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NIO Short report, Polestar goes public in the US, TSMC bigger than Intel - SAI Newsletter 25


Beijing is moving in the right direction this week. The boys are back in school as of Monday - just in time for finals. Most international schools are already out for summer break, but the local schools are not yet. A lot of families have either gone on vacation domestically or have left or will be leaving the country COVID be damned! Some will return, many won’t. There is certainly fatigue in Beijing and Shanghai over the travel constraints and my family is no different. Our current plan is to head down to Sanya for a week for some R&R as well, but each city has their own protocols when it comes to people entering their cities from what is considered a medium risk area and Beijing was that as of last week. That means to go, we’d need to quarantine when we arrived, likely for at least a week before we were able to be out and about. That’s obviously a nonstarter but that medium risk may have been lifted as well. The good news is that China also just announced a reduction in quarantine time for international travelers from 14 (central quarantine) + 7 (home quarantine) to 7 + 3. That’s a MAJOR improvement. The other current constraint is the lack of international flights into China but that should also be addressed later this year as airlines schedule more flights into China. It’s still a delicate situation since this could all go crashing down if there are more outbreaks so fingers crossed. For those that have been wanting to either go visit family outside of China or check on family that are here, the 7 + 3 seems much more reasonable. Although most of the rest of the world has completely moved from QTing. As a follow up to Li Auto’s L9 unveil from last week, I heard that the response to the unveil has been tremendously positive and that they’ve received ~30K orders for the large SUV. I called the L9 a segment buster in last week’s China EVs & More because for its size and competitors (the ones that Li Auto is projecting to go head-to-head with anyway), it should be priced much higher. The large premium SUV market in China is <50K units sold/year on average so once ramped, the Li Auto L9 could conceivably sell close to that alone. China EVs & More is scheduled this week for Thursday, 06.30 – 9pm EST, Friday, 07.01 – 9am China local time so meet us in our Twitter Spaces room then to get a download on all that’s happening in the space. Those that can’t join, the China EVs & More podcast is available wherever you grab your podcasts from. Most of our back pods are posted and the descriptions will be able to tell you what we discussed that particular episode. I am excited about what’s on tap for the podcast. We have some cool guests that we’ve scheduled for the MAX series but also the pod is going through changes that’ll give it a bit more reach so stay tuned for more excitement. QUOTED - Busy week for me with the media. CK Tan of Asia Nikkei asked for my response to the unfortunate tragedy that occurred at NIO headquarters when an ET5 was being tested crashed through a wall and window and landed after falling three stories with the two passengers in the vehicle dying from injuries sufferend from the crash. The ex-car guy in me has so many questions. Why was it being tested on the third floor? Why wasn’t it strapped down? How fast was the thing going? What safety measures or failsafes were in place? It's likely that the two passengers weren’t wearing seatbelts either. There hasn’t been much detail given about why the accident occurred but the initial response from NIO trying to absolve themselves and their vehicle of any responsibility for the tragedy was met on Chinese social media with immediate condemnation. I don’t think there’s any flaw per se in their vehicles, but the lack of empathy didn’t buy them any new fans. As more and more of their cars hit the road, especially outside of China where they’ll have NO control over the media, they’ll need to manage these types of serious issues delicately. - Some of you may not know this, but Sino Auto Insights specializes in the mobility sector whether the products have two, three or four wheels even though conversations and media coverage tends to focus on electric passenger vehicles. There’s a revolution going on with EVs in South and Southeast Asia too but this revolution involves 2 wheels. It’s a point of emphasis whenever I speak at conferences because the innovation going on with scooters is game changing as well. I had a really good conversation with Erin Hale for her BBC article about the growth of EVs, the two-wheeled versions, in Asia. Growth in the sector is tremendous and necessary, specifically in places like India where infrastructure and income isn’t ready for the mass adoption of passenger vehicles, but the choking pollution in many cities means that the pollution emitting petrol mopeds need to be swapped out for clean energy ones. If western take rates for passenger vehicle ownership hit places like Beijing, Bangkok or Saigon (I was born in Saigon and refuse to call it Ho Chi Minh City) those cities would literally turn into huge parking lots. And if my theory holds, we may see even more electric two-wheelers in the west as European and American cities begin to restrict access of private passenger vehicles into city centers even further. I believe that’s a when and not an if. - I spoke with Michell Toh of CNN about Tesla’s being banned from entering a resort area 3 hours outside of Beijing where an annual Chinese government meeting convenes each year. My take was that it’s a continuation of a current policy that sometimes isn’t enforced very strictly at all times. These are very sensitive times here in China due to covid and because Xi Jinping should be extending his reign, so all precautions are being taken to not upset any apple cart. But what happens when China EV Inc crosses the border over to Europe and the US? Will they also get a chilly reception? Perhaps, but for certain more and more decisionmakers are paying attention as China EV Inc is slowly but surely making its way into those markets. This means that it’s a smart EV problem for each of the regions and not a Tesla specific problem. It’s a Tesla problem in China because they blow every other foreign automaker out of the water with regards to sales so calling Tesla out just points to how well they’re doing here. And Elon’s silence on the ban is deafening. TESLA - Tesla putting some money on the ‘hood’ in order to move the metal in China. Tesla is trying to incentivize people to trade in their ICE vehicles for Tesla’s. The foot traffic in many retail locations and dealerships has increased significantly due to the Chinese govt’s incentives for purchase that were put in place in just the last couple of weeks. That’s apparently not enough for Tesla as they seem to be discounting their vehicles without lowering the price by offering these other benefits. This could add incremental sales volume in the tier 1 cities that don’t have any preferential license plate policies for EV purchase. We will have to wait another couple of months to determine if there is softness in Tesla demand but if not, this is just them keeping pressure on the other EV makers to match their offer. Remember that many of these startups competing against Tesla don’t have the bank account that Tesla does so matching them with any additional incentives or reductions in pricing could result in big losses come end of the quarter. In my best Freddie Mercury/David Bowie voice – Under pressure!

THE MOST INTERESTING THINGS THAT HAPPENED THIS WEEK - NIO gets a short report dropped on them by Grizzly Research. And they quickly responded. Now, it’s a bit of he said, she said and we won’t likely get any clarity for some time. NIO shares were down though after the report dropped so for Grizzly Research, Mission Accomplished for now. I’ve not read the entire report yet, but it seems that Grizzly may be arguing that some aggressive accounting is fraud? There’re two things that stick out to me, the revenue recognition of the battery swapping subscription fees. Normally, you recognize the revenue or ‘book’ the revenue when it actually occurs so for subscription revenues over the period of the subscription, but NIO is being accused of recognizing the entire duration of the subscription all at once which would make the immediate term sales numbers look much better. Also, with the battery swapping, NIO was never going to hold those batteries on their books hence the entity that was created that basically does nothing but move the assets over to its books, this Weineng entity. If true, this could be considered aggressive accounting but as long as it’s noted in the annual report, I don’t think it’s illegal? But I am no CPA. If NIO is cooking the books, and that’s a BIG if, it would be another reason why the US govt wants Chinese companies off of their exchanges. - A Bentley, Rolls Royce slayer is coming from …Cadillac? I love the boldness of thought here but will this just be a rerun of the past from Cadillac? That is my fear but this time, Caddy isn’t only going after the S-Class, 7-Series and A8 crowd, they want to go even higher above the fray and launch a halo that’ll rival the best from Rolls Royce and Bentley with a price tag to match, an eye watering $300K starting price. Back in the day, Cadillac was the standard of luxury for the world but that’s not been the case for a very long time. This current inflection point in the sector could be that chance, when the Germans and even the British brands are a bit off-balance, to sneak in and help redefine what luxury is in a service oriented, digital mobility space. That means for certain that the Cadillac experience needs to extend well beyond the vehicle. I look forward to experiencing how they’ll be interpreting the future of luxury. BAD TAKE OF THE WEEK - VW and Tesla are not in the same leagues right now. I am not normally advocating for many of Elon’s positions, but I agree with him that VW isn’t that close to overtaking Tesla on global sales of EVs let alone EV supremacy which should be defined completely differently and across many other dimensions. If VW does happen to overtake Tesla this or next year in sales, then the Tesla ops team dropped the ball on Berlin & AustinGiga. ShanghaiGiga is humming right now. If you talk VW or Tesla or both in an article, there should be at least a couple of paragraphs dedicated to China to set the ‘global’ stage for both companies. Elon may be keeping sales numbers in mind but likely not on a daily or weekly basis. Tesla has ALL the momentum. The ID series hasn’t gotten any traction in China, a linchpin country for the vehicles. If sales don’t turn around quickly, it could put VW in a huge hole that’ll be VERY difficult to dig out of, especially if they get behind the domestics that are ALL also coming out with new and better featured vehicles that are more well-suited for the China market. Diess is looking for silver linings to try and get the media and likely VW’s board to not pay attention to what’s actually happening. He’s also likely looking over his shoulder because unless he can stop the slide in China, where 50% of their profits come from, he’s not gonna be much longer for that job. And before they take on the schoolyard bully, they need to be able to at least get the software right. IN THE NEWS - Polestar goes public in the US. Some vital stats: They sold just under 23K cars last year, mostly Polestar 2s but not many in China. They have unveiled a premium mid-sized SUV EV starting at ~$75K that’ll do battle with the Porsche Cayenne and be built in both South Carolina and China. Volvo owns a 49.5% stake in Polestar with Geely controlling the other 50.5%. This was sneaky way for Geely to get a Chinese company IPO’d in the US markets where valuations would be higher than anything they could achieve in Europe or Asia. Polestar’s market cap is just under $25B right now which makes them close to the same valuation as both Rivian and Lucid. If we’re being optimistic, Polestar is undervalued relative to both Rivian and Lucid who’ve been having problems ramping production. Further Polestar will likely see sales of >50-60K units for ’22 while the other two may not even see 15K for the year. And Polestar already sells into multiple regions and will manufacture in two in the short term as well, so with all that said, who has a better chance to keep that sales momentum going once production challenges have been sorted? Yeah, I thought so too. - Gotion ready to begin producing batteries in Germany for the European market ..almost. We should begin to see more potential acquisitions of old factories and / or land in Europe as most of the top battery makers in China fan out and make their intentions known about where they will spread their manufacturing footprints. A few of us have a bet going about whether BYD or CATL will be the first to announce the location in North America where they will manufacture batteries. Notice that I didn’t write the US as there’s distinct possibility that a major factory could be built in MX or CA (as in Canada, not California). For both it’s a ‘when’ and not an ‘if.’ For BYD it could be a double whammy! Battery plant next to an assembly plant. And my guess is that it would be in the deep south somewhere. Far away from the rust belt and the strong union. TRENDING ON SOCIAL MEDIA - TSMC will be bigger than Intel. Yahoo Finance is forecasting that TSMC will surpass Intel revenues this quarter making them the #2 largest semiconductor company in the world behind Samsung. And reliance on TSMC in the short-term is only going to grow. There’s a big difference in what both companies do even if they’re both in the ‘semiconductor’ business. Intel designs and fabs chips as well as outsources to foundries like TSMC whereas TSMC just makes chips for everyone else and that’s why they’re so good at it. The most efficient with the largest capacity – that combination makes them indispensable to the industry - for now at least. As more companies add capacity and the world continues to bifurcate, what the future holds for TSMC is anyone’s guess but for now they play a key role in almost everything we touch. INTRODUCING - The ID. Aero concept. It’s a clean design if not a bit boring and it’s likely 75% design frozen. But does it bring the goods when it comes to features, I doubt it. It’s about the same size as an ET7 but if it’s anywhere close on pricing ¥458K (~$69K) starting MSRP for ET7 it’s gonna get killed. My thought is that pricing needs to be closer to ¥350K ($53K) if it stands any chance of taking sales from the current and future crop of large sedans here. At ¥350K, it’s likely not profitable though. Not until we get to >100K units sold. GET SMARTER - Challenging times means that the China EV Inc needs to restructure in response. Jill Shen from Technode bringing the goods as always. I won’t get into too many of the details of this article since it’s totally worth the click to read. BUT XPeng struggling to catch on in Norway in 2021 with only 438 vehicles sold means that they need to revisit their European strategy. It’s too late to pull back but there must be many questions swirling around the Guangzhou headquarters. And key members of the team have left as well which likely means the changes that were made aren’t being well received. Or maybe it was a chance for Brian Gu and He Xiaopeng to dump some dead weight? BY THE NUMBERS - $25M. That’s how much Sony could’ve paid for the rights to all of Marvel’s characters back in 1998. They paid $10M and only for the rights to Spiderman. The Marvel Universe has grossed over $30B since. DOH. —— 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

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