On today's episode, Vincent Shen joins Sean O'Reilly to talk about two areas where industrials and energy and consumer products overlap.
First, a look at the current state of technology and regulations around self-driving cars, and which companies are really pushing the concept forward. Then, the hosts chat about how 3D printing (remember when that was exciting?) companies have been moving forward since the hyped-up industry crashed last year, and where we're seeing the innovation now that things have calmed down.
A full transcript follows the video.
This podcast was recorded on Feb. 11, 2016.
Sean O'Reilly: Where am I going on my first trip in an autonomous car? I'm going to Disney World. All that and more on this special Energy and Industrials episode of Industry Focus.
Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is Thursday, Feb. 11, 2016, and joining me to talk about big things going on in the industrial sector is... Vincent Shen?! What are you doing here?! [laughs]
Vincent Shen: How are you, Sean?
O'Reilly: Get out of here, you're not supposed to be here!
Shen: I'm invading your other show.
O'Reilly: You are. No, thanks for being here, continuing the, what are we calling it? Shake-up...
Shen: Remix week, whatever we're referring to it as, yeah.
O'Reilly: So, I guess this is going to be a merging of the energy and industrials episode and consumer goods, because all of the products we're going to be talking about are particularly consumer-facing.
Shen: Yes, exactly.
O'Reilly: So, I've actually been really excited to talk about this for a while now, because we don't get to do it enough, especially on the energy show. We would do industrials more, for our listeners who are, of course, curious. [laughs] There's so much stuff going on in the oil sector that we pretty much have to talk about it all the time.
Shen: I can understand, the past year, year and a half.
O'Reilly: Yeah. So, anyway, we're talking first and foremost about autonomous cars.
O'Reilly: I desperately want one. I had a friend of mine who I went to college with, we were at a wedding and all this stuff, and we got to talking about autonomous cars, and he actually brought something to mind that I didn't even think about, which was, this could actually revolutionize travel and distance between families and jobs, because both he and I have our families in Ohio, we're here on the East Coast -- he's up in New Jersey, your home state -- and he said, "Imagine being able to hop in an autonomous car, ride home to Ohio for 6 or 8 hours overnight, just sleep through the car ride or something on a Friday night, and then go back home to your job or whatever on Sunday night, and you don't have to fly, it would be awesome."
Shen: Oh, absolutely.
O'Reilly: So, anyways, all this autonomous car stuff, driverless car stuff, it requires regulations. We just got a big update there, by the way.
Shen: Yes. So, I'm really excited to talk about this topic. It's not something we would usually cover on our consumer show, of course. And, before we get into some of the companies and the technologies and the innovation that's happening in the space, there is of course, the regulatory framework. And there's a big update recently being pushed by [Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) subsidiary] Google, actually. Basically, Google is obviously very well-known for pushing a lot of these self-driving car efforts. They've been petitioning the National Highway Traffic Safety Administration to basically reevaluate how it defines a driver, the idea being, while some companies are approaching the self-driving cars where they're still giving it a steering wheel and brake pedals and things along those lines, where the riders can still operate the car, Google is envisioning it where there's none of that, and the car is truly --
O'Reilly: It's literally just a pod or something.
Shen: Exactly. And, as a result, they want to petition the government to consider the fact that in those instances where there is no steering wheel, and the person is just getting into this pod like you mentioned, the driver is considered the software, and not the rider.
O'Reilly: So, I'm sure that what just popped into our listeners' minds, because it popped into my mind immediately, is, what happens in the event of a fatality or something? Is it just an act of God? Or what?
Shen: This is where, I think, a lot of laws and rules are going to need to be rewritten, exempted, waived, or just changed to try and catch up with the technology. All this decision really came out as, basically, the Traffic Safety Administration agreed with what Google was petitioning --
Shen: -- in this instance. But, there's still a lot of work to do, obviously. So, in those instances where you mentioned, like, there's a fatality, for example, that is ultimately the main focus of these companies, where they see the benefits of these cars and this technology, making driving safer, reducing congestion, and also potentially having a lot of environmental benefits as well, and way more than that actually, as we get into it. The thing is, there's going to be, obviously, a really long fight ahead to create all of those exemptions, the exceptions, and necessary rules to adapt for this. But, on that note, I will say that Secretary of Transportation Anthony Foxx, he commented earlier this year, I think it was at the Auto Show, the big Detroit Auto Show, his department is really supportive of this technology. And he's stated that he would actually consider speeding up the process or even waiving some rules in order to help get these cars on the road, assuming they could pass all the safety tests and things along those lines.
O'Reilly: The reasoning being that the benefits outweigh the potential downsides?
Shen: Yeah. The technology is improving, and they can drive safely. When you can remove elements like people being distracted, texting on the phone, or things along those lines, or just aggressive drivers, when you can remove some of those elements --
O'Reilly: Well, is it true that -- like, I heard that Google's autonomous cars that they've been testing, they've been in a few accidents, but they were all human errors or something?
Shen: Oh yeah, from the other party. That's generally what I've heard as well.
O'Reilly: Yeah. It's like, well, if every car on the road is an autonomous car, and they're all talking to each other, I mean, I would have to assume auto fatalities alone would go down like 99% or something. So, OK. Obviously, your answer to my question earlier, it sounds like they don't have actual rules written for when a fatality happens?
Shen: No, no, of course not. So, this is just kind of moving in that direction, where you can see that they are making some progress, and it seems like, in terms of the institution, the government, they are supportive of these efforts, and they are generally trying to work with automakers, technology companies, and building out this technology together.
O'Reilly: So, the conversation has begun -- wait and see -- but if the government is on board, that's obviously bullish. I'm trying to remember, as long ago as a year and a half or two years, I read this article on Bloomberg, I think, and it was talking about how the CEO of Mercedes-Benz had actually been riding around in like rush-hour traffic at 6 p.m. in Munich in the back of a driverless Benz. And I was like, oh my gosh, like, one, he trusts the car, two, it went well. And that was two years ago. So, what companies are in on the game other than Mercedes-Benz? What are they seeing as likely to happen?
Shen: Sure. We talked about Google because they were petitioning the Safety Administration, and they're usually one of the main players that comes to people's minds when they think about self-driving cars. They've been, obviously, pushing those efforts a lot. But, honestly, I think every automaker out there is thinking about it. This is going to be the next evolution or revolution for cars, in that Kia, Ford, and, like you mentioned, Mercedes, which I really want to talk about, in their concept car, is envisioning this. So, Mercedes has their F 015. And I highly encourage our listeners to go check out their website for this, because it paints a picture, broad strokes, but it paints a picture of some of the potential for what these cars can look like, how people can interact --
O'Reilly: Is that the car with the table and the four swivel chairs?
Shen: Yep, exactly.
O'Reilly: OK. [laughs]
Shen: So, beyond some of those gains or the benefits that we get from this autonomous car technology, you're avoiding things like DUIs, you're avoiding things like being distracted on the road, people who are distracted on the road, aggressive drivers. It might ease congestion as well, but the thing is, it's just really interesting how these cars can really change how we view even our daily commute. The idea being, infotainment systems of today would already be considered futuristic and high-tech to drivers 20-30 years ago. We have access to things like GPS, Bluetooth calls, Spotify, Pandora. It's all there. Some cars even have a full iPad built into the console.
You take that to the next step, and if you were in the car before, driving monopolized your attention. Hopefully, you're focused on the road, operating the car safely. You don't have to do that anymore, now you're basically traveling in a giant mobile device. And that infotainment system becomes the centerpiece of what you're going to be spending your time doing in the car, a lot of the time. And so, you might be able to watch TV, play games, be on a conference call for work, even work on a presentation or something as --
O'Reilly: While riding to work.
Shen: Yeah, exactly. As the F 015, presents, they have a lot of screens in the car to interact with. And, admittedly, I really like my very large phablet-size smartphone, but in the end, I would take a large monitor --
O'Reilly: An actual computer screen, yeah.
Shen: -- and keyboard any day of the week. So, that's some of the potential that, with the F 015, you can see the inside of, you mentioned, the front seats, they swivel around, so you can basically have four people sitting in a circle facing each other. It's really just a really cool concept. Otherwise, bringing this into the more consumer-facing side, so, of all these people who are saving time -- like my brother, for example, he commutes an hour a day, so, 10 hours a week is time spent on the road. Now --
O'Reilly: Multiply that times a lifetime, and you've got --
Shen: Or a year, even.
O'Reilly: -- 80, 90 years on this world at best. It's like... [laughs]
Shen: Exactly. So, you take that and you expand it to the idea that, OK, that time can now be spent with retailers, browsing stores, shopping online. You can think about a company like Netflix, consuming content from a lot of entertainment companies and content providers, and just, it shifts something that happens every day, like your commute, from, often, a source of frustration, as a lot of people in the D.C. area will know --
O'Reilly: Why do you think I moved to Alexandria? [laughs]
Shen: -- into a source of relaxation, or however you want to spend that time, it's pretty incredible. And you mentioned overnight trips to visit family, or for work or something --
O'Reilly: Yeah, can you imagine such a thing? We have a great, flexible work policy, where you can telecommute a lot of times, and you can sometimes duck out a little early on a Friday to go home to New Jersey or whatever. Imagine leaving at noon or not even coming in on a Friday, and just getting in a driverless car and popping up to see Mom and get your laundry done or whatever. [laughs]
Shen: And bringing this down to the average person, too, I found that the average commute time in the U.S. is about 25.4 minutes. So, call that --
O'Reilly: Double that for D.C. [laughs]
Shen: -- about an hour a day. An hour a day you're spending on the road. If you're in a major metropolitan area, probably even worse than that, going into the cities. So, I think most people would say, "Yes, I would absolutely like to have another hour to my day to do whatever in the car."
O'Reilly: Absolutely. So, how far along is this technology? Is this going to... you kind of know what I'm getting at, because in the 1970s, we were told we would have moon colonies by now. You know what I mean? [laughs]
Shen: Of course, I understand. In terms of rubber meeting the road, right now, one company that I feel is pushing the limits in terms of what is possible with autonomous vehicles, and pushing the boundaries in terms of actually releasing these features and allowing owners of their cars to use them, is Tesla Motors (NASDAQ:TSLA). Tesla, though, I think it's their Model S and X, they have their autopilot, which has some really incredible features.
O'Reilly: Now, that just works on the freeway right now, right?
Shen: Yeah. So, just to give you an idea, a lot of cars are released these days where you have sensors that might warn you that there's something in your blind spot, or they might have adaptive headlights, so as you turn, the headlights will adjust to better illuminate your path. So, I feel like the autopilot program takes it to the next level. So, you have automatic steering. As you mentioned, on the highway, for example, you can take your hands off the wheel, and it will control it. It has this smart cruise control that basically uses the sensors to detect other cars and maintains its speed according to the traffic flow around you. And then, it also has automatic lane changes. So, if you're in the autopilot mode, you can just hit your blinker, and once it's safe, it'll automatically change to the next lane for you.
O'Reilly: Oh, wow.
Shen: It'll warn you if your car's drifting into another lane, for example. So, those are some of the features that we're seeing right now. And, with the release of an update that Tesla pushed out last month, actually, it takes it to the next level. And a lot of that already sounds amazing, but now they have --
O'Reilly: So, this is just a software update that got...
O'Reilly: Wow, OK.
Shen: So, of course, you have to have hardware that can run this autopilot feature --
O'Reilly: But the sensors, from what you're telling me, are already in the car.
Shen: For certain models, yes. And if you've opted for that package. But this update that was released last month, it has this really cool "summon" feature. Now, we're getting into parking.
O'Reilly: Is this like the Batmobile in 1989's Tim Burton Batman? [laughs]
Shen: OK, yes, close. I'm glad that you just reminded me of that. In a sense, the summon feature, it'll park your car for you, parallel parking or in a perpendicular spot in a bigger parking lot. And, there's some limitations. You're only supposed to use it on private property, and you can only use it --
O'Reilly: To protect Gotham City. [laughs]
Shen: [laughs] Exactly. Or, within about 30 feet from the car. But ultimately, in tight spaces, you can get out of the car. For example, you get into a really tight garage, and you can't open the door to get out, you can get out of the car, line it up, hit a key fob or a smartphone app on your phone --
O'Reilly: Oh my gosh.
Shen: And it will pull the car in. And at the same time, you can summon it, so you can be inside your house getting ready in the kitchen, having your coffee -- hit a button, it'll open your garage door, start your car, back the car out, close the garage door, and be ready for you to go with the engine running the moment you walk out your door.
O'Reilly: Wow. Which is handy in a blizzard.
Shen: Exactly. And, like I said, there's some limitations right now just around the laws of where you can use these. Again, it's private property. But the CEO, Elon Musk, he has very confidently stated that --
O'Reilly: Did this happen just yesterday on the conference call? When did he say this?
Shen: It may have been, but he stated that eventually, he's hoping summon could work on a coast-to-coast basis, even, where you could summon your car in New York from Los Angeles --
O'Reilly: Oh, stop it.
Shen: -- across the country. Not only that, it'll know when to charge on the way, and will even sync up, potentially, with your calendar, to arrive right when you need it.
Shen: And he's saying that's within two years. A lot of other manufacturers, automakers have put a timeline of around 2020 when we'll really start seeing these cars hitting the road in smaller numbers. Google is even more bullish than that. But again, some of these incredible features, it just gives you an idea of what's on the horizon.
O'Reilly: It definitely seems -- before we move on, really quick -- that the safety and the benefits really become prevalent when there's mass adoption. That seems to be the key.
Shen: Yeah, of course. And, you mentioned, with some of these prototypes, I know it's a much smaller sample, but there have been accidents, from what I recall, by human error, either by the operator, in some way, or something else.
O'Reilly: I mean, they went like 2 million miles before it happens, and then it was human error. It's like, how long can you drive without an accident? [laughs] You know?
Shen: Yeah, that's a very impressive result. I don't think these companies would be pursuing it if they didn't see how well this technology is coming along.
O'Reilly: Cool. Before we go on to chat about the current state of the 3D printing industry, I wanted to point our listeners to the newly redesigned focus.fool.com. There, you can take advantage of a special discount on The Motley Fool's Stock Advisor newsletter that works out to $129 for a full two-year subscription. Once again, that's focus.fool.com.
All right, so, Vince. For our special crossover Industrials show, we want to talk about 3D printing.
O'Reilly: The industry itself has not been doing so hot over the last 12-18 months.
Shen: Unfortunately not. But, again, I'm pretty pumped to talk about this topic, just because I like how it is giving a lot of different players or parties, essentially, access to manufacturing capabilities that previously they would not have been able to get. So, for 3D printing, a lot of the bigger names have taken big hits over the past two years.
O'Reilly: As I understand it, there's two types of 3D printing companies. There's the industrial side --
Shen: The more enterprise, industrial-focused side. There's the consumer side. A lot of the companies will straddle both sectors, whereas some will focus on trying to develop that expertise in one. But, some of the bigger companies, like Stratasys (NASDAQ: SSYS), it's down 90% over the past two years.
O'Reilly: And they're more of an industrial player, as I understand it.
Shen: I believe they had some crossover, Stratasys. 3D Systems (NYSE: DDD) has, I think it's actually generally moved away from the consumer market. But, Stratasys, they posted incredible double- and triple-digit quarterly revenue growth for years. And then, the products of the company stalled, the most recent third-quarter report had revenue falling 18% year over year for the first time in many quarters. And they've just generally been dinged with poor execution of their strategy, in terms of integration with certain acquisitions, it's been difficult.
O'Reilly: Did the projection and the adoption of this stuff just not meet what they thought it would?
Shen: I think this was an instance where there was a lot of hype very early on in the development of the technology, and before, the adoption issue wasn't as big of an issue as people had anticipated. But it's not like... this isn't a groundbreaking movement, in that regard. I still think there's tons of potential here, it's just that people need more time to basically see where the best benefits come around, where the profitability is coming in for them. But Stratasys, they reported a $1.1 billion loss for the first nine months of 2015, versus a $120 million loss for the full year of .
O'Reilly: Ooh! Was that writedowns? That's not good.
Shen: 3D Systems suffered a similar fate. The stock crashed 90% over the exact same time period, really, and their third-quarter revenue fell 9%, breaking another multiyear streak of growth. They had a $44 million profit in 2013, and that swung to a $60 million loss for the first three quarters of 2015. Then, you have other players like Materialise, ExOne -- again, they've had similar issues and their stocks have struggled as well. And a lot of them are just burning cash right now, trying to develop --
O'Reilly: Get the products out.
Shen: Exactly. So, in terms of the adoption thing, some of the big issues with these printers are, they're either too big, too expensive, too slow, or some combination of that. So, they haven't really moved beyond their typical uses, which include a lot of prototypes testing. So, as a result, some of these companies are moving away from the consumer market, which is where a lot of the potential was initially seen as being in.
O'Reilly: Yeah, I was kind of surprised, because the theory for a long time was I'd be able to go into Home Depot and get my own 3D printer. I don't know what I was going to do with it, I was probably going to make little action figures or something for my son. [laughs]
Shen: [laughs] So, while the consumer side hasn't been as promising, I think there are some companies that are seeing promising results in the more industrial enterprise sector. So, there's a Swedish company, Arcam, for example. They use [electron] beam technology to melt metal powders into solid objects.
O'Reilly: I do not want to own that.
Shen: This is on the metal 3D printing side, OK? And the thing is, the company is focused on the aerospace industry, also medical devices as well. But they are gaining some traction in aerospace with airplanes and engines, because General Electric, Pratt & Whitney, and Rolls Royce are all customers using these 3D-printed parts in their products. And even, like, HP Inc (NYSE: HPQ), usually considered the weaker of the two entities after the spinoff, because they are kind of settled with slow growth, they've actually been declining --
O'Reilly: They actually make printers. Yeah.
Shen: Yeah, they're a hardware business. HP Inc is kind of leveraging this technology, too, where 3D printing, ultimately, I think there is a nice runway to growth, and that's going to be pretty rare for their business. So, they're focusing on that. They're using their Multi Jet Fusion technology to hopefully create some faster polymer printers for enterprise use. And then, again, on the institutional side, this was a really interesting story out of Singapore, where they recently announced that they want to consider using 3D printing technology for public housing.
Shen: So, they have --
O'Reilly: The can quickly and cheaply get houses together.
Shen: Exactly. So, they have a lot of people in their city-state that are in government housing, they have an aging population, and they're trying to reduce their reliance on foreign labor and increase productivity overall. So, this idea they're having is, working with this 3D printing company who can 3D print concrete, and they want to build it room by room, floor by floor, offsite, and then bring it to the actual construction site, and assemble it there. So, it's mostly focused on infrastructure. They wouldn't be making all the little --
O'Reilly: The fixtures and stuff, yeah.
Shen: Exactly. But, in terms of --
O'Reilly: The walls and the floor, yeah.
O'Reilly: Action figures, obviously.
Shen: Exactly. So, some people are able to use some for their start-up businesses --
O'Reilly: To make prototypes.
Shen: Think of Etsy, where you can make a prototype, but before, if you wanted to make jewelry or something like that, you might have to find somebody to contract their facilities in order to make these. But now, you can have what is essentially a mini-manufacturing --
O'Reilly: That looks like a microwave. [laughs]
Shen: Exactly. So, on the start-up side, it's really interesting. But also, even with the gun industry, this could be something that's really big, not only in terms of some of the regulatory concerns, but also in terms of product innovation, where there's a guy who recently had videos on YouTube, and some people were calling it the first 3D-printed semiautomatic gun.
O'Reilly: Uh...! [laughs]
Shen: Granted, it's not fully 3D printed. A lot of the main parts that endure a lot of stress when actually firing the gun are actually provided by Glock. But, otherwise, I think some 95% of the parts are 3D-printed. And it just kind of gives you, again, an idea of how some people are using this technology to innovate. And then, in another way, I was just thinking about, just, parts for household items. So, if you have a desk, and some part breaks off of it, you can go to the company site that made it --
O'Reilly: Yeah, download the software.
Shen: Yeah, essentially the electronic blueprints for that part, put it into your printer, and replace it without having to wait on the mail and all that. So, again, I think there's going to be a lot more uses to come out as adoption increases, as different parties use it and realize, "Oh, wow, this could really work in this way." But otherwise, this is definitely a sector to watch, especially on the industrial side, because it seems to be having more success there.
O'Reilly: Cool. All right. If you're a loyal listener and have questions or comments, we would love to hear from you. Email us at IndustryFocus@Fool.com. Again, that's IndustryFocus@Fool.com. As always, people on this program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. Vince, thanks again for your time.
Shen: Thanks, Sean.
O'Reilly: We'll catch you later. That's it for us, folks, have a great day and Fool on!
Editor's note: A previous version of this transcript stated that Stratasys' Q3 revenue fell 80% YOY, instead of 18%, and that the company experienced a $120 million loss for full-year 2015, instead of 2014. The Fool regrets the errors.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Ford, Netflix, Pandora Media, and Tesla Motors. The Motley Fool owns shares of Etsy and General Electric Company. The Motley Fool recommends 3D Systems, Home Depot, and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.