Alfidi Capital Blog: manufacturing

I made my annual presence known last week at the joint meeting of Intersolar North America and SEMICON West in San Francisco for 2014. I absolutely cannot miss the latest and greatest developments in solar power and semiconductors. Go search Google if you want to see what I discovered in previous conferences. You've already read my impressions of the Intersolar opening ceremony this year. The rest of the joint conference was even more fun. Those of you who are pressed for time can focus on my trenchant original observations in bold text. I make being a genius so easy.

The opening keynote from Micron set the right tone. Once I got past the corporate rah-rah about new tech converging with smartphones, I heard the news about evolving computing models requiring more power and reliability to knit logic and storage together. I can't wait to see who emerges on top of the next wave of semiconductor sector consolidation. I also can't wait for the quantum computing revolution. SEMICON speakers on my agenda didn't mention quantum computing, but they should if Micron's estimate of the end of lithography walls means ordinary tech can't scale up power and speed anymore. Micron has also caught the innovation bug I keep seeing in the startup sector, if they're serious about chip fabricators seeking partnerships in other verticals like packaging and assembly.

The DOE SunShot Initiative presenter reiterated their awesome multifaceted program. DOE's EERE is funding the reduction of solar's cost per kWh and they even incubate startups. I think EERE's Funding Opportunity Exchange might be a decent source of non-dilutive funding for startups if they can pivot to government's needs. Here's a hint for aspiring solar entrepreneurs . . . basic color properties matter. Black solar cells absorb more sunlight than other colors like blue. That's so simple that everyone in solar should know it. I was particularly impressed with the presentation from Bandgap Engineering, one of SunShot's incubated startups.

I kept busy in between presentations by browsing the expo floor. Booth babes made rare appearances compared with 2013. Shoals Technologies Group had the best babes by far at their Intersolar display.

I must have been distracted by something at their coffee bar. Perhaps it was the soft pretzels they were giving away. I should have grabbed a pretzel before they ran out. I never turn down free food if I can help it.

You can see that I have my hands full with these babes. They were just as soft as the pretzels and probably just as tasty. Feast your eyes on the incontrovertible proof that gorgeous women cannot resist yours truly, Anthony J. Alfidi, CEO of Alfidi Capital.

SEMICON's Silicon Innovation Forum featured Dr. Robert Metcalfe as keynote speaker. This brilliant guy has created enormous value in multiple verticals and I was privileged to hear his insights. I will add his mention of the Doriot Ecology and Christensen Disruption to my latticework of mental models (nod to Charles Munger here). I learned a new acronym from Dr. Metcalfe: FOCACA = Freedom of Choice Among Competing Alternatives, i.e. the state of affairs in a free market when consumers don't have to live with tech monopolies. His formula for a successful startup in a Doriot Ecology combines an academic professor and talented students working with laboratory tech, a scaling entrepreneur who provides adult supervision, and venture capital. I note with interest his preference for tech developed in university labs with government agency sponsorship, rather than tech from government-run labs. Dr. Metcalfe thinks universities that compete with each other are more productive than federal labs, which show poor research output per dollar spent. That throws cold water on my hopes for commercializing the federal government's science. IMHO the missing ingredient from the government's commercialization efforts is competition that will sharpen the federal labs' abilities. Analysts tracking tech innovation need more laws in their mental latticeworks . . . Shockley, Grosch, Moore, Rock, Cooper, Metcalfe, and maybe others I heard for the first time from Dr. Metcalfe. He plugged NSF's US Ignite project to seek killer apps for the Gigabit Internet. Hey entrepreneurs, there's your big hint about what's coming next after the social / mobile / Big Data convergence, and venture funding will follow a hot trend. Dr. Metcalfe closed with some cautionary observations for would-be entrepreneurs. He said Solyndra was a classic scaling mistake where a political commitment to job creation drove failure, and their tech had everything but silicon (uh, yeah, that would be pretty crucial to have in solar).

The Silicon Innovation Forum continued with a venture investing panel. They were refreshingly candid, unlike some of the self-serving blather I tend to hear from VC panels. They see very few good opportunities now but are looking for IoT to impact sensors and MEMS. I believe any startup that can push back the limits of Moore's Law and Dr. Metcalfe's other laws above would be compelling. I was pleased to hear these VCs say they look at a startup's supply chain when scaling it up to see where bottlenecks will appear. I hope they apply that perspective to the IoT applications they claim to like in precision agriculture, because a farmer's subscribed sensor arrays assessing moisture and temperature all need power sources of some sort. I wonder if a farm drone could power the sensors with wireless transmission of electricity at the same time it makes a recon overflight . . . hmmm. They would all tie in together to optimize pesticide spraying and hydrology. "Sustainable differentiation" was a common buzz phrase from this panel. I don't think they mean that in the cleantech sense of sustainability, but in a scaling sense.

The game-changing startup success stories from Silicon Innovation Forum were mostly products of NSF SBIR funding. Such early non-dilutive funding proves something to future funders by underwriting early research. Competitive manufacturing costs and capital efficiency matter.

I missed the Center for Sustainable Energy talk on their Self-Generation Incentive Program (SGIP). Solar entrepreneurs should give it a serious look. It helps a solar sales pitch as long as it's fully funded. CPUC is on board with SGIP.

Intersolar allowed me to attend their press breakfast on the second day because they recognize the value I bring as a sector analyst. My reputation must be seriously growing if this very important conference series has let me into the tent. I got some insights into the segmentation of the grid-connected storage market and the very versatile modularity of battery tech. DOE's Global Energy Storage Database links regulatory policies to notable projects. The National Alliance for Advanced Technology Batteries (NATTBatt) noted that batteries allow the solar sector to sell more product of higher quality by bundling storage solutions with solar production, and I wish I had attended their separate talk on strategies to reduce storage costs. The California Energy Storage Alliance, California ISO Energy Storage Roadmap, and EPRI advocate public policies that will make the storage sector even more complementary to solar. They need to address costs, especially since the economic losses of short-term outages make storage a compelling mitigation tool. Storage factors of response range and speed enable storage solutions to be scaled and customized for local markets. The battery sector can make its case effectively by linking storage costs to the range of battery materials that deliver different gravimetric and volumetric energy densities.

The next SEMICON keynote from Microsoft was the expected commingling of value chains and supply chains in connected networks. I thought ERP was supposed to have solved that already. Does any big strategic investor like Microsoft, Cisco, IBM, and others still believe that the mobile / social / cloud / Big Data fusion will drive value?! That train left the station in 2013. There's little room left for disruption in retail users' verticals. Let's move on to IoT and M2M already. I still hear too many business intelligence solutions sales pitches disguised as these multi-sector fusion case studies. Microsoft does recognize the importance of enterprise security but I'm not sure where it resides in Azure or their other offerings.

One other product pitch mentioned NREL's calculations of site survey costs for solar installations. I couldn't find the data on NREL's Open PV Project but a Google search reveals tons of data from NREL and others on soft costs. Geographically precise data helps with lead generation and prospect qualification, especially when an integrated solar installer shows cost advantages from policy, taxes, storage integration, and soft cost savings.

The highlight of my Intersolar experience is always the Joint Forces for Solar series of presentations. CALSEIA was first up discussing the West Coast market. The California Solar Initiative (CSI) will end soon and it would be a shame to lose access to the valuable California Solar Statistics it generated. A statistical void makes the market less transparent and homeowners will be inhibited from comparing pricing. I liked the "duck curve" chart showing the daily production ramp that utilities want to moderate with storage. I asked the presenter about the typical salvage value and recycling cost of a solar system at the end of its useful life, but I should probably look that up on my own.

I was all over the Joint Forces for Solar section on solar PV financing opportunities. Chadbourne and Parke's Project Finance Newswire covers plenty of good info on financial innovation. Securitization has come a long way since solar investors first started weighing the tax equity of a project. The yield co model does for solar what MLPs do for hydrocarbon and pipeline projects. Yield cos remind me of REITs but the difference is their securitization of cash flows from solar leases, not the physical system assets themselves. Watch the Alfidi Capital blog for a whole separate article on how yield cos compare to other instruments, and how they can theoretically commingle with tax equity via inverted lease structures. Property owners in special tax districts can still use property assessed clean energy (PACE) payments for solar upgrades. I was delighted to hear that NREL data on solar performance can validate the credit default risk of solar securities. I want to consider whether NREL's RReDC data can evaluate credit risk for yield cos in any renewable sector besides solar, and whether NREL's Solar APIs can adapt to publishing that data in formats usable to the finance sector. I am intrigued by NREL's backing of Sunspec Alliance's Open Solar Performance and Reliability Clearinghouse (oSPARC), which may fill the immediate market need for solar performance data. Anyway, the presenter for this session did mention that state-chartered green banks are emerging, along with green bonds and holding company loans as additional vehicles. I searched around the Web for insights on those subjects. The Coalition for Green Capital is pushing for more green banks. The World Bank knows something about green bonds. I haven't addressed these topics in a while but rest assured they are fodder for my future blog articles. If NREL's Renewable Energy Project Finance site doesn't cover it, just watch for it from Alfidi Capital.

I left Joint Forces for Solar early to catch the SEMICON Bulls and Bears session. Splitting my time between two sessions oriented to the finance sector is how I optimize Alfidi Capital coverage of major developments. Anyway, the bull and bear analysts from major investment banks presented their thinking on cost and competition in the semiconductor sector. Slowing demand all around was a major theme. I can easily summarize everything they said. Leverage points in a production process determine where semiconductor manufacturers have a competitive advantage. Simple, low-cost supply chains matter. The ability to continually make incremental improvements in a production process matters. The Alfidi Capital official definition of the one thing that matters most is a durable competitive advantage (a la Warren Buffett) that generates the surplus earnings funding a constant search for the things that matter! I suspect that such an advantage comes down to a mix of advanced material science and the ability to match chips to form factor changes. I don't follow semiconductors as closely as I follow renewable energy, so I'll just have to wonder. I also wonder why so many people attending the SEMICON Bulls and Bears session looked like total douchebags. Maybe they were all Wall Street investment bankers looking for someone else's work to pass off as their own. That happens in the bulge bracket all the time.

I sat in on a sponsor's breakfast forum on the final day of SEMICON West. All I needed to know is that material science places the same limits on chip and circuit capacity as it does for energy storage capacity in batteries. The cost factors of chips and their dies seem to multiply each other, especially as die area scales. Mobile computing makes chip design complex because mobile sensors (like modems) are always turned on and processors for graphics and video have high workloads.

I switched back to the Intersolar track to hear a very attractive German woman present on the German storage market. It should not surprise anyone that solar PV systems with a storage component offer a higher NPV for investment that stand-alone PV systems, regardless of feed-in tariffs. Obviously, storage allows energy use in non-peak hours without any additional demand on the grid. It also seems like installer scale matters if big players offer more added NPV. More installers making proactive offers to add storage with their PV installation should expect more market penetration and more profitability. That IMHO is the key for those solar installers who want to survive industry consolidation. This technique should work in the US as well as Germany. The big problem is that battery life is still too short for many household needs.

I went back to SEMICON for their expo floor panel on the 3D printing revolution. You know something, I had mentioned 3D printing in passing to several exhibitors last year and they really didn't see it coming. Now it has arrived. Adapt or die. If 3D printing is at the same maturity stage now as PCs were in the 1970s, then the sector needs a consumer product as elegantly simple to use as Apple's Macintosh. The inevitable game-change is obvious . . Apple should launch a 3D printer! The best part of this 3D maker panel was the presence of 3D engineering goddess Sandra Madrigal. Oh wow, she was one hot babe. She showed an image of a 3D printed version of her head she made as an experiment. I'd like to see more 3D printed versions of her, if you know what I mean. I say the 3D printing sector could jump start its growth by encouraging 3D printed molds of unclad female figure studies. This gal really got me thinking. I could have studied the LLNL material selection chart on the stiffness versus density tradeoff, but after watching Sandra Madrigal I was developing a mental tradeoff of my own. Okay, let's get serious here. I think alloying in 3D is solvable with some elegant nanotech. It probably means using airstreams to bring metal particles down into a melt pool, or using electrolysis plates to to attract them into a honeycombed grid where they can be heated and set. The first desktop device that does that will own the home market for cheap customization. I suspect very few financial analysts follow the 3D printing sector. That's why Alfidi Capital stands out.

I circled back to Intersolar for one last presentation. NABCEP discussed licenses and certifications for solar system installers. I recalled much of the material from past years at this show. The key takeaways for the financial sector are clear. Financial incentive programs for renewables support accredited contractors. NREL's Solar Access to Public Capital (SAPC) standards make that clear.

I did make the rounds of the entire expo floors of both conferences as is my annual habit. Nothing can stop me from cramming as much discovery into my schedule as possible. John Perlin's book Let It Shine got special mention at Intersolar's opening ceremony and he sold copies on the expo floor. TeamCalifornia supported the presence of California Go-Biz, SFCED, the East Bay EDA, and other regional advocacy groups at Intersolar. My round trip of all the exhibitors scored me tons of market insights and plenty of free candy. I informally surveyed some exhibitors on their most significant pain points. The unscientific results of my exploration will be the subject of another future blog post. Like I said above, you need to watch this space.

Intersolar and SEMICON West are always worth my time. I don't attend merely for free candy and photos with booth babes, although those are certainly nice perks. Entrepreneurs and venture investors need analysis of meta trends at the intersection of renewable energy and component manufacturing. I may not be the only person on the planet who sees these connections but I'm definitely having the most fun doing it. I'll see you all in 2015 for the next round of these combined trade shows.

Wednesday, March 05, 2014

Identifying The Manufacturing And Design Bodies Of Knowledge

I attended a PR seminar last night that got me thinking about design details that drive a PR message. A lot of the panel's comments addressed the expertise that cross-functional teams bring to product design. They also covered how product features drive user engagement, which will ultimately get the product's story told. Cross-functional teams have been all the rage for decades but the manufacturing knowledge that drives product design has become a lost art in the US ever since American executives started outsourcing production to developing countries. Practitioners need to know where knowledge of manufacturing and design can be found.

I asked the panel if a body of knowledge exists that product designers can use. One expert remarked that innovation has outpaced documentation, and many product development details can escape notice. That tells me there's a gap in knowledge management where some automated solution for documenting product and process changes can fill an enterprise need. Another panelist mentioned the free courseware at edX and free design templates at the MIT Media Lab. Those are great sources for people adding skills to their repertoire.

Professional societies have organized larger bodies of knowledge (BoKs) that pertain specifically to manufacturing and design. APICS has a BoK for operations management. The Society of Manufacturing Engineers has a BoK for manufacturing technology, and another BoK for lean certification. The Usability Body of Knowledge should be very useful to any produce designer working the human-computer interface (HCI) for wearables. The IEEE software engineering BoK, ASQ quality management BoK, and ASQ reliability engineer BoK are within the reach of anyone willing to study them. All of those things matter in scaling up hi-tech products.

The secrets to success in product development aren't secrets at all. They're buried under reams of academic concepts that practitioners have spent decades validating. Practitioners who master the above BoKs should populate the cross-functional teams that design products. The crucial factor today in product success is iterating product development in response to CustDev on a very compressed timeline. One panelist remarked that the old way of developing product features in advance of seeking customer feedback now takes too long to get a product to market. Enterprises doing CustDev can make that happen faster.

Most of the people I've seen attending the startup talks and meetups in San Francisco aren't very impressive. They're either too dense to benefit from the panelists' expert wisdom or too impatient to slog it out through the long road of development. There aren't many shortcuts in product development, and only experts can find the ones that exist. Experts do that once they've mastered BoKs and can see intuitively how systems behave. Come to think of it, these BoKs are the kind of multidisciplinary education that artisan designers in the maker movement need. The San Franciscans who show up at meetups should spend less time grabbing food from their hosts and more time applying BoKs to real projects.

Sunday, June 30, 2013

Observation for KMWorld "Measuring Collaboration Success"

I don't have time to read my various media inputs from cover to cover. I just focus on knowledge I can use. I value KMWorld for insights into knowledge management but sometimes knowledge hides in plain sight. Let's take a closer look at their June 2013 article, "Measuring Collaboration Success."

Forrester Research's very subjective, self-reported questionnaire drives the conclusions of a tradeoff chart measuring business units by their contribution to business value and their ability to drive change. I can tell what's missing just by looking at the chart. The least flexible business unit is manufacturing, followed by operations. The most flexible unit is sales. The missing variable is obvious: investment in fixed plant. Sales is a largely human element that can be changed at little cost by hiring and firing people in the sales force until the right people are in place. Minor tweaks to their CRM systems cost little. Compare this to the difficulty in changing a manufacturing unit without enormous new investments in physical infrastructure. Changing operations is almost as costly because it involves reengineering supply chains.

The whole purpose of KM is to optimize the performance of large, complicated organizations. That includes pushing KM practices down to capital-intensive business areas like operations and manufacturing. I would like to argue that applying operations research and KM together can reduce the delta in business value between new product development (which isn't always capital-intensive until physical prototypes go for testing) and manufacturing. The literature on KM is extensive but much of it is qualitative in nature. KM sorely needs a textbook treatment like Cloudonomics that can quantify the value added by reducing the costs of human latency or introducing new collaborative tools. That's the kind of thing I'd like to see KMWorld and Forrester Research address when they publish new KM thinking.

Monday, September 17, 2012

Financial Sarcasm Roundup for 09/17/12

I never have a hard time seeing the silliness in business. Here comes proof. Check it out.

The Fed's QE3 does a funny thing to commodity prices. It can't magically create more supply to satisfy demand, so any new demand is panic buying by hedge funds and other money managers who stampede into hard assets. That's happening in the oil markets now. Blame Helicopter Ben for making your driving addiction more expensive. There's plenty of blame for hedge funds too; their HFT algorithms play so much havoc with prices that they probably caused a flash crash in oil prices today. The onset of hyperinflation often brings uncontrollable swings in short-term input prices that make it impossible for producers to reliably plan production. This eventually hits the real economy with shortages of finished goods. People will be queuing in line at your favorite grocery store, hardware store, appliance store, and car dealer to draw lots for the chance to buy goods that might become available with no notice. Once again, thank Helicopter Ben for making your life more difficult.

The slowdown in U.S. manufacturing activity is coming just in time to make the national election season interesting. Hardly any Americans work in manufacturing anymore so they won't see the effects until their service jobs stocking shelves at Wal-Mart are eliminated. You can't put stuff on shelves if it's not getting made.

Even Wall Street analysts are figuring out that the U.S. is slowing down and that businesses will see reduced earnings. I'd like to think they all took a break from playing drinking games in the office long enough to read my blog but that would be giving these folks too much credit for original thinking. Investors who bought stocks on he assumption that the Fed's QE3 can keep the market afloat are in for a rude awakening when the reality of lower earnings becomes official.

The ECB's attempt at QE won't be any more successful than the Fed's at propping up equity prices, given the restrictions on debtor countries' eligibility for the bond-buying program. I've written quite a bit on the political games European leaders have been playing to make the markets think everything will be okay. The market loses interest in the shuttle diplomacy of finance ministers if it doesn't produce corporate earnings or restore solvency to bankrupt countries. The markets can figure this out, unexpectedly. Politicians can't figure this out, which is expected.

Monday, April 02, 2012

Manufacturing Up? Really?

I have a hard time understanding what's driving U.S. manufacturing growth. The ISM doesn't massage its statistics nearly as much as government agencies, so its numbers are probably accurate. The government's last revisions put GDP growth for Q4 2011 at an annual 3.0% but those numbers are so twisted with seasonal statistical adjustments that they mean less now than they did a generation ago. Manufacturing still adds value but not as much as it did in grandpa's day before the U.S. outsourced all of its hard work to Asia. Compare the value added by manufacturing to the value added by finance/insurance/real estate. The FIRE sector wins hands down. See how skewed the U.S. economy has become? That's why it's so easy for the Fed's ZIRP policy to impact nominal GDP; so much more of the GDP figure now depends on easy credit and leverage for the FIRE sector.

Monday, March 12, 2012

Molycorp Deal For Neo Material Technologies Moves REE To Vertical Integration

Molycorp has been consistently ahead of the game in rare earth metal production. They were first to see the potential in reactivation of the old Mountain Pass rare earth motherlode. Now they're the first REE producer to move toward large-scale vertical integration. Molycorp's $1.3B offer for Neo Material Technologies will give the combined company end-to-end control of an entire REE value chain, from ore to finished products (specifically magnets).

Molycorp made a bold move last year with a $35M investment in Boulder Wind Power. This investment sustains a wind turbine technology that is not dependent on dysprosium and is strategically complementary for Molycorp given that company's seeming lack of dysprosium among its deposits. I've seen other media reports that describe Boulder Wind's technology as "non-ferrous," which is curious given Molycorp's move toward neodymium-iron-boron (NdFeB) magnet combinations.

It's worth noting that Great Western Minerals Group has had a well-integrated business model for many years. Molycorp's model is large in scale and is notable for having something that has eluded Great Western for some time: profitability.

Full disclosure: No positions in any companies mentioned.

Thursday, October 13, 2011

Reshoring Jobs Can Be Fun And Funny

BCG has turned bullish on America. Their study of manufacturing costs in China drives them to conclude that 3mm jobs can be "reshored" to the U.S. There are some problems with that conclusion. The manufacturing infrastructure that used to enable those jobs was also shipped overseas, and it won't come back without major investment. U.S. workers also lack the skills to do many of the hi-tech they could do before offshoring. Plenty of other emerging economies have lower production costs than China, so global wage arbitrage can still keep manufacturing jobs from coming back here.

If jobs are to return to the U.S., they will have to fit the changed skill sets and personal characteristics of most Americans. Let's get creative, America! Lots of grown adults in this country like to play video games, so perhaps they could get jobs as "gold farmers" who earn online credits for game-playing masters. Asians have a lock on that job sector for now, so we'll have to give them a run for their money.

Americans can also get jobs clearing out the vacated branch offices of banks that are bound to collapse all over again. Fitch has put a bunch of U.S. banks on negative credit watch, so waiting for them to fail can become a fun game. Fired bankers will only have a few minutes to clear out personal belongings from their cubicles, so plenty of temp jobs will be available for Americans who can spend a few weeks moving very attractive furniture to auction houses.

Another great source of future employment will be the cleanup effort needed in the aftermath of the Occupy Wall Street movement. New York City will soon require the Occupiers to leave Zuccotti Park so city streets can be restored to a semblance of civilization. This is a full employment program for janitors and garbage truck drivers all around the nation. Will the otherwise unemployed Occupiers want to take jobs cleaning up the messes they made? I doubt it. Today I walked past the OccupySF gathering in front of the Federal Reserve Bank of San Francisco on Market Street. The sad losers squatting there wouldn't recognize productive work if it hit them on the head. It's only a matter of time before they get hit on the head anyway.

In case you haven't figured it out by now, I'm being really facetious with these suggestions. Avoiding the poor career choices I've mentioned here will require the kind of hard work to which many Americans have grown unaccustomed. Roll up your sleeves, people. It gets worse before it gets better.

Thursday, August 25, 2011

China Winning Over Manufacturers With Rare Earths

China's strategic gamble on its rare earth metal resources is starting to pay off big time. Foreign manufacturers are beginning to build capacity in China because they don't want to lose access to its rare earth metal stockpile. The article's last sentence says it all; of course this is what China's government has always wanted, from as far back as Chairman Mao's days.

China possesses about a third of the world's store of rare earth elements but ramped up its production to 95% of the world's output. The intent behind this move was to flood the market with supply that would drive smaller producers outside China out of business or make new exploration prohibitively expensive. China would then be free to impose export controls on its metals that would force dependent manufacturers into a bind. They could do without the metals and let their supply chains atrophy while they sought production elsewhere, or invest directly in China to manufacture stuff there.

The faster China attracts high-value manufacturers, the sooner it will have the technological capacity to become a military peer competitor to the U.S. Asian nations need to take note and plan accordingly for tighter links with India and the U.S. American investors need to plan accordingly for undeveloped rare earth deposits in the Anglo-West.

Full disclosure: Long FXI with covered calls.

Wednesday, March 16, 2011

Japan Nuclear Disaster Will Impact Chinese Industry

The full impact of the nuclear emergency facing Japan is unknown. The physical effects of reactor meltdowns and the spread of radiation are horrendous possibilities. The economic fallout from this disaster is not nearly as grave a threat to human life, yet it bears consideration.

Damage to the Japanese economy will seriously degrade the supply chains of manufacturers in China. Chinese companies will need to jump through hoops to source some components. This will provide even greater impetus for China to entice manufacturers to locate their entire production chains on the mainland. Value chain integration isn't just for rare earth metals anymore.

Full disclosure: Long FXI with covered calls.