Case studies using methods from ‘competition demystified’

In the last article (投资思考随笔-Competition Demystify心得), I tried to answer questions as:

1, What is true competition advantage; and how to evaluate whether a company has it or not?

2, Where are the advantages coming from?

3, What’s the strategy should take in different circumstances;

In this article, I will try to do some real life case studies, and try to use the theory from the book (Competition Demystified) to help our investment decisions. Let’s dive in directly in different industries and companies analysis, and check on the key issues. The case studies this time are more based on current situation and my own analysis, the book has also given many case studies happened nearly 20 years ago, which are also worth study, however will not be the focus of this paper.

Apple and smart phone industry

It’s amazing how long the misunderstandings about Apple lingers, as investors and analysts debated on whether Apple is more like a normal electronic OEM which faces heated competition or Apple has some real competition advantage which helps it enjoy a long time above industry profit margin (similar debate also on Tesla). Even last year, Goldman Sachs issued a report saying that Apple is doomed and will drop from the sky just as Nokia did in 10 years ago.

Today, I will not dive into very details of Apple and smart phone industry, which can be extremely complicated and can burn out our readers. I will only use the simple methods provided by the book.

1, Does Apple have competition advantage?

Yes, it has a commanding market share (more than 60%) in high-end smart phone (>$500) market and enjoys more than 80% of the profits from the entire market for may be more than a decade.

2, Where are the advantage coming from?

Supply: Apple’s vertical integration strategy certainly gives it some edge on supply side, such as patents, innovations, chip design know how, etc. However, this kind of advantage tends to be short term and needs to advance constantly;

Demand: Because of the Apple’s inherent eco-system, customers grow strong captivity. The more a customer use Apple’s software and service everyday, especially album, music, clound, and the overall system, more loyal a customer can be. This is huge advantage against other smart phone oems, which all rely on third party providers, thus customers grow loyalty on software and service providers, as wechat, spotify, etc, but not on OEMs.

Economy of scale: Apple has already fall behind Samsung and Huawei on delivery numbers, however, in dollar shares, Apple still has by far the biggest share. And more importantly, Apple has provided the least models, giving it a strong economy of scale. Apple’s econmoy of scale is also from eco-system standpoint, as the bigger its market grow, more providers are willing to rely on Apple’s platform.

Efficiency factor: Even though the efficiency is not included by the book as a competition advantage, it certainly impacts the competition and margin a lot. The Apple in the old days used to have all of its capacities home owned, a big disadvantage compared with other competitors, especially considering its smaller market share in PC market. The genius idea from Jobs and Cook was to outsourced the factory part to China, a decision greatly improved its efficiency and level play filed its manufacturing capability with competitors.

Tesla and industry

Many would like to compare Tesla with Apple, however Tesla might still do not have the same competition advantage as Apple has.

1, Does Tesla have competition advantage?

Yes, though debatable. At least in its own EV industry, Tesla has already proven to be a commanding power with 80% in US market and a much higher margin, though the its margin is still not comparable with top ICE OEMs.

2, Where are the advantage coming from?

Supply: Being a leader in EV market, Tesla has many technology advantages (some say 5 years ahead of competition) both in its proprietary technology and its manufacturing know-how.

Demand: As an inclusive smart car service OEM, Tesla not only sells the EV car itself, but also provides its software (assistant and autopilot system) and entertainment system. The whole range of service Tesla provides is complex enough that Tesla customers will find very difficult to find another equivalent provider, especially for those who have already got used to its software and system. The using habits and inclusive services providing can generate strong user loyalty, just as we found in Apple’s example.

Economy of scale: The automotive industry has a very high fixed cost and thus has a big operating leverage. At least in EV market, Tesla has a very strong economy of scale. Though it is still debatable that whether Tesla still has an economy of scale in a more broadly automotive industry, the efficiency between Tesla and the legacy oems are clearly closing, as Tesla’s unit costs continually to go down. 

Efficiency factor: The efficiency factor used to be very bad when Tesla only sold a few or tens of thousands of car per year, however it improved a lot as Tesla enhanced its manufacturing process and enlarged its sales scale.

Google/Facebook and industry

1, Does Google/Facebook have competition advantage?

With dominating market share in online-advertising and social media advertising market and above average profit generating capability, Google and Facebook clearly have competition advantage in their own industries. 

2, Where are the advantage coming from?

Supply: From the technology standpoint, Google may have many proprietory technologies as: advanced search engine, cloud, AI, etc, which give some leg up to Google’s competition, especially in the early times. And for Facebook, its advantange is not mainly from its technology advantage I believe, especially compared with other tech giants;

Demand: Because of their strong customer capativity in nature, Google and Facebook tend to have very loyal user base --- people are simply habit creatures and if once get used to use Google and Facebook everyday, it will be very difficult for them to switch to other providers.

Economy of scale: Because of the strong network effect, Google and Facebook clearly have great economy of scale.

Efficiency factor: In its core business, Google proved to be extremely efficient, partly because of its economy of scale and high operating leverage. However, Google tends to spend quite a lot money on its adventures (for example X department, and many investment ventures), many turned out to be purely splunder of money. Investors hope to see if Google’s new CEO Pichai can turn its investment efficiency around and be more shareholder oriented. Facebook mainly focuses on its core business, thus its efficiency is very high, though it also need to spend more and more to match its security and privacy requirements.

TSMC and industry

1, Does TSMC have competition advantage?

With dominating market share in semiconductor foundry business and long time above average margin, TSMC clearly has competition advantage in the foundry industry. 

2, Where are the advantage coming from?

Supply: TSMC has a strong technology advantange, especially in manufacturing know-how. The foundry business not only needs a extremely complicated technology understanding, but also relys heavyly on long time manufacturing experience, which most of its competitors lack of.

Demand: Even though some competitors, especially Samsung, can manage to provide similar service, the switching cost for customers is also huge. In order to switch foundry, the customers not only need to change their design preferences according to different foundry standards, but also risk making mistakes thus might lose a ton of money and, mor importantly, time to market.

Economy of scale: Most of the cost of semiconductor foundry business is fixed cost, and thus has a huge operating leverage. The bigger market share TSMC has, the more powerful it gets. 

Efficiency factor: TSMC has the best sales/capex efficiency number in the industry, largely given its market leader position and high operating leverage characteristic.

Software and Cloud industry

Software and Cloud industry might be the best example from the book’s standpoint, given its extremely high user loyalty and economy of scale combination, especially for those who keep focus on their own product sectors and not try to dilute their competition advantanges, for example Microsoft, Salesforce, Adobe, etc.

There is actually nothing left below. This is only a test of the payment function and try to find out whether this is a viable way to get some sponsorships in the future.