How do you deal with change? I’m talking BIG CHANGE. Existential change in the way you do business.
We are witnessing it being played out every week now in the drug sales world. CVS is buying Aetna Insurance, Express Scripts is combining with Cigna Insurance, and Wal-Mart is exploring a deal with Humana. These mergers are defensive moves because the health care delivery business is living in mortal fear of Amazon making a big move into the industry, which most people see as ripe low hanging fruit waiting to be plucked. Amazon, Berkshire Hathaway and Chase are combining efforts to develop an end run around traditional health insurance.
Many people more connected than I am think the machining world, particularly high-volume turning aimed at the automotive industry, will soon face similar existential change. This view is based on the growth of electric vehicles, which use significantly fewer machined parts than internal combustion powered vehicles. Automotive suppliers as well as companies involved in the oil and gas products and distribution industry face a long-term dwindling demand for the stuff they provide. This will also affect the metals business, from mining to melting to rolling and trucking.
The big shift to electric powered rechargeable cars and trucks will be more visible in five years because the Chinese seem to be committed to allowing only new electric cars to be sold in the country within a few years.
China is a 13 million car market. The country’s leadership, almost out of self-preservation, realizes air pollution is an existential issue that cannot be pushed off indefinitely.
The move to electric is a big step, and while it does not address China’s coal fired electricity plants, it will ameliorate air quality and show people that the government wants to make the country semi-livable.
A billion Chinese folks wearing gas masks isn’t my primary worry. I am concerned that my traditional machining company clients will be choking as they compete for dwindling contracts for beautiful, accurate machined components that connect the petrol to the engines in the Chevys, Toyotas and Benzes across the world.
These days I frequently address the big “electric” question to clients who I know well. The answers I usually get are the kind civilians probably give when they know an invasion is coming but don’t know when. The answer often goes something like this, “I know it’s coming. We discuss it every week, but we need to make money today, and today our business is terrific.”
What are some good options for folks (like me) who see very good business short-term by continuing to do what we are doing but are fearful about the longer term trend.
• Diversify. Find a business where your skills translate but is unrelated to the internal combustion engine. Medical, firearms, plumbing, construction and military are some areas of interest.
• Improve what you are doing now. Gasoline engines will be around for a long time even if new sales taper off, so prepare to get a bigger share of a smaller pie, especially the replacement market.
• Redefine your narrative. If you define yourself as an automotive supplier or a screw machine house, change your mission to a broader one or a more specialized one.
• If you are a company owner, fatten up your EBITDA and look for someone to buy your firm. Private equity companies are quite interested in machining companies these days. They like the cash flows and most of them are relatively short-term players. If you have a five-year window of growth in the machining world as related to oil and engines this is the time to fatten the cow. If you are not an owner go work for a firm which has made necessary changes.
• As a wildcard countermeasure, invest in copper and cobalt stocks or futures. If electric really takes off, the price of copper and cobalt (lithium appears to be on the way out) will climb dramatically. The Chinese have been buying up copper and cobalt assets like crazy, especially in the Democratic Republic of Congo in Africa. If they hog the supply for internal use, the rest of the world will bid up the price for what is available.
• Be on the lookout for the next big thing. It could be additive manufacturing, urban farming, exercise equipment, underground living, water purification, or a million other possibilities if you can change your personal narrative.
Question: Do you think you will be driving in an electric vehicle in 10 years?