Dyson taps out, Why No Electric Buses in the US, SEA Investment - SAI Newsletter #38
We know it’s October in Beijing since the weather has started to get more Fall-like. It was unseasonably warm in September so we’re getting back to normal, especially now that the National Day parade and celebration has passed.
This is making out to be a pretty busy 4th Quarter for me with potential trips planned for Shanghai, HK, Singapore and back to the States. Shanghai and HK seem all but certain with Sing and the US about 50/50 so I’ll let you all know my travel dates as they solidify and would love to meet up if anyone is able.
It’s an important couple of days here between the US and China as trade talks resume with hopes of coming to an amicable compromise on how to move forward. Both parties till now have really not wanted to blink and I do see more of that which makes me think the trade war could last at least past Chinese New Year 2020, which next year will be January 25.
I’ve also heard recently about 4 Chinese car companies that are on the brink, with debt coming due that they won’t be able to service. There is some concern outside of China that if they were to go down, it would cause a very negative ripple effect to the already battered China/Asia automotive sector. I think the Chinese govt. is monitoring the situation closely and would likely step in to rescue any company they thought were in danger of collapsing. We will continue to monitor this situation though.
Heading into day 25 of the strike, the UAW is looking for further assurances that there will be no plant closures within the next 4-year contract. GM is likely trying to reduce its manufacturing footprint in the US or at least move some of it to lower cost countries like Mexico and China that have free-trade agreements or lower tariffs rates so those vehicles made abroad can then be imported back to the US without substantial increases to its price.
An important part of the OEM product planning process is identifying where new products will be built, which means allocating new products to idle assembly plants. This essentially guarantees that the plants assigned to build the new products will remain open and that those employees will retain their jobs. The more future model year products assigned to the US assembly plants, the better for the UAW and its members. GM hasn’t seemed willing to make those types of guarantees, at least not yet hence the stalemate on negotiations.
To give you a better idea of scale, from the article, GM has 33 manufacturing sites in the US, employing 46K UAW workers and 4 manufacturing sites in Mexico that employ about 16K people. The US sites aren’t all assembly plants since the 33 include Metal Fabrication and Powertrain plants, all of which are on strike.
I still am not optimistic that either side is close or is willing to budge so my prediction is that this could last until the end of October. The strike has already caused Southeast Michigan and the greater Midwest a lot of economic pain. If it goes on much further, this strike could be one of the catalysts, along with the trade war, that pushes the US into a recession.
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 US, 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/Ride-sharing/Ride-hailing/Bike-sharing, OEMs, EVStartups, Investments, and Other.
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The Sino Auto Insights team
EV / AV
James Dyson has decided that there is no business case for his company, which designs and sells premium consumer appliances, to move forward with manufacturing an electric vehicle, one they’d already invested likely over $1B developing and planned building in Singapore. This project was already 4 years and 523 employees in the making, which tells me that they were pretty far along.
Having said all that, this MIGHT be the smartest decision any entrepreneur dabbling in EVs has made to date. I think Dyson’s decision can likely be traced back to the (current) difficulties that Tesla and many of the Chinese EVStartups have had just selling enough vehicles to keep their doors open - let alone make money! This has been exacerbated by the recent difficulty these companies are having raising capital just to stay afloat.
The thought of dragging down his very profitable and premium business of consumer appliances also had to have played a HUGE factor. For the few startups in the US and China that are still around to battle it out with the major OEM’s upcoming products, expect a BRUTAL, knockdown, drag-out, take-no-prisoners fight to the death.
Most of the OEMs have been pretty profitable over the last few years, specifically in China, and they’re investing a few hundred Brinks trucks worth of loot, ~$300B (yes, that’s with a B) to make sure that they are major players in the shift to EVs globally and they don’t take kindly to newbies treading on their turf. They also have A LOT of experience selling vehicles, at least initially, at a loss as part of a market share grab.
Most of these EVStartups will fail, that we know, there will be a few that are able to carve out small niches that will allow them to make some money selling a few hundred thousand units / annum, but there isn’t ANY guarantee that any of them will break through to become in 25-30 years, this generation’s GM or VW, but that also could be because in 30 years, most people won’t be driving cars.
According to Elon we have.
Elon points to the fact that sales in the EU of traditional European luxury brands have fallen off a cliff with demand for Tesla Model 3s taking their place. Since July 2017, Tesla claims they’ve sold 140K Model 3s, a pretty significant achievement indeed, of which 22% of trade-ins were European luxury vehicles.
Elon posits that as the cost of ownership shrinks past that of ICEs and residual values for EVs surpass values for traditional European luxury vehicles, it becomes an economic no brainer that most consumers would want to buy an EV.
Maybe that’s a valid argument for the European market but from the article we highlighted last week, the Chinese market, primarily due to its glut of low end EVs, still has quite a ways to go.
This article focuses mostly on the US but the overview, IMHO is a pretty good reality check for those that are confused or worried about how quickly autonomous vehicles will actually hit our roads en masse.
As most of the venture capital has moved on to other sectors already, with the exception of a handful of ‘premium’ AI startups still able to attract investment, the media has also slowed their roll on predicting when autonomous vehicles will be the dominant vehicle on the roads globally.
The authors point out the areas that will mostly determine how quickly adoption can & will occur:
- Technology – V2X, 5G, LiDAR, radar, etc.
- Public education & social acceptance – more pilot programs in tier 2 cities with 3-4 seasons will help
- Regulatory & Govt. acceptance – Will vary from country to country and city to city within countries
- Infrastructure improvements – City and urban planning, highways redesigns, etc.
A couple I’ll add:
- Increased use cases
The above ‘general’ bases need to keep progressing and moving forward in order clear the path for autonomous vehicles. Even if everything works perfectly and there are no disruptions, like say a major slowdown in EV sales, I and others I trust, will tell you that we’re still AT LEAST 7-10 years out before the majority of ‘car owners’ become ‘car users.’
Let’s not confuse this with when companies can begin ‘making’ money since I think that could happen well within the next 5 years. That means the initial runways and capital forecasted to get to that first $1 of profit needs to be reconciled with the current reality. All the AI, EV, and mobility startups that came strong out of the gate, may not be around in the next 5 years without some serious welfare from a govt., company or other entity willing to bail them out. The startups that have taken the ‘slow and steady wins the race’ approach probably need to be given that double-take since they likely new that there were not going to be any shortcuts to success in this cutthroat sector.
Although we call it a ‘race,’ without question it primarily only involves two countries, China and the US. China, which has the ability to quickly implement new policies, the capital to invest in the infrastructure and the population to produce the data necessary to refine the machine learning systems, will probably be first out of the gate on implementation with the US a bit more cautious and deliberate next.
Also, the article focuses on passenger vehicles but my prediction is that Level 4 autonomy will be implemented on the commercial side, meaning long haul ‘over the road’ semis and short haul ‘intracity’ delivery vehicles, a lot more cheaply, easily, and quickly in both the US and China. The combination of electrification and swapping out ‘drivers’ with ‘human safety drivers’ should result in incremental cost savings (10-30%) that would make getting them on the road quickly very attractive to a lot of parties.
To bridge the gap, V2X technology that enables Level 2-3 autonomy has reached its tipping point with customer demand and will become standard, in many cases already are, on many premium and luxury vehicles around the world. Having spoken with a few sourcing execs, there’s currently a HUGE opportunity for those companies and suppliers that specialize in that technology, be it for parking assist, autonomous cruise control, lane monitoring, etc. to grow their US, EU and Asia businesses right now.
What I wanted to highlight here is NOT that a report about electric buses (EBs) being tested in a handful of US cities found that the buses had a short battery life, range issues and sensitivity to extremely hot climates, but the fact that this should be a surprise in the first place. Doesn’t China already have a TON of data that can be analyzed and tested?
Just googling “number of electric buses in the US” and doing the same for China tells me that EBs running in the US number in the hundreds whereas there are over 40K EBs running in China. The city of Shenzhen ALONE has 16K EBs! China’s adoption started over a decade ago so they should be leading the world on this but they have 99% of the entire world’s EBs. 99%! So it’s not just the US falling down on this it seems.
The two things that drove early adoption of EBs in China are the pollution issues and the fact that most EBs are manufactured by Chinese companies which, through incentive programs adopted by many Chinese cities, were able to sell as many domestically as they could manufacture. In the US, there are likely a lot of ‘special interests’ that do NOT want to see EBs becoming the standard but again, this could be an opportunity for any manufacturer, supplier and/or entrepreneur that has an idea about how to work with local municipalities to get this ball rolling so that the greenhouse gases that the current diesel buses emit can be eliminated in cities across the US. There seems to be a HUGE opportunity in the US if someone willing and prepared to take it on.
Although not as likely to happen unless the US & EU take their eyes off the ball, you can bet that the Chinese govt. would love to see this kind of dominance repeated in the EV/AV sector as well. This just illustrates to the world that it COULD happen.
A bit of good news out of NIO this week as they announced Q3 sales were 35% over Q2’19, with the bulk of that volume from increased sales of its smaller, cheaper ES6 SUV. NIO’s shares popped almost 10% on the good news but has since settled back down to $1.53 just about where it started before the announcement.
A couple observations that I am sure the management team is also tracking.
- Q3’19 ES8 sales cratered 80% - This is their flagship vehicle and where much of their margin likely needs to come from. I’m guessing that if NIO isn’t able to get the ratio of ES8:ES6 sales to about 1:3 or 4, its at 1:8 now, they will not be able to produce a healthy margin.
- NIO’s auto financing programs and free battery swapping in order to incent people to buy their vehicle, they’ll find is like crack. It will be VERY difficult to ween consumers off of these discounts. It also pushes profitability out even further and pounds the residual value of the vehicle.
- Sales still well under the 10K units/month - likely the VERY minimum volume needed to get even a whiff of profitability
NIO is by no means out of the woods yet, but this quarter bought them a little more time to get their house in order. They will need further investment soon, am thinking around CNY 2020 timeframe so where will that come from?
MOBILITY IN DETROIT
This is just to help the folks following the newsletter ideate on ways they can work with their local municipalities, enter international markets, or improve on current ideas to make transportation more convenient, cheap and accessible to the masses. More and more cities and towns are willing to try different things out, so is your product or service ready to fulfill a need? They say opportunity is where luck and preparation meet right?
MOBILITY & INVESTMENTS – REST OF ASIA
A good deep dive on how, in just a few short years, VCs have begun taking a long look at the potential and diversity of the Southeast Asian (SEA) startup scene. The author draws out a framework to follow that’s logical and easy to understand, albeit with an investor bias.
The combination of Asian VCs along with the entry of the traditional Silicon Valley VCs into the SEA startup scene has created a fierce competition to be the first ‘investor’ SEA entrepreneurs think of when they need capital.
I won’t get into too many details about the article since I think it’s informative enough that those of you on either side of the investor vs. entrepreneur equation should take that 8 mins. to read it.
I was drawn to this article since it refers to the SOS Ventures – Chinaccelerator program, a program that I happen to be a mentor for, as being particularly strong with helping startups break into the China market – something that I would agree with wholeheartedly!
Piggybacking on the previous post, we get a bit more specific here about where much of the capital is coming from to fund these SEA startups. In a sign that the Chinese startup scene may be a bit oversubscribed along with a nod to the market potential of SEA, Chinese VCs are starting to deploy a bunch of capital into e-commerce, peer-to-peer lending and ride-hailing startups, sectors that much of the Chinese tech startups have their focus and expertise in as well.
Even the BAT (Baidu, Alibaba, Tencent) are getting in on the spending spree as they try to expand their reach into SEA. With SEA’s internet economy forecasted to hit $300B by 2025, mostly due to the ‘young population’ all starting to get online and shop via their mobiles, this is the ‘right’ thing to do.
I believe most of the world’s economic growth over the next 30 years is going to be coming out of Asia, more specifically SEA and South Asia, and this article just reinforces my belief.
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.