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CFIUS & EV/AV Sector, Ford & Google Mashup, WSJ Spotlight on Detroit Style Pie - SAI Newsletter 4



We should shift from measuring market capitalizations, global sales, gross margins, etc. as viable and fundamental ways to measure the health of a company, as well as indirectly, whether or not its managers are doing a good job. Tesla, the Chinese EV startups, and the tech cos. entering the market are skewing the numbers. Many of these companies that are getting VERY favorable valuations have no business doing so (see Evergrande EV). I may be stating the obvious but unfortunately, those responsible for analyzing the companies, competition, and innovations coming from the sector haven’t been able to suggest different, more representative statistics that accurately and logically explain what’s happening in the market. Two major sectors are converging which is causing a disruption the auto market has NEVER experienced. Add to that the ‘China’ effect and you get DCF models that don’t make a ton of sense which is being reflected in these people’s Buy, Sell, and Hold ratings. Not that I have the correct measures myself. But we ARE working on some and if my team can come up with some we think work, we will let you know. What makes the future even more difficult to predict is that once the cost of building cars (cap-ex + op-ex) lowers enough (toward commoditization), the tech companies will abandon their partnerships with the OEMs and take back control of the entire ‘go to market’ process. Mark it down. This will probably happen before 2030 as companies like Foxconn and Magna Steyr are helping push contract manufacturing costs down even more quickly. If you think I am out of my mind, think about how fast Tesla is moving – GLOBALLY. We are NOT working at the legacy automaker’s pace anymore. Tesla, the Chinese EV makers, and the tech cos. are now dictating the pace, levels of innovation, and business models to OEMs in the US, Germany, Japan, and Korea – and they know it. Think about how much disruption Tesla has caused over just the last 5 years. Now think of a half dozen EV startups + Tesla ALL trying to outdo each other in multiple markets. That’s called competition and it’s not anything the legacies have had to deal with in a very long time. Not like this. And it’s coming in waves from both sides. Literally. Silicon Valley & China. It’s essentially surrounding them so that they can’t avoid it. Mary knows this. Jim Farley is still a bit in denial but he knows this as well (which makes inking Google as their tech partner kinda a headscratcher). Tavares knows this. Toyoda knows this. Diess is yelling it in the press! The unions know this …now, who am I missing? Oh yeah, the suppliers know too. Some of them even believe that they’re well placed enough to move upstream to take on the OEMs themselves! The likely winners in 10-15 years will have a sprinkle of legacy automakers but also some tech companies that you may or may not have heard of in China and the US. There will be multiple winners since the pie is too big for one or two to ‘take all.’ It’ll also be dictated by the relationship between the US & China, the access to capital, technology, data, and just as importantly - manufacturing. Both parties will force that to be played out this decade. They’ll try to slice regions up into strongholds. That’s why India needs to figure things out in a hurry. You can only protect your turf for so long before you get left behind, although India’s market is such that it’s too attractive not to jump in. I’ve been thinking about this and I don’t see how this is avoided. Oh, but in between all this brutal competition that determines the ultimate winners and losers, we should see some of the most innovative, customer-friendly products and services the sector has EVER developed. I can’t wait. TESLA IN THE NEWS - It’s a feature, NOT a bug. Tesla posted a profit this year but more of that profit came from Tesla selling credits, not making cars. I’d mentioned this before and will say it again. Tesla knows this is going to dry up but that’s OK for them. I went as far as predicting that in the future, Tesla could sell their vehicles at cost or close to it and generate most of their revenue by selling services within the vehicle. That would be recurring, sticky revenue in a closed system. If this wasn’t the case, the traditional automakers wouldn’t be racing to play catch up on the software side since that’s truly where the difference (read: chasm) between the startups and the legacies are. Master the software, integration, and experience and you get to be first to experiment with how to monetize the data, creating new revenue models kinda like Tesla is doing right now. In other words, dictate to the market where it needs to go. The automakers that can’t develop this core competency within the next 5-7 years will likely not be around in 20 or will be subjugated to building vehicles for the ones that can. - Tesla, the recipient of more welfare this time from the German government in the form of ~$1.2B in subsidies for building their Gigafactory there. The rich just keep getting richer. IN THE NEWS - Will Cfius hang over the EV/AV sector like a dark cloud this year as more startups look to raise capital through either the private or public markets? This is a fact that most investors and startups aren’t talking about and don’t want it raised in the media. Here’s another great article that was in the FT last week about this same subject. But there are a number of companies that straddle the line between Chinese and US startup and would rather you not know where most of the funding that gives them the unicorn level valuations come from. As we get closer to commercialization of these products and services, and competition gets more fierce for customer dollars, we’ll likely also see much more scrutiny from the US govt. on investments in the technology (chips, batteries, connectivity) that supports these sectors and the sectors themselves. We will also see more scrutiny about all the data that’s being collected on the people that use the products and services and how its moved from one region to another. Many investors will tell you publicly that this isn’t a great concern of theirs. They’d be lying. If access to technology that’s key to their products and services becomes cut off, or worse the entire market gets cut off, shouldn’t the affected companies’ market caps ALSO be cut commensurate to the market opportunity that was declared off-limits to them? We will have more on this subject this year, likely through specific verticals and technologies, so stay tuned. - Ford outsources their tech stack to Google. Have they just welcomed the fox into the hen house? Subscribers know that I believe that the OEMs which can develop the competencies that will allow them to eventually own the HW/SW stack is one sure-fire way to stay relevant and perhaps help turn them into serious players in what will become a completely different sector by the time we get to 2030. Those that can’t get their minds around the fact that automakers may not be significant players in the future unless they make the necessary pivots to their businesses & teams (read: become great at software development) haven’t been paying attention. Let me put it simply for you. Ford, as of yesterday was valued at $42B. Google has $100B in cash on its balance sheet, Apple almost twice that. At what value do you think Google would just as soon acquire Ford, gut the entire company with the exception of the manufacturing teams and factories and bring everything in-house - $25B? $20B? If Google already knows how Ford operates, how Ford’s systems work, and more importantly how Google could improve them to fit their particular purposes you don’t think that Sundar would make that move? Again, you’re not paying attention if you don’t think that’s a viable and more importantly, realistic scenario. It’s not likely to happen right now so there’s still time for ALL of the OEMs to determine what is safe to ‘buy’ from the tech cos. vs. what they need to keep in-house and ‘make’ themselves. - And then there were two. In the vehicle subscription game in the US, that is. That would be Volvo and Porsche. Laid by the wayside, the companies that launched then shuttered their services: GM, Mercedes, Audi, Nissan, and Bimmer. Another bold statement from me. These programs will eventually succeed in bringing new customers to the brands that are able to justify keeping them afloat as they adjust the business models so that they can be profitable, standalone businesses. Another important aspect that is not really being discussed - This will be a MAJOR opportunity for the OEMs to create what tech companies call ‘stickiness.’ Stickiness just means the user stays on the platform for long periods of time, also avoiding spending time & money on other’s platforms. I was in a conference last week that talked about Apple and how their products & services are successful in part due to their ‘stickiness’ and argued that buying cars was NOT very sticky. That statement doesn’t completely think through future scenarios though, so to me it’s incomplete. It’s like saying cars can’t drive themselves. Yes, technically correct but some really smart people are working to change that. The numbers for the subscription services will work eventually in the future. As more data is gathered, the OEMs will also be able to package the services in a lot of different ways to encourage even more ‘stickiness.’ Some automakers could set up a ‘friends and family’ plan so that entire families can subscribe and be authorized to share the subscription for an additional fee, of course. Think Apple, Netflix, or even the mobile phone family sharing plans. More importantly, it would be VERY sticky and as the install base for the service grows, fixed costs could be amortized over more people moving companies farther into profitability. - As predicted, Lime is widening its offering this time adding Niu mopeds to their services in DC & Paris. I can see this working out really well in Paris but DC not as much. Not initially anyway. First, the moped culture in the US is not as strong as it is in the EU. Second, DC is a peculiar place to launch since it’s a 4 season city meaning that the service is really only going to be a viable mobility option for subscribers a fraction of the time it would be useful in say, LA. Niu knows this all too well. The other service they supply mopeds to – Revel, had to shutter their service in Austin and it wasn’t because of the weather since Austin sees A LOT of sun. Lime had to have studied the viability of success when determining which cities to launch these pilot programs, right? TRENDING ON SOCIAL MEDIA - According to Masa Son - CEO of Softbank, we should begin to see mass production of self-driving cars starting in 2023. He’s kinda-sorta NOT the one you want to trust when he says this since he has big bets on Cruise Automation and a few other notable companies working on autonomous vehicles. But even if he’s off by 4-5 years, that puts more pressure on the automakers to get their acts together or miss the boat entirely on the biggest technological shift the world has ever seen. - As low-speed delivery robots become more common in cities across the UK and US, kids have begun to feed them bananas. More importantly, Starship Technologies reached 1 million deliveries this month, a 900% increase from less than 18 months before. This was aided by Starship adding ~1K delivery robots during 2020. Starship has even more ambitious plans for 2021 as they see some habits like grocery delivery being permanently changed because of the pandemic. - I was NOT going to post about this but thought it was compelling enough that it needed some light. Currently, the GameStop (GME) share price is at $225 and lost about 30% of its value today. For those that have not been following this, I’d click on the article to read up but effectively a bunch of retail investors banded together via a Reddit board to push up the share price of GameStop which many hedge funds consequently had been shorting. These investors almost ‘blew up’ a hedge fund, Melvin Capital which lost 53% of its value within weeks because of its short position on GME. It’s a crazy story that I think is a bit of commentary on society writ large. Losing 53% of your value in weeks due to one company, whether you’re long or short is NOT investing BTW – it’s gambling pure and simple. - Detroit-style pizza-making headlines in the WSJ! As a Michigander and someone who grew up close to Detroit, I will admit that even I had NO IDEA what Detroit style pizza was until I left Michigan and started living in Beijing. That’s not to say I never had it because of course, I know what Buddy’s Pizza is! It’s my favorite whenever I am home – and it was a weekly lunch stop when I worked at the GM Tech Center in Warren (there’s one across the street on Van Dyke). It is LEGIT. And while you’re at it, order the antipasto salad too. Thing is, I didn’t know it was called ‘Detroit’ style, not until I’d heard about this pizza place in Beijing called Pie Squared founded by my good buddy who grew up in the Detroit suburbs. You cannot consider yourself a pizza lover unless you’ve had Detroit-style pie, whether in Beijing, NYC, Pittsburgh, or SF. Put that on your To-Do list this week! And if you happen to be in Beijing and want to go to Pie Squared, make sure you tell Asher that ‘Tu sent me!’ JUST THE NUMBERS - $266B over 10 years. That’s the estimated investment needed for India to transition completely over to EVs. EVs as India sees them is NOT perhaps what the rest of the world would consider an EV. First, they primarily use 2 & 3 wheels whereas most folks in the US and EU may think – passenger vehicle. It’s not clear how this would be financed and what the ratio of public vs. private money is estimated but combined with SEA’s desire to roll out EVs (also mostly 2 & 3 wheels as well for now), there will be A LOT of competition for capital that should mean more innovation in the sector. For a lot of these countries though, that means getting their infrastructure sorted out, which in some cases is a real mess. - $310M of capital raised by Faraday Future (FF) from the (what FF called a tier 1 city, Zhuhai – it’s NOT) city of Zhuhai to get their FF91 on the road. FF will then merge with a SPAC to go public within the next few weeks. The share price of the SPAC has almost doubled over the last 2 weeks to ~$19 today. - 2035. That’s when GM pledges to do their best to only sell NEVs by. I'd posted a few weeks back on LinkedIn (for those who are on LinkedIn, please feel free to add me as a connection) that a visual identity update wasn't enough to change a company. I see that Mary Barra knew this as well and this pledge acknowledges that. Unfortunately, a pledge can’t be enforced in a court of law. Nonetheless, I fully endorse this HUGE announcement by GM. Mary is taking a page out of Tesla’s playbook by taking a lead role in transforming the space & keeping intense pressure on the legacy automakers to step up! Unfortunately, most won't be able to, although 5 (Ford, Volvo, Honda, VW, and BMW) have made pledges to significantly increase the fuel efficiency of their vehicles per California’s just launched much stricter CAFE standards there by 2026. Let's not forget, this also puts tremendous pressure on the GM team to execute flawlessly, course correct as necessary, pull-in schedule where possible, and find the 'right' partners as needed. Mary is basically telling her team to go 'BREAK STUFF!' - $750K AUD. How much the last Holden Commodore ever built at the Holden Adelaide factory fetched at auction, or is it? GM says they have the last real Aussie-made Commodore and that this one just has the last VIN. Either way, that’s a staggering price for that rig, one of a total of 7,687,675 Commodores that were built! - 60 million rides/day that Didi provided in 2020. Contrast that with Uber who provided ~15 million rides/day. Didi’s total number of users hit 600 million as well. I use Didi at least 3-4x’s/week so I can believe those numbers. PRODUCT & SERVICE INTRODUCTIONS - The Zooz 750. If a BMX bike and a Buick had a baby, at least that’s how the author describes it. It comes in different motor sizes, so for $2K, you get the 750w motor, which seems like decent enough power to get around town. The best thing is that banana seat that fits a +1! - The EV Mobility LEF – A micro EV made for bike lanes or streets and costs ~$5,300. Seems high TBH for what you get. I’ve seen a few different form factors for micro EVs so I think this one’s just OK. I do think there’s a pretty decent sized market for fully enclosed micro EVs like this though so we will definitely see more in the future. Trust me. —— 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

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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