Why the car, oil, tobacco businesses are still (sometimes) very profitable?

[Matteo Martini]

During my earlier years, I studied a little bit of Marketing, and there was the famous chart about the life of a product: the BSG matrix
http://www.netmba.com/strategy/matrix/bcg/
It predicts that any product/business have several phases:
- child, new products
- star, high market growth and high profit
- cash cow, market growth stops and you make profits
- dogs: product/business end

In other words, AFAIK, when a product gets techonologically obsolete, everybody copies it and nobody will make big profits on it.

My question is, why the oil, car, tobacco industries are still among the most profitable, even if the technology behind all of them is at least 50-100 year old?
Should not competition leverage profits down?

How come that Toyota and Exxon make such enormous profits?

[Gazpacho]

First, I don't know why you'd say that the auto and oil industries are technologically stagnant. Car enthusiasts and chemical engineers don't seem to think so.

Second, auto makers have relied a great deal on style to sell cars since the 1930s. This bothers a lot of scientifically minded people (or would-be scientists like Galbraith), I guess because they can't explain styling from first principles. But people really do care about styling when they can get it.

Third, tobacco isn't so much a technology driven business as a taste and supply-driven one. A tobacco brand's success, like a soft drink's, depends on its formula, which is not registered with the patent office.

[Matteo Martini]

First, I don't know why you'd say that the auto and oil industries are technologically stagnant. Car enthusiasts and chemical engineers don't seem to think so.

Cars are basically the same since 1930


Second, auto makers have relied a great deal on style to sell cars since the 1930s. This bothers a lot of scientifically minded people (or would-be scientists like Galbraith), I guess because they can't explain styling from first principles. But people really do care about styling when they can get it.

You can not make billions out of style


Third, tobacco isn't so much a technology driven business as a taste and supply-driven one. A tobacco brand's success, like a soft drink's, depends on its formula, which is not registered with the patent office.

Tobacco is tobacco.
One friend of mine said it is basically is a cartel, and I believe him.
You can not keep selling cigarettes at x price, making a lot of profit.
Making a cigarette is very simple.
How can profits be so high?

[e-sabbath]

Either... cars must not be the same since 1930... or marketing theory must be wrong!

[NobbyNobbs]

Cars are basically the same since 1930

How they function is essentially the same, i.e. combustion engines, pistons, brakes, steering, etc. But this (http://images.google.com/imgres?imgurl=http://www.moviecarmania.com/prodimages/Al_Capone_1930_Cadillac.jpg&imgrefurl=http://www.moviecarmania.com/proddetail.asp%3Fprod%3DMCM-0040%26cat%3D19&h=308&w=500&sz=46&hl=en&start=1&um=1&tbnid=P-cVW1W9tWnLaM:&tbnh=80&tbnw=130&prev=/images%3Fq%3Dcar%2B1930%26svnum%3D10%26um%3D1%26hl %3Den%26rls%3DGGLD,GGLD:2004-30,GGLD:en%26sa%3DN) is hardly the same as this (http://images.google.com/imgres?imgurl=http://www.seriouswheels.com/pics-def/Ford-GT90-Concept-Car-Front.jpg&imgrefurl=http://www.seriouswheels.com/def/Ford-GT90-Concept-Car-Front.htm&h=960&w=1280&sz=135&hl=en&start=9&um=1&tbnid=SeOMyfE0cDtFJM:&tbnh=113&tbnw=150&prev=/images%3Fq%3Dconcept%2Bcar%26svnum%3D10%26um%3D1%2 6hl%3Den%26rls%3DGGLD,GGLD:2004-30,GGLD:en), stylistically. And people's tastes change.

You may as well say that movies haven't changed since 1930. After all, it's still shown on a big screen, and it's still boy meets girl, and spy vs. spy, etc.

You can not make billions out of style

I would think the fashion industry proves otherwise, wouldn't you?



Tobacco is tobacco.
One friend of mine said it is basically is a cartel, and I believe him.
You can not keep selling cigarettes at x price, making a lot of profit.
Making a cigarette is very simple.
How can profits be so high?

Tobacco is the one thing on your list I can't empathize with; I've never smoked. But to hear people talk about it, tobacco is like wine; there are connosieurs who can taste a difference in tobacco products. And then, of course, there are the millions of cigarette addicts. You can absolutely sell cigarettes at x price, making a lot of profit, if the ones buying are addicted.

Again, you say this is impossible, but the success of the industry obviously proves otherwise.

[e-sabbath]

According to this logic, horses are now available for pittances, as are houses.

Therefore, either the BSG matrix, as explained, is wrong, or the world is wrong. I believe something may be wrong with the explanation. I will examine it when I have a moment. I rather suspect barriers to entry (eg, making a car is a non-trivial cost) may have weight.

[tsg]

Cars are basically the same since 1930

Anti-lock brakes. Computer controlled ignition. Air-bags. Navigation systems. Electric start. Seat belts. Radios. Heat. Air-conditioning. Power windows. Power locks. Power Steering. Power Brakes. Except for having four wheels and a motor, there isn't much about cars that hasn't changed since the 1930s.

You can not make billions out of style

I think the fashion industry would disagree with you.

[Tokenconservative]

First, I don't know why you'd say that the auto and oil industries are technologically stagnant. Car enthusiasts and chemical engineers don't seem to think so.

Second, auto makers have relied a great deal on style to sell cars since the 1930s. This bothers a lot of scientifically minded people (or would-be scientists like Galbraith), I guess because they can't explain styling from first principles. But people really do care about styling when they can get it.

Third, tobacco isn't so much a technology driven business as a taste and supply-driven one. A tobacco brand's success, like a soft drink's, depends on its formula, which is not registered with the patent office.

I think by "technologically stagnant" you can say that a car is essentially unchanged since Ford built his Model Ts: an enclosed platform that gets you from here to there.

Oil exploration, extraction, refining, etc., etc., are moving ahead apace, indeed. But same thing applies: you use oil (mostly...there are other products: plastice, fertilizers, etc.) for energy, like running those cars.

Tobacco is a very addictive thing, like legal heroin--worse, actually.

Cars and oil are necessities in modern life in America, especially. Cars are very much "status" things elsewhere. While it's a status thing here to drive a H3 or Lexus, or Mercedes, in most other parts of the world just being able to afford a car is a HUGE status symbol.

Tobacco is constantly being marketed to new markets. It's a HUGE seller in China, now and the Chinese have money to spend on smokes and American cigs are HUGE status symbol, as they have been all over the world for 75 years. In fact, only in N. America do we look down our noses at smoking. The Euros all smoke like locomotives and do Latin and S. Americans, Aussies and Kiwis, and Asia is awash in smoking...virtually EVERYONE over the age of 9-10 in China smokes and smokes a LOT.

It's just good marketing that keeps this going.

Tokie

[ImaginalDisc]

I think by "technologically stagnant" you can say that a car is essentially unchanged since Ford built his Model Ts: an enclosed platform that gets you from here to there.

An enclosed platform, of which every part inside has undergone radical alteration numerous times conforming to increasing standards of speed, handling, braking, acceleration, top speed, safety, fuel efficiency, and style, which gets you from here to there.

That's as idiotic as saying that a coracle and a battleship are so similar that shipbuilding is "technogologically stangnant."

[JonnyFive]

OP: You really don't think the technology behind cars, oil, and tobacco has changed at all? Seriously?

The level of efficiency in manufacturing alone (ignoring all the wonderful advances in the technology of cars themselves, which is the only product on your list that actually has "technology" as a real component of the product itself) is considerably greater than it was 50 or 100 years ago. This drives down the cost of production.

Your three industries are very different, and the reasons for profit in the three are also quite different. It might also be worth pointing out that many car manufacturers have had trouble making consistent profits in the face of tough competition (GMC, anyone?), and the tobacco industry has seen their US market suffer due to lawsuits and increased anti-tobacco legislation.

[Jaggy Bunnet]

The Euros all smoke like locomotives

Percentages smoking in the UK and US are broadly the same. Guess we can't be in Europe.

[TjW]

With regard to automobiles, I think you're mistaking the forest for the trees.
Trees sprout, get old, and die. How can there still be forests after all these years?

[JonnyFive]

With regard to automobiles, I think you're mistaking the forest for the trees.
Trees sprout, get old, and die. How can there still be forests after all these years?

I don't know for sure, but I'm fairly certain the answer has something to do with badgers.

[NobbyNobbs]

I would think the fashion industry proves otherwise, wouldn't you?






I think the fashion industry would disagree with you.


I beat you! (Actually, I predicted you would say that, almost word for word. I'd like the $1 million in 50's and 100's please.)

As my dad would say, "Great minds think alike....and soft minds run together."

[Gazpacho]

Cars are basically the same since 1930
Here are some changes that have happened just during my lifetime:
- Carburetors have disappeared
- The drive axle has moved from the rear to the front
- Computer control systems have been added
- Numerous safety developments like crumple zones, detachments, and fuel line cut-off.

This is just what I know as a layman. A car enthusiast could tell you more. Sure, cars still spray gasoline into a cylinder and make it explode, so they're the same if you conveniently ignore how the gas gets into the cylinder and how the explosion is used to turn the wheels, as well as everything outside the power system.

You can not make billions out of style
You can if the market is big enough.

Tobacco is tobacco.
You simply do not know what you are talking about.

[tsg]

I beat you! (Actually, I predicted you would say that, almost word for word. I'd like the $1 million in 50's and 100's please.)

In my defense, I hadn't read your post when I made mine. That's my story and I'm sticking to it.

As my dad would say, "Great minds think alike....and soft minds run together."

I always preferred "twisted minds think alike".

[NobbyNobbs]

I think by "technologically stagnant" you can say that a car is essentially unchanged since Ford built his Model Ts: an enclosed platform that gets you from here to there.


I like the idea of applying this logic to other inventions.

After all, an aircraft is simply an object with wings (generally) that uses lift to get you from here to there. Therefore, there really isn't much difference between a hang glider and the Concorde, the aircraft industry being "technologically stagnant" since the Montpelier brothers.

And communications must be "technologically stagnant", since both a cell phone and a couple of tin cans tied with string allow you to project your voice from here to there.

And medicine must be "technologically stagnant", since trepanning and laser-controlled brain surgery are both used to relieve pressure on the brain.

This is fun!

[tsg]

I like the idea of applying this logic to other inventions.

I was thinking that, too. Essentially, the statement is "if you ignore all the things that have changed, nothing has changed."

[littlehulkster]

Cars are basically the same since 1930


Jets are basically the same since 1955.

The automobile might be operating on the same concepts as one from the 30s, but so much has changed since then. Things like electronic fuel injection, variable valve timing, capacitor ignition, and advances in metallurgy have made cars far more efficient, more powerful and cleaner running than ever before.

Not to mention computers allow automakers to greatly increase the efficiency of many parts and plan out aerodynamics for more efficiency.

[NobbyNobbs]

Jets are basically the same since 1955.

The automobile might be operating on the same concepts as one from the 30s, but so much has changed since then. Things like electronic fuel injection, variable valve timing, capacitor ignition, and advances in metallurgy have made cars far more efficient, more powerful and cleaner running than ever before.

Not to mention computers allow automakers to greatly increase the efficiency of many parts and plan out aerodynamics for more efficiency.

Computers! Not much different than an abacus, only faster!

[Tokenconservative]

I like the idea of applying this logic to other inventions.

After all, an aircraft is simply an object with wings (generally) that uses lift to get you from here to there. Therefore, there really isn't much difference between a hang glider and the Concorde, the aircraft industry being "technologically stagnant" since the Montpelier brothers.

And communications must be "technologically stagnant", since both a cell phone and a couple of tin cans tied with string allow you to project your voice from here to there.

And medicine must be "technologically stagnant", since trepanning and laser-controlled brain surgery are both used to relieve pressure on the brain.

This is fun!

Clearly (you've demonstrated this before) logic does escape you.

(this is only a working definition presented by a layman) An airplane is a self-propelled, non-kinetic energy machine that moves through the atmosphere using some sort of engine to do so (this would not include hang gliders or hot air baloons, but could include dirigibles, I suppose).

The Wright brothers had a machine that did this.

A Hawker Harrier does this.

Both are, therefore, airplanes.

Your communications analogy is correct, only it's too broad 'communications' means something far more than devising technical means of communicating over distance. A better analogy would be smoke signals or drums and a cell phone, which, since they do the same thing, analogous.

I did not say the advancement of technolgy was "stagnant." That was someone else.

But yes, in your medicine analogy, all other things being equal, they are very comparble.

I see that the further you went into this, the more rational you became.

That's a start.

Now, if you could only have stopped and said to yourself "uh, self...I am kinda defeating my own point here...that Tokie feller is right!" you'd be much further ahead intellectually.

Tokie

[Tokenconservative]

Computers! Not much different than an abacus, only faster!

No, absolutely wrong. Computers do all sorts of things from the simplest math (like an abacus) to producing advanced graphics.

Sigh...yes...you can argue that it's ALL just math to a computer, and you'd be right.

But the last time I checked, an abacus could not make Angelina Jolie's feet sprout built-in CFM heels as a computer did in Beowulf.

Tokie

[ImaginalDisc]

Clearly (you've demonstrated this before) logic does escape you.

(this is only a working definition presented by a layman) An airplane is a self-propelled, non-kinetic energy machine that moves through the atmosphere using some sort of engine to do so (this would not include hang gliders or hot air baloons, but could include dirigibles, I suppose).

The Wright brothers had a machine that did this.

A Hawker Harrier does this.

Both are, therefore, airplanes.

Your communications analogy is correct, only it's too broad 'communications' means something far more than devising technical means of communicating over distance. A better analogy would be smoke signals or drums and a cell phone, which, since they do the same thing, analogous.

I did not say the advancement of technolgy was "stagnant." That was someone else.

But yes, in your medicine analogy, all other things being equal, they are very comparble.

I see that the further you went into this, the more rational you became.

That's a start.

Now, if you could only have stopped and said to yourself "uh, self...I am kinda defeating my own point here...that Tokie feller is right!" you'd be much further ahead intellectually.

Tokie

I take it then you will stop using the internet and take to using smoke signals to communicate with us over long distances, please? They're both just messages. With one wave if your hand you're idiotically equating the most primative technologies to the bleeding, cutting edge.

[Tokenconservative]

You know, I realize it's something of an...obsession in here for various n00bs to try and find some niggling little aspect of something--anything--Tokie says and nit-pick it to the nth degreee, but sometimes you guys just make yourselves look like morons when you do it.

I will now await my "warning!!!" for calling some morons morons.

Sheesh.

Tokie

[Tokenconservative]

I take it then you will stop using the internet and take to using smoke signals to communicate with us over long distances, please? They're both just messages. With one wave if you hand you're idiotically equating the most primative technologies to the bleeding, cutting edge.

See my post just previous to this one. It especially applies to you.

Tokie

[ImaginalDisc]

You know, I realize it's something of an...obsession in here for various n00bs to try and find some niggling little aspect of something--anything--Tokie says and nit-pick it to the nth degreee, but sometimes you guys just make yourselves look like morons when you do it.

I will now await my "warning!!!" for calling some morons morons.

Sheesh.

Tokie

Egads! You're experiencing criticism of your statements on a forum dedicated to critical thinking?

I am so suprised!

[Gazpacho]

(this is only a working definition presented by a layman) An airplane is a self-propelled, non-kinetic energy machine that moves through the atmosphere using some sort of engine to do so (this would not include hang gliders or hot air baloons, but could include dirigibles, I suppose).
The Wright brothers attached airfoils to their flier and pushed it through the air fast enough that the air pressure difference lifted the flier off the ground.

Modern airplanes work the same way. Therefore airplanes are basically the same as they were at the beginning of the 20th century.

[blutoski]

I think there's a confusion here about what the BCG is showing: it's not a product life cycle, but a set of four general descriptions of how products might compare to one another in an overall company portfolio, in two independent ways, which makes for 'types' of product.

It does speak to product life cycle, though, in that many question marks become stars, which become cash cows, and some cash cows may become dogs. But there's no rigid law about this.


The second complication is the conflation of commodity products versus invented products. An example of this is oil, which is dug out of the ground, and is essentially valuable because it's a bucket of Joules.

The third complication is the conflation of products with markets. "Cars" is an market. "The Datsun S10" is a product. The BCG matrix applies to products a company sells [/i]within[/i] a market.

The fourth complication is that the product life cycle duration varies, and the goal is to make a product profitable forever. There's no reason that some products can't remain cash cows forever.

The BCG is a resource allocation tool, and an obsolete one, at that.

You're thinking of product life cycle (http://www.netmba.com/marketing/product/lifecycle/). Note that PLC models have limitations and exceptions. Specifically, note this passage from the linked citation:
The life cycle concept may apply to a brand or to a category of product. Its duration may be as short as a few months for a fad item or a century or more for product categories such as the gasoline-powered automobile.

It would not apply to 'oil,' since that's a resource commodity and anyway, as you're aware, it's a cartel and resistant to conventional marketing models. There are models for cartel management that would apply.

[WildCat]

When I was in college we learned a much different meaning for the term "cash cow". A cash cow was a company that had lots of cash on hand, and these companies were ripe for the picking (meaning likely to be bought out) because they shouldn't have so much cash on hand. Instead, they should be re-investing in new products, new technology, etc. In other words, cash cows were underperforming companies.

[bjb]

During my earlier years, I studied a little bit of Marketing, and there was the famous chart about the life of a product: the BSG matrix
http://www.netmba.com/strategy/matrix/bcg/

My question is, why the oil, car, tobacco industries are still among the most profitable, even if the technology behind all of them is at least 50-100 year old?
Should not competition leverage profits down?

How come that Toyota and Exxon make such enormous profits?

You have made the mistake of not reading your own link:

The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed.

To answer your question, all of these companies are successful in spite of the BCG matrix because the BCG matrix is not a very good economic model.

[Marquis de Carabas]

You have made the mistake of not reading your own link:

The growth-share matrix once was used widely, but has since faded from popularity as more comprehensive models have been developed.

To answer your question, all of these companies are successful in spite of the BCG matrix because the BCG matrix is not a very good economic model.
Pah! Economic models are basically the same since 1930.

[Matteo Martini]

How they function is essentially the same, i.e. combustion engines, pistons, brakes, steering, etc. But this (http://images.google.com/imgres?imgurl=http://www.moviecarmania.com/prodimages/Al_Capone_1930_Cadillac.jpg&imgrefurl=http://www.moviecarmania.com/proddetail.asp%3Fprod%3DMCM-0040%26cat%3D19&h=308&w=500&sz=46&hl=en&start=1&um=1&tbnid=P-cVW1W9tWnLaM:&tbnh=80&tbnw=130&prev=/images%3Fq%3Dcar%2B1930%26svnum%3D10%26um%3D1%26hl %3Den%26rls%3DGGLD,GGLD:2004-30,GGLD:en%26sa%3DN) is hardly the same as this (http://images.google.com/imgres?imgurl=http://www.seriouswheels.com/pics-def/Ford-GT90-Concept-Car-Front.jpg&imgrefurl=http://www.seriouswheels.com/def/Ford-GT90-Concept-Car-Front.htm&h=960&w=1280&sz=135&hl=en&start=9&um=1&tbnid=SeOMyfE0cDtFJM:&tbnh=113&tbnw=150&prev=/images%3Fq%3Dconcept%2Bcar%26svnum%3D10%26um%3D1%2 6hl%3Den%26rls%3DGGLD,GGLD:2004-30,GGLD:en), stylistically. And people's tastes change.

You may as well say that movies haven't changed since 1930. After all, it's still shown on a big screen, and it's still boy meets girl, and spy vs. spy, etc.


I agree.
I would rather say: "the main concept behind/things you can do with" a car have not really changed since 1930


I would think the fashion industry proves otherwise, wouldn't you?


The fashion industry is quite small, if compared with the car industry, and nowhere as profitable


Tobacco is the one thing on your list I can't empathize with; I've never smoked. But to hear people talk about it, tobacco is like wine; there are connosieurs who can taste a difference in tobacco products. And then, of course, there are the millions of cigarette addicts. You can absolutely sell cigarettes at x price, making a lot of profit, if the ones buying are addicted.


Why prices do not get leveraged downwards?

[Matteo Martini]

Anti-lock brakes. Computer controlled ignition. Air-bags. Navigation systems. Electric start. Seat belts. Radios. Heat. Air-conditioning. Power windows. Power locks. Power Steering. Power Brakes. Except for having four wheels and a motor, there isn't much about cars that hasn't changed since the 1930s.


With a car, you can do in 2007 basically the same things you could do in 1937.
Air bags do not reduce accidents that much.
Radios are availalbe in cars since 1960.
Power windows, etc., yes, an improvement, hardly a drastic change


I think the fashion industry would disagree with you.

Is there any fashion company one quarter as profitable as Toyota?

[Matteo Martini]

The Euros all smoke like locomotives ..
Tokie

Not really true, but ;)

OP: You really don't think the technology behind cars, oil, and tobacco has changed at all? Seriously?

It has changed, even if cars do basically now what they did in the 30s


The level of efficiency in manufacturing alone (ignoring all the wonderful advances in the technology of cars themselves, which is the only product on your list that actually has "technology" as a real component of the product itself) is considerably greater than it was 50 or 100 years ago. This drives down the cost of production.
[..]
It might also be worth pointing out that many car manufacturers have had trouble making consistent profits in the face of tough competition (GMC, anyone?),

So, why GMC is making huge losses and Toyota great profits, if they both sell similar products at similar prices?

Jets are basically the same since 1955.
[..]

Yes, the main concept of my discussion can involve jets too.
But, with jets, there are basically two big players, with cars, more.

Again, the main concept behing cars has not changed.

You're thinking of product life cycle (http://www.netmba.com/marketing/product/lifecycle/). Note that PLC models have limitations and exceptions. Specifically, note this passage from the linked citation:


You are probably right.
What I am saying is: how can some car companies make big profits (and some, big losses), in an industry which has not seen any kind of enormous tech breakthrough in the last decades?

[tsg]

With a car, you can do in 2007 basically the same things you could do in 1937.
Air bags do not reduce accidents that much.
Radios are availalbe in cars since 1960.
Power windows, etc., yes, an improvement, hardly a drastic change


In other words, except for the things that have changed, nothing has changed.


Is there any fashion company one quarter as profitable as Toyota?

You're moving the goalposts. You don't have to be one quarter as profitable as Toyota to be successful at selling style as the fashion industry clearly shows.

[Matteo Martini]

In other words, except for the things that have changed, nothing has changed.


Cars have remained virtually the same in the last 50-70 years.
Things which changed are: Ipods, computers, internet and microwave, ..


You're moving the goalposts. You don't have to be one quarter as profitable as Toyota to be successful at selling style as the fashion industry clearly shows.

I am talking about the big money.
Not fashion

[Jaggy Bunnet]

Is there any fashion company one quarter as profitable as Toyota?

Depends what you mean by profitable.

As a percentage of revenue? Yes. (For example LVMH made €1,298 million of profit before tax and minority interest on turnover of €7,412 million in the first half of 2007 - 17.5%. Toyota in its half year to Sep 07 made Yen1,166,134 on turnover of Yen11,471,889 - 10.2%)

In absolute terms? Probably not as the fashion industry does not offer the same economies of scale benefits as motor manufacture and therefore companies tend to be smaller.

Given that competition will have a more direct impact on margins than company size, it would appear that net income percentage is a more relevant measure - on that basis the first "fashion" company that came to mind (behind the Louis Vuitton, Moet and Hennessy brands) is significantly more profitable than Toyota.

[tsg]

Cars have remained virtually the same in the last 50-70 years.

Except for having four wheels and a motor (and even the wheels and motor have changed significantly) very little of the car hasn't changed. That you don't want to acknowledge it doesn't change anything.

I am talking about the big money.
Not fashion

You're moving goalposts. You said you can't make billions selling style. The fashion industry says otherwise.

[JonnyFive]

It has changed, even if cars do basically now what they did in the 30s

Well then, that's settled.

So, why GMC is making huge losses and Toyota great profits, if they both sell similar products at similar prices?

This is really beside the point of anything in this thread. Issues with profitability within a particular market are complex, and you weren't really asking about "why are some companies profitable and some aren't?" If you want to explore that, I'd suggest starting a new thread.

Really, blutoski head it square on the head. There are a number of, as he put it, "complications" with your original question. Honestly, I think you're lumping too many different things into one generic question, then making some giant assumptions to make that generalized question valid.

Another issue that I didn't see blutoski mention is that you're conflating "profit" with "price" when you talk about the market. You keep saying that competition will affect "profit," but what you probably mean to say is that competition tends to drive down the price of a good. If a manufacturer is able to continue to reduce their costs of production, distribution, marketing, etc. they may still be able to remain equally profitable.

Although the two do tend to be linked, it's confusing to try to ram the concept of profit into the supply/price curve.

[Tokenconservative]

Egads! You're experiencing criticism of your statements on a forum dedicated to critical thinking?

I am so suprised!

Sigh.

And this is precisely what I mean.

"Critical thinking" does not mean "criticizing someone."

Sigh.

Tokie

[Tokenconservative]

According to this logic, horses are now available for pittances, as are houses.

Therefore, either the BSG matrix, as explained, is wrong, or the world is wrong. I believe something may be wrong with the explanation. I will examine it when I have a moment. I rather suspect barriers to entry (eg, making a car is a non-trivial cost) may have weight.

Not sure, zactly, what you are driving at, but since I know a little about the cost of horses and a lot about the cost of houses, I will comment.

We have given away 6 horses in the past oh, about 10 years. That's pretty cheap.

A reasonably decent Mustang can be had for $300-600. A slightly more trained and better lineage Quarter for around a grand.

Pretty cheap, yeah. On the other hand, I know people who pay $20k-$30 k for horses. I think that's crazy, but they don't.

Houses? Well, that depends. I know neighborhoods near me where you can get a 200-2500 s.f 2-story for around $100k.

I also know neighborhoods not too far from those neighborhoods where the same house will cost you upstairs from $500k.

To me $100k is "cheap" and $500k is expensive (for the same thing. If someone were to offer me Trump Tower for $500k, I would think that "cheap.").

"Cheap" and "expensive" are relative things, no matter the product, era, place or whatever.

Tokie

[Tokenconservative]

Pah! Economic models are basically the same since 1930.

Um...no...only if you are a liberal.

Then you believe that economics started with Malthus and ended with Keynes.

Otherwise, you know better.

Tokie

[ImaginalDisc]

Sigh.

And this is precisely what I mean.

"Critical thinking" does not mean "criticizing someone."

Sigh.

Tokie

When you says thing here, they will be criticized. If you prattle on without a shred of evidence while you spout idiocies we will pick your words apart and then laugh at you.

[Tokenconservative]

With a car, you can do in 2007 basically the same things you could do in 1937.
Air bags do not reduce accidents that much.
Radios are availalbe in cars since 1960.
Power windows, etc., yes, an improvement, hardly a drastic change

Is there any fashion company one quarter as profitable as Toyota?

Exactly so.

Power windows and locks, stereo systems...hell, you can even get little TVs and DVD players in every seat back in your car now.

How (this question is not posed to you, Martini, but to the pedants we are dealing with) does any of this change the basic fuctioning of the car? It's still a means of conveyance more similar to a 1925 Model T than it is to a horse, is it not?

Why is it necessary, in such conversations, for engineer and other types to engage in this sort of nit-pickng pedantry?

Does a car or an airplane do, essentially, the same thing today, as it did in 1920?

If they do something radically different than they did in 1920, then okay. Let's say cars now are primarily used as a means of detecting gamma radiation from neutron stars and aircraft are used, primarily, to inseminate cattle--these would be radically different discoveries of new uses and radical divergences from the original uses, indeed.

But from all that I am able to determine, cars (automobiles) today are independent systems designed to move people and things from one place to another on the ground, and aircraft do the same thing in the air.

How is this radically different from what these machines did in 1997? 1987? 1977? 1967? 1957? 1947? 1937? 1927?

Tokie

[Tokenconservative]

When you says thing here, they will be criticized. If you prattle on without a shred of evidence while you spout idiocies we will pick your words apart and then laugh at you.

Hm.....I am having a hard time figuring out whether the miscommunication here is coming from me, or from the fact that you seem to be a bit...obtuse.

I'll try it again: Critical thinking is not "criticizing" others.

But please, since I am apparently not, in this statement of fact, being entirely clear, tell me which of the words in the above statement you don't have any understanding of, and I'll try to work through their meaning(s) with you.

Tokie

[ImaginalDisc]

Hm.....I am having a hard time figuring out whether the miscommunication here is coming from me, or from the fact that you seem to be a bit...obtuse.

I'll try it again: Critical thinking is not "criticizing" others.

But please, since I am apparently not, in this statement of fact, being entirely clear, tell me which of the words in the above statement you don't have any understanding of, and I'll try to work through their meaning(s) with you.

Tokie

Learn to read.

No one is calling you short, fat, weak, or clumsy. We are tearing apart your assertions, not your appearance or personality.

[Jaggy Bunnet]

But from all that I am able to determine, cars (automobiles) today are independent systems designed to move people and things from one place to another on the ground, and aircraft do the same thing in the air.

And a house is a fixed place intended to provide protection from the elements, intruders and wild animals, so I guess houses must be worth almost nothing as they have been performing the same function for tens of thousands of years?

After all a house today does essentially the same thing as a cave dwelling.

[technoextreme]

My question is, why the oil, car, tobacco industries are still among the most profitable, even if the technology behind all of them is at least 50-100 year old?

Don't know about the oil and tobacco industries but the technology in the current batch of cars is not 50-100 years old. It's an idiotic argument to say that they haven't changed.Jets are basically the same since 1955.

Except for the whole flying themselves part.So, why GMC is making huge losses and Toyota great profits, if they both sell similar products at similar prices?
There are multiple reasons why they could be making great profits that have nothing to do with the similar products. You are ignoring the manufacturing process which is significantly different. Japanese companies like Toyota go to great lengthes to streamline their manufacturing process. They'll have the manufacturer send the parts that they need when they need them. This is called just in time manufacturing.

[blutoski]

You are probably right.

So this is actually not the question you were asking in the original post.

You're talking about industies now, not products. The BCG would be used by, say, GM, to manage its product lines so that they always had something in the pipeline to replace a tired brand.

Consider Apple: a few years ago when Jobs came back on board, they did something like a BCG review, and concluded that Newton was a dog, the OS was a dog, and that their cash cow was the hardware. They used some of the cash cow value to buy NeXT and build a new OS to bundle with the hardware, increasing the profit margin, and invested some of this surplus profit to put new products in the pipeline. Specifically, they gambled on iPod, which is arguably their new star, with the computer+OS as the cash cow. They need to take some of this excess profit and invest in something new, because someday, the iPod may be a dog. That's how the BCG is supposed to be used. And it's a bit obsolete, because it was developed in a time before acquisition research budgets became such an important substitute for in-house product development budgets.






What I am saying is: how can some car companies make big profits (and some, big losses), in an industry which has not seen any kind of enormous tech breakthrough in the last decades?

Cars are not just sold on their tech specs. In fact: auto sales are very dependent on style. A joke I remember from years ago in Mad Magazine of all things was that the typical car buyer spends approximately 200 hours researching his next car purchase, then buys a Buick anyway, 'cause that's what his daddy drove.

My dad spent $2000 on an Austin-Healey Sprite in the '50s. It's worth about $20,000 today. It didn't get 10x more technologically sophisticated in the last five decades.

In any case, there are other factors that come into play that explain the industry's profit volatility. But overall, I have always considered the auto industry to be mature and that part of the evidence for this was that they regularly struggle for profits. The Japanese manufacturers are just now getting out of a decade-long slump, and the American manufacturers are still in one (GM lost $2B in 2006, Ford lost $12.7B in 2006, and DaimlerChrysler appears to have made no profit/loss in 2006)

The second reason that you see cycles in this industry is that the enormous sunken costs (which are also barriers to entry) mean that the industry is very sensitive to demand - it is not able to reduce costs in proportion to production downticks in order to meet temporary reductions in demand. During the good years, they'll underproduce, which raises profits, and during bad years they'll overproduce, which causes losses.

Basically, industries that have large investments in plant can remain slightly profitable (as an industry - not necessarily as a company) in a mature market since increases in demand against a limited production will translate into increased prices. At least temporarily. It is this sensitivity to cycles that also acts as a barrier to entry - would you invest in a new auto company if its factories will not come online for five years? ie: what if they come online in a recession?

The same applies to the automakers: just because there's an increase in demand today doesn't necessarily mean that they will increase capacity. They may find that when the new factories are completed, this demand blip has passed. That's part of why the US automakers are in bad shape: they expected sales growth, invested in plant, and the growth did not materialize. Reports are that in 2006 GM plants were operating at 65% capacity, whereas Toyota plants were at 95%. Per-unit profits are low because of the increased overhead.

Fuel costs and consumer preference made the Ford/GM/Chrysler SUV designs obsolete, and undercut the domestic manufacturers' profits, shifting purchasing dollars mostly to Toyota and Honda, who were selling more fuel efficient cars.

So, I'm not seeing what you're seeing: I'm seeing established producers losing market share to new competitors and overall low average profits in the industry. It'll get worse for profitability when the Chinese manufacturers get access to the US and Japanese markets. I predict China will actually dump (sell at a loss to buy market share).

[Matteo Martini]

Depends what you mean by profitable.

As a percentage of revenue? Yes. (For example LVMH made €1,298 million of profit before tax and minority interest on turnover of €7,412 million in the first half of 2007 - 17.5%. Toyota in its half year to Sep 07 made Yen1,166,134 on turnover of Yen11,471,889 - 10.2%)

In absolute terms? Probably not as the fashion industry does not offer the same economies of scale benefits as motor manufacture and therefore companies tend to be smaller.

Given that competition will have a more direct impact on margins than company size, it would appear that net income percentage is a more relevant measure - on that basis the first "fashion" company that came to mind (behind the Louis Vuitton, Moet and Hennessy brands) is significantly more profitable than Toyota.

I mean, in absolute terms.
The fashion market is a small one, if compared with cars, oil and tobacco.
P.S.
Toyota did not make a profit of 1 million yen

Except for having four wheels and a motor (and even the wheels and motor have changed significantly) very little of the car hasn't changed. That you don't want to acknowledge it doesn't change anything.


You do with cars in 2007 the same you did with them in the 30s


You're moving goalposts. You said you can't make billions selling style. The fashion industry says otherwise.

OK
Maybe, there is only one ( or two?) fashion company which made more than 1 billion in profit in 2006

Exactly so.
Power windows and locks, stereo systems...hell, you can even get little TVs and DVD players in every seat back in your car now.

How (this question is not posed to you, Martini, but to the pedants we are dealing with) does any of this change the basic fuctioning of the car? It's still a means of conveyance more similar to a 1925 Model T than it is to a horse, is it not?

Why is it necessary, in such conversations, for engineer and other types to engage in this sort of nit-pickng pedantry?

Does a car or an airplane do, essentially, the same thing today, as it did in 1920?
[..]

TV and DVDs are not really part of the car business, but as part of the electronic business even if they are used in cars.
The main design and the main performances of cars have not really ben changed in the lat 50 years.
You could drive at the same speed in a car built in 1940 and in another one built in 2000.
Probably gallons of oil/mile ration has improved, but how much? Not that much, I guess.

The reasons why Toyota should be profitable and GM is not should be others

Don't know about the oil and tobacco industries but the technology in the current batch of cars is not 50-100 years old. It's an idiotic argument to say that they haven't changed.
Except for the whole flying themselves part.
There are multiple reasons why they could be making great profits that have nothing to do with the similar products. You are ignoring the manufacturing process which is significantly different. Japanese companies like Toyota go to great lengthes to streamline their manufacturing process. They'll have the manufacturer send the parts that they need when they need them. This is called just in time manufacturing.

JIT manifacturing was known in the weat about 20 years ago (I studied it in University).
If it was that good, GM could have used it 20 years ago.
No, the reasons should be others

[tsg]

You do with cars in 2007 the same you did with them in the 30s

That's not the same as the technology behind them being 50 - 100 years old.

[technoextreme]

JIT manifacturing was known in the weat about 20 years ago (I studied it in University).
If it was that good, GM could have used it 20 years ago.
No, the reasons should be others
That's the problem. No one knew it was that good back then. On top of that it's impossible for GM to really implement on any apreciable level. We are talking about having parts flowing in every single minute of the day. You do with cars in 2007 the same you did with them in the 30s
You don't do the same with cares in 2007 the same you did with them in the 30s. You don't do the same with cars in 2007 as the same as you did in 1988. Hell depending on your car it may not do the same thing in 2007 as it did in 1999. Technology changed significantly within cars. Some improvements were for safety. Some were for cost effectivness.

[Matteo Martini]

So this is actually not the question you were asking in the original post.
[..]

Yes, you are right.
The point is that I dunno a lot about business, and I have not really been interested in this topic until recently.
So, my questions may seem naive, to an expert, but I am just trying to figure out why some companies that work in fields which has not really been under a technological revolution in the last years, are so much profitable


Cars are not just sold on their tech specs. In fact: auto sales are very dependent on style. A joke I remember from years ago in Mad Magazine of all things was that the typical car buyer spends approximately 200 hours researching his next car purchase, then buys a Buick anyway, 'cause that's what his daddy drove.

My dad spent $2000 on an Austin-Healey Sprite in the '50s. It's worth about $20,000 today. It didn't get 10x more technologically sophisticated in the last five decades.

In any case, there are other factors that come into play that explain the industry's profit volatility. But overall, I have always considered the auto industry to be mature and that part of the evidence for this was that they regularly struggle for profits. The Japanese manufacturers are just now getting out of a decade-long slump, and the American manufacturers are still in one (GM lost $2B in 2006, Ford lost $12.7B in 2006, and DaimlerChrysler appears to have made no profit/loss in 2006)

The second reason that you see cycles in this industry is that the enormous sunken costs (which are also barriers to entry) mean that the industry is very sensitive to demand - it is not able to reduce costs in proportion to production downticks in order to meet temporary reductions in demand. During the good years, they'll underproduce, which raises profits, and during bad years they'll overproduce, which causes losses.

Basically, industries that have large investments in plant can remain slightly profitable (as an industry - not necessarily as a company) in a mature market since increases in demand against a limited production will translate into increased prices. At least temporarily. It is this sensitivity to cycles that also acts as a barrier to entry - would you invest in a new auto company if its factories will not come online for five years? ie: what if they come online in a recession?

The same applies to the automakers: just because there's an increase in demand today doesn't necessarily mean that they will increase capacity. They may find that when the new factories are completed, this demand blip has passed. That's part of why the US automakers are in bad shape: they expected sales growth, invested in plant, and the growth did not materialize. Reports are that in 2006 GM plants were operating at 65% capacity, whereas Toyota plants were at 95%. Per-unit profits are low because of the increased overhead.

Fuel costs and consumer preference made the Ford/GM/Chrysler SUV designs obsolete, and undercut the domestic manufacturers' profits, shifting purchasing dollars mostly to Toyota and Honda, who were selling more fuel efficient cars.

So, I'm not seeing what you're seeing: I'm seeing established producers losing market share to new competitors and overall low average profits in the industry. It'll get worse for profitability when the Chinese manufacturers get access to the US and Japanese markets. I predict China will actually dump (sell at a loss to buy market share).

Mm..
This is the kind of informative answer I was looking for.
Basically, you are saying that the car industry is not actually that profitable, and the excellent performance on companies like Toyota is compensated by the poor performance of companies like GM.
GM seems to have lost USD10B in 2005 (Struggling US car giant General Motors (GM) has been forced to increase its annual 2005 losses by $2bn (£1.1bn) due to accounting errors http://news.bbc.co.uk/1/hi/business/4818950.stm)
Also, it seems impossible, but did GM really got a loss of USD39billion in the 3rd quarter of 2007 alone?
http://www.mutual-funds.us/2007/11/07/news/companies/gm/index.htm

But leaves out the tobacco and the oil industry.

Now, these two industries really seem to be profitable.
If you look here (http://aol.theonlineinvestor.com/large_cap.phtml), in the first 8 largest companies by market cap, 2 work in the oil business and the number 14 (Altria), in the tobacco industry.
The oil industry has not really been changed that much in the last years, you basically dig and find oil, then you refine it in the consumer place.
How much radical innovation in this business?
Even more interesting with Altria, where what they do is just buy tobacco and pack it.
How can they have a market cap of 160billions just doing this?

[Matteo Martini]

That's the problem. No one knew it was that good back then.

They did.
I was told how good that business model was at least 15 years ago.


On top of that it's impossible for GM to really implement on any apreciable level. We are talking about having parts flowing in every single minute of the day.
You don't do the same with cares in 2007 the same you did with them in the 30s. You don't do the same with cars in 2007 as the same as you did in 1988. Hell depending on your car it may not do the same thing in 2007 as it did in 1999. Technology changed significantly within cars. Some improvements were for safety. Some were for cost effectivness.

Yes, but none of them was a dramatic tech breakthrough.
Apparently, the answer to my question is that the car business is not that profitable at all, after all

[NoZed Avenger]

Yes, but none of them was a dramatic tech breakthrough.
Apparently, the answer to my question is that the car business is not that profitable at all, after all


If you change the question being asked radically, then ignore 90 percent of the answers, then change the last 10 percent to something else, then yes. You got it precisely.

[Lensman]

I'm a smoker & I can tell you that different blends of tobacco DO taste differently, some I like, some I don't - some I used to like I now dislike.

[Marquis de Carabas]

Um...no...only if you are a liberal.

Then you believe that economics started with Malthus and ended with Keynes.

Otherwise, you know better.

Tokie
The inability to detect sarcasm is basically the same since 1930.

[Skibum]

Even more interesting with Altria, where what they do is just buy tobacco and pack it.
How can they have a market cap of 160billions just doing this?


Easy, supply a consumable product that 100's of millions perhaps billions of people worldwide are willing to pay for.

[Matteo Martini]

I'm a smoker & I can tell you that different blends of tobacco DO taste differently, some I like, some I don't - some I used to like I now dislike.

I know that many people smoke one or two packets of cigarette per day.
Now, that amounts to one or two grands per year, right?
If you had a brand of tobacco that tastes almost the same and costs half of this, why do not you think people would switch?

Easy, supply a consumable product that 100's of millions perhaps billions of people worldwide are willing to pay for.

Why there is such a concentration in this business?
I do not think tobacco manufacturing is so capital intensive

[Skibum]

If you had a brand of tobacco that tastes almost the same and costs half of this, why do not you think people would switch?


Some would. The problem is, 'almost tastes the same' usually isn't close enough.


I do not think tobacco manufacturing is so capital intensiveWhich would probably explain how they manage to rake in billions per year.

[Matteo Martini]

Some would. The problem is, 'almost tastes the same' usually isn't close enough.

I guess, in free market, if you sell a similar product half the price of your competitor, you have chances some people will buy it

Which would probably explain how they manage to rake in billions per year.

Capital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production, especially labor.

[Tokenconservative]

And a house is a fixed place intended to provide protection from the elements, intruders and wild animals, so I guess houses must be worth almost nothing as they have been performing the same function for tens of thousands of years?

After all a house today does essentially the same thing as a cave dwelling.

Well, now you are introducing another element: worth.

What does "worth" mean?

There's a house built in a cave in Tennessee, I believe, that sold for somthing like $3mil USD a few years ago.

To me, cigarettes have no value. I can't imagine wasting as much money as people do on these things on a bit of weed rolled into a srap of paper for the sole purpose of introducing carcinogens and other poisons to your body.

Unless I thought I could resell a fag to an addict for a profit, I wouldn't pay anything for one.

I sense however, that you are intending something else by this comment. I sense that you are essentially putting up a billboard here that reads: I know utterly NOTHING about economics and should probably stay the hell out of this particular debate.

Tokie

[Tokenconservative]

The inability to detect sarcasm is basically the same since 1930.

Really? I'd guess it's gone down quite a bit due primarily to "smart assed" TV shows. Sarcasm is a staple of these things from Seinfeld and Friends to Married with Children to even more serious shows like Law and Order. And look at CSI Miami...that guy who plays the lead male role...you cannot believe the writers give him those lines without at least a bit of sarcasm, can you?

You heard a lot of joshing around, but never the quantity and quality of sarcasm on say the old Amos n' Andy radio show, or the Green Hornet, or Dragnet or Little Orphan Annie.

Nope, I'd have to say that simply by dint of exposure, we are far more attuned to sarcasm today, than we were in the 1930s.

Tokie

[Gazpacho]

Why there is such a concentration in this business?
It's so heavily taxed and so risky, legally, that new companies can't enter. You cannot make and sell cigarettes on any significant scale in the US, without getting sued for a large chunk of your profits.

[Matteo Martini]

It's so heavily taxed and so risky, legally, that new companies can't enter. You cannot make and sell cigarettes on any significant scale in the US, without getting sued for a large chunk of your profits.

Which risks are you talking about?
Manufacturing cigarettes is perfectly legal in almost every country of the world.

[Gazpacho]

Which risks are you talking about?
Manufacturing cigarettes is perfectly legal in almost every country of the world.
It's legal in the US only on several conditions, which include punitive taxes, "protection" payments in addition to the taxes, ongoing civil litigation, a total ban on advertising the product, and a requirement to advertise against cigarette smoking.

As Token said, the politics of cigarettes in North America are a bit out of line with most of the world. A lot of Americans support these measures, and I'm not going to debate them. I'm just saying that there are many problems for anyone who wants to start a new cigarette company that operates in the US. Yes, it's a cartel, and the US government is enforcing it.

[littlehulkster]

Matteo, you are aware that cars periodically wear out/are wrecked and need to be replaced, right?

This isn't even factoring in cars that are replaced for issues of style and taste. An example would be someone going out to buy a new BMW the day they get a promotion.

Also, cars now are tremendously more efficient than their predecessors. A new WRX STi makes more power per liter of displacement than a Formula 1 car did in 1967, not to mention getting nearly 10 times better MPG.

[Geek Goddess]

Yes, you are right.


But leaves out the tobacco and the oil industry.

Now, these two industries really seem to be profitable.
If you look here (http://aol.theonlineinvestor.com/large_cap.phtml), in the first 8 largest companies by market cap, 2 work in the oil business and the number 14 (Altria), in the tobacco industry.
The oil industry has not really been changed that much in the last years, you basically dig and find oil, then you refine it in the consumer place.
How much radical innovation in this business?
Even more interesting with Altria, where what they do is just buy tobacco and pack it.
How can they have a market cap of 160billions just doing this?


Uh.


Why I can't say "basically dig and find oil" is not correct, it's so simplistic that it doesn't make sense. The technology is constantly evolving in both the exploration/production, and in the processing/refining as well. I don't mean only improvements in the efficiencies or energy conservation. The most common process used in natural gas processing until the mid-80s, for example, was something called 'lean oil absorption'. I have not come across one of these facilities in almost 20 years. It was like replacing a slide rule with a calculator.

[Matteo Martini]

Uh.


Why I can't say "basically dig and find oil" is not correct, it's so simplistic that it doesn't make sense. The technology is constantly evolving in both the exploration/production, and in the processing/refining as well. I don't mean only improvements in the efficiencies or energy conservation. The most common process used in natural gas processing until the mid-80s, for example, was something called 'lean oil absorption'. I have not come across one of these facilities in almost 20 years. It was like replacing a slide rule with a calculator.

Yes, techonogical improvements have happened in all the area of the all the industries in the alst 30 years, still, oil business has not seen such a radical innovation to justify the USD10billions in profit that Exxon made in one quarter alone, few years ago.

[Matteo Martini]

Matteo, you are aware that cars periodically wear out/are wrecked and need to be replaced, right?

This isn't even factoring in cars that are replaced for issues of style and taste. An example would be someone going out to buy a new BMW the day they get a promotion.

Also, cars now are tremendously more efficient than their predecessors. A new WRX STi makes more power per liter of displacement than a Formula 1 car did in 1967, not to mention getting nearly 10 times better MPG.

Formula 1 cars may not be the best comparison model for power/liter

[Matteo Martini]

It's legal in the US only on several conditions, which include punitive taxes, "protection" payments in addition to the taxes, ongoing civil litigation, a total ban on advertising the product, and a requirement to advertise against cigarette smoking.

As Token said, the politics of cigarettes in North America are a bit out of line with most of the world. A lot of Americans support these measures, and I'm not going to debate them. I'm just saying that there are many problems for anyone who wants to start a new cigarette company that operates in the US. Yes, it's a cartel, and the US government is enforcing it.

So, it is a cartel, after all?

[Gazpacho]

So, it is a cartel, after all?
I never said it wasn't a cartel. I wish you'd admit that automobiles, oil development, and tobacco manufacturing aren't as simple as you want to assume.

If automotive technology is not continually improving, then no technology is. Can you admit that?

Formula 1 cars may not be the best comparison model for power/liter
Did you read the post, or did you just reply as soon you saw the words "Formula 1"?

oil business has not seen such a radical innovation to justify the USD10billions in profit that Exxon made in one quarter alone, few years ago.
Exxon is setting profit records because mainly it is setting sales records.

[Geek Goddess]

Yes, techonogical improvements have happened in all the area of the all the industries in the alst 30 years, still, oil business has not seen such a radical innovation to justify the USD10billions in profit that Exxon made in one quarter alone, few years ago.


(a) why do you think radical innovations are needed to 'justify' profits?

(b) Percent profits aren't necessarily related to gross profits.

(c) What is the basis of your determining whether or not the oil business has had radical innovations? What is the source of your opinion, ie., how do YOU know about what innovations have occurred?

[littlehulkster]

Formula 1 cars may not be the best comparison model for power/liter

Yes, they are.

F1 has always been strictly regulated on displacement. When most racing leagues allowed 6l motors, F1 only had 3. F1 cars were, at one time, making nearly 1000 horsepower out of 1.8l motors. Only Group B rally can match those numbers, and that only lasted a few years. Even now F1 is only running 2.4l motors, and getting nearly 800 horsepower.

F1 has always been about making the most power out of a small motor. Nothing else makes nearly that much power out of that size motor.

[Jaggy Bunnet]

I mean, in absolute terms.
The fashion market is a small one, if compared with cars, oil and tobacco.

Then you need to think about what you are asking.

Why is there more profit (in absolute terms) on the sale of a car than a shirt? That is obvious and there is no reason to expect that there would not be.

[Jaggy Bunnet]

Well, now you are introducing another element: worth.

What does "worth" mean?

There's a house built in a cave in Tennessee, I believe, that sold for somthing like $3mil USD a few years ago.

To me, cigarettes have no value. I can't imagine wasting as much money as people do on these things on a bit of weed rolled into a srap of paper for the sole purpose of introducing carcinogens and other poisons to your body.

Unless I thought I could resell a fag to an addict for a profit, I wouldn't pay anything for one.

I sense however, that you are intending something else by this comment. I sense that you are essentially putting up a billboard here that reads: I know utterly NOTHING about economics and should probably stay the hell out of this particular debate.

Tokie

No, just trying to point out to the hard of thinking (clue: that means you) that just because something has existed for a long period of time it is not reasonable to conclude it has no value.

[Jaggy Bunnet]

I know that many people smoke one or two packets of cigarette per day.
Now, that amounts to one or two grands per year, right?
If you had a brand of tobacco that tastes almost the same and costs half of this, why do not you think people would switch?

Lets try and drag this little example into the real world shall we?

How are you going to produce cigarettes that retail for half the price of those currently on the market?

You are going to have to charge the same tax as other brands (and that is a large percentage of the retail price - a minimum of 57% in the EU).

Having adjusted for that you will have a maximum of £1.20 per pack of revenue (source: http://www.the-tma.org.uk/files/January%202007.pdf).

From that £1.20 you need to take out the retailers cut, the distribution costs, the manufacturing costs and the costs of acquiring the raw materials needed in the first place. Now I very much doubt that you are going to convince the retailer, the distributor or the grower to cut their prices in half just because you are a nice bloke, so what we are actually looking at MIGHT be a price differential of 10p per pack on a good day with a fair wind.

All you need to find now are huge numbers of smokers willing to change the brand of cigarettes that they have smoked for however many years that costs £5.25 to try a new one that they have no idea if they will like, that they have never heard of previously (got to save those expensive branding costs to keep the price down) and that costs £5.15. Or more accurately you need to find financial backers who believe that you are going to be able to do so. Good luck with that.

[Jaggy Bunnet]

Yes, techonogical improvements have happened in all the area of the all the industries in the alst 30 years, still, oil business has not seen such a radical innovation to justify the USD10billions in profit that Exxon made in one quarter alone, few years ago.

Oil is a limited commodity, in that there is a finite amount of it available. Therefore if demand increases, supply cannot easily and quickly be increased to match that demand, therefore the price goes up.

As a simple example, lets say that there are 5 types of oil deposit in the world:

Type A is easily accessible and costs $10 a barrel to extract
Type B is slightly more difficult and costs $20 a barrel
Type C $30 and Type D $30.
Finally there is Type E which costs $50 a barrel to extract (lets say it is under deep water in a remote region and needs highly specialised equipment)

If the market price for oil is $25 a barrel, then the Type A and B deposits will be drilled as there is a profit in doing so. I own the only company in the world that has access to Type B deposits, so I make a healthy return on each barrel as I sell it for $25 and it only cost me $20.

Then a war breaks out in the country that has a large percentage of the type A deposits and demand increases as countries which have previously been largely undeveloped advance economically and increase their demand for oil. As a result it gets a little bit more expensive for me to hire workers and equipment (supply and demand after all) and therefore the cost to me of extracting my Type B oil goes up to $25. Fortunately the price of oil increases to $60, encouraging extraction from higher cost sources to make up the supply shortfall.

I now make $35 a barrel instead of $5. No radical innovation required.

[Cinorjer]

"During my earlier years, I studied a little bit of Marketing, and there was the famous chart about the life of a product: the BSG matrix
http://www.netmba.com/strategy/matrix/bcg/
It predicts that any product/business have several phases:
- child, new products
- star, high market growth and high profit
- cash cow, market growth stops and you make profits
- dogs: product/business end"

After reading the posts, I'd like to suggest that the problem is that this initial theory sounds good but is either completely wrong or so oversimplified as to not apply to real life situations - something people in Marketing and Sales are notorious for doing.

Also, this more accurately describes the life of a company, not a product. And for every instance where a company seems to fit the paradigm, I can think of dozens that don't. This describes the exception instead of the rule.

And profits certainly aren't only realized in direction relation to market growth.

[Tokenconservative]

No, just trying to point out to the hard of thinking (clue: that means you) that just because something has existed for a long period of time it is not reasonable to conclude it has no value.

Um...I guess maybe I am hard-of-thinking. Since I have a houseful of antique furniture, I can't imagine myself saying something like that, but okay...if you think I did, you must be right because I am Tokie and you are not.

You should probably not allow your hatred of me for my political beliefs cripple your own thinking.

Crippled thinking is not pretty.


Tokie

[Tokenconservative]

When you says thing here, they will be criticized. If you prattle on without a shred of evidence while you spout idiocies we will pick your words apart and then laugh at you.

Hmm...so can you provide a link showing that critical thinking means "criticizing conservatives"?

Tokie

[Gazpacho]

Hmm...so can you provide a link showing that critical thinking means "criticizing conservatives"?
I don't see anyone talking about political ideology in this thread except you.

[Tokenconservative]

I don't see anyone talking about political ideology in this thread except you.

True...but when someone ignorantly claims that they know what "critical thinking" is, and then goes on to parrot the standard leftist-education version of what that is today, and to verify my understanding of the leftist-education version as "criticizin conservatives," then I am going to note that.

Tokie

[blutoski]

Basically, you are saying that the car industry is not actually that profitable, and the excellent performance on companies like Toyota is compensated by the poor performance of companies like GM.

Basically, yes. And that's not new: Chrysler was on government-subsidized life support in the 1970s. Aviation is another unprofitable industry: Warren Buffet is famous for pointing out that the industry is a net loser.






But leaves out the tobacco and the oil industry.

Now, these two industries really seem to be profitable.
If you look here (http://aol.theonlineinvestor.com/large_cap.phtml), in the first 8 largest companies by market cap, 2 work in the oil business and the number 14 (Altria), in the tobacco industry.
The oil industry has not really been changed that much in the last years, you basically dig and find oil, then you refine it in the consumer place.
How much radical innovation in this business?
Even more interesting with Altria, where what they do is just buy tobacco and pack it.
How can they have a market cap of 160billions just doing this?

Don't confuse market cap with profitability. Profitability's best measured in terms of dividends.

Tobacco and oil are very different industries, so I'll address them seperately.

Oil's easiest to explain: it is largely a cartel. But it's not the oil companies that are raking in the profits - it's the governments of the producer nations. Here in Canada, each province gets a cut of every litre pumped out of the ground, and it's used to reduce general taxes. Most countries in OPEC have nationalized oil companies. They get together and establish national production quotas to keep prices high. That's the definition of a cartel, and OPEC is a perfect specimen.

Also: the production bottlenecks in oil are the refineries, which are extremely expensive, and this captial outlay has the same effect as automobilie factories. Would you invest a quarter trillion dollars in an oil refinery if it's going to come online in 2015 or so? What if crude has a 80% crash like the one OPEC saw between 1981 ($70/barrel) and 1998 ($15/barrel)?


Tobacco is different in that the supply isn't limited, and governments don't have as much control over production, except in terms of zoning agricultural land. Also, there's a credible argument that it has a legal oligopoly in the US due to the terms of the Master Settlement Agreement, but this is different than oil's global cartel, and even a global oligopoly is not the same thing as a global cartel.

On the other hand, the MSA almost bankrupted them all, and this speaks to risk versus return issues. I just had a look at the big board, and Altria's dividend yield on the US exchange is about 4%, which is not a very attractive return considering the menace of risk of total loss. There's not much net profit there to attract competitors. If I'm going to park my cabbage somewhere for 4%, it wouldn't be in tobacco. Altria's net tangible assets appear close to zero (negative six billion dollars in 2006), which means the stock price is almost entirely a reflection of dividend and speculative capital gains potential. Dividends were $3.05/share in 2007, which does jibe with about $76/share for about a 4% return.

So, again, I'd suggest that the tobacco industry is not as profitable as you're assuming in the opening post. Big dollars because it's large volumes, but narrow margins and diminishing if not negative growth potential, which hurts long-term capital gains expectations.

One thing that oil and tobacco have in common is low plasticity: if you increase the price, people don't cut back as much as they do for other products.

[Matteo Martini]

(a) why do you think radical innovations are needed to 'justify' profits?

As if no radical innovation/patent comes out, market competition should leverage profits down


(b) Percent profits aren't necessarily related to gross profits.


Yes


(c) What is the basis of your determining whether or not the oil business has had radical innovations? What is the source of your opinion, ie., how do YOU know about what innovations have occurred?

I have limited knowledge on the topic, but I am an engineer, and it looks like oil business has not had radical innovations in the last 20-30 years

[Matteo Martini]

Yes, they are.

F1 has always been strictly regulated on displacement. When most racing leagues allowed 6l motors, F1 only had 3. F1 cars were, at one time, making nearly 1000 horsepower out of 1.8l motors. Only Group B rally can match those numbers, and that only lasted a few years. Even now F1 is only running 2.4l motors, and getting nearly 800 horsepower.

F1 has always been about making the most power out of a small motor. Nothing else makes nearly that much power out of that size motor.

Then you are maybe right on this, I am not really speacialized on F1 cars, so I take your word for it.
However, I do not see how improved mileage alone can be seen as such a breakthrough revolution in technology, looking at the mileage of many SUVs that have been best sellers only few years ago.

Then you need to think about what you are asking.

Why is there more profit (in absolute terms) on the sale of a car than a shirt? That is obvious and there is no reason to expect that there would not be.

That does not change the fact that, competition should leverage profits down.
My wrong point is that I considered the car industry as profitable, and, Blutoski showed me I was wrong on this

No, just trying to point out to the hard of thinking (clue: that means you) that just because something has existed for a long period of time it is not reasonable to conclude it has no value.

Not no value, but market competition should leverage profits down

Basically, yes. And that's not new: Chrysler was on government-subsidized life support in the 1970s. Aviation is another unprofitable industry: Warren Buffet is famous for pointing out that the industry is a net loser.
[..]

Thank you for the very informative answer.
I have read it and I think it deserves a well-thought reply.
Unfortunately, my head still aches (it is 1st January 10:08 here in Tokyo).
I will address your point ASAP.

[littlehulkster]

SUVs are remarkably efficient for their size. A 1974 Suburban had a rating of 8MPG highway, 5MPG city.

A new one is rated at 15/20 and has nearly twice as much power, not to mention being a much nicer ride.

Even the VW Beetle was only getting around 35mpg. A Toyota Corolla does better than that by around 6mpg, weighs 1000 pounds more, has 3 times the horsepower and does 0-60 a full 4 seconds faster.

[Geek Goddess]

As if no radical innovation/patent comes out, market competition should leverage profits down
Apparently not. Oil is not a manufacturing enterprise, it is a mining operation.



I have limited knowledge on the topic, but I am an engineer, and it looks like oil business has not had radical innovations in the last 20-30 years

Ah. I am also an engineer. A chemical engineer, and I have worked in the oil business and processing business exclusively since May 1981. I am intimately familiar with the innovations and new technology in this industry, and politely say that you are incorrect in your analysis. I attend one or two industry conferences each year trying to keep up, and serve on the technical advisory committee of one industry group, that is based in the U.S. but serves the international community.

[Matteo Martini]

Apparently not. Oil is not a manufacturing enterprise, it is a mining operation.


Refinery?
Distribuition?


Ah. I am also an engineer. A chemical engineer, and I have worked in the oil business and processing business exclusively since May 1981. I am intimately familiar with the innovations and new technology in this industry, and politely say that you are incorrect in your analysis. I attend one or two industry conferences each year trying to keep up, and serve on the technical advisory committee of one industry group, that is based in the U.S. but serves the international community.

Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so

[Matteo Martini]

Basically, yes. And that's not new: Chrysler was on government-subsidized life support in the 1970s. Aviation is another unprofitable industry: Warren Buffet is famous for pointing out that the industry is a net loser.


Good point.


Don't confuse market cap with profitability. Profitability's best measured in terms of dividends.


I think the two are closely related.
The more a company is profitable, the higher the value of its stock, the bigger the market cap


Tobacco and oil are very different industries, so I'll address them seperately.

Oil's easiest to explain: it is largely a cartel. But it's not the oil companies that are raking in the profits - it's the governments of the producer nations. Here in Canada, each province gets a cut of every litre pumped out of the ground, and it's used to reduce general taxes. Most countries in OPEC have nationalized oil companies. They get together and establish national production quotas to keep prices high. That's the definition of a cartel, and OPEC is a perfect specimen.


I had a similar opinion.
Anyway, I remember that the current president of Iraq, Ahmadinejiad, was complaining that oil companies get a more-than-fair share in the business, and that they buy oil at xUSD from Iran, Iraq, Venezuela, Saudi Arabia, and they sell it back still not refined at 2xUSD (if I remember well).
I still have to understand how an oil company can make USD10billions in profits in one quarter.


Also: the production bottlenecks in oil are the refineries, which are extremely expensive, and this captial outlay has the same effect as automobilie factories. Would you invest a quarter trillion dollars in an oil refinery if it's going to come online in 2015 or so? What if crude has a 80% crash like the one OPEC saw between 1981 ($70/barrel) and 1998 ($15/barrel)?


Agreed with that.
Anyway, as you pointed out, the situation is similar to the one of the car industry.
Now, compare the market cap of General Motors, with the one of Exxon.
The difference is forty times?


Tobacco is different in that the supply isn't limited, and governments don't have as much control over production, except in terms of zoning agricultural land. Also, there's a credible argument that it has a legal oligopoly in the US due to the terms of the Master Settlement Agreement, but this is different than oil's global cartel, and even a global oligopoly is not the same thing as a global cartel.

Mmmm..
I can not see the difference between "global oligopoly" and "global cartel".
Anyway, maybe this is just my problem and not the main point here


On the other hand, the MSA almost bankrupted them all, and this speaks to risk versus return issues. I just had a look at the big board, and Altria's dividend yield on the US exchange is about 4%, which is not a very attractive return considering the menace of risk of total loss. There's not much net profit there to attract competitors. If I'm going to park my cabbage somewhere for 4%, it wouldn't be in tobacco. Altria's net tangible assets appear close to zero (negative six billion dollars in 2006), which means the stock price is almost entirely a reflection of dividend and speculative capital gains potential. Dividends were $3.05/share in 2007, which does jibe with about $76/share for about a 4% return.

So, again, I'd suggest that the tobacco industry is not as profitable as you're assuming in the opening post. Big dollars because it's large volumes, but narrow margins and diminishing if not negative growth potential, which hurts long-term capital gains expectations.

One thing that oil and tobacco have in common is low plasticity: if you increase the price, people don't cut back as much as they do for other products.

Sorry, but I have to go back to market cap.
Market cap is the value of a company.

Altria 160billions
BTI 80billions
Reynolds American a lot

Basically, since the assets of tobacco companies are not so worthy, as you pointed out, the market cap is only based on hope of future profits, and we are talking about some of the biggest companies of the world.

So, tobacco has to be a lot profitable.
If not, why their stock value is so high?

[NoZed Avenger]

Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so


Wow. Are those goalposts heavy?

They look heavy.

[Tokenconservative]

SUVs are remarkably efficient for their size. A 1974 Suburban had a rating of 8MPG highway, 5MPG city.

A new one is rated at 15/20 and has nearly twice as much power, not to mention being a much nicer ride.

Even the VW Beetle was only getting around 35mpg. A Toyota Corolla does better than that by around 6mpg, weighs 1000 pounds more, has 3 times the horsepower and does 0-60 a full 4 seconds faster.


You misunderstand: since nobody, in a good, leftist-environmentalist's view from the Starbuck's table behind a venti soy latte with extra soymilk foam and cinamon sprinkles and the $4000 laptop his mom got him for Winter Solstice, "needs" such a vehicle, they should be banned.

Tokie

[Tokenconservative]

Basically, yes. And

So, again, I'd suggest that the tobacco industry is not as profitable as you're assuming in the opening post. Big dollars because it's large volumes, but narrow margins and diminishing if not negative growth potential, which hurts long-term capital gains expectations.



Doesn't this apply to just about any retail business (I can't think of one it does not apply to). Look at grocery stores...we all have to eat, but I think their profit margin is something around 3% normally. And while there are staples there is also plasticity there...I don't HAVE to eat Doule-Stufft Oreos when the price goes up because the price of the lard they make the filling out of is going up because corn prices are going up and the cost of a cow to get lard from is rising.

Tokie

[Hindmost]

Yes, techonogical improvements have happened in all the area of the all the industries in the alst 30 years, still, oil business has not seen such a radical innovation to justify the USD10billions in profit that Exxon made in one quarter alone, few years ago.

I don't think it is fair to single out Exxon for its profits. The profit of 10 billion was on 100 billion in sales...a standard goal of 10% margin. Oil company profits were terrible to non-existant for a long period when oil was cheap. Now that cheap oil is gone due to demand, oil profits are returning to normal. I am not sure what day rates are for rigs at this time, but I would believe it would be about 150 to 200 thousand a day--very capital intensive.

Google made 4 billion on only 15 billion in sales last year...that margin should outrage people...but everyone likes google because they don't see it directly in their gas cost.

glenn

[Tokenconservative]

I don't think it is fair to single out Exxon for its profits. The profit of 10 billion was on 100 billion in sales...a standard goal of 10% margin. Oil company profits were terrible to non-existant for a long period when oil was cheap. Now that cheap oil is gone due to demand, oil profits are returning to normal. I am not sure what day rates are for rigs at this time, but I would believe it would be about 150 to 200 thousand a day--very capital intensive.

Google made 4 billion on only 15 billion in sales last year...that margin should outrage people...but everyone likes google because they don't see it directly in their gas cost.

glenn

Hmmm....I guess you are forgetting a few things:

Google was started by liberals and Exxon is eeeeehhhhhhvvvvviiiilllllllllllll!!!

So they should be punished for making money, whereas Google, being a "progressive" company (you know how "progressive" all those child porn links are) deserves it's financial rewards!

Tokie

[NoZed Avenger]

Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so


Come to think of it, can you name three other major industries who have "similar innovationas . . . the microprocessor[s], electronics industries in the last twenty years"? How about one other major industry?

[Skibum]

Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so

Exactly what sort of innovation are you expecting from the oil industry?

Self refining oil?
Non polluting gasoline?

I'm not sure there is going to be similar types of innovative breakthroughs in the oil industry (tobacco either) that are seen elsewhere. About the best I would expect are methods of slightly increasing production and slightly decreasing production costs.

[Hindmost]

I was thinking about the innovation issues related to the oil industry...since I follow it to a reasonable extent...there are some great stuff that has occured in recent years.

steerable drilling: can angle and steer bits throught a field to hit more pockets of oil...great for west texas. Also, drill bits have sensors on them to reveal oil or gas and can sense density of the rocks.

Enhanced recovery: Boost of about 10-15% out of a well using liquid carbon dioxide..or water.

Seismic analysis: 3D pictures of underground strata...this has increased field production by better knowing where to drill in certain fields.

Deepwater drilling: Can drill in 1000 meters of water now.


glenn

[Geek Goddess]

You misunderstand: since nobody, in a good, leftist-environmentalist's view from the Starbuck's table behind a venti soy latte with extra soymilk foam and cinamon sprinkles and the $4000 laptop his mom got him for Winter Solstice, "needs" such a vehicle, they should be banned.

Tokie You forgot "non-fat"

Refinery?
Distribuition?



Do you say that the oil business has had similar innovation as, let`s say, the microprocessor`s, electronics industries in the last 20 years? I do not think so Can you fill me in on what qualifies you to make such a determination?

I'm not disputing that you are not qualified, I am just interested in your credentials or expertise in this area.


Exactly what sort of innovation are you expecting from the oil industry?

Self refining oil?
Non polluting gasoline?

I'm not sure there is going to be similar types of innovative breakthroughs in the oil industry (tobacco either) that are seen elsewhere. About the best I would expect are methods of slightly increasing production and slightly decreasing production costs.

Much of innovation in the oil production arena is driven by finding and producing oil that was not discoverable or producible 10 years ago. At $90/bbl, I can afford to explore and drill for oil that might cost $50 to find and lift. When oil was $5-8 per bbl just a decade ago, only the most shallow, light, sweet, or very old (meaning that the investment was long since paid out) could be produced without a loss. Frac spreads were so low that you could not afford deep extraction on the ethane/propane components of natural gas.

I was thinking about the innovation issues related to the oil industry...since I follow it to a reasonable extent...there are some great stuff that has occurred in recent years.

steerable drilling: can angle and steer bits throught a field to hit more pockets of oil...great for west texas. Also, drill bits have sensors on them to reveal oil or gas and can sense density of the rocks.

Enhanced recovery: Boost of about 10-15% out of a well using liquid carbon dioxide..or water.

Seismic analysis: 3D pictures of underground strata...this has increased field production by better knowing where to drill in certain fields.

Deepwater drilling: Can drill in 1000 meters of water now.


glenn

Horizontal drilling, membrane separation, foamed cement fracturing, gas sub-cooled processing. Smart pigging.

[Tokenconservative]

Exactly what sort of innovation are you expecting from the oil industry?

Self refining oil?
Non polluting gasoline?

I'm not sure there is going to be similar types of innovative breakthroughs in the oil industry (tobacco either) that are seen elsewhere. About the best I would expect are methods of slightly increasing production and slightly decreasing production costs.

Standard lefty, anti-Western, anti-capital, anti-American fare: no more oil exploration or extraction, no more oil refined, no more oil used for anything except cups at Starbuck's and the cases of $4000 laptops to use at Starbuck's.

Tokie

[Tokenconservative]

Come to think of it, can you name three other major industries who have "similar innovationas . . . the microprocessor[s], electronics industries in the last twenty years"? How about one other major industry?

How about that little scooter that was going to "change everything!"?

Anybody ever see any of those? Not here. When we have 8-10 inches of Global Warming lying around on the ground for weeks at a time, those seem one of the less...utilized means of personal transport.

Tokie

[Matteo Martini]

I don't think it is fair to single out Exxon for its profits. The profit of 10 billion was on 100 billion in sales...a standard goal of 10% margin. Oil company profits were terrible to non-existant for a long period when oil was cheap. Now that cheap oil is gone due to demand, oil profits are returning to normal. I am not sure what day rates are for rigs at this time, but I would believe it would be about 150 to 200 thousand a day--very capital intensive.

Google made 4 billion on only 15 billion in sales last year...that margin should outrage people...but everyone likes google because they don't see it directly in their gas cost.

glenn

Mmmm..
That is more or less my point.
Exxon is working in a business which is old (oil), so, competition should leverage profits down.
Oil should be a commodity, so, a profit margin of 10% should be very high/impossible to achieve.
Google is a completely new company which works in a completely new business (internet ads).
They started something really new, they have more reasons to deserve the money.
If no major change in that industry in the next 10-15 years, they should have theor profits (and market cap) leveraged down by competition/antitrust too.
But, as I explain, Google and Exxon is the new business against the old one.

Come to think of it, can you name three other major industries who have "similar innovationas . . . the microprocessor[s], electronics industries in the last twenty years"? How about one other major industry?

There are others, internet, informatics/OSes, certainly not oil

Exactly what sort of innovation are you expecting from the oil industry?

Self refining oil?
Non polluting gasoline?
[..]

None.
But, I would expect Exxon to have the same market cap of GM.

I was thinking about the innovation issues related to the oil industry...since I follow it to a reasonable extent...there are some great stuff that has occured in recent years.

steerable drilling: can angle and steer bits throught a field to hit more pockets of oil...great for west texas. Also, drill bits have sensors on them to reveal oil or gas and can sense density of the rocks.

Enhanced recovery: Boost of about 10-15% out of a well using liquid carbon dioxide..or water.

Seismic analysis: 3D pictures of underground strata...this has increased field production by better knowing where to drill in certain fields.

Deepwater drilling: Can drill in 1000 meters of water now.

glenn

Well, if there is no big big patent rights problem behind this (I maybe wrong, but I have no news there is, maybe Greek Goddess can help), there is no reason why all the above technologies should not be adopted by all competitors, therefore, leveraging profits down

[Matteo Martini]

You forgot "non-fat"

Can you fill me in on what qualifies you to make such a determination?

I'm not disputing that you are not qualified, I am just interested in your credentials or expertise in this area.

I may well be not qualified.
But, I think you do not have to be a leading expert in the oil mining field to make some general statements about the oil industry.
BTW, I may well be wrong.
As for the "I do not think so", I think that this is not "I am sure it is not so", it is just "I do not think so"


Much of innovation in the oil production arena is driven by finding and producing oil that was not discoverable or producible 10 years ago. At $90/bbl, I can afford to explore and drill for oil that might cost $50 to find and lift. When oil was $5-8 per bbl just a decade ago, only the most shallow, light, sweet, or very old (meaning that the investment was long since paid out) could be produced without a loss. Frac spreads were so low that you could not afford deep extraction on the ethane/propane components of natural gas.

Horizontal drilling, membrane separation, foamed cement fracturing, gas sub-cooled processing. Smart pigging.

Is there any reason to believe that there are patents or other impeding obstacles to use to the technologies above mentioned? In order to assume that only few of the players have access to, for example, horizontal drilling?
If not, and if all the players in the field have access to the techniques you mentioned, there I see no reason why competition should not leverage profits down.

[NobbyNobbs]

No, absolutely wrong. Computers do all sorts of things from the simplest math (like an abacus) to producing advanced graphics.

Sigh...yes...you can argue that it's ALL just math to a computer, and you'd be right.

But the last time I checked, an abacus could not make Angelina Jolie's feet sprout built-in CFM heels as a computer did in Beowulf.

Tokie

Whether it's balancing the budget or putting heels on Angelina, it all eventually comes down to ones and zeroes. Lots of them, really fast. Just like I said.



I did not say the advancement of technolgy was "stagnant." That was someone else.


Never claimed you did. Note the quote. I was answering someone else.

[littlehulkster]

One more thing I forgot.

The auto industry can sell vehicles at a loss and still make money off them. As long as you finance through them, they're raking in the cash. GM and Ford may have lost money, but GMAC and Ford Financial are still big winners. They also own lots of other financial companies, Ditech being an example (They're GMAC owned.)

[Geek Goddess]

Is there any reason to believe that there are patents or other impeding obstacles to use to the technologies above mentioned? In order to assume that only few of the players have access to, for example, horizontal drilling?
If not, and if all the players in the field have access to the techniques you mentioned, there I see no reason why competition should not leverage profits down.

First, the entry cost into this industry is huge. A couple guys can't go in their garage and start it. They have to acquire the leases, then do the seismic, then obtain drilling permits, find rigs, drill, test, and complete the wells and build the surface facilities.

Second, many of these technologies ARE available to any company that has both the funds and the foresight to use them. Producing a bit more oil won't drive the price down when there is an unlimited market. At some point, consumer goods reach a saturation. Once everyone has a cell phone, then all you can do is produce newer, cheaper, fancier phones with more services.

Oil is getting burned up, one way or another. No matter how much heating oil I buy, I need more next year. Even if I cut consumption, insulate my house, turn down the thermostat, I will still need heating oil every year, and in 20 years, there are even more people that need heating oil. You cannot compare something like oil to widgets. If there were unlimited supplies, and the next incremental barrel took the same technology to pull out of the ground, the price would drop. But each additional barrel takes something new, and probably more expensive, to lift. Each new EPA regulation means the next barrel costs more to process. And the market is out there, with its mouth wide open.

The price is controlled by OPEC, more or less. The USSR was largely brought to its financial knees in the 1980s when crude prices fell so far that their only source of hard currency essentially disappeared.

[Matteo Martini]

Oil is a limited commodity, in that there is a finite amount of it available. Therefore if demand increases, supply cannot easily and quickly be increased to match that demand, therefore the price goes up.

As a simple example, lets say that there are 5 types of oil deposit in the world:

Type A is easily accessible and costs $10 a barrel to extract
Type B is slightly more difficult and costs $20 a barrel
Type C $30 and Type D $30.
Finally there is Type E which costs $50 a barrel to extract (lets say it is under deep water in a remote region and needs highly specialised equipment)

If the market price for oil is $25 a barrel, then the Type A and B deposits will be drilled as there is a profit in doing so. I own the only company in the world that has access to Type B deposits, so I make a healthy return on each barrel as I sell it for $25 and it only cost me $20.


If you own the only company in the world that has access to Type B deposits, either you have some real tech advantage over competitors, or you are a monopolist, at least, in that specific area

Lets try and drag this little example into the real world shall we?

How are you going to produce cigarettes that retail for half the price of those currently on the market?

You are going to have to charge the same tax as other brands (and that is a large percentage of the retail price - a minimum of 57% in the EU).

Having adjusted for that you will have a maximum of £1.20 per pack of revenue (source: http://www.the-tma.org.uk/files/January%202007.pdf).

From that £1.20 you need to take out the retailers cut, the distribution costs, the manufacturing costs and the costs of acquiring the raw materials needed in the first place. Now I very much doubt that you are going to convince the retailer, the distributor or the grower to cut their prices in half just because you are a nice bloke, so what we are actually looking at MIGHT be a price differential of 10p per pack on a good day with a fair wind.

All you need to find now are huge numbers of smokers willing to change the brand of cigarettes that they have smoked for however many years that costs £5.25 to try a new one that they have no idea if they will like, that they have never heard of previously (got to save those expensive branding costs to keep the price down) and that costs £5.15. Or more accurately you need to find financial backers who believe that you are going to be able to do so. Good luck with that.

I see it from another point of view.
PM, err., Alteia, has a market cap of 160 billions.
Other tobacco companies have a huge market cap.
If they have a huge market cap, it is because they rack up huge profits.
If they rack up huge profits, it is because they sell cigarettes at a price which is far higher than the cost of production + fixed costs.
Making cigarettes is not enormously difficult, you are not making high-precision lasers.
So, new competitors should come in, sell cigarettes at half the price, like it happens in all the other markets.
Yes, you have to consdier the margin of the reseller and the brand loyalty, but that is something that happens in every other market.
So, why this does not happen?

[Hindmost]

Mmmm..
That is more or less my point.
Exxon is working in a business which is old (oil), so, competition should leverage profits down.
Oil should be a commodity, so, a profit margin of 10% should be very high/impossible to achieve.
Google is a completely new company which works in a completely new business (internet ads).
They started something really new, they have more reasons to deserve the money.
If no major change in that industry in the next 10-15 years, they should have theor profits (and market cap) leveraged down by competition/antitrust too.
But, as I explain, Google and Exxon is the new business against the old one.


I don't see why the age of a company should be related to profits unless there is an anti-trust issue. No one complained when exxon didn't make any profit and that was actually a problem as there was no incentive to search for oil. A 10% margin is a standard goal for large cap companies and if an old or new company can manage it, that is reasonable. Google being a new company doesn't