force his way on the board, the focus will be on succession. After the vote, Iger said choosing a successor is the board's No. 1 priority, echoing comments from a board member this week. There are other issues on the agenda, such as making streaming profitable, shoring up ESPN and racking up some (non-woke) box-office hits. But the botched handover to Bob Chapek in 2020, whom the board later fired to bring back Iger, haunts the CEO. His legacy remains in the balance and the proxy fight has been bruising and embarrassing. The board's history of extending Iger was Peltz's most effective critique. Iger, 73, has vowed to name a successor before his current contract expires at the end of 2026, though Hollywood skeptics doubt he will really step down. As noted earlier, Bloomberg previously reported that there are four internal candidates in the mix: TV chief Dana Walden, ESPN's Jimmy Pitaro, theme-parks boss Josh D'Amarao and film chief Alan Bergman. None is ideal. Bring on the profiles! According to CNBC this week, some see Walden (previously described as the putative frontrunner), who would be the first woman to run Disney, as the favorite; she is seen as a creative and successful TV executive but one who lacks experience across Disney's units and perhaps some business acumen. Pitaro lacks Hollywood experience, but how he handles the new streaming venture and works to right ESPN could elevate him.
3. Elsewhere in Hollywood, The Journal reported that the board of Paramount Global had entered exclusive talks with Skydance on a merger, spurning a $26 billion all-cash offer from Apollo. Skydance, which is run by David Ellison (Larry's son), has 30 days to seal a deal with Shari Redstone's National Amusements, the family's privately owned company that owns 77% of Paramount. Bloomberg says they have a tentative deal. Meanwhile, two Newhouse family members were forced out as board members at Warner Brothers Discovery under antitrust pressure. Given the flack that CEO David Zaslav gets, it is worth noting that Warner Brothers Discovery is crushing rivals at the box office. Perhaps most significantly, April 8 marks the date when his company can again pursue deals without getting hammered on taxes. Finally, Endeavor is going private in a deal with Silver Lake three years after going public.
4. Boeing's new chair (see below), Steve Mollenkpf, is cancelling planned roundtables and reaching out to airline CEOs directly amid the manufacturer's rolling crisis. Its output has dropped significantly as regulators conduct factory checks and workers slow the assembly line outside Seattle. United is urging pilots to take unpaid time off. Southwest has paused hiring. Jet rentals are soaring with production down. Boeing paid $160 million to Alaska Airlines as initial compensation for the grounding of 737 Max 9 jets after a door panel blowout on a flight in January. With Dave Calhoun on the way out, any successor has a tough gig. Boeing and Airbus are reported to be exploring a way to divide up operations of troubled Spirit AeroSystems. (News Items noted earlier this week that a federal probe is intensifying, and flagged this WSJ story on disarray before the Alaska incident.)
5. Intel said its chip manufacturing unit lost $7 billion in 2023--a drop from a $5.2 billion loss the year before--a blow to CEO Pat Gelsinger's turnaround efforts, and implicitly, to the Biden administration's efforts to bolster the US chip business. Gelsinger said 2024 would be the trough in its efforts to make up lost ground against Taiwan Semiconductor Manufacturing, and that the unit would break even in 2027. Gelsinger blamed the loss on bad decisions, including a year ago against using extreme ultraviolet (EUV) machines from Dutch firm ASML, which while expensive are more cost effective that earlier tools. The depths of the loss underscored the difficulty of the turnaround as Washington keeps giving Intel money under the CHIPS Act, especially as the company struggles to meet the demand of AI products. Just last month, Intel got $8.5 billion in grants and access to $11 billion in loans. Shares fell 8%.
6. FT: A surprise late entrant in bidding for a Zambian copper mine turned out to be an obscure company called International Holding Company from the United Arab Emirates. It ended up on top with a 51% stake. Behind the scenes, its parent, International Holding Company, the $240 billion business empire of powerful Abu Dhabi royal Sheikh Tahnoon bin Zayed al-Nahyan, had been courting the highest levels of Zambia’s government for nearly two years. It was the latest sign of how wealthy Gulf states, hungry to diversify beyond oil, are putting petrodollars into mining and processing of minerals like nickel and copper, pushing to break China's grip. Chief among them is Saudi Arabia, which wants mining to contribute $75 billion to its economy by 2035, up from $17 billion. For resource-rich nations in Africa, Asia and Latin America, the entrance of these middle powers into the critical minerals battleground is a welcome alternative to decades of exploitative arrangements underpinned by either western colonialism or Chinese debt.
7. Levi Strauss, long reliant on wholesalers like Macy's and Kohl's, now gets nearly half its sales directly through its own website and stores, a boon for profits that raises questions about its long-term relationships with stores. After some recent cost-cutting, it raised profit forecasts this week. In the first quarter, the company swung to a net loss of $10.6 million, or 3 cents a share, from $114.7 million, or 29 cents a share, but that included one-time restructuring costs; earnings per share of 26 cents beat estimates and shares surged. More significantly, a sales drop of about 8%, to $1.56 billion, was due primarily to a shift in Levi’s wholesale orders. For the last couple of years, Levi’s has been moving away from wholesalers and doing more of its sales through its own stores and website. Selling directly to consumers boosts Levi’s profit and gives it better data on its customers and their shopping patterns as department stores continue to shrink. Macy's said in February it is closing another 150 stores. A new Beyonce song could boost sales too.
8. Google will purge billions of records containing personal information collected from more than 136 million people in the U.S. surfing the internet through its Chrome web browser in "Incognito" mode, as part of a settlement in a lawsuit accusing the company of illegal surveillance. The proposed settlement in Brown v. Google will also mandate greater disclosure from the company about how it collects information in Incognito mode and put limits on future data collection. If approved by a California federal judge, the settlement could apply to 136 million Google users. The 2020 lawsuit was brought by Google account holders who accused the company of illegally tracking their behavior through the private browsing feature. Google is racing to settle lawsuits ahead of expected antitrust fights with the DOJ latest this year. In fact, Sundar Pichai was in court this week defending Google Play.
9. In a further indication of regulatory reach, Microsoft will sell its chat and video app Teams separately from its Office product globally, six months after making the change in Europe to appease regulators there. Competitors, especially Salesforce-owned Slack, had long groused that bundling the products gave Microsoft an unfair advantage. The move could help Slack and Zoom. Separately, a scathing federal report blasted Microsoft for shoddy cybersecurity practices, a lax corporate culture and a lack of transparency in a targeted Chinese hack last year of top U.S. government officials’ emails, including those of Commerce Secretary Gina Raimondo.
10. WSJ: For years, Forbes ran an alternate version of its website where it stuck ads that were intended to run on Forbes.com. Fake Forbes featured articles that were repurposed and stretched into formats that are more accommodating of various ad formats. For instance, one 700-word article was turned into a 34-slide slideshow, so the reader was exposed to 150 ads compared to about seven for the original piece. They were promoted on clickbait referral sites. Forbes blamed an outside vendor and shut the site down after WSJ asked about it.
11. Fortune: When Aflac Chairman and CEO Daniel Paul Amos took over the family insurance company 34 years ago, George H.W. Bush was president, the Soviet Union still existed and China was just beginning its emergence. During his tenure, Amos has increased annual sales sevenfold. Its shares were trading at around $85 in late March, far beyond their (split-adjusted) 1990 value of $1. Amos has helped shape the corporate landscape, as the first publicly traded company to give shareholders a "say on pay" vote. He also gets credit (blame?) for that duck mascot whose "AFLAAAC!" bleat has transformed insurance marketing. Now the Georgia-based company is aging and showing the limits of its long-ago innovations. Sales have been shrinking since 2019, and it faces regulatory scrutiny, changing customer attitudes and the basic challenge of selling expensive extras to inflation-squeezed consumers. The eventual succession will be unusually bittersweet, as it means passing Aflac to someone outside the family.
12. As the dismantling of GE into three parts was completed this week, following on the news that Dave Calhoun was leaving Boeing, there was another round in the ongoing debate about the legacy of Jack Welch. One camp is well-represented by the longtime columnist Allan Sloan, who notes that most Welch "acolytes" haven't made for successful CEOs. He cites Times reporter David Gelles, who in his book "The Man Who Broke Capitalism" blames Welch for "shareholder capitalism" that led to massive layoffs and big salaries, and much else. Bill Cohan, whose GE book, "Power Failure," is well worth reading, takes a more nuanced view, but agrees that the Welch era is ending; David Zaslav is the last prominent CEO left who worked for Welch. Welch died in 2020, just before the Covid-19 pandemic took hold.
Footnotes: Huawei has shrugged off US sanctions imposed in 2019, with sales up nearly 10% and profit up 144% in 2023, lifted by more competitive smartphone products, especially its flagship Mate 60 Pro, and growth in its cloud business. It has become a symbol of China's determination to thwart US curbs....Amazon Web Services cuts several hundred jobs.....And Amazon is dropping its grab-and-go checkout system in grocery stores...Are we at peak K-pop?...How Chicken Soup for the Soul lost its way...Liberty Media buys MotoGP for $4.5 billion, hoping to repeat its Formula 1 success...Rubrik pursues an IPO amid hopes the market is thawing...April Fools Day brings the usual painful groaners at work, including lame pranks from the boss...Tesla scouts sites in India for a factory...Tubi's unique foothold helps it grow while streaming stalls...Tiger closes its latest VC fund at well below its original target...Is the worst over for Apple stock?...Ripple is launching a stablecoin...McKinsey is paying staff to leave...In a rare interview, Steve Cohen foresees a four-day workweek...Barry Diller agrees...My blue check wasn't restored ...Spotify is raising prices again....Person oh person: Gendered titles are fading away...No. Just no.
Commentary: William Cohan: A lengthy interview with Epstein-tarred Leon Black. Ip: The economy just isn't as bad as Americans say. Schumpeter: Why Japan Inc. is no longer in thrall to the US economy. Borchers: Becoming indispensable at work is a big lie. Levine: The Disney proxy fight turned out fine for Peltz.