Yes, perhaps, but the counter to this is that they could "benefit from the closed system of vertical integration" that seems to be all the rage these days. I could envision a scenario where they partner with existing manufacturers for a couple years, then "courageously" break off and produce their own vehicle in order to "control the process".
That would be one hell of an ecosystem to bootstrap, even starting with a partnership with an existing company, even for Google. Building "a" car isn't that hard. Building a car that conforms with all regulations, has had all the testing done on it, can be manufactured at any useful scale, and, oh, also is something that people want to buy, is not a problem that should be underestimated.
(Yes, props to Tesla. They did it. Well... mostly, at least, but it's at least a reasonable guess they're on a success trajectory. It's still a hard problem.)
It would probably be easier for Google to manufacture their own computing hardware from scratch, and as far as I know, they don't do that. Yes, they get it customized because they are a big customer, and they've at least dabbled in phone hardware, but even that wasn't "from scratch". I've got a 2013 Nexus tablet, and it's got all sorts of things in it that aren't from Google.
As big as Google may be, they are not infinitely big, and they have the paradoxical problem of being too successful to take on every little business. Large profitable businesses can't economically afford to take on new businesses that are significantly less profitable than their current businesses, because the rational business decision then is to reallocate the resources being given to the unprofitable sub-business and give them to the profitable sub-business to make more profits. [1] The car industry is very hit-driven due to the need to sell enough cars to overcome massive fixed costs, but even at in their most profitable years I'm not sure the car companies came even close to Google's profitability. I'm not taking the time to look that claim up, because I'm sure that even if they did, they never did it year after year after year the way Google has.
[1] Obviously I'm simplifying a complex thing here. I understand that's a complicated topic, but details would be an unimportant-to-my-point waste of time for all.
Large profitable businesses can't economically afford to take on new businesses that are significantly less profitable than their current businesses
Whoa there, isn't that completely backwards? Who can afford to invest in new businesses if not large, profitable companies?
because the rational business decision then is to reallocate the resources being given to the unprofitable sub-business and give them to the profitable sub-business to make more profits. [...] Obviously I'm simplifying a complex thing here. I understand that's a complicated topic, but details would be an unimportant-to-my-point waste of time for all.
(Edit to add: I think that apparent paradox is easily resolved by thinking in terms of long-term versus short-term investment.)
I agree there are complications, but fundamentally, big profitable companies are the ones which have spare resources to invest.
One problem is company culture and skill sets, and the difficulty of ramping up in a new area, but that's why big tech companies try things like internal "startup incubators" with lots of autonomy. Amazon in particular seems really effective at expanding into new areas.
It's not clear to me that Amazon actually has one business line that is both huge and so massively profitable that it prevents them from spreading out. They are huge, but they don't make the profits that Google, Microsoft, or Apple does.
I wouldn't be surprised to see AWS get spun out as it continues to grow in the next 3-10 years, because unless the trajectory of that subbusiness changes, it threatens to become the business that is too profitable to put resources anywhere else.
But Amazon has explicitly chosen to keep its margins tight, and aggressively invest for expansion. In a sense they choose not to make huge profits. They're famous for it!
I still don't buy your general point. It's true that some large companies have run into trouble because they were afraid of damaging their core product. But that's a risk everyone's aware of now -- the whole "innovator's dilemma" thing.
What's an example of a large successful company that was thereby prevented from spreading out? I don't mean companies that failed due to complacency, or overly rigid business practices, but where their size actually worked against them.
(Hmm, possibly we really mean the same thing, we're just describing it in different ways...)
You aren't simplifying, you're misrepresenting. A company wants to invest in projects with an expected return exceeding it's cost of capital for the project. It doesn't matter if you lower your overall rate of return.
To give a concrete example, imagine I have a hotel in New York generating profits of $50 mn/year. If it required an investment of $100 mn to build hotels, making another one in Atlanta that generates profits of $10 mn per year would still be sensible if these exceed the financing costs. My return on (book) assets would fall from 50% - 30% but my profits would rise from $45-50 mn.
Tax, risk and use of management time can complicate the issue but your point isn't first-order correct...
Your example doesn't apply because my point applies to different businesses, not just "investments" in general. A hotelier buying or building another hotel is just expanding, not investing in different businesses. A hotelier that is making 10% RoI in the hotel industry would be ill-advised to take on a car rental business that makes 3% RoI, because that car rental business won't be free, and they should be investing that money where they can make 10% RoI.
Google, paradoxically, by having such a good RoI on ads has a hard time taking on other businesses. This is a big part of why they spun so much stuff off; if they stay within Google, business forces would tend to starve them despite the abundance of resources that at first glance seem to be available. It's why you see companies so often cut product lines that are profitable, but not as profitable as something else... or, to put that another way, this isn't something I'm hypothesizing about how it might happen because of the theory, it's a thing that happens all the time. I've seen at least two major passes of it at the company I work at.
Ok so if a business a) has limited management bandwidth and many promising options or b) has a particularly cyclical/risky business model that results in a high cost of borrowing then you're right.
These are somewhat linked to profitability as you say, but a safe slow-growth company generating massive profits (eg Coca-Cola) doesn't face this.
Tesla deserves plenty of accolades just for getting to the point where they are producing multiple models of vehicle that conform to or exceed modern standards of quality .
However, Tthey have only managed to build "a" luxury sedan, "a" crossover SUV, and will soon be building "a" budget-luxury sedan. The real challenge is in attaining and sustaining the pace of development maintained by the rest of the industry. The automotive industry at large keeps a rolling cycle of refreshes and replacements on a roughly 3/6 year timetable (refreshed after 3 years, replaced after 6). Some niche models (Jeep Wrangler, Mazda Miata) stay in production far longer than that average but a 3/6 cycle is also a bit too long in ultra-competitive categories such as the compact crossover segment.
This is where I see Tesla beginning to struggle as their entirely bootstrapped operation has struggled to meet deadlines. That is cause for concern as it places their current lineup at a competitive disadvantage as their competition has gone through at least 1 refresh, if not a full replacement, since the design of their most recent model (Model X) was set in stone.
The Model S design was largely set in stone by 2009, 2010 at the latest and the Model X design was mostly locked in by 2012, 2013 at the latest. It took 3 years for both of those designs to actually reach showroom floors (2012 and 2016 respectively) so while the clock hasn't run out in terms of production life, the designs themselves are beginning to become dates. I don't just mean "design" as in styling, I mean it as the all-encompassing architecture of the vehicles.
While Tesla's offerings have several unique attributes which cannot be found in any of their closest competitors, one can only push an old design for so long before it becomes completely unappealing to consumers, even when sold at break even prices. I dare say that such a scenario may be playing out with the Model S as its sales had slumped leading up to the 2016 refresh that boosted sales, yet the bump still fell short of that model's best sales quarter which occurred back in 2015. The fact is that the Model S was designed to achieve the minimum level of refinement expected of a 2010-era, $65,000 luxury sedan with the silent, powerful electric powertrain being the plan to make up for its shortcomings in the areas of ride quality and interior fit and finish. Now that ~7 years have passed, the high end, mid-size sedan offerings from mass market brands have caught up to the Model S in many areas.
The Model S may smoke a Nissan Maxima in straight line and the Maxima can't hold a candle to the silence of the Tesla's powertrain but it also costs ~$35,000. In my opinion, it also has a better finished interior and more up-to-date styling than the Model S. We can argue all day over these points but you have to admit that manufacturers like Nissan are at least getting within striking distance in certain areas with cars costing half the price. Tesla needs to seriously step up their development game lest they be left behind with woefully dates products that simply cannot be discounted enough to remain appealing.
Google will want ad revenue from the captive audience in the self driving car. Control the self driving car ecosystem in the long term and avoid the cost of manufacturing and compliance in the short. I like the assumption that they will "come back" into the space, because it's a great play.
