Can a New CEO Really Make a Difference?

By Timothy Kubarych, CFA, Co-Deputy Director of Research | January 06, 2025

Intel and Schneider Electric along with some other big companies decided to replace their chief executive officers in recent months. As investors wonder what effect new leadership might have on these businesses, they should start by asking themselves two questions: Is the company changeable? And would change be a good or bad thing?

It’s tempting to think that a new CEO can reshape a business overnight. Yet investors often overlook how the timing of a CEO’s appointment is a factor in that person’s ability to steer the company in a new direction. While a CEO controls key decisions—pertaining to hiring, spending, corporate strategy, and workplace culture—those efforts can only gain traction if the company is one in which change is possible. And that isn’t meant to be an abstract observation. Rather, a company’s susceptibility to change is partly reflected in a quantifiable metric found in every 10-K filing: its asset life.

Asset life is the estimated duration over which a company’s assets remain useful to the business. Assets can be physical structures, such as property, plants, and equipment, but they can also be intangible, such as investments in research and development. By examining average asset life, investors can gauge how long capital expenditures made in the past will continue to shape the company’s capabilities and cash flows. Shorter asset lives allow new leadership to shift investment priorities relatively quickly. Conversely, longer asset lives mean that earlier investments remain in place for years or even decades, limiting the new CEO’s ability to quickly implement large-scale changes.

A related metric is the ratio of net property, plant, and equipment (PPE) to gross PPE. A high ratio indicates the outgoing CEO heavily invested in the company’s facilities and equipment. A declining ratio suggests that the outgoing CEO invested little to maintain or upgrade them—or as some might say, management was “sweating the assets.” The latter scenario constrains the next CEO’s ability to implement significant changes. Think of it as the difference between buying a well-maintained house and one needing extensive repairs: The same renovation budget would achieve far more in the well-maintained house, while at the fixer-upper the money would need to be used for necessary but less exciting projects.

Take Intel as an example. Once the leading chip designer and manufacturer, the US company has fallen behind rivals such as NVIDIA and TSMC. Its CEO was pushed out in December, and shareholders are hopeful that his replacement can restore Intel to its prominence. The challenge is that Intel is not easily changeable. Chipmaking is intricate and capital intensive, and the process relies on specialized tools, machinery, and facilities that last for many years. According to its filings, Intel’s manufacturing assets can remain in service for up to eight years, with some facilities lasting over two decades. Despite recent capital investments, the net-to-gross PPE ratio hasn’t dramatically improved, suggesting legacy infrastructure still defines the firm’s capabilities. A quick pivot is tough.

The other question to ask about an incoming CEO is whether change at the company would be a good or bad thing. Generally speaking, change is more welcome for a business that is in a position of weakness, such as Intel, than one that is in a position of strength, such as Schneider Electric. Schneider’s competitive edge in providing electrical solutions continues to be a source of sustained profitable growth, particularly as it sees heightened demand from data-center customers. While the industrials company replaced its CEO in November, investors are unlikely to want drastic changes. Fortunately, with Schneider’s long-lived assets providing operational consistency, the new CEO has limited room—or need—to meaningfully change things.

Consider the potentially very different implications of a new CEO for a company such as Intel compared with a company such as Schneider:

The quadrant to steer clear of is the bottom right, because a weak company that is difficult to change doesn’t leave a lot of options for a CEO, no matter how skilled they may be. It all comes back to something Warren Buffett once said: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

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In the Robotaxi Race, Look to the Software

By Uday Cheruvu, CFA, Analyst and Portfolio Manager | November 20, 2024

If you live in Phoenix, San Francisco, or Los Angeles, chances are you’ve seen driverless taxis picking up or dropping off passengers; maybe you’ve been in one of these “robotaxis” yourself. Waymo, the division of Alphabet that’s been building and operating these autonomous vehicles (AVs), says it is logging about 150,000 rides every week. That is up from 100,000 a week just three months ago.

Alphabet’s Waymo, General Motors’ Cruise, Tesla, Baidu, and others are all in a competition to perfect and dominate the market for AVs. The winner of this new competition won’t be the one that builds the best vehicle, though. The heart of an autonomous vehicle is not the car. It’s the operating system.

The concept behind autonomous vehicles is simple—cars that are controlled by onboard computers and sensors rather than a human driver—but the technologies behind making them work are far more complex. Autonomous vehicles replace the human driver with a highly advanced system of hardware and software. The most promising ones incorporate a system called LiDAR (Light Detection and Ranging). LiDAR systems flash a laser and record the time it takes that light to hit an object and return to measure distance and the shapes of objects (very similar to radar, which uses radio waves in the same way). A LiDAR system can measure data points down to the centimeter. An AV’s operating system takes the information provided by the LiDAR system to map out the car’s path and then control the steering, acceleration, and braking.

The concept of self-driving cars has been around for a long time. A man named Francis Houdina experimented with a radio-controlled car all the way back in 1925, driving it down New York’s Fifth Avenue. In the 1950s, a famous one-off concept car called the Golden Sahara utilized a rudimentary, LiDAR-like self-driving system. A team at Carnegie Mellon built its first autonomous vehicle, dubbed Navlab, in 1986. Much like humanoid robots, the problem wasn’t the technology but the cost; it was too expensive to be commercially feasible. Recent advances in hardware and software have driven the costs down and given these companies a real chance at making and selling AVs at scale and profitably.

They’re not there quite yet. Israeli company Mobileye has dominated the market for driver-assisted software, but has struggled to sell to auto makers more advanced systems that enable higher levels of autonomous driving. Tesla earlier this year delayed the initial launch of its robotaxis (the company dubbed them “cybercabs”) from July to October, and the October “launch” was just the reveal of a prototype. Production vehicles won’t be available for sale until the first half of 2025 at the earliest (and Elon Musk is notorious for his unmet timelines). Just getting the cars onto the road is not sign of success, either. A Cruise robotaxi hit and dragged a pedestrian in San Francisco last year; subsequently California regulators rescinded the test permit they’d given the company just months earlier. Stories like that highlight what could end up being a material obstacle: regulators who will need to be convinced these cars are safe before they approve any more of them for public roads, or suspend ones that have already been approved.

The AV competition splits pretty cleanly between two kinds of companies, auto and software companies, and in this competition, experience making cars is less important than experience making software. Because the key part of the vehicle is the autonomous operating system, companies such as Baidu and Alphabet are on equal footing with Tesla and GM.

The fact that software companies such as Alphabet and Baidu are already such prominent players in this market proves the point. The ”picks and shovels” of the AV industry won’t be the car makers, we think, it will be the software makers. Whoever builds the best operating system—which means one that can both be completely effective and pass muster with the regulators who will allow it on the roads—will be able to sell it to any auto maker. The car itself will almost become a commodity while the operating system will be the key differentiator. It will be analogous to mobile phones. There are really only two operating systems: Apple’s iOS and Alphabet’s Android. Autonomous vehicles are likely to repeat that development. We imagine the landscape for AV operating systems will end up looking like the landscape for mobile-phone operating systems. Which means this competition is virtually all or nothing, where only one or two companies will end up with the dominant system that everybody else is forced to use.

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“CATL Inside”? EV-Battery Maker Making a Name for Itself

By Lee Gao, Analyst and Portfolio Manager | November 13, 2024

A couple of news stories that crossed our transom recently reminded us that the batteries in electric vehicles (EVs) are not all the same, and that’s a good thing for China’s CATL.

CATL is the world’s largest maker of batteries, which are by far the highest-value component of EVs. In recent years, the company has gained considerable share globally and now accounts for nearly 40% of global EV-battery shipments, more than its three closest competitors combined. Over time, we have seen CATL’s brand emerging as an asset in itself, as its technology and quality differentiate its products from what were largely seen as commodity items.

EV makers are beginning to highlight their use of CATL batteries as a way to differentiate their cars from the competition. Companies such as Zeekr have been advertising their use of CATL batteries, much like PC makers used to do with “Intel Inside” stickers to differentiate themselves in a crowded, intensely competitive market. Like Intel’s chips in the 1990s, CATL’s batteries have consistently pushed the envelope in technological advances, including industry-leading charging speed and density, which enable total ranges of more than 600 miles. These advanced batteries, called Shenxing and Qilin, now account for roughly a third of its EV battery shipments. Earlier this year, CATL started offering special service stations exclusively for owners of cars with the Shenxing batteries.

In August, CATL took that idea—that the battery in your car matters, more than you think—one step further. It opened a showroom in Chengdu, in Sichuan province, displaying nearly 100 models of EVs from 50 different car brands that use CATL batteries. The only major car maker not featured is BYD, a vertically integrated EV maker that has insisted on producing its own batteries, effectively becoming CATL’s main competitor.

As if to illustrate just how important an EV battery really can be, a Mercedes EV caught fire in Incheon, South Korea, just a week before CATL’s showroom launched. Thankfully no one was hurt, but the fire ended up damaging or destroying dozens of cars in an underground garage. After that, Korean regulators started requesting automakers disclose their battery suppliers.

The car in question had a battery from Farasis, a Chinese semi-captive supplier to Mercedes and one of a long tail of unprofitable, substandard rivals to CATL, which has the best safety record in the industry among major makers. CATL sets aside the most reserves for quality/warranty payouts (a conservative accounting approach), yet uses the least amount of those reserves in practice.

Batteries are not as commoditized as many think. These recent events could lead more consumers, and investors, to that conclusion.

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How Retailers Are Managing Disruption by China’s Shein, Temu

July 10, 2024

The following is based on a panel discussion among our retail analysts at the Harding Loevner 2024 Investor Forum.

The three most important considerations for companies in the retail industry are product, price, and place. This is because a retailer generally differentiates itself through what it sells, how much it charges, or how convenient it is for customers to shop there. Therefore, when new rivals enter the industry, they tend to target perceived shortcomings in one or more of these areas.

The clearest example of how these dynamics can play out has been the rise of e-commerce over the past two decades. Websites such as Amazon.com were able to take market share from store-based retailers by providing shoppers a greater assortment, price transparency and savings, and the ability to shop from their homes.

Now, a new class of online retailers is finding room to further disrupt the 3Ps of retail by offering deep discounts on trendy apparel and other impulse purchases. They include Shein, a company that is aiming to go public soon, Temu, a subsidiary of China’s PDD Holdings, as well as TikTok Shop, a shopping feature that was added to the namesake social-media app owned by China’s ByteDance. (While Shein has moved its headquarters to Singapore, its operations are also primarily in China.) All three cross-border operators are bringing specific competitive advantages to large retail markets such as the US and Brazil.

Perhaps because consumers in the US and elsewhere are accustomed to seeing “made in China” tags on their clothing, there is a misconception that China was always the domain of fast fashion—cheap, rapidly produced apparel that mimics catwalk trends. Traditionally, though, production and shipping lead times were longer in China, making it a more suitable supplier for brands such as Nike than retailers trying to quickly recreate viral looks. Leading fast-fashion retailers such as Inditex, the Spanish parent of Zara, and the British e-ecommerce site ASOS source only about 30% to 40% of their merchandise from China and often turn to countries such as Spain, Portugal, Morocco, and Turkey for styles requiring a quicker turnaround.

Shein and Temu, however, mostly rely on Chinese suppliers, and they’re able to offer low prices in part because of the method they use to get their products from those suppliers to shoppers. By shipping individual orders directly to customers, they avoid US import duties, which are waived if a shipment’s value is less than US$800. US lawmakers have called this an unfair advantage over American retailers, many of which do pay import duties to bring in inventory made overseas. Duties, particularly in countries with high duties, can be a meaningful component of costs, although their avoidance isn’t the only reason Shein and Temu can offer low prices. Another is the efficiency of their supply chains and logistics operations.

But while these relative newcomers have been popular with some consumers, there doesn’t appear to be much risk to high-quality retail companies. One reason is that the retail market pie is so large, which means the rivalry dynamics are such that many different strategies can succeed at the same time. For example, even after getting off to a gangbuster start in the US, Temu’s gross merchandise value represents just 1% of the US e-commerce market, putting it significantly behind Amazon at 38% and even Walmart at 6%. Its customer retention rate is also lower, suggesting that some shoppers may be drawn to the novelty of scoring a deal but aren’t becoming repeat customers. The Sensor Tower data below shows the proportion of Apple iPhone users who open the Temu app at least once a month after downloading and how that compares to other retail apps; the large drop-off in Temu visitors is true among Android users as well:

Source: Sensor Tower

To offer such low prices, Shein and Temu also can’t provide the speedy shipping that American shoppers have come to expect from companies with robust local distribution infrastructure, such as Amazon and Walmart. Instead, the packages can take a week or longer to arrive from China. This is one reason that the risk to sales of large, easily accessible US discounters such as Amazon and Walmart, which has over 4,600 stores in the US—more than one for every US county—appears to be low.

Where Shein has somewhat differentiated itself is in its use of artificial intelligence (AI), which helps it quickly respond to fashion trends and accelerate production of items that are expected to be in high demand. It’s a strategy that other retailers with high financial resources can replicate. AI may prove particularly advantageous for online marketplaces because of the tremendous amount of data that is captured by a company’s relationship with a large mix of buyers, sellers, and goods. So far, though, most of what the retail industry has done with AI doesn’t appear to be game-changing. In fact, there are cautionary tales in which brands have put too much emphasis on technology and the product suffered as a result. For example, Adidas said in 2019 that it over-invested in digital advertising and focused too much on the number of shoppers clicking its ads rather than its overall brand perception.

The category of retailers that would seem to be most at risk from competition from Shein and Temu are dollar stores given the similarities in product selection and prices. But even dollar stores have some differentiating characteristics. For example, many sell items that the Chinese apps don’t, such as consumables. They also offer convenience for shoppers in need of an item quickly and the ability to inspect a product in person rather than scrolling through a long list of options. So far, new online challengers haven’t had a material impact on the dollar-store industry.

Overall, high-quality specialist companies have continued to grow despite the success of new challengers such as Shein and Temu. It’s because of their differing strategies around product, price, and place that the barriers to entry in retail are higher than most might assume. However, it is possible that market-share gains by Shein and Temu will shake the stock-price sentiment for even some high-quality retailers, which may produce more attractive valuations and potential buying opportunities.

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Out of Our Minds

Can a New CEO Really Make a Difference?

In the Robotaxi Race, Look to the Software

“CATL Inside”? EV-Battery Maker Making a Name for Itself

How Retailers Are Managing Disruption by China’s Shein, Temu

Source: Sensor Tower

Disclosures