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CHIPs Act tightens screws, Audi's Tough Go in China, BYD Feeling the Price War - SAI Newsletter 12


It’ll be short and sweet this and next week as I head off to NYC/DC for meetings and some R&R with the family. Rumors are really starting to bubble up now that we are less than 30 days from Auto Shanghai. One company in particular has folks talking. I’ll give you a hint too, its the company that starts with a B and ends with a YD. Also, deeper analysis of preliminary March sales numbers is creeping out too re: damage the Tesla price cuts have done to a few of their competitors. I won’t get into yet since I’ve just heard about them. I’ll have more to tell you all during the first newsletter of April. I did want to mention that its MARCH and you know what that means? March MADNESS. I caught the madness on Sunday because my Spartans were playing just 3.5 hours away in Columbus. I thought about it for a minute, bought tickets at 11:30am and was in the car pointed towards Ohio by 11:45am. It was a great game, a great atmosphere. We made it just in time for the anthem and intros. BTW – Nationwide Arena, where the Columbus Bluejackets play is a nice arena, nothing too memorable but clean and new-ish. But c’mon, it’s 2023 and there was no 5G to be found within the arena. Not sure if that was a Verizon thing or an arena thing but who cares, that shouldn’t be happening at all. Ever. In the middle of a downtown area in a major city in the US. With that all said – It’s what I realized as I was driving down 75 just getting towards the MI border > Toledo area. THIS is one of the things I missed most about the US. Random trips like this. BTW – I made it home in time for the kids to be in bed by midnight. Finally, guess where I’ll be this weekend? And guess where my Spartans will be playing on Thursday? Unfortunately, I/we will be in transit when they’re just finishing the Thursday game but WHEN they make it to Saturday, we may have to make some plan changes. Because I’ve never been to the Mecca that is Madison Square Garden! Go GREEN! CHINA EVs & MORE We are scheduled for Thursday, March 23rd, 3pm ET this week. Will update on topics on Twitter so stay tuned for that. Join us if you want to ask questions and / or interact with us. 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 - AP News. As part of Xi Jinping’s third term and the Two Sessions that just closed a week back a new premier was selected to replace Li Keqiang. His name is Li Qiang and his most famous recent post was as party chief of Shanghai where he oversaw the very business friendly city and greased the skids for ShanghaiGiga and notoriously oversaw the two month lockdown during Covid. Analysts and pundits alike are wondering whether he will be influential (in a positive way) and whether his appointment is ultimately good for the foreign businesses in China. I spent some time speaking with Kanis Leung, AP News journo for the article about the hurdles that seemingly were non-existent during Tesla’s pursuit, construction and launch of operations in China. Remember that Tesla is the ONE and ONLY foreign entity in the automotive space that is wholly owned by Tesla with no China partner. Li Qiang was a bit part of making that happen in a very short period of time. For the China watchers, this is an article that’s worth the click. TESLA The current design of EV battery packs makes affordable repair all but impossible. Insurance companies are being forced to completely scrap vehicles due to damage to EV battery packs after an accident because they aren’t able to assess or (affordably) repair the pack due to the complexity of the assembly and/or the inability to determine whether any cells or modules are salvable. The 2nd part of that issue is due to the lack of transparency and data sharing from the OEMs not giving the insurance and repair shops enough information to base diagnostics/assessments on. Tesla has the most extreme case after moving to the single chassis unit that creates the structural pack for their Model Ys. According to Sandy Munro, the one-piece pack means that it’s 100% non-salvageable. See how vehicle design, engineering and manufacturing still can get you in the end? Because if we can’t repair it, it’ll cost more to insure it. If the premiums to insure it are too high, people will not buy it. So, are the upfront savings worth the higher insurance rates in the end? Maybe if Tesla is the insurer. Otherwise, the single piece may need to be re-engineered to make repair easier and affordable. NEWS THAT GOT OUR ATTENTION THIS WEEK - NO SOUP FOR YOU! That’s if you invest in more capacity in China anyway. The US govt is tightening the screws on the silicon that runs AI and cutting-edge technology available to be manufactured in and/or used by China. There will be significant ‘strings’ attached to any capital that’s handed out to chip companies that want help from Uncle Sam to subsidize their mega investments in capacity in the US. Grants will only be given to those companies that limit (effectively eliminate) increasing fab capacity in China for chips using technology smaller than 28 nanometers. Right now, the most cutting-edge chips get down to 3nm so 28nm is >5-year-old technology. Still relevant and useable, just not for the most intensive AI algos which take much higher computing power. The kind that <5nm chips can provide. This affects companies from Taiwan, the US, South Korea and Japan. All these restrictions will eventually add up to a response from the Chinese govt. so let’s hope the Biden administration has gamed it out, otherwise it’s likely NOT going to be a good time to be an American company doing business there. - Like their American and German counterparts – the Japanese brands feel the squeeze in China. With the exception of Toyota, Honda and Nissan, like GM & Volkswagen have been losing sales in China the last couple of years, specifically in the ICE space. And it doesn’t get any better for them on the NEV side as the domestic competitors seem to have every single space in the market occupied, making it difficult for foreign brands and their new NEV products to breathe. Even Toyota, the most efficiently run automaker in the world lost (a little) sales in China in 2022. China EV Inc is forcing ALL automakers to pivot towards NEVs sooner than they want or are prepared to do. And this is where the logic runs out for a lot of western analysts that can’t see into China very well. If there are no protectionist measures put in place, and in many cases even if so, we know that China EV Inc is entering Europe en masse. And when I say en masse I mean 15-20 brands will be eventually entering at least one or more European markets by the end of the year if they’ve not already. With 2035 and 2030 (for the UK) right around the corner and not many products from the legacies available currently and not likely until at least 2025, specifically at the mass market price points, the legacies aren’t in any place to supply EVs to European consumers, but you know who is – China EV Inc. They will ship them there too because it many ways, it'll be easier to compete there than in China for the foreseeable future. We could see a scenario where one or more Chinese EV players sell more units in Europe than they do in China. And just like China EV Inc is forcing the foreign automakers in China to pivot more quickly than originally planned, why wouldn’t that also happen in Europe? It will. Again, unless there are protectionist policies quickly adopted, which I wouldn’t rule out… TRENDING ON SOCIAL MEDIA - Is Audi hosed in China? Duesmann the CEO comes off a bit pompous in this article, especially his analogy of ‘watching a marathon, turning away for 30 seconds and looking back’ to find the competitors because the reality is that they ran right past you and are now in front of you. German Legacy Inc is STILL in denial. Some quick numbers here. Audi is down 8% YoY in 2022 with 40% of sales still coming from China. That’s on top of the fact that they need to stop overpricing their electric vehicles. The competition is stiff and the premium EV space is getting even more crowded starting later this year and next. This is also where both Merc and Bimmer have it easier, they don’t have to share platforms, software, the spotlight or compete with brands within their own company in order to sell product. The next several years are going to be very painful for VW Group but they CAN make the pivot. There is NO ROOM for anymore lollygagging or arrogance. And if Porsche sneezes at all, VW Group will likely need to head to the hospital. - BYD feeling the heat from the China Price Wars? If these reports are correct, production is being reduced by a shift at one of its Shenzhen factories & its Xian factory as well while workers in Xian are being asked to work 4 day weeks vs. the normal 5. This wouldn’t surprise me because we’ve talked about how brutal the price wars are and how there would be some EV companies weakened because of it. As for BYD’s situation, if you think about how they were going gangbusters to finish out 2022 it would make sense to tap on the brakes a bit in this weakened and early 2023. If this lingers for a couple of months there is something else afoot that I’ll need to dig into but for now, let’s continue to monitor and chalk this up as a ‘nothing much’ burger. INTRODUCING - Europe ONLY Ford Explorer EV. A bit of hoopla on Twitter for this unveil but it’ll need to be the first in many if Ford is to get back into real growth mode. Not too many details outside of price (<€45K which probably means €44,999.99), that it’ll be built on VW’s MEB platform and some high-res pics. And it’s more crossover than SUV BTW. The center console does a nifty little trick that’s worth having a look at. As for the vehicle, I like it. Kinda. Will it sell a bunch in the EU, perhaps but again, this needs to be the first of several (at least) doubles and triples if they’re going to climb back into relevancy in Europe. This seems to be putting Ford on the right track. - KIA launches an EV in China. KIA showed off three EVs (the EV% & EV9 concepts and the EV6 GT) at an event this week in China. The EV6 should begin import into China later this year. We know KIA/Hyundai are killing it in the US and in Europe but why not China? Give them credit for not giving up but it'll be a tough go for them there IMHO. There are still some hard feelings from a slight the Chinese govt believes South Korea gave them years earlier and it flows through the Chinese consumer. GET SMARTER - Silicon Valley Bank (SVB) in China. The title of the article – ‘SVB’s First Failure’ – is apropos and worth the read but unfortunately the article is paywalled unless you’re a subscriber to The Wire China. With that all said, the former CEO of SVB writes about the learnings from his time opening the SVB JV with a bank in Shanghai. I appreciate his candor since as he’d mentioned, most foreign managers with challenging experiences in China don’t usually openly talk about it let alone point out the real ‘whys’ behind it all. And he’s also correct pointing out that there’s some secrecy between companies about the lessons learned but that if pooled and shared, could help other foreign companies doing business in China avoid making the same/similar mistakes. The fact of the matter is – the market is too big and companies too greedy to take a pass on trying to build a business there. Unfortunately, for some companies they’ve become too reliant on the China market and it’s going to end up breaking a few of them. On the other hand, you can clearly see some companies trying to make some separation with the mainland, but China doesn’t make it easy. See Audi and 40%. What I tell clients that want to enter the China market. Make sure you fully commit the resources, capital and people because it will suck up all of your time and money, more than you’re thinking. Many naïve companies still believe that the level and intensity of competition is the same as in other regions they have operations. It’s not. EVERYTHING moves faster there. There are more companies to compete against with a few of them seeming to have endless budgets for marketing and price wars. They also know how to market better to Chinese consumers. There are clearly some foreign company success stories like Tesla, Volkswagen, KFC, Starbucks to name just a few. But it’s an addiction that’s about impossible to break. And therein lies the rub because the Chinese govt knows this. As Chinese companies reach for the international markets, I predict that some of that leverage China has over foreign companies in the China market could weaken or those same Chinese companies trying to build beachheads in Southeast Asia, South Asia, Europe and yes, even the US could face some backlash of its own in those markets. Finally, this is not everyone’s experience in China as you can see from the doubling down by foreign companies to grow their presence there today. But it’s also not that unusual of an experience either. ___________________ 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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When it comes to rising insurance rates, I should hope they wouldn’t ignore the proven integrity of Tesla‘s body structure, when exposed to a 240 ft fall off that CA cliff.

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