Foreign OEMs losing in China, Tesla fatigue, India gets serious about pollution - SAI Newsletter #20
Read a lot of great articles this week so it took some time for me to whittle down the list but I think the articles that made the newsletter are VERY relevant and representative of the current climate that’s been created due to the trade war. I had a great discussion about how Tesla's struggles could continue in China, a small portion of which was captured in the Business Insider article written by Linette Lopez linked below as well.
Right now, folks seem a lot less optimistic about it ending soon and are considering how they can reduce future exposure to disagreements between the U.S. and China. It creates challenges for every single automotive player that relies on China and the U.S. for the bulk of their revenue, growth, tech, talent or parts. I am also not that optimistic about it ending or even that it will get better soon. Let's hope I am wrong.
One article I thought I should point out is the first one below from the Detroit News. Although challenging, I have not given up hope that the U.S. automakers can achieve leadership positions in China as long as they’re given a fair chance. I took the time to give some advice to companies that are struggling to adjust to the speed, fierceness of competition and transformation needed in order to compete in Transportation 2.0.
For those that have spoken to me before I firmly believe that ‘ALL car companies will become software companies’ and if these companies haven’t developed a plan to make that transition, they’re going to have a hard time competing in the next 5-7 years.
Finally, we can debate on how long it’ll take for EVs to become ubiquitous but I don’t think we’d argue that they won’t so there’s still a lot of time and lot of opportunities for companies to create that disruption and be that company that's driving that transformation.
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
I do not subscribe to this potential doomsday scenario for foreign automakers in China, I still think there’s some runway to course correct but there are many aspects of the article that are valid and hence the OEMs should consider moving forward.
The first is the unpredictability of the trade war, especially since it affects both the German (Daimler & Bimmer) and American (Ford, FCA, Tesla) OEMs. No one can predict how long it will last but many that follow China and the sector believe that it won’t likely end soon and has a decent shot of getting worse.
China’s auto market is still growing although the pace has slowed significantly and the choice of quality vehicles available has never been better for the Chinese consumer meaning even more competition for that one sale. Competition is ultimately a good thing so unless the Chinese govt. decides to intervene and help the domestics which it's stated that it wouldn’t, the competition will weed out weaker players giving those that are left to take on a bigger share of the market.
But this is where the OEMs really need to take a step back and change some of their stripes. I believe incorporating these success factors will ultimately help the (foreign) OEMs remain relevant here and in the rest of the world:
- Taking on a bigger appetite for risk, this is TRULY out of character for most traditional automakers and that’s why it’s so necessary.
- Move faster. That means quicker decision-making and just overall having that GSD attitude, this is an acronym I learned while working in Silicon Valley and it means ‘Getting shit done.’ Chop the time that normally things get done, whatever it is, by half. At least. Sounds like an impossible task until you do it and for the OEMs that are able to remain relevant in the market, it was because they were able to.
- Learn what user experience is, what it means for the consumer and incorporate it into every aspect of the customer journey. In your products, services, via your partnerships - determine who your customers are, have them define their journey for you and build things around those tenets. The user experience begins when your customer wakes up in the morning, not when they get into your car.
- Surprise them. Delight them. Develop products to meet their ‘unfulfilled’ needs. Take on more risk (there goes that word again) in order to do that. The OEMs that DO NOT own the customer journey will never be able to wrestle it back from the tech company that took it from them and hence - will LOSE.
- Hire people that are NOT like you and have people that are NOT like you work with you. It goes back to that saying, ‘Insanity is doing the same thing over and over and expecting a different result.’ Someone that normally hits doubles isn’t going to all of a sudden start consistently hitting home runs unless something changes.
- Be humble, admit what you don’t know and quickly find people that do and have them help you build that product or service that’s going to make that difference in the market.
This is by NO MEANS the end all be all list of success factors and the above factors should mean different things for each company. I do promise that within 18 months if you’ve implemented changes to your organization that incorporate the above factors, you’ll be on the right path forward. Someone(s) is going to get it right, it might as well be you. But you’ll still be moving too slow.
Reality could finally be catching up with Tesla as a good number of analysts, many of who were bullish on Tesla in the past, have cut their target share price for the company. I think they mean it this time. Not sure Elon will be able to charm his way out of this one since I think his distortion field has lost its effectiveness.
For Tesla to be successful, and I mean consistently profitable, there is still a long list of items that need to be reconciled, while some need to be re-worked as they launch a new manufacturing facility half a world away and qualify new key suppliers for the vehicles to be made there.
I won’t say that Tesla’s back is against a wall but there isn’t much room for error if they’re going to get back to being profitable. It’s like they are threading the eye of a needle. With so much negativity recently surrounding Tesla, a good management team would be able to use that as motivation to rally the troops and accomplish some amazing things. I am hoping that Tesla’s bench strength has the ambition and ability to get them through these very important next several months.
For the EVStartups in China & the U.S., I hope they’re studying Tesla’s moves, are taking notes and scrutinizing how ambitious and achievable their own goals and timelines are and have found the right managers and GSD’ers that can get them the wins needed to successfully launch their vehicles because as most car company veterans know, in order to go from startup to 100-year-old company, you need to perform at a high level, execute flawlessly and design and manufacture products that people actually want to buy. None of the traditional OEMs are batting 1.000 at that.
EVs & EVStartups
I know that in order to finish that report or to emphasize a point about EVs taking over, people need to pull growth forecast estimates out of research reports coming out of Bloomberg New Energy Finance (BNEF), JP Morgan, or any other respectable team that tracks the sector.
Quartz calls out these researchers (I wholeheartedly agree), their estimates, and any EV forecast that goes out any farther than 2025 is a WAG since there are too many variables, such as oil prices, local incentives, ICE/EV pricing parity, to name a few that make forecasting future sales accurately a fool’s errand. For those who don’t know, ‘WAG’ is a very formal, important acronym learned by most b-schoolers that stands for ‘Wild Ass Guess.’
With that being said, I will never give you my ‘forecast’ but I will postulate that EVs overtaking ICEs in sales will likely come sooner than most forecasts, maybe not Bloomberg’s which always seem to gain optimism each year.
I claim this due to the fact that most major OEMs have bet BIG on them and plan to launch dozens of NEVs collectively within the next 24-30 months. Further, these OEMs likely aren’t keen on manufacturing two sets of vehicles with different powertrains since it wouldn’t drive the cost or manufacturing efficiencies via economies of scale and split their manufacturing footprints.
A lesson we’ve all taken from Tesla and other EVStartups who’ve recently launched is that one of the main drivers of consistent profitability is selling A LOT of cars every quarter.
MOBILITY and LAST MILE
I haven’t been back to India in close to 14 years so I can’t comment on what it’s like now but I’ve been told that recently the pollution in quite a few cities has gotten pretty serious, worse than much of China and that the Indian govt. needs to do something to help its citizens.
If this proposal becomes law, AND the government is able to incentivize companies properly via subsidies, land, tariff reduction/elimination, etc. then there could be a lot of opportunities for scooter (moped), e-bike and battery companies to fill the demand created by this new law. I am not referring to the Bird/Lime type e-scooters since a lot of India’s infrastructure (roads and sidewalks) and traffic would chew those things up and spit them out. This means replacing over 20M petrol powered scooters with electric ones, that’s the number sold from March 2018-March2019. That’s a HUGE opportunity.
6-8 years seems like an aggressive timeline to be replacing so many scooters, especially since the Indian government isn’t known for quick decision-making and implementation of policy so we’ll have to wait and see how this plays out. Having spoken with enough of these companies myself, they’ve always kept an eye on the market since it’s just way too big to ignore. Honda, Suzuki, Hero and a few others own much of the current market share, but you can bet that they’ve not spent that much on R&D there to upgrade their petrol engines otherwise why would they need to switch to electric - which means the market is ripe for disruption.
If companies decide that the time is right to invest in manufacturing locally, any excess capacity could easily be exported to the rest of SEA (Southeast Asia), if the Indian govt. decides it wants to have most companies build locally which is what I would want.
This could put a real squeeze on battery cells and the raw materials in them raising pricing in the short term until capacity is added to alleviate the demand. I think this has a good chance of getting approved so stay tuned and we’ll keep you updated.
This article illustrates the amount of red tape and bureaucracy that the traditional OEMs still need to eliminate as part of their ‘house cleaning’ if they’re going to truly be able to compete in Transportation 2.0.
Make no mistake about it and I’ll repeat it even though I’ve stated this in the intro, ALL car companies will become software companies. You can actually drop ‘car’ from that statement and I’d say it still generally holds true.
When I worked at GM, the policy was that every 2.5 – 3 years, you’d get a new computer so why couldn’t they follow their IT policy? I kid, kinda sorta, but the fact that it took so long is also how I know there are still MAJOR challenges with people, policy, procedure, and a general lack of urgency at the traditional American, Japanese, German, and Chinese OEMs, yes ALL of them.
Telsa has pretty much had Over The Air (OTA) updates since day one (not really, just over 6 years) so for GM to finally be rolling the hardware/software stack out that will be capable OTA updates for their 2020 Cadillac is very telling.
I do applaud GM for getting it done and the indication that it will underpin most of their vehicles moving forward is a major plus for the product lineup, potential features, and capabilities of its future vehicles but this MAJOR step is actually just a qualifier that lets GM stay in the game.
Let’s keep grinding GM, I know you can do it.
AV and AI
Although you could clearly argue that this Forbes article positions Ford in a very positive light I selected it because the OEMs should get a lot more credit for currently utilizing AI, neural networks and machine learning in a lot more areas than they get credit for.
The automotive manufacturing sector has traditionally been very innovative due to the fact that manufacturing cars is VERY capital intensive so any way to reduce costs across multiple manufacturing facilities could really be helpful to the bottom line.
OEMs tend to try new ways of product development and manufacturing and if successful, these ‘new’ processes normally get copied and implemented in other industries, the aviation sector also excels at this type of innovation.
The author uses the assembly line as an example of the innovation that historically came out of the sector and that’s just one of thousands of examples that could’ve been used.
The technology threat they are facing right now though is the largest, fastest and most dangerous they’ve ever dealt with so here’s to hoping that they can reach back and innovate their way into Transportation 2.0.
Many of these manufacturers whose bikes and scooters are utilized as part of the ‘last mile’ solution are now scrambling to assess how long they think the trade war will last, how much their product’s costed BOM (bill of material) has increased because of it, whether or not they should pass that cost bump on to their customer and if so, how much.
My guess is that the calculator is spitting out about 6 months, meaning that if the tariffs last more than 6 months these manufacturers will have to find a permanent alternate supplier for parts, WIP (work in process), or finished goods that aren’t located in China.
I know Zak, he’s a great guy who’s passionate about what he’s doing and that his signature products are truly ‘Made in America,’ and I really love what he’s trying to do for Detroit with Detroit Bikes. That said, he’s competing against some Giants (literally) so he’s got his work cut out for him.
If he and people like him in the U.S. decide to find alternate suppliers that aren’t affected by the trade war so that they don’t have to significantly increase their pricing, assuming that quality and lead time are similar, they’ll likely never go back to their original Chinese supplier, why would you when there would still be a future risk of a trade war flaring up.
On the other hand, for the Chinese manufacturers who’ve until now shipped thousands of finished bikes to the U.S. for sale at places like Walmart and Dicks, this might be the right time to re-examine your manufacturing footprint & strategy so that you don’t price yourself out of a HUGE U.S. market. Only time will tell on this one.
GAC Motor, a Chinese OEM which has global ambitions decided to postpone its launch into the U.S. market. This is the right move since trying to break into the U.S. market would’ve been difficult enough, but the addition of the trade war would’ve likely not allowed GAC to build ANY excitement and sales momentum.
GAC Motor likely still plans to launch in the U.S. but isn’t sure when. Just like we have no idea when this trade war will end.
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.