India Eyes Tesla, 两会 & the China EV Sector, The Switch to Selling Services - SAI Newsletter 9

The tech sell-off that began in late February and that has continued into the earnings releases of the Big Three (NIO, Li Auto, XPeng) is freaking people out. For those EV & mobility-related companies with their head down working hard to build something lasting though, this shouldn’t phase them. The strongest companies with the best management teams that are designing & manufacturing the best products will just look at this as part of doing business in a FOMO & retail investor-driven market. They’re not chasing quarterly results and aren’t likely as worried about how much value they’ve lost over the last few weeks, which for the Big Three has been substantial (>25%). For the companies who’ve not yet gone public, this shouldn’t dissuade them from moving forward unless they were hoping for astronomical valuations since they’re not likely there or available anymore. The one thing a huge loss in value could bring is higher borrowing costs so now each of these company’s corporate finance teams are probably staring at their bank accounts and second-guessing whether or not they wrung everything they could’ve out of a favorable capital markets while they had the chance. After all, their lofty ambitions aren’t going to pay for themselves. 两会or the Two Sessions is going on as we speak so the news cycle here has been a bit weirder than normal. That said, there hasn’t been much about the EV sector to chew on but I’ve posted a bit about what we’ve heard so far down below. Lei Xing and I are at it again this Thursday 8am EST in our Clubhouse room. I invite those that are on Clubhouse to drop-in listen or better yet contribute to the discussion. Looking forward to it, we’ve gotten some terrific feedback about the room and have really learned a lot between show #1 to #3. TESLA IN THE NEWS - India wants to compete with China for Tesla’s attention. It looks like Tesla is playing India against China in order to get the best deal they can from the Indian govt. to manufacture locally in India. Tesla has already created legal entities in the country but no firm commitment about manufacturing locally has been made. Yet. Currently, India’s vehicle demand doesn’t merit a dedicated facility to be built exclusively for India's demand. Further, it will likely take years to grow enough domestic Indian demand to have it make sense for Tesla, that’s unless Tesla forecasts demand increasing significantly in the rest of South & Southeast Asia (SEA) so that excess capacity from the Indian factory could be used to fill demand from those regions. India does currently have an FTA in place with the ASEAN countries but I am not certain that includes passenger vehicles so I will find out by next week’s newsletter. For now though, I could see Tesla shipping China-made Model 3s and Ys to India and the rest of Asia in order to establish a presence in those markets. The challenge with that strategy is that if China demand increases significantly, the domestic market may take up all of the Shanghai Giga capacity. Long-term, my guess is that there’s a high likelihood that Tesla will manufacture in India. Likely a smaller, less expensive mass-market vehicle that would have higher demand in South & SEA. - Will Shanghai Giga be the Asia manufacturing hub for Tesla? See above. Perhaps, but this will depend on Tesla’s growth in China over the next few years in addition to Tesla’s growth in the rest of Asia ex-China. For now, ~450K units of capacity is likely ‘just right’ for the China market but it was confirmed by the Tesla China GM that a mass-market <$25K Tesla is on the way in the next 18 months. That would likely significantly increase demand for their vehicles even further in the Middle Kingdom constraining capacity. This is probably why Tesla has taken the adjacent 100 acres next to their Shanghai Giga, to increase capacity even further. As they get closer to manufacturing the mass-market Tesla, if they have not already Tesla will need to take a step back to look at their global manufacturing footprint against their global demand, transportation costs, labor rates, tariff rates, competition, etc. in order to optimize their manufacturing footprint for their likeliest future demand, cost, supply chain, and growth area considerations. - Tesla works with the local government in Brazil to secure its nickel supply for the foreseeable future. Nickel is a key raw material in the manufacture of lithium-ion batteries so rather than scramble, Tesla went ahead and likely purchased options or future capacity at a price they deemed fair in order to guarantee future linear supply as needed for their multiple factories around the world. IN THE NEWS - The plan for China to dominate the global EV market is coming along as planned according to the Chinese govt. Since the start of this year’s 两会or Two Sessions and the corresponding policy report outlining the Chinese govt’s latest 5-year plan released on March 5th, the EV sector was barely mentioned. We should interpret that as the Chinese govt.’s expectations for growth & continued maturity of the sector has generally been met up until now. Further, government policies & investment to support the EV sector are likely not needed because private enterprise has largely taken over to further grow the sector. Two EV-related areas that will continue to receive stimulus measures are EV infrastructure & EV battery recycling. Expectations are high on reaching the government’s stated goal of 20% of all vehicles sold in China be NEVs by 2025 (from around ~5% in 2020) so the supporting infrastructure will be needed in order to achieve that lofty goal. FYI: The Two Sessions is an annual planning meeting for the Chines govt where policies to support industries are discussed and rolled out. - The Indian entrepreneur that’s trying to outdo Elon and all of the Chinese EV startup CEOs. India has one entrepreneur that wants to become their Elon Musk. He’s going to first try to do this with 2-wheeled electric scooters though, not 4-wheeled passenger vehicles since passenger vehicles aren’t ready for primetime in India yet. Bhavish Aggarwal, the founder of Ola Cabs, a company that Uber competes within India in the ride-hailing space has now moved onto electric moped hardware design, software development & manufacturing with his newest venture Ola Electric. Spun out of Ola Cabs, Aggarwal’s vision for Ola Electric is to be India’s global player in the EV sector. First, he plans to manufacture 10M vehicles / annum or about 15% of the entire world’s scooters by 2022 at a plant about a 2.5 hr ride southeast of Bangalore. Did I mention that he was ambitious? Once Aggarwal has reached that lofty goal, he wants to quickly move upstream within the next 3 years to design and build passenger vehicles out of that same $330M facility. He is quoted as saying ‘Our ambition is to build the world’s leading urban mobility EV company’ so I am not sure he can be any clearer with his goal. He has the support of some deep-pocketed, well-connected investors like Hyundai / Kia as well and he was able to grow Ola into the top ride-hailing company in India which was NOT easy to do. More importantly, Aggarwal also has the support of India’s Prime Minister Modi for his ambitious goals. Is it the right timing for India to get out from under all that pollution to nurture a few national champions in clean energy and mobility? With >1.5B citizens, Ola could leapfrog some current moped manufacturing front-runners and vie for leadership positions in some of the key South & Southeast Asian (SEA) cities that are currently dominated by Honda & Yamaha. With annual sales of mopeds at ~20M units annually, it’s a region worth competing in. - Speaking of two-wheeled, electric mopeds it doesn’t seem like Niu is slowing their global expansion plans either. CEO Yan Li sees tremendous opportunities for the brand in the US, EU, and SEA although SEA could be a pretty tough nut to crack since >90% of mopeds sold in the region are still fueled by petrol. That said, with annual sales of 20M units and the inevitability of all of those mopeds moving over to electric, it will pay to be there early. One announcement that I’d not heard until watching the linked video is that Niu will be working with Lime in the US now in addition to their current moped sharing partner Revel. Lime has a much larger footprint in the US and globally so this could be a pretty significant get for Niu. - An automaker's 'How to’ on switching from selling products to selling services. This Harvard Business Review article does a great job of outlining how Microsoft (MS) switched from selling products (MS Windows/Office) to selling services (Azure Cloud Services) when Satya Nadella took over the Microsoft (MS) CEO role from Steve Ballmer in 2014. There should absolutely be more studying going on with what the author coins as: ‘How’ to sell ‘What’ to ‘Whom.’ A lot of credit for MS’s turnaround should be given to Nadella though since I am certain that pivoting the company and its sales organization was an exercise in management genius and it shows. Since taking over for Steve Ballmer, Satya has grown MS from a respectable $300B market cap to a current market cap of $1.74T, that’s with a ‘T.’ This is the same type of transformation the automakers are currently going through with their sales organizations, or at least they should be. I understand that selling software and cloud space isn’t the same as selling passenger vehicles but there are still lessons to be learned here. As the author outlines, Step 1: Rethinking Customer Segmentation Step 2: Restructure the Sales Organization Step 3: Use Sales Force Management Instruments to Drive the Right Behavior For those working in the automotive marketing and sales departments, this should be a ‘MUST READ.’ It’s a lot easier said than done, but it MUST be done if car companies are going to shift their revenue from vehicle sales to a service & subscription-based revenue. - A major shift in strategy for Nissan as it moves from a global strategy to a local strategy. As part of this revised strategy, Nissan will pull up launches of electric vehicles for the China market while also moving to a ‘local parts for a local market’ strategy in order to reduce manufacturing costs of its vehicles to better compete with local players. With all the recent turmoil that Nissan has had to go through (Google: Carlos Ghosn Nissan), it shouldn’t be surprising that sales are lagging for them in the largest car market in the world. The revised regional strategy focusing on China, Japan, and the US should help a bit but it’s the product strategy that needs to be realigned globally. This is what I don’t understand completely though about their initiative to reduce parts costs since cost reductions should be considered at every opportunity. If part’s cost too much, that seems to me like an engineering issue as much as a sourcing one. Anytime there’s an opportunity to eliminate unnecessary costs be it parts, overheard or manufacturing costs, they should be pursued as long as it’s not at the expense of quality, manufacturing efficiency, and reliability. A final note - It sounds like Nissan will try to pursue the ultra-low cost vehicle segment where the SGM Wuling HongGuang Mini EV plays. Good luck with that! TRENDING ON SOCIAL MEDIA - Gojek plans to go BIGGER in Singapore. Gojek plans to take the city by storm and hire more employees, recruit more drivers while also expanding its portfolio of services. Looks like they’re also trying to transition themselves properly over to a ‘mobility services’ platform and will use Singapore as their jumping-off point. - Paris will be launching a universal charging infrastructure pilot program rolling out 150 points where users can dock, lock, and charge e-scooters after they’ve completed their rides. Local city officials are hoping that by locating many of these docking stations close to public transportation stops, it will make it for a more overall convenient experience for pedestrians to get around the city creating a virtuous cycle with more folks abandoning their cars for e-scooters + public transit. This also helps organize Paris’ 15K e-scooters while reducing the e-scooter operator’s cost of operation passing on those savings to its users. This is similar to what many Chinese cities have done with bicycle sharing. By designating certain areas of the sidewalk as parking lots for the bikes, the cities are able to keep the sidewalks free of randomly parked bicycles that block sidewalks, entrances / exits, and parking spaces which was a huge nuisance and created a love-hate relationship between pedestrians and those bikes. JUST THE NUMBERS - Bolt, which competes alongside Uber in some European cities, raises $24M, a smallish sum, but a significant endorsement by the investor – the International Finance Corporation, a division of the World Bank. It seems that they’ve selected a side to be on in the EU ride-hailing / mobility platform competition. - 12,964 vehicles sold. That’s what XPeng reported CQ4’20 sales came in at. Li Auto (14,464) & NIO (17,353) both outsold XPeng even though their products have higher price points compared to XPeng. XPeng shares were down after earnings, no surprise since tech stocks have taken ‘a bath’ the last few weeks, specifically the EV stocks. - Aero, a semi-private jet service that operates in parts of the EU, US, & Mexico has raised $20M in Series A funding. Aero offers a more customized, high-touch approach to air travel and ticket prices reflect this. As travel gets back to its feet we should see these types of services become more popular since Aero allows its travelers to avoid the large airports and being stuffed into huge airplanes with hundreds of other passengers. Most of their current fleet of jets is retrofitted to only carry up to 16 passengers. If overhead costs can be managed, something that’s ALWAYS been pretty challenging in the aerospace sector, there could be room for these smaller upstarts to take business away from the larger airlines that aren’t able to provide the same level of high touch service. PRODUCT & SERVICE INTRODUCTIONS - Porsche is getting into the e-bike business. If your guess is that these e-bikes aren’t cheap, you are absolutely correct. They’ll initially launch two products, a ‘Sport’ and a ‘Cross.’ The Sport will be the daily rider although at a blistering $10.7K you may need to ride it A LOT if you’re planning to get the value you want out of it. The Cross is more for off-roading with similar specs to the Sport although it’ll be a bargain compared to the Sport at $8,549. Both are pretty heavy (~48ish lbs.) considering their frames are carbon fiber and for being branded Porsche, they slow with a top speed of 25km / hr. although that may be due to the legal limit for e-bikes in Germany. —— 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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