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AutoShanghai2023, Tesla selling at Cost, Some China EV Inc Need a Hug - SAI Newsletter 16



 

My schedule has been absolutely packed since I was wheels down in Shanghai two Wednesdays ago. I am currently on a fast train back to Shanghai after spending about 5 days in Beijing for more meetings, social catchup's and site visits. I am excited for the tail end of my trip where I’ll head down to Shenzhen to visit a few more companies that you’ve heard me talk about before flying out of HK. More on that in next week’s newsletter though. Being back in Beijing was a bit surreal, especially as I was walking around my old neighborhood and haunts. Many dear friends still call it home but what has changed is that many of them now openly talk about the ‘when’ as in when they’ll pull the ripcord. Before it was never really discussed unless there someone’s employment contract that was expiring but that was always pre-planned. Most that could, extended those contracts but nowadays it seems like many don’t want to finish them out. It’s much easier for some to pull the ripcord than others of course but there are MANY less foreigners in Shanghai and Beijing than there were at any time in the past that I can remember. There’s a confusing message from the Chinese govt as well since they are trying to attract foreign investment at the same time, they’ve made it tougher for a number of foreign companies doing business here. The US China relationship adds to the complicated situation and my fear is that it will not get better anytime soon which puts US firms here smack dab in the middle of the conflict. In my recent experience finally making the move back 7 months ago, upon reflection there’s no real ‘perfect’ time and it takes sacrifice from the entire family if there’s any hope of a ‘clean’ break. Remember, if kids are involved, they’ve likely lived much of their lives there and have made friends and created routines that they’d not want to disrupt. In many cases, there is family involved if one of the spouses (if you’re married) is ethnically Chinese so that makes it also very difficult. My family had an amazing run and have built friendships that will last throughout our lives and our children’s as well. But for us, there’s also no looking back – we’ve plugged into the US and are ready for brand new adventures there. The great thing about being in the US right now is that the move to EVs is just starting. I am finding that more people are starting to become aware of my background and expertise and are reaching out to pick my brain, learn more about what happened here, how it happened so fast and whether it can be repeated. I am also correcting some misconceptions and trying to set the record straight about how fair/unfair or protectionist the China market is for foreign automakers. Not to oversimplify this but the legacies had a good, long run in the China market, a more than 30 year run for a few of them. If you want to point to the protectionist measures like the JV requirement, the foreign legacies were willing participants for all that stuff. If you’re a data person, check the financials and sales numbers of VW Group, GM, Toyota and others. Would VW Group have been able to become the world’s #1 automaker in 2016 had it not sold a bunch of those cars in China? Not a chance – look at how they struggle in the US, the 2nd largest market in the world. For many, it’s their #1 market BY FAR. As a matter of fact, I’d argue that it was too easy for them to sell their products here. It made them even slower and less attentive to the changes that were happening at lightning-fast speed, but right in front of their faces. Last year was the 1st year since stats were kept that the Chinese domestic automakers collectively outsold the foreign automakers. That didn’t happen overnight. And any data minded team or company should’ve seen that coming years ago. It’s just really hard to pivot away from a cash cow to move into a space where you’re completely unfamiliar with how to design, engineer and even manufacture the product. On top of that, the heart and the soul of the product, the software that enables the engagement with the customer has always been the afterthought for those automakers. Making it the main course – means that the leadership of these companies need to all look themselves in the mirror and bring on people that have loads of experience in that space, specifically where they do not. Where has that happened? But not just to hire them so that they can be managed but hire them to lead. A hard (in still many cases an impossible) pill for many proud, and previously (unquestioned) management to swallow but that’s what needs to happen. And except for a few younger high potentials here and there, most of these automotive companies have industry veterans with 20, 30-40 years of experience that ‘earns’ them their right to their opinion. Now, look at Kyle Vogt who’s 36 / 37 years old and the CEO of Cruise. That makes him basically an SVP at GM. I wonder how many GM managers with all that experience are like, I’d NEVER want to report to someone that much younger than me, he doesn’t ‘understand my business.’ But GM didn’t hire him, he was acqui-hired when GM bought Cruise. Contrast that with Ford and the Model E team, they hired Doug Field after which he basically hired a bunch of high-tech managers to lead his teams. Look at Ferrari – they hire a Benedetto Vigna who led a chip company to lead the team. Will all these bold moves work, of course not but small, evolutionary moves now are a one-way ticket to exiting the China market. Most of the legacies won’t be able to make the pivot, not in the small window that they need to and unfortunately, in a fit of desperation they’ll likely hire an up and coming tech exec to lead their diminishing operations. It’ll be too late. Allow me to be a bit of a wet blanket here though. Software development isn’t easy. In fact, it’s really f’n hard. For companies with ninja-like SW Dev teams, their expertise is nurtured because it’s part of the company culture and their DNA. For example, at Apple the gods were the designers, SW developers and the product & marketing folks, every other department was a back-office function where warm bodies were shuttled in and out. That was by design too. If you can’t handle the boiler room atmosphere, especially on the Ops side they’d rather you not be there. There are folks lined up 5 deep outside the office willing to take your place. Its why Apple is now the most valuable company on the planet. With Amazon, Alphabet and Meta not far behind. Because they’ve been able to build those ninja SW Dev teams over years of trial and error. Further, a good/great software developer can make or break a team and get a product out the door on-time and (fairly) bug free. A bunch of good software developers can literally work miracles. These aren’t things you buy or develop in a few years’ time. And you’re not gonna get it done with a bunch of car guys still calling all the shots because they’ll be talking an entirely different language to the dev teams and there won’t be that respect because the car guy has no idea what the dev is building or how it’s built. But this is where we are. If YOU wanted to build a product that could compete against not only Tesla, but BYD, NIO, Zeekr, XPeng and Li Auto would you start with putting a car guy at the top of the ticket? Now let me be clear – I think the current leadership at the automakers can get it done. They must get it done. Or else. But the management teams are carrying a lot of dead weight and dead weight ALWAYs slows you down. They want to make the sizes of the companies smaller, but they want to keep all of the management? Don’t listen to what the CEOs are saying but keep an eye on what they’re doing. Software development costs should be one of the expenses that continues to grow – find out where they park it on the financial statements – Where does it sit? Is it part of the product costs? Or is it allocated out across products? A quick look will tell you how they really think about how important software development is. I’ve been talking about this now for years. It’s why I began writing the newsletter and launched the podcast. And most importantly, I saw it on the faces of most of the European executives walking the halls of #AutoShanghai2023 – the culmination of three years of their worst fears manifested in half empty foreign legacy booths and crowded, excited, 4-5 deep lines of people waiting for their chance to have a seat in the new Zeekr X. The ¥190K (~$28K) small hatchback like EV that was launched at the show. A brief example. I LOVE the Audi RS e-tron. I think it’s a beautiful machine. I think it’s a terrible EV but that’s beside the point. I went to the Audi booth walked to the car and was able to get right inside. No one was in front of me and no one was clamoring around me to get a peek. Contrast that with the fact that I waited 10 minutes for the privilege of sitting inside the Zeekr X. There were KOLs recording inside it and more importantly, an excitement and what feels like an inevitability that it’ll sell as many as Zeekr can make. There has been a flood of coverage on the show and a lot of it was really good. Kudos to the short staffed teams here working their butts off walking the show, attending the press conferences and seeing what the products were all about. I say short staffed because many journalists that wanted to attend that weren’t already in country had a pretty challenging time getting the visa approved and flight booked, specifically those from US media outlets. CHINA EVs & MORE I just finished a special edition China EVs & More podcast where Lei and I reviewed the sights and sounds of the event through our eyes. Well worth a listen although we are a bit behind on publishing the last few episodes. Will try to remedy that over the next week or so. Will also get our latest MAX episode out as well so that the universe is back in balance. We will then look at getting the LIVE show back to a normal schedule since Lei and I will both be back in the US late next week. For those that can’t join the live show, I invite you to listen to our recorded China EVs & More episodes at this site. And as always, we appreciate any feedback that will make the show better. Also, if there are any companies you want our thoughts on, let me know. INTERVEWED/QUOTED Big week for interviews and quotes from me since I was on the ground in Shanghai so bear with me. The cool thing is that it’s pretty international and I actually was interviewed live by CNBC just before the doors opened on #AutoShanghai2023. I was also a guest on John McElroy’s Autoline After Hours where we talked about, you guessed it - #AutoShanghai2023. You can find that discussion here. I have a ton or respect for John and he’s equal parts skeptic / advocate but most importantly he’s not married to an opinion, evolving it as he learns more. I really enjoy being on his show and he recently hit 100K subscribers on YouTube (actually 103K as of the recording) so there are many others in the space that look to him for the latest news and opinions on all things auto and EV. - Forbes. I spoke with Russell Flannery and gave him what I expected to see and wanted to see on the eve of the Auto Show. The article is worth the read for those wondering how many I got right. My predictions had to do with design, AI, ADAS and the foreign legacies. Click the link – I know you’re curious to know my predictions! - CNBC. Part of my live interview was edited into this short sound bite. For those interested in seeing the entire video, ping me and I’ll try to post it. This week’s photo is a BTS or Behind the Scenes look at what I was dealing with. The full picture: I was standing about 20 yards from a major road in Shanghai, the ear piece wasn’t very clear and the bao an (security guards) who were across the street decided to cross the street and do their morning rally exercises that included yelling about 10-15 meters away from where we were recording. Let’s just say I’ve a new appreciation for the producers and journos that deal with this stuff on a daily basis! - NY Times. I had a nice chat with Dai Wakabayashi who co-wrote this piece for the NY Times about the current price war. We’ve been talking about this price war in the newsletter for a few weeks now so I won’t get into too many details but what’s notable is that car sales fell 13% YoY in Q1’23, mostly from ICE sales falling off a cliff. Uh oh, foreign legacy. The head of the China Passenger Car Association predicts that there will be a shakeout with the less/non-competitive brands getting got. Folks are also speculating when it will end but until we see more moves by the Chinese govt to boost consumption, expect the scissors to stay sharp! - Bloomberg. I spent some time chatting with Linda Lew for her piece on BYD and the newly unveiled and aggressively priced ~$11.5K Seagull that will ship later this year. Many folks point to the Wuling Hongguang Mini EV as the OG micro-car that started it all, but there are newer entrants like the Wuling Bingo & T3 from Leapmotor that are poised to compete as well in the segment. But this Seagull could be the perfect bridge between the cute, cultural icon that is the Mini EV and a full-fledged, daily driver that fills a lot of people’s needs. Put me down as someone who thinks it’s going to be a strong seller right out of the gates. Not only in China but in other parts of the world like Latin America and Southeast Asia where the pricepoints on cars is much lower. Once the Seagull incorporates sodium ion batteries which its rumored to do before the end of this year – it could reduce the price even further. And if that happens, some of the weaker players will be waving the white flag saying ‘no mas!’ - Deutsche Welle. I traded emails with Srinivas Mazumdaru for his article about battery tech being dominated by Chinese companies. I effectively told him that the US & European automakers can’t build affordable, profitable small EVs without using Chinese batteries and that’s not going to change for the foreseeable future, likely >2030. It’s a delicate balance of investing in mines, refineries and working with allies to allocate rare earth metals to those who need it the most in a fair way. All the while utilizing the Chinese batteries as a band-aid that gets ripped off once the domestic capacity and supply has been established in high enough quantities that can support growing EV demand. The problem with that scenario is that CATL & BYD will be the only game in town and when they see that Europe and the US are getting close and are about to pinch them out of the market, they lower prices and keep those prices lower than any western battery manufacturer could compete against. Then what? TESLA - Elon just said what I said – 4 years ago. Now it could be more or less than 4 years ago but anyone following me for that time should remember that I’ve said it wouldn’t surprise me if Tesla eventually sold their cars at close to cost to get more of them on the roads. And the way they’d make money? Through services. I’ll need to dig up the first time I said or wrote that. To be clear, it’s not what investors want to hear but this was such an obvious strategy for Tesla even way back when. Many people have gotten rich off Tesla stock so a lot of people would get pretty upset if Elon then decided to torpedo his share price for the long-term gains of eventually monetizing all the cars sold at cost at a later date. - Tesla shipping MIC Model Ys to Canada. Another pressure release valve for slack domestic demand for Tesla in the China market. I’d mentioned earlier that they’d likely increase exports to Sing, Japan, S. Korea, Aus and a few other countries as BerlinGiga began to ramp and not allow them to dump capacity there. What I hadn’t predicted was that they’d ship excess capacity to CA! Let’s put this in quotes ‘North America’ technically but remember that any MIC Tesla’s would be slapped with a 25% + 2.5% tariff if shipped to the US so for now North America = Canada. Do I see them eventually shipping MIC Tesla’s to the US market? Why not – GM, Polestar are doing it and Ford will be starting in 2024. Now, how Americans will feel about this is still up in the air but let me assure you that if they can keep prices low on those vehicles, many Americans won’t mind one bit. NEWS THAT GOT OUR ATTENTION THIS WEEK - So which EV startups are in trouble? This South China Morning Post article lists 6: Evergrande (Hengchi), WM Motor, Enovate, Aiways, Qiantu and Niutron as those on watch. No real surprises from that list as we’ve talked about all of them here in the newsletter as well as on the pod. There are rumors about a couple of them getting close to a capital injection but I’ll have to see it to believe it. I’d also add Faraday to that list too. They’re struggling to raise enough capital to get cars shipped. Another stat. Of the 500 startups that launched over the past several years, only (and I say this tongue in cheek) 200 have their manufacturing licenses. This price war has further scared off any investors that want to swoop in to rescue any of these companies. The only hope they have is getting a new product launched that would be a BIG hit in the China market. With competition not letting up anytime soon, I think winning the lottery might get you better odds. TRENDING ON SOCIAL MEDIA - Is the Land Rover brand dead? It seems some media jumped to conclusions after JLR announced a new brand strategy that would separate out the Defender, Range Rover, Discovery and Jaguar brands. OK, if Land Rover isn’t dead then where does it fit? Would it be akin to Ford when they acquired said Land Rover, Jaguar and Aston Martin and grouped them as the Premiere Automotive Group? Still need some clarification here JLR. - BMW is sorry for being stingy with their ice cream. Now, it actually wasn’t even Bimmer but the Mini brand that BMW owns that was accused of only giving free ice cream to foreigners at #AutoShanghai2023. What I was told was that they were running low and were saving the last few ice creams for staff and employees but who even knows if that’s the truth. What’s weird is that it was Chinese people serving (or not) other Chinese people and the likely culprits were not even Mini employees but agency employees from the event planning company Mini hired. Let’s just say I think it’ll be tough for them to get another project with Mini anytime soon. - The EV models eligible for tax credits from the Inflation Reduction Act has been released. For those interested in seeing which vehicles are eligible, feel free to click the link. Let’s just say, the Big Three are well represented along with Tesla and Rivian. Foreign brands, not so much but that’s just for now. It’s likely going to change as they reshore EV production to North America or lobby the Biden Administration to create some carveouts. BY THE NUMBERS - 8K. That’s how many orders the Buick Electra E5 received 12 days after it was launched. This is a very positive sign for the vehicle and it’s aggressive pricing most assuredly had something to do with that. I was quoted as saying it started at ¥230K but it actually starts at ¥210K! That’s pretty aggressive pricing and it’s likely not where the price was when the price war began. So look at this as an embedded price cut that just happened to be implemented prior to its launch 12 days ago. If you’re wondering, it’s about the size of a Tesla Model Y and I don’t believe that’s a coincidence. ___________________ This weekly newsletter is a collection of articles we feel best reflect the happenings of the week or important trends that have effects on the automotive and mobility sectors here and in the US, we also provide a point of view that we hope educates and sparks debate. The Sino Auto Insights Team


 

Sino Auto Insights is a Beijing, China-based market research and advisory firm that specializes in assisting companies analyze, strategize, and develop products and services that will shape the future of mobility and transportation. Members of our team have experience working in Detroit, Silicon Valley as well as here in China across multiple sectors and functions as entrepreneurs as well as working at larger companies like Apple, Google, Amazon, GM and FCA, and many others.

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