Blain’s Morning Porridge, Oct 25th 2024: Big Tech, DefTech and Why Musk is all-in on Trump.
“The light that burns twice as bright burns half as long, and you have burned so very brightly, Roy.”
Tesla’s spectacular rally this week shows why it’s the stock to short if you think Harris will win. As the world becomes less stable, Deftech is the next new thing. But, the adoption of new battlespace tech is being slowed by bureaucracy, Primes and dumb thinking – factors common to every government and business.
Apologies for no porridge y’day – an early conf call over-ran and ran and ran, in a good way.
Now we know why Elon Musk has gone all-in on Donald Trump. He needs to be Secretary of the Department of Government Efficiency (DOGE – good grief!). He said it Wednesday night: “There should be a federal approval process for autonomous vehicles. If there is a [DOGE] I’ll make that happen.” Who would be the beneficiary…? Tesla. Yesterday, Tesla posted a 22% stock gain – its biggest in 11 years. (More on Tesla at the bottom of this morning’s Porridge.)
I’ve been thinking about big Tech and Geopolitics. We live in an increasingly uncertain world – and Tech is one of the major differentiators – maybe something we are too blasé about?
I suspect we’re missing the Trees for the Wood in Tech… It’s dominated by the minutiae around the price of the Big 7. Tesla is an example; if there is essentially under-regulated autonomous driving, Tesla will make out like a bandit – finally unleashing its “Full” Self-Driving mash-up on the unsuspecting roads of America. Hence the uptick in the stock as Trump looks a coin-toss winner on Nov 5th.. but that will only last so long before more Tesla uncontrolled crashes force the courts to intervene.
This week’s headlines about Nvidia designed chips being found in Huawei tech, or Apple cancelling millions of orders for the new iPhone (which is same as the old one with a new number), or Telsa’s 12% stock gain on the back of meh numbers – a 2% rise in car revenues, and lots of mumbleswerve about autonomous driving, which with a moment’s thinking about confirms it’s a busted flush at current valuations – all confirm we’re no longer thinking about next S-curve tiggering innovative surge, but the longevity of their current, successful, but increasingly tired-looking corporate models.
All corporates have a shelf life. Some are like Red Giants and burn themselves out quicky, others burn slow and remain white dwarves for eternity. Some change the world. The real value of tech lies in the potential new value it creates, and how quickly it can be innovated. I suspect we’re into a new phase – the current raft of tech giants are middle-aged. Primes, an epithet I’ll come back to, is the stage before flabby.
Why does that corporate life-cycle matter? I suspect because Tech needs a reason, a trigger, to explode into relevance. At present, our focus on Tech is all about how AI will change and revolutionise the economy based our current paradigm of global peace, prosperity, growth and trade.
What if the current cosy acceptance of Big Tech permanence is about to be shaken and stirred?
With a Trump victory in the US election looking increasingly likely – at least according to the Street, I’m looking for the right way to invest in defence. It isn’t buying Defence “Primes” like RTX, Northrop or Lockheed Martin. Heck, I don’t think electing Harris won’t make the world much safer, either.
Defence should be a primary duty of any state. However, states spend money on what they judge the threat board looks like. Today, the big picture boils down to what Emperor Xi of China is strategizing.
China current strategy is destabilisation by enabling Iran and Russia. Does Xi continue to keep the West on Tenterhooks playing his ambitions on the BRICs conference stage, undermining the dollar on the global economy to break down American alliances, (particularly in the Gulf), how much does he continue to test and pressure the West in Ukraine and the Middle East (it was clear from Xi’s dismissal of Putin at the conference that Russia is now little more than a China client state), or when will he judge the West is so weak and divided it’s worth going outward bound on Taiwan?
Instability after the US election might be a moment. China and Xi’s axis favour a Trump win – in the expectation he’ll further erode European and ANZUS alliances, and be an isolationist.
Big questions, but it’s almost the weekend, so time to think about them.
The West won the last global war because of industrialisation – we out produced the German and Japanese economies and put more materials, machines and a stronger logistical tail on the ground where they needed to be. We controlled the sea-lanes and could move resources swifty around the globe. The proxy wars of the last 80-years have largely been asymmetric, when the weaker force tries to negate industrial might through terror and other forms of irregular warfare.
However, the next conflict – which many believe is already upon us – will be tech driven. The nations that best harness complex tech will win. We’re kind of relaxed about that because everyone knows the West has the biggest defence Primes, is far better at inventing and innovating the best new technologies, and therefore we’ll have the best weapons and the best equipped warfighters.
Er… maybe not. In fact. No. We won’t win.
There is a Tech arms race underway, and the West is not necessarily winning. Whether that is the rumoured capabilities of hypersonic Chinese missiles to take out US aircraft carrier task forces, or simply negating the power of a tank in battle – China and its allies are already there in many cases. And, as the war in Ukraine demonstrates the power of tech, it also shows that keeping forces liberally supplied with ammo to utilise new, tech weapons, means productive strength still counts.
Nations fighting the next war using cold war tactics, tech, and playbooks will inevitably lose – as the Russians have discovered. The Russian logistic chains, lauded by Kremlin shills as a sign of economic resilience, are dependent on shells from North Korean and missiles from Iran.
Headlines about 11,000 North Korean Special forces on their way to Ukraine to aid Russia are fascinating. I wonder if the soldier-slaves of the Kim dictatorship are aware civilians in Ukraine can use an app to report enemy troop and armour concentrations, where the data can be immediately verified and tasked to artillery units? Drones have become a dominant force on the battlefield. New tech to take them down is constantly evolving. Aircraft don’t go near the front line because of the efficiency of the AA defences. The pace of tech leapfrogging the other side is extraordinary.
My interest in Defence Tech isn’t new. As a kid my bedroom was a mess of Airfix models. Dad was involved in the design of everything the RAF flew, and the first drones. I wrote my master’s dissertation of why defence procurement policies fail.
A new book – Unit X – absolutely resonated with me. It’s the illuminating story of how the US military has struggled to innovate America’s undoubted mastery of modern technology; failing to encourage founders, inventors and innovators to propose and build the future state-of-the-art new weapons systems.
The quote on the front page sums it up:
- “The second decade of the 21st Century was one of colossal missed opportunities for the US military. The Pentagon missed the advent of modern software development, the move to cloud computing, the commercial space revolution, the centrality of data, and the rise of machine learning. It’s a story of the US getting ambushed by the future.”
In the 1960s, US defence spending accounted for 36% of global R&D. Today that number is less than 3% – which is paying benefits in terms of new commercial technologies and open-source AI. The four largest tech firms each have a market cap greater than the whole of the US defence sector.
In an increasingly unstable geopolitical world, the issue is how do the armed forces play catch up with the commercial tech – China’s military is now embedded top-to-bottom in every single aspect of its tech sector, and is a critical factor in determining who gets and doesn’t get funding. Meanwhile, the American’s may be flying brand new $220mm B-21 bombers and F-35 Fighters, when they work, but most of their war-fighters are stuck with systems reliant on software that Microsoft stopped supporting a millennia ago.
Unit X describes how the Defence Innovation Unit – DIU – was supposed to trigger a renaissance in defence tech by swiftly innovating new commercial tech into weapons systems, by forging links with Silcon Valley and scouting future tech. It nearly collapsed innumerable times as Pentagon bureaucracy threatened to defund and disappear it. The venality of some of the tales is extraordinary.
The Primes – the same large defence contractors President Eisenhower warned against when he coined the phrase “the military-industrial complex” – are so enmeshed into the Pentagon’s bureaucracy and procurement policies they effectively stymie evolution and the integration of transformational tech into the military. It takes years to even order a hammer – and it will then famously cost over $400. The book warns how entrenched prime defence contractors will seek to repackage aging technology and market it as new, while what is needed is for “disruptors to select problems and solutions where real new tech could provide a 10x improvement.”
One conclusion is: “The Pentagon is not the first entity that experienced success only to be hindered, as times changed, by the very processes and culture that led it to be dominant.” That’s as good as line as any to put on any corporate tombstone – just change the name. Bureaucracy and red tape.
Commercially tech and the Pentagon’s bureaucracy won’t work easy together. No entrepreneur will innovate tech into a marketplace blocked by internal addled systems. These are problems not confined to just the military. Every aspect of the state sees its decision-making arteries become sclerotic. Every business spawns its own bureaucracy, which become comfortable ensconced as profit prevention units.
Tesla – the cure?
That is, perhaps, what distinguishes Elon Musk from the common pack. He’s declined to be set in a similar niche. He is a car-maker, a rocket-scientist and now a politician. His ethos is to fail fast and keep moving. It’s been a spectacularly successful approach to business, making him the world’s richest man, and apparently on course to be the first trillionaire. For nearly a decade I’ve been quietly seething at Musk’s “wrongness”, and screaming the down-right-bleeding obvious – that Tesla’s overvalued. Doesn’t matter how right I am, the only valuation that matters is the markets. That’s cost me millions. My bad, but I know I’m right.
Telsa is a great car maker. Tesla stock soared following its recent numbers and Musk’s latest promise of FSD tomorrow. It will sell a 1.8mm cars this year. What makes it a great car company is that it sells cars at very attractive margins, and seems capable of increasing these margins by aggressively cutting costs and headcount. To the downside, it only makes lithium-battery powered EVs, in an increasingly crowed market where its old models are competing largely on price point. Again, that’s not a problem in a large market – but EVs are no longer the only future for autos. Demand has plateaued – hybrids are in vogue, and who knows if a new paradigm shift in power is around the corner.
It’s the top-selling EV brand but car revenues were only up 2%! Its biggest line item – as it usually is – is selling regulatory credits to other makers. It’s been boosted by massive state subsidies – without which it would not have survived. The other auto-makers are slowly but inevitably now selling their own tech. Tesla’s battery and solar panels business posted 52% growth – but that is a highly competitive space, but guess what – if Trump gets to put 100% tariffs on China imports… it will be an even bigger share of Teslas’ profits next year. Its chargers are making money – although other EV firms say they can see 1000 mile ranges in the near future, meaning you wont need to stop.
Aye, Musk is smart. While the rest of us worry about election outcomes.. he’s dancing all over them making them work for Brand Musk.
Out of time, have a great weekend, and back to the day job..
Bill Blain
Author of the Morning Porridge, founder of Wind Shift Capital
