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May 28, 2024
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How Businesses Can Attract Government Spending

How Businesses Can Attract Government Spending

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Tesla was once the archetype of an innovative company pioneering the possibilities of electric vehicles. Its market success—both in selling actual EVs and in the stock market—was well known. But last week, Deutsche Bank analyst Emmanuel Rosner asked in a memo if it was about time that investors in the company would “throw in the towel.”

It’s unclear if Tesla CEO Elon Musk has already thrown in the towel when it comes to managing his business. While some of Tesla’s remarkable losses this year—the company has the worst performing stock of 2024, having lost almost 40% of its value since Jan. 1—are due to drops in sales, revenues and vehicle inventory, some of it is directly attributable to Musk’s own decisions. The one that inspired Deutsche Bank’s memo was an apparent “thesis-changing” shift in the company’s strategy. Tesla had been planning to produce a less expensive vehicle, which would have hit dealerships in the last half of 2025. But a news report earlier this month indicated the company’s focus was shifting to robotaxis, which Musk said on X would be unveiled on August 8. Robotaxis, Rosner wrote, have a “likely elongated timeline” to find earnings growth, while the consumer car business has been Tesla’s bread and butter, and the most direct way for the company to rehabilitate its earnings.

Tesla’s stock also took a hit in January, when a Delaware judge voided Musk’s mammoth pay package worth more than $50 billion. Judge Kathaleen McCormick wrote Tesla’s board breached its fiduciary duties by allowing “the largest potential compensation opportunity ever observed in public markets.” Instead of accepting the ruling and working with the board to craft something that could be seen as more objectively fair, Musk immediately vowed Tesla would reincorporate in a state other than Delaware. On June 13, Tesla shareholders will vote to reinstate Musk’s huge pay package—now worth more than $40 billion—and for the company to move its incorporation to Texas. Tesla Board Chairman Robyn Denholm wrote the board supports this compensation package because it presses Musk to “continue to be driven to innovate and drive growth at Tesla because the value of his shares will depend on it.”

“The moment of truth has now arrived for [chief executive] Elon Musk and Tesla,” Wedbush analyst Dan Ives wrote to clients Friday. “Many long-time Tesla believers are giving up,”

But shouldn’t a CEO be driven to foster growth at the company anyway? Success at Tesla and other ventures including SpaceX and Starlink, as well proceeds from the sale of as early internet businesses like PayPal, combined to make Musk one of the world’s richest people. However, given his haphazard management at X, the social network formerly known as Twitter, maybe he does need a direct financial incentive for a growth mindset at his most valuable company. After Musk took Twitter private in 2022, the social network changed dramatically—removing the bulk of content moderation and user verification, both of which built user trust. X doesn’t have to report user numbers, but Edison Research reported last month that the social network has seen a 30% drop in users from 2023 to 2024.

It’s a difficult business climate for companies in all sorts of industries, but there are some very consistent buyers of goods: governments. It can be tough for many businesses to land government contracts, especially if they are small- or medium-sized, but they can do solid business in “micro-purchases” under $10,000. I talked to Glass CEO Paola Santana about it, and an excerpt from our conversation is later in this newsletter.

ECONOMIC INDICATORS

People walk past the New York Stock Exchange earlier this month.

Spencer Platt/Getty Images

There were no new reports or statistics that impacted the direction of the markets last week, but the simmering geopolitical situation in the Middle East took care of that. Tensions in the Middle East ratcheted up considerably, with Iranian missile and drone strikes on Israel last weekend, and Israel retaliating with strikes near an Iranian military base Friday. The S&P 500 hit its lowest level in two months last Monday and continued to fall throughout the week, closing more than 5% down on Friday. Reports of the airstrikes spiked oil prices on Friday morning, immediately causing 2% increases in both Brent Crude and West Texas Intermediate. AAA speculated that continuing conflict could lead to price instability, and the wars both in the Middle East and Ukraine “has the oil market on edge.”

More reason for caution: The “AI bubble” that has buoyed the stock market in recent months may be set to burst. Forbes contributor R. Scott Raynovich writes growth expectations and technology investment are uneven and it may be time for hype around the new technology to simmer down. While AI has enormous potential and a few companies have seen sales of their tech infrastructure surge, enterprise technology spending in general has actually decreased at a level that isn’t offset by the new sales.

INDUSTRY NEWS

Netflix headquarters in Los Gatos, California.

getty

Netflix reported record profits and subscriber growth exceeding expectations on Thursday. The streaming leader had $9.4 billion in first quarter revenues, and had 9.3 million paid net subscriber additions—70% above analyst forecasts—increasing its global subscriber base to 270 million. However, prospects for future growth might not be as optimistic. MoffettNathanson analyst Michael Nathanson noted there is a dwindling number of households in the U.S. and Canada without a Netflix subscription, so this growth cannot be sustained indefinitely. Netflix’s stock price actually decreased more than 9% after reporting earnings on Friday, as projected earnings per share for the next quarter are lower than analysts’ estimates.

NOTABLE NEWS

A group of people lie on blankets, watching the solar eclipse in Glover, Vermont on April 8.

Erin Clark/Boston Globe via Getty Images

The receipts are being tallied for the economic impact of the April 8 solar eclipse, and for states in the path of totality, the boost was massive. Forbes senior contributor Jamie Carter delved into some of the statistics. Hotel sales were up 71% overall, with New Hampshire posting a whopping 729% more in sales than a typical early April. There was a 7% increase in fuel sales through the path of totality—potentially as eclipse-watchers took to the interstates to beat the clouds. Dining sales also increased by 27%. Michelle Meyer, chief economist at the Mastercard Economics Institute, said the solar eclipse was a testament to the experience economy. “Consumers continue to prioritize spending on experiences, particularly when it involves travel for an unmissable event,” Meyer said.

TOMORROW’S TRENDS

Meet The Expert Demystifying Government Purchasing For Small Businesses

Glass founder and CEO Paola Santana.

Glass

Regardless of inflation or the prevailing economic climate, there are some customers for goods and services who are always reliable: government entities. Governments—in levels ranging from federal, state, county and local—spend close to a third of the funds they take in. Glass CEO Paola Santana leads a company that helps small businesses get some of this business, mostly by capitalizing on “micro-purchases,” which are $10,000 and less and don’t require a procurement contract. I talked to her about how to do this kind of business with the government. This conversation has been edited for continuity, brevity and clarity. A longer version is available here.

Why should businesses sell their goods to governments?

Santana: Governments are the largest buyers in the world, and the U.S. federal government is the single largest buyer in the world. Governments in general spend about between 20% to 30% of their national GDP to make purchases. That estimates global procurement anywhere between a $13 trillion to $16 trillion market.

When you hear the traditional storytelling, small- and medium-sized businesses never win a [government] contract. When you connect these two pieces of information, what we are literally saying is that the largest buyers in the world, that actually make purchases out of taxes they captured from individuals and businesses, they don’t put that money back right into the foundation of our country’s economy.

When we come to small businesses, they’re like, ‘Look, I just want more revenue. I just want to be in business. I have taken this program to win a contract. I have done this webinar. I have even gotten government certification, and none of them has gotten me a government contract.’ What we’re telling small businesses is that a government contract is one in a million. But your chances to winning a small purchase where you don’t need to even compete, government has an ability to come to you [is better]. In many of these businesses, small- and medium-sized that we’re talking about, a $10,000 purchase is something that would keep them in business and keep the lights on for a couple of weeks.

Are governments specifically looking for local small businesses to work with?

Our city customers are looking for serious, specific vendors. They have the list because the vendors have a business license from the city. And they’re like, ‘I’m doing business with less than 1% of my city business license list. How can I do more business with them?’ Imagine the whole logistics and the CO2 emissions reduction and the turnaround time reduction achieved by something that is local: Local demand with local supply.

Governments do not have a mandate to buy the cheapest thing. In the U.S., they have a mandate to buy the best value for taxpayers’ dollars. You can do the right thing from the right groups and track it in one single place, which is one of our value propositions. In one simple screen, you can bring a big box retailer that will have a better price, and will ship from a state next to yours. And you will see a small business that has the same thing that you want, in the quantity that you want, can do same-hour delivery and it’s $1 more. It’s same-hour delivery, free delivery, and it’s a women-owned business. Then you have a veteran-owned business that has $1 less-priced item because they want to get rid of that in their warehouse, and they have already done business with you. Which one of these options do you want? If women-owned business is the goal, you’ll go with the second one. If you are optimizing for budget, I need to stretch it, you will with the first one. If you, like many government entities during the pandemic, don’t have time to wait for shipping, [it could be like laboratories that needed hand sanitizer to open quickly:] It was a local vendor and it was a little bit more expensive, but we could open that laboratory on time.

Once you start getting government business through these purchases, is it likely to stay steady?

Based on the data that we observed from governments making transactions, government is a slower decision maker, but is a decision maker that is deep and that doesn’t churn. So when they make a purchase from you, after they have verified you, see that you are a responsible partner, that you do what you say you were going to do, once you do it once well, our data indicates that government continues using you. Unless they’re like, I have capped the budget that I can spend with one single vendor, so I need to find another one. Because governments know that they are giving monopoly power to every vendor that they choose for a while. This is a good thing about government, as well. They have to rotate and they have to distribute by law.

FACTS + COMMENTS

United Airlines was on track to turn a profit in Q1 2024, but ultimately did not because of canceled flights after the Federal Aviation Administration forced the grounding of Boeing 737 Max jets earlier this year.

$164 million: Amount of United’s Q1 loss

80: Number of larger Boeing Max 10s United expected to receive this year. Problems at Boeing forced United to cancel its order

‘Better reflect the reality of what the manufacturers are able to deliver’: What United CEO Scott Kirby said the adjustments in its plans for airplanes would do

VIDEO

Meet The AI Entrepreneur Who Used LinkedIn To Raise $13.8 Million

YouTube

STRATEGIES + ADVICE

The hottest new C-suite position is a chief AI officer, and not just because it’s listed in President Biden’s executive order on the technology. What does this position entail, and should you add it to your business?

There’s a lot to learn from other CEOs. Three of these leaders wrote new books brimming with advice about how to stand out, build strong teams and achieve success.

QUIZ

Self-made billionaire Taylor Swift’s latest album, The Tortured Poets Department, broke Spotify’s record for the most streamed album in a single day after it dropped on Friday. Which of these notable people isn’t mentioned in the lyrics?

A. Britney Spears

B. Clara Bow

C. Stevie Nicks

D. Patti Smith

See if you got the answer right here.

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