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Cruise pushout, VW profits, Tesla on schedule in Shanghai - SAI Newsletter #27

Enjoyed a bit of R&R last week in SoCal although the itinerary was pretty packed in hindsight. A couple highlights from the trip: - The Petersen Automotive Museum in LA – I'd never been so it brought me back a bit with all the old movie cars they have on display including the original Batmobile, the Back to the Future Delorean, as well as Kit from Knight Rider - Disneyland – Star Wars Galaxy’s Edge – Went on a Monday so were able to avoid the HUGE crowds and were very lucky to have it only be ‘very hot’ in Anaheim and not the record temperatures we’ve seen recently around the world. VERY impressed with the Galaxy’s Edge section of the park, it really felt like you were IN the world and enjoyed the - Millennium Falcon, Smuggler’s Run - ride so much we rode it twice. Am currently back in San Jose for work, meetings and catchups with old friends. One interesting story a friend told me that’s very relevant to this newsletter was about his experience so far after buying an Audi E-Tron. My friend is a car enthusiast and every 24-40 months he’ll turn in what he has for something new and different. His preference in the past has been for Porsches and Mercs so he knows his way around German cars. Overall, he liked the looks of the E-Tron and has had electric vehicles in the past so no reservations about getting another one. After only having the vehicle for two weeks, he receives a phone call from a 313 number (Detroit area code), it’s Audi customer service who tells him that they need to recall his E-Tron due to a battery issue we now know was caused by a ‘thermal event’ and his vehicle is one of about 2.1K recalled. Recalls happen and he was disappointed but not that upset. 7 weeks pass and he hasn’t heard a peep from ANYONE at Audi. Mind you the sticker on this thing was $90K. Wondering what’s going on he calls them, we’re going on week 8 now btw and they still were not able to give him any definitive answers to when his car would be available. All the while he’s driving a gas guzzling Q7 as the loaner! Clearly, on all levels, Audi was not ready to launch this vehicle, from manufacturing to quality all the way to after sales service. He originally tried working through the dealership he picked the E-Tron up from but they referred him to the centralized team because they weren’t equipped to deal with the E-Tron. As this unfolds, I’ll try to update everyone on how this eventually gets resolved although my friend has promised that he’s going to give them a much more difficult time moving forward.

Audi, I know you can do better so let’s step it up for all your customer’s sake! I hope that this is a one-off and that ALL the OEMs launching EVs within the next 18 months have really thought through how they will manage sales, marketing all the way to after sales service. This is an entirely different product that will need new processes and a lot of communication and training of customers, internal staff and dealers. Oh, and saw the great news from Trevor Pawl’s LinkedIn feed, congratulations to May Mobility partnering with the city of Grand Rapids (or GR if you’re a Michigander), that’s a pretty big get!

Now onto the news. This weekly newsletter is a collection of articles I feel best reflect the happenings of the week or important trends that have effects on the automotive and mobility sectors here and in the U.S. I also provide a point of view that I hope educates and sparks debate about how I look at the issues. We will mostly divide our articles into these buckets: AI, Mobility/Ridesharing/Ride-hailing/Bikesharing, OEMs, EVStartups, Investments, and Other.  If you know of anyone who would like to sign up for this newsletter please have them visit: www.sinoautoinsights.com. Thanks for reading.  The Sino Auto Insights team

OEM But we knew this already right? Cruise delays launch of self-drive service.(www.theverge.com) All the hype about autonomous vehicles and their eminent launch died down quite some time ago so this announcement shouldn’t come as any surprise. I have been told that Cruise was definitely having some challenging times with their machine learning algo, causing the cars to do some crazy stuff as documented in past articles. The trickle out approach to test vehicles will only push out commercial use even farther into the future but the bottleneck isn’t that they can’t be built, and I am oversimplifying a bit here, but let's say it’s a combination of government policy, hiring, and data. True indications of progress will be when multiple AI organizations begin to test vehicles in volume in four season cities like New York, Detroit and Pittsburgh (meaning in the fall and winter seasons), that’s when we will start to see the commercialization ‘light’ towards the end of the tunnel - likely >10 years out. What would be interesting to know more about with Cruise, since they were an outright acquisition by GM, is how they’ve been able to work alongside ‘Big Brother’ especially since Dan Ammann from the mothership, took over the top job. How much are they interacting with Detroit? If both parties are in a meeting, who gets final say? Do the GM folks think they are actually running things over at Cruise? Does Cruise think that GM is ultimately helping or hurting them? Which side drives strategy and is the product development process integrated? I’ll see if I can talk to a few people to see what working ‘together’ looks like. #GM #Cruise #notreadyforprimtimeyet #delayedlaunch #showstoppers VW Group profits up, the bright spot in a tough market. (www.wsj.com) VW Group, riding the wave of increasing SUV & Porsche sales, was able to increase YoY quarterly profit - NOT a small feat if you’ve been paying attention to automotive OEM earnings reports. This means that Diess’s cost cutting measures are bearing fruit and as the line-up shifts further out of sedans and into more SUVs, profits from vehicles should remain strong. I’ve said this before, VW, with their strong brand line-up is very well positioned to continue being a leader in the EU and China as it pertains to EVs and mobility services. The fact that BMW and Daimler are behind them in refreshing their lineups with viable EVs should mean that VW will dominate the EU with their numerous upcoming products, just as long as they can educate consumers while marketing and pricing the EVs properly. If they can get diesel-gate completely behind them and contain the liabilities associated with it, funding their future ambitions for the future shouldn’t be an issue. They still do need to move faster though. #VW #intheblack #costcutsworking #moreSUVsontheway Tesla Shanghai Gigafactory, right on schedule. (www.quartz.com) As we’ve passed the midpoint of 2019, Tesla is on schedule to complete its Shanghai Gigafactory this year, likely in November. Tesla also still aims to have Job 1 rolling off the line before the end of the year, still really a BOLD target date when you consider all that will likely still need to be done with hiring, suppliers, tooling, testing, qualifications, validations, prototypes and pilots. They’re currently running a 24hr operation to meet these aggressive targets since October 1st holiday will be hitting before you know it, chopping off a week’s worth of productivity. Pictures of the work-in-progress Gigafactory have been posted online and I am impressed that there have not been any major delays communicated to the press yet. Alot can still go wrong so we will continue to monitor their progress. #Shanghai #locallymade #ontarget #Job1 #wecandoit Tesla paying the price for desperately trying to ‘move the metal’ to boost quarterly sales numbers. (www.qz.com) This article was written prior to Tesla’s earning release so we already know that Tesla lost $408M last quarter ending in June, a lot worse than most analysts forecasted so their stock price paid for it after hours, losing almost 25% of its value. One of Detroit’s main addictions that helped push 2 of the 3 OEMs into bankruptcy was its affinity for ‘putting money on the hood’ or in other words offering incentives like 0% financing or instant cash back in order to sell more vehicles. Customers became accustomed to NEVER paying 'full freight' for a vehicle and it squeezed profits both ways since it decreased margins and also damaged residual values for the vehicles at lease turn in or when it needed to be sold. Seems like Tesla is starting to learn the same bad habits that got its 'older' brothers in trouble. Prioritizing sales over margin and customer loyalty is a dangerous game and it’s not easy to get out of that hole you dig yourself into by playing it, just ask FCA, Ford and GM. #Tesla #weneedtosellmore #donotchasesalesvolume #wehaveseenthisbefore   BMW the Ultimate (still mostly ICE) Driving Machine. (www.electrek.co) Looks like we may have incorrectly assumed the direction and speed of change that BMW’s new CEO, Oliver Zipse will be taking BMW after the abrupt departure of its last CEO, Harald Kreuger. Statements by Zipse indicate he may believe that ‘slow and steady’ wins the race and he’d be ...WRONG. There will be pain for EACH and EVERY large OEM as they transition from mainly ICE vehicles to mainly EVs, the question isn’t if there will be pain, it’s WHEN and HOW MUCH. You can try to ignore or not acknowledge the multiple tidal waves that are coming from China, Silicon Valley and Detroit but one of them is gonna get you unless you can get to them first. Zipse isn’t wrong about one thing, that you need profits (to fund the future development of EVs), but what he’s NOT saying is that he’s praying that the transition takes much longer, at least in Europe so that 10 years from now he can retire and be given credit for their ‘profitability’ while leaving a mess and tough decisions for the CEO taking over for him. #BMW #ICEoverEV #slowandsteady #notdifferent Daimler, a Chinese-German automotive company. (www.reuters.com) Beijing Automotive Industry Holding Company, better known as BAIC is playing defense against Geely while simultaneously solidifying its longstanding alliance with Daimler by acquiring a 5% stake in the German OEM. Geely last year acquired almost 10% in Daimler hoping to work with them on electric and self-driving cars. This is starting to get really complicated for all parties involved, especially if they decide to launch new brands for the joint electric vehicles and any services they plan on providing in China and the EU. At a time companies should aim to become simpler, they’ve decided to do the opposite. #Daimler #BAIC #Geely #multipledancepartners #thisisgettingconfusing BMW starts nickelling and diming its customers. (www.caranddriver.com) BMW has decided to turn Apple CarPlay into a subscription service that’ll cost you $80 annually or if you’re into long-term commitments, a 20-year subscription for the one-time bargain basement price of $300! For those not familiar, CarPlay is the Apple in-car platform they’d likely just as soon give away for free to build up their install base. In the grand scheme of things, these prices aren’t significant and won’t make a tangible impact to Bimmer’s revenues but it will likely be an annoyance for their customers, so not sure the thinking behind this yet, unless they’re developing their own platform to compete with CarPlay but will come standard on all Bimmers and Minis. My prediction is that other carmakers will not follow suit and Bimmer will back out of this pricing strategy within 18 months. #BMW #hopeful #unncessaryaddon #newstrategy #workonEVs    In times of crises lies opportunity, see Ford, Peugeot. (www.wsj.com) In total agreement with this WSJ article that highlights the recent surprise, profitable performance of VW and Peugeot. Both recently went through existential, albeit different crises (VW with diesel-gate, Peugeot teetering on bankruptcy) and because of this were able to take the necessary extreme measures to turn around their companies, measures that would be non-starters for companies not in crisis mode. If we look at the other automakers, a big reason they’re struggling is because they’re unable to make the drastic moves (in a shorter timeframe) like VW management knows are necessary for the future competitiveness and health of the company. It’s unfortunate that it’ll likely take crises at many of these other automakers to allow them to make the tough decisions necessary to right-size and set up their operations for future success. Right now, the closest to crisis mode is Nissan so we’ll be watching closely to see if they’re able to take ‘advantage’ of their own crisis. I also agree with the author’s assessment that Ford, although their stock price has outperformed everyone else’s year to date, will need years to get everything back on track, assuming they have the right management team in place to execute, a BIG assumption to many in and around Detroit and Dearborn. #crisismanagement #crisisopportunity #VW #Pegeot #Ford #changesneeded #turningaprofit MOBILITY Lyft recruits some heavy hitters to boost its 2-wheeled mobility solutions.(www.techcrunch.com) The recent strategic hires by Lyft indicate that we are in the beginnings of a hardware ‘war’ between the scooter and mobility companies with competitors likely to follow suit. The level of seriousness for in-house development of next gen scooters and moped just got substantially upgraded by Lyft. Scooters, mopeds and other types of hardware along with the app are the main touchpoints to the consumers for these companies and are a HUGE enabler for customer acquisition, stickiness and ultimately profitability so this makes a ton of sense. The days of buying ‘off the shelf’ Xiaomi (or shanzhai) electric scooters and slapping Lime/Bird stickers on them seems to be over. These teams will be tasked with designing “bulletproof” (read: durable/easily repairable/user friendly/comfortable/long range/manufacturable) products that are simultaneously safe AND cost effective. Well, let’s hope those are their priorities anyway. Sounds easy enough! #Lyft #newhires #whatsnext #upgrades #productiskey GoShare wants to go global. (www.techcrunch.com) Horace and team look ready to show that their battery swapping scooter/subscription service business, a proven model in Taiwan, is ready for the bright lights and have recently launched their GoShare platform, a turnkey battery swapping system for energy efficient vehicles with the goal of efficiently expanding to international markets. Think of this as a better designed, more disciplined ‘Better Place’ with the idea that as long as there are enough strategically placed battery swapping stations deployed across a city/region, it will eliminate the range anxiety that’s commonly associated with electric vehicles, in this case 2-wheeled scooters. I had a chance to see their operation up close and was very impressed. He’s got a good team in place, and they’ve been able to do a lot in a short amount of time but he wants Gogoro to become a big player and is currently evaluating partners in and around Asia, particularly Southeast Asia where scooters, petrol powered unfortunately, are still the major mode of transport. I see a lot of opportunity for Gogoro if they can scale quickly outside of their home turf and make some headway in the U.S. and the EU. #GGR #internationalexpansion #movingonout #wheretogonext EVs Battery supply chain issues in the near future? (www.axios.com) The main raw materials used for manufacturing lithium ion batteries: cobalt, lithium, and nickel could be supply constrained as early as 2025 based on the forecast by consultancy Wood Mackenzie. This means that the cost of the battery cell, the most expensive part on an EV, would likely remain high and push out further into the future the possibility of more affordable EVs. 2025 is right around the corner and my guess is that the OEMs are working frantically (alone and with their battery cell partners) on negotiating multi-year contracts with these raw materials suppliers to guarantee supply for their future needs, similar to what Apple did with memory and other supply constrained commodities in the past. Their overall cost will increase but it shouldn’t spike and that increased cost is worth the guarantee of linear supply. If their demand doesn’t hit their forecasts, the excess supply can easily be sold on the grey market to others who weren’t prudent enough to put those ‘call’ options in place. #bottleneck #rawmaterials #lithium #cobalt #nickel #needmore #calloption

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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