Mostly EVs by 2040, Pengster to compete with Didi, regulating AI - SAI Newsletter #19
I was in Shanghai earlier this week to participate in the Tustar Mobility Startup tour and got the chance to visit Aiways and NIO two of many companies developing EVs for the China and later international markets, in NIO’s case they already launched and are delivering their first product, the ES8. Two very impressive campuses with a TON of energy and a lot employees, maybe too many. Thanks to the Tustar team for letting me tag along! I was able to meet some great entrepreneurs and help them a bit with understanding the evolving Chinese automotive market.
Lots in the news this week as the trade war escalates increasing uncertainty in the global markets. I think most companies should prepare for this trade war lasting for quite some time.
I’ll be back in Shanghai next week to attend the “emerge conference” hosted by technode so if you plan to attend please keep an eye out for me. Am looking forward 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 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
EVs & EVStartups
The ‘500 EVStartups in China’ number gets thrown around quite a bit so I want to clarify that there’s a much smaller number of EVStartups that are designing and manufacturing passenger vehicles. I’ve covered quite a few of them in past newsletters so when I talk about ‘EVStartups,’ I’m generally referring to companies that have raised significant funding and are targeting the passenger vehicle market segment.
Now, I think most of the EVStartup founders will tell you that it’s really hard and expensive to design a vehicle, hindsight being 20/20! But that is only the BEGINNING, then you have to manufacture it, market it and sell it, service it and if you’re lucky enough to sell enough of them, you get to do it all over again with a new model IF you’ve generated enough cash and have managed it wisely. EVs get even more complicated than ICEs because there has to be a support system put in place via charging stations at home, the office and recreational locations so people don’t get ‘range anxiety.’
The addition of the trade war, slowing Chinese economy, and future uncertainty all point to a brutal market to be launching new brands and vehicles in. If the Chinese govt. keeps its thumb off the scale, we will definitely see the majority of these EVStartups close their doors as their piggy bank shrinks to 0.
We will also likely see consolidation, investment and buying opportunities for the larger OEMs or anyone else that wants to enter the market, to acquire technologies from otherwise viable companies for maybe cents on the dollar.
We all know that EVs are disrupting the automotive sector, specifically here in China and the U.S. This article articulates in more detail when the likely transition will take place and by how many vehicles.
Takeaways include that by 2040 EVs will make up 57% of the global market for passenger vehicles. China will account for 26% of that and the EU will pull ahead of the U.S. in EV adoption by the mid-2020s.
Further, overall demand for private car ownership will be reduced by ridehailing/sharing services which currently 1 billion people utilize for transportation.
MOBILITY and LAST MILE
Xpeng, which recently announced April sales of 2.2K for its G3 SUV, a paltry number IMHO, has decided that it's ready to compete with Didi in the ride-hailing space with their version called ‘Pengster,’ another challenging business, if you want to actually make money that is. Chris Udemans from Technode does a good job of capturing my thoughts and more in the article but I’ll go a step further here.
With this announcement, one area that XPeng will likely explore is their relationship with investor Alibaba. XPeng will already be using AliOS for their vehicles so it makes a lot of sense that building off that, they could offer other ‘value-added’ services for both buyers and ridehailers, splitting the spoils with Ali, of course.
Since we know from Didi that the current economics of ridehailing isn’t profitable, my guess is that they would offer some type of hybrid, maybe a subscription+ model that may include a monthly service fee along with a /ride cost component in order for the business line to provide more predictable, consistent revenue stream. This would also lock in customers for XPeng to introduce those value-added services.
For Ali, it would provide valuable data that could be combined with their already mountainous cache of buying insights on Chinese consumers in order to offer riders a truly customized experience.
The devil is in the details and if XPeng isn’t able to get at least 4-5x more sales/month, they’re likely going to have a difficult time getting the P7 sedan they launched earlier this year, on the road. It’s risky to launch a new business when you’ve not really gotten your original one set up for success so let’s hope their management team is up to the task.
I think I’ve been pretty consistent in my prediction that e-bikes will be HUGE in the next 3-7 years and will likely take over for e-scooters (think Lime, Bird, etc.) as the preferred mode of transport for that ‘last mile.’
In some cases, e-bikes can be substituted out for using a car ridehailing service altogether since they’re comfortable and safer than e-scooters making them easier to ride farther distances, creating a broader opportunity to monetize the transaction and increasing the chance of being profitable.
The regulatory environment is not fully formed, so there’s still an opportunity for a company to dominate the market by committing the resources and time necessary to make it a viable business. Please reach out if you’d like our help in doing that!
This article does more introducing than comparing the 4 companies since the author doesn’t get into pricing but he does highlight one company that is offering an e-bike as opposed to e-scooters which currently dominate the market.
I also think that this ‘network effect,’ defined as ‘increased numbers of people or participants improving the value of a good or service’ may be overstated as a game-changing advantage since I’ve seen firsthand here in China with Ofo, which had a TON of cash and built up a bunch of market share, run out of money and is now on the verge of bankruptcy. It doesn’t matter how many people have downloaded your app or how many riders/day you can boast if your model can’t get to consistent profitability. I suppose they could just IPO and have others deal with the challenge of making money.
It could also be that China is just a brutal market for these types of companies and services.
AV and AI
The EU and U.S. govt. hopefully have taken notes about how data privacy, if not managed properly, can blow up in their faces. Whatever side you fall on in this debate, whether or not tech companies should have a say in drafting policy and if so, how much, what’s important is that these conversations are happening and will hopefully lead to protecting privacy and eliminating bias so that AI systems can ultimately serve to help EVERYONE.
Although China suspended auto import tariffs for vehicles made in the U.S. in December 2018, there’s a high likelihood that China will be put them back in place as the trade war between China and the U.S. escalates. Even though this doesn't have much negative effect on many American carmakers since the German OEMs import to China more American made vehicles, China may be indirectly placing pressure on the U.S. via the German OEMs who would likely lobby Washington DC and perhaps threaten to move their manufacturing out of the U.S. permanently if a resolution to the trade war wasn’t found quickly.
The main U.S. carmakers affected by the tariffs are Ford and Tesla (who currently import 100% of their vehicles to China). For Ford specifically, which imports many of their SUVs, sports cars and luxury vehicles (Lincoln brand) it would make a dire situation worse since their sales have fallen significantly over the past several months.
Tesla is in a similar situation with declining sales in China as part of the overall market slowdown but they plan to begin manufacturing their own vehicles in China by the beginning of next year so they at least have a silver lining.
Effects to the China auto industry, the slowing overall market + tariffs are creating a vicious cycle that could lead to a significant decline in 2019 sales for China, it's very likely that the market will continue to shrink.
This could very well dampen the excitement of all the new EVs being announced and launched so I'd expect this to also have a negative effect on EV sales in China unless the Chinese govt. intervenes to prop it up.
If the trade war isn't resolved quickly then I would expect car pricing to increase to make up for the tariffs on parts which would squeeze margins and make competing for sales brutal. Medium to long term with no resolution OEMs that are manufacturing in the U.S. and China have likely been studying the costs of moving manufacturing and where parts are sourced (maybe to Vietnam, Mexico, Canada, Thailand, Indonesia, India) in order to avoid this type of disruption in the future.
In what will likely be one of the first of likely a chorus of investments into much smaller, nimbler EVStartups, Hyundai/Kia has decided to buy into Rimac, a Croatian electric supercar manufacturer. This is Rimac’s second major investment announcement, the first coming from Porsche, who acquired a 10% stake in 2018.
This is right on the heels of Ford making a large investment in Rivian, an American electric truck and SUV startup based in Michigan. These EVStartups build their prototypes, which in turn acts as a ‘proof of concept’ for them to shop around and find potential investment for.
The startups are normally able to run themselves with little oversight from their investors but are able to take advantage of the resources their strategic partners provide including engineering, testing, sourcing, validation, and potentially manufacturing. In turn, the strategic partners, if they’re smart, normally request exclusivity or at least first right of refusal on innovation & IP that comes out of the startup to integrate into their vehicles and ecosystem.
Nissan’s struggles in China (and with their ex-CEO) have been well covered in the media so in order to help stop their slide they are looking to acquire a stake in a Chinese EVStartup.
The likeliest candidates are WM Motor, Zhejiang Hozon, and CHJ Automotive. Buying a stake in an EVStartup will not solve their serious problems but it’s a step in the right direction.
Nissan also has experience building their own EV, the Leaf so both sides would likely benefit from the transaction. My $.02 is that they’d choose WM Motor unless WM’s valuation is too high but, in this market, there’s going to be a lot of downward pressure on the valuations of the EVStartups across the board.
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.