How CATL got so big, Waymo and no safety driver, NIU going BIG - SAI Newsletter #42
Not a lot up top today, let’s get right to it.
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
As I’d mentioned in a previous post, the pace at which Tesla got their Shanghai Gigafactory 3 up and running meant that there were likely going to be some ‘gating’ items or ‘showstoppers’ that would make production ramp pretty challenging. ‘Gating item’ or ‘showstopper’ are just terms operations people use to call parts, tooling or anything else that would prevent production from kicking off, or halt / slow down production in any way. I’d thought that batteries were going be at the heart of those challenges and that they’d likely need to import quite a few of the (Panasonic) battery modules to support production start and ramp.
If this article is accurate, I may have been prescient – since they’re reporting that Tesla has been shipping Panasonic battery modules from Fremont to build up inventory in order to launch production of their Model 3 before the end of this month. It looks like they still need to qualify the LG Chem battery sometime in early 2020 then work with LG Chem until they can build up enough inventory to support their production in Shanghai.
This will allow Tesla to stop importing the Panasonic modules which will help the Model 3’s profitability, which at around ~$52K USD MSRP in China, is by far the lowest gross margin vehicle in their lineup. Tesla would then need to bleed out any excess inventory of the Panasonic battery while swapping in the LG Chem battery, all this while keeping production moving uninterrupted. I guesstimate that this would likely happen sometime towards the end of CQ1’20 or CQ2’20.
I can also bet you money that the Panasonic and LG Chem batteries react entirely differently to the HW & SW stacks of the Model 3 so actually getting both batteries to look, feel and act the same is going to be another challenge for the Tesla engineering, manufacturing, and quality teams.
Tesla also JUST announced a battery supply partnership with CATL, so would they dual source the battery modules for the Shanghai Gigafactory’s Model 3? I would think that for such an important vehicle they would stick to what they know works in order to make sure the vehicles would be of a consistent quality and reliability, if not better than, the Model 3’s currently rolling out of Fremont. They might need to though depending on how optimistic their sales forecasts are and, in the event, that one supplier doesn’t have the capacity necessary to fulfill their requirements.
Having 2 battery partners, let alone 3, would complicate things exponentially for Tesla. What I could see is Tesla swapping in the CATL battery for the Model Y launch after the engineering teams have had a longer time period to really research its characteristics and feel comfortable with their use in their vehicles. This of course could also just be a cost play with CATL batteries likely coming in much cheaper than LG Chem and Panasonic’s. If that’s the case, I’d be careful what I wished for. Or this could be Elon creating leverage so that LG Chem falls in line on production and pricing.
These Tesla men and women on both sides of the pond in Fremont and Shanghai will likely NOT have a very pleasant holiday season since they’ll be working OT in order to get Model 3 production started as well as getting the LG Chem battery PPAP'd (Production Part Approval Process) and pushing LG Chem to work OT to get their supply built up enough to support Tesla’s Model 3 production in order to save those transportation & import costs.
This is just one, albeit very important part, you can bet that there are other potential showstoppers that they don’t even know about yet.
This article outlines how the Chinese govt is able to help domestic companies in select sectors become global players in a very short period of time, in the case of CATL 8 years. This is also why many foreign businesses think the playing field in China isn’t level and needs to be addressed. The requirement that car companies use ONLY Chinese batteries in their EVs was a hard pill to swallow for many foreign OEMs as well as the leaders in the vehicle battery space, Panasonic and LG Chem, who’d already committed capital investment to increase capacity substantially for the domestic market.
The requirement to source from a Chinese battery manufacturer was lifted earlier this year but much of the damage had already been done and the opportunity gained from the domestic players, namely CATL, who has inked deals with Daimler, Bimmer, Toyota and now Tesla - all likely non-binding and dependent on quality, reliability and ultimately availability.
On the other hand, it would’ve been almost impossible for the foreign battery manufacturers from Japan and Korea to fulfill all the demand that’s going to be coming out of China, the EU and the US over the next several years until capacity was increased significantly which will take a couple years at least, so a Chinese partner would’ve still had to step up and CATL was at the right place at the right time and has done just that.
CATL has global ambitions and are investing in the EU and the US to increase capacity enough globally to become the world’s largest battery manufacturer overtaking Tesla and their Gigafactories. Once that happens they will be tough to match on price and supply.
What I think you’re going to find is that it will take quite some time for the Chinese battery manufacturers to catch up to their foreign competitors in quality AND reliability. This is extremely important because after the battery is installed into a vehicle it becomes that OEM’s headache should there be any issues. For example, NIO earlier this year, and as a precaution, recalled 5K of their ES8’s due to the ‘potential’ for battery fires and although they did not disclose what the exact cause was for the fires NIO took the brunt of that bad press in the media, the batteries they use are sourced from CATL BTW. There’s a reason why electric mopeds generally aren’t allowed to be parked in underground parking lots overnight in China and it’s not because they take up too much space or that their batteries have been supplied by the Japanese or Korean manufacturers which they likely have not been.
The one presumption that the author makes about throwing more money at R&D will automatically allow you to get to the highest levels of quality and reliability or at least competitive levels in a short period of time I’d like to counter. To me that’s a HUGE bridge that is going to be challenging to cross for CATL and their domestic brothers. Foreign OEMs have been in China for nearly 30 years so there’s been plenty of capital thrown at R&D and A LOT of opportunity to learn from their foreign partners, but the Chinese manufacturers have still struggled to become the national champions with the global reach that the Chinese govt. had hoped and I think it could be very similar for the battery manufacturers as well.
I further believe that the Chinese govt. lifted the requirement to source from a Chinese battery manufacturer to not only alleviate some pressure applied by foreign govts. but also because the domestic players weren’t ready to produce at the quality and reliability necessary to be competitive globally and any misstep would’ve shined a light on these companies which would be a loss of face for the battery manufacturers and the entire Chinese EV battery sector in general.
There are many dimensions to this issue that, due to the US & China trade war, is getting more and more attention. Whether that leads to real change depends on ALL the parties involved.
The WeWork debacle, when combined with the struggling Uber and Lyft stock prices, has really done a number on fundraising and valuations of startups and unicorns across sectors. Retail investors that used to stand in line to pay a premium for dogs (stocks) during an IPO and lost money when those companies couldn’t grow their way out of losing money are now starting to refuse to buy into the hype, at least not until they see some genuine profitability, not just the promise of it sometime ‘in the future.’
This makes it harder for VCs who thought they’d be able to get many multiples of their investments within a short time horizon. The guys that are supposed to be able to predict trends and push companies that are on the leading edge. Turns out they may not really know what it takes to run companies profitably either. In the case of EVs and mobility companies, there was always going to be a long period of growth, pain and challenges before winners would start to emerge. I am talking 7-12 years before we can see who truly has been able to evolve into potential competitors to VW, GM, Daimler, Toyota, etc.
Just look at Tesla, which is already a 16yr old company. They’ve not been able to consistently generate profits although you could argue that their products have been very well received by the market. I don’t know ANY Tesla owners that say they’ve regretted purchasing their car. That having been said, Tesla has received a TON of welfare from the US govt and still are only able to pull out the occasional quarterly profit.
Now fast forward to China where there was supposedly over 500 EVStartups around just last year. That number is quickly shrinking with the most notable startups still having problems with making the numbers work in their favor, which shouldn’t be that shocking if we’re tracking at the 7-12-year profitability outlook, and in addition are now all dealing with a slowing auto market making keeping the doors open even more challenging while pulling down their valuations. At least now these EV companies in China & the US, the ones really trying to make a difference and not chasing the extra zero on their valuation, can get focused on what makes auto companies successful.
It takes first creating a brand and spending time to educate the consumer on what your brand stands for, identifying & understanding who your particular customers are in the market, studying their habits and needs, and finally developing a product that fulfills those needs in a package that makes sense, all while managing costs and investments so that your product can make you few RMB. Their challenge is now to find investors that believe in their brand, business model and have the patience to wait the likely 7-12 years for the promise of a ‘decent’ return on investment.
My wife and I have always thought that we’d eventually make our way back to the US …eventually. Fast forward 10 years later and we still honestly believe that’s where we will end up. China has been a great place for us for most of the time we’ve been here, I say most because yes there have been some challenging times due to pollution, the internet, and traffic but we’ve learned to deal with that stuff as you do with any situation where ever you are that’s out of your control. Overall the experiences (both professionally and personally) and friends we’ve made makes living away from home quite a bit easier.
With that said, Beijing and Shanghai are NOT cheap places to live and haven’t been for a while now. We have kids that we’d like to also have the experience of growing up in the US while they’re still young so that likely means we’re just a few years away from a major move.
When we do finally decide to ‘pull the ripcord,’ there are 3 locations that really make the most sense for us and one of them is Detroit. The other happens to be the Bay area, where we met and just happens to by my wife’s hometown. We haven’t lived there though in over 10 years and there’s been A LOT of changes, some good and some bad. The cost of living in NorCal is pretty intimidating but I think we’d still be able to manage.
The third location happens to be Pittsburgh, a great town that I spent two years in while in b-school. I love all that’s going on in both Pittsburgh and Detroit and the proximity to family adds to the attraction. All three of these locations also just happen to be at the center of the EV/AV sectors which makes my transition much easier.
There are also a couple of dark horses but for now we could totally see ourselves in any of these three locations. With any of them, I think we’d be in a ‘no lose’ situation.
This seems like one of those ‘why didn’t I think of that’ ideas. Pushing the responsibility of recommending a solution to the providers is brilliant! I could also see this turn pear shaped quickly if not managed well, especially since most of the parties involved likely have diverging goals like getting Yinzers to use their service over another’s, as well as different sized operating budgets.
I had to highlight this because it’s Pittsburgh and second, I’ve not heard of any other city take this approach to solving the city’s transition to a multi-modal, citizen friendly transportation system.
Will see if I can’t find out more about the specifics and share them as I learn more. Hoping that it’s a HUGE success though, and that it’s practical enough that it can be copied by other cities around the world.
John Krafcik, CEO of Waymo has upped the ante in the race to provide autonomous ride-hailing services in the US. They’ve begun piloting a service in Phoenix where a ‘rider only,’ that’s right no safety driver sitting at the wheel, is in the vehicle as it shuttles you to your destination.
They are also looking to expand their portfolio of services - to sell or license their technology to OEMs and companies in adjacent sectors like commercial trucking / delivery in order to create some immediate revenue generating opportunities. All of a sudden, those adjacent sectors just got really crowded!
Waymo has arguably the DEEPEST pockets with some of THE most talented people working on commercializing their autonomous business. The fact that they feel confident enough to put people in a car, albeit those who have volunteered to be their guinea pigs, without a safety attendant should worry any company that plays in this space. Contrast this with the National Transportation Safety Board (NTSB) findings of the Uber accident that occurred in Phoenix that killed a pedestrian that I detail further below.
They seem confidently well ahead of any direct competitors and since there’s A LOT of ways to go with this and the fact that they’ve already collected a ton of data, any pivots they may make should be able to go from 0-100 MPH in the blink of an eye. Where they decide to go will likely depend on the competitive landscape, likelihood of cooperation with the local govts., and/or the potential market opportunity.
I assume that there is going to be A LOT more information available to detail what happened with the Uber testing vehicle that struck a pedestrian in Arizona in 2018, killing her. For the system to not be able to identify, let alone react in time to a pedestrian crossing the street even if she was jaywalking, seems almost negligent for those in charge @ Uber to have allowed their autonomous vehicle out on the roads when it was clearly not ready for use outside of a carefully controlled setting.
I have not followed the number of accidents caused or that autonomous testing vehicles have been in in China or the US but 37 crashes in less than a 2-year period by one company just seems quite excessive. I am taking a leap here but this would indicate to me that their vehicle hitting a pedestrian was bound to happen and the testing should’ve been shut down before it did.
We are talking about people’s lives so these autonomous testing pilot vehicles should NOT be put on the road without a multiple set of redundancies or fail-safes to completely eliminate the chances of this happening. In the rest of the world (read: China), there are A LOT more distractions that need to be addressed while driving, with cars and/or other vehicles being a small set of potential issues that need to be identified and the ‘correct’ decision to be made.
Was or is this an Uber thing or is this an autonomous vehicle thing that other AI companies are dealing with? No one knows, but this is something the NTSB should definitely be much more involved in, especially since there are now more testing vehicles from various other AI companies on the road.
Growing up in Michigan, I know exactly what it means to be a ‘car’ guy. I know many, and women too. When we all get together to talk ‘shop’ about what we think is going to happen to the current set of automotive brands we’ve followed all of our lives, how the future of the sector will play out and ultimately when we think this will all happen there are always wildly varying opinions and the beauty of it all, no one is wrong ….yet. I nerd out on ALL of this stuff.
The disruption to the traditional transportation (mobility) sector that’s being caused by the slow but growing adoption of electric vehicles, the development & use of autonomous ones and new EV, mobility and mobility related companies entering the market is all in an effort to answer one simple question - How can we affordably, safely and efficiently get from point A to point B?
There will be a few different major transitions that will overlap over the course of the next 20-30 years. They’ve all begun already you could argue but some transitions will be completed before others with the shift to autonomous vehicles being the farthest out.
- Car usage -> alternate forms of transportation (e-scooters, e-bicycles, e-mopeds)
- Internal combustion engines (ICE) vehicles -> electric vehicles
- Car ownership -> car sharing services
- Self-driven vehicles -> autonomous vehicles
It may take time for each of these transitions to build momentum, but once they do and a tipping point has been reached, the complete transition will move fast. As technology advances, laws and policies change, and attitudes regarding mobility evolve, there will be many new opportunities for forward thinking entrepreneurs to launch new businesses in order to address people’s unmet, maybe even unknown needs and you can bet that I’ll be there trying to help them!
LAST MILE (<4 WHEELED) MOBILITY
It seems that in a short period of time, the electric moped and electric bicycle markets have become pretty crowded with new products from companies (startup and established) that have global ambitions, many of which I’ve highlighted in past newsletters, launching products over the last 18 months, aimed specifically at the US & EU markets.
Take NIU, an extremely popular electric moped brand in China that IPO’d in 2018 who’ve announced this year that they’re going to begin selling their products in the US. In a New York minute, NIU has gone from 1-2 main products to 4-5 including an electric bicycle, products that will begin selling in the US in early 2020.
I am predicting that 2020 is the year that electric bicycles & electric mopeds really gain traction and move into the mainstream and onto US roads as a real alternative to ride-hailing and e-scooters in a BIG way, at least in the ones that have a ton of sunshine ALL year long. Talking about you LA, SF, Phoenix, San Diego, and Austin.
One unknown is how competitive these products will be priced. Anything over $2.5K-$3K just really becomes a non-starter for a lot of folks in the US. NIU’s pricing strategy will reflect their desire to be a major player there since as I’d mentioned above, the field is already getting crowded with some decent looking product.
The good thing is that we will find out soon enough about NIU’s chances for success since they’ve gotten Department of Transportation (DOT) approval for a few of their products already and are aiming for early 2020 to open their own stores while also selling through retail partners.
Speaking of NIU, did I mention they’re entering the US market in a pretty aggressive way? In addition to selling their products to end customers via retail stores and online, they’ve also partnered with an e-moped sharing company called Revel and have a couple thousand of their electric mopeds being shared in cities like Brooklyn, Queens, Washington DC and just recently Austin, TX.
The latter city massaged legislation that allowed the sharing program to enter the city in a much easier, agreeable way. This should lead to a much better chance for success and could be used as a model for other cities that want to adopt friendlier laws surrounding the sharing economy for transportation services.
Not sure when I am going to be in any of the cities to yet but def keen to try these sharing services out to see for myself and when I do, I’ll update you with my thoughts. I’ve ridden NIU’s here in China and know what to expect when riding those so I’ll be much more keyed into the app, overall user experience, ease finding and using then parking the mopeds, and finally the affordability factor. I am thinking I should work with the folks in Detroit to help them find a sharing program there so stay tuned!
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.