• Tu T. Le

Overcapacity concerns, Inflated tech startup valuations - SAI Newsletter #4



Although Chinese New Year is right around the corner and much of Asia is getting ready to celebrate the 'Year of the Pig,' folks are still pretty bearish about the automotive sector for China and until there's more concrete information coming out of the trade talks between the U.S. and China, that should remain in place until everyone gets back in the next 2-3 weeks.

Tesla should remain to be in the news though while China is idle and concerns about overcapacity are trickling over to the western media as well which could force western OEMs to reconsider their strategies. This doesn't bode well for companies like Ford and VW who've made HUGE bets on the China market and can't afford to have it stalled for very long.

I should have one more newsletter next week before the CNY holiday so please do let me know if there are any particular areas you'd like me to focus on. 

My name is Tu Le and I am the founder and managing director of Sino Auto Insights. 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

Economy

Overcapacity will be an issue in both ICE and EV markets for China. ( www.wsj.com)

The recent announcement from the Chinese Central Government about adding stimulus to the automotive market to spark sales did not move the needle for many analysts and Chinese auto stocks fell because of it.

The normal tax cut on vehicles, although not yet implemented, is feared to have very little effect on sales anyway since so many vehicle purchases were pulled ahead because of the last time they had the tax cut from 2015-17.

Unless there is MUCH better news regarding a trade deal, this could be a VERY challenging year for ALL automakers in China.

#Chinaeconomyslowing #taxbreaks #tradewar #buymorecars


Joe Tsai predicts a correction in tech startup space. ( www.scmp.com)

In total agreement with Joe Tsai, who happens to own the Brooklyn Nets, here regarding the correction that should happen sometime this year to private tech company’s valuations. There are too many external factors at play here that are pushing the economies of both the U.S. and China downward, the trade war and the growing challenges between the two countries playing a significant role.

This should include some of the EVStartups that plan to launch as well this year. I wouldn’t be surprised that for those startups that are able to get further investment, there could be a down round or valuation that holds.

For those companies that aren’t able to launch on-time, have trouble with ramp, quality and/or reliability you’ll likely see their investors panic, at least the ones that weren’t savvy enough to be happy with a multiple X return and dump their shares to someone else hungry for an EVStartup in their investment portfolio.

If you click-through to the article, you’ll be able to see what he says about a few other topics as well.

#marketcorrection #tradewar #downround #JoeTsai


EVs

Too much enthusiasm for EVs, not enough buyers. ( www.carbuzz.com)

This is a western media outlet that’s writing about global overcapacity so if this is already being highlighted as a concern in the West, you can multiply that concern many times over for the China market.

What this article alludes to and what I predicted for 2019 in my Jan 8th newsletter was that the combination of the slowing automotive market and EV overcapacity will squeeze profitability for both EVStartups and traditional OEMs which in turn will force many of the undercapitalized startups out of business or into the hands of larger companies with deeper pockets that are trying to play catchup. There’s overcapacity and a slowing market for ICEs too which will only increase this pressure.

This, of course will be true only if the Chinese government doesn’t see too many signs of trouble and decides they need to step in to ‘help’ some of their want to be national champions. Will the trade talks help level the playing field, that remains to be seen but if the past is any indication of the future, it’ll still be an uphill battle for a lot of non-Chinese companies in this space.

#overcapacity #pricingpressure #thumbonthescale #levelplayingfield


Mobility

What Didi’s partnership with BAIC means. ( www.entrepreneur.com)

This Didi announcement is not surprising as it tries to pivot from their traditional ride-hailing business to business(es) that take into account the new regulations and changing competitive landscape.

If you squint for long enough, you might be able to see just how much Didi is transforming themselves into more of a traditional automaker that provides financing, leasing, etc.

There are arguments to be had that Didi is in a much better position for the future than the traditional OEMs but launching so many new businesses that fall outside of their core competencies spells trouble, even for a veteran team of managers which Didi does NOT have.

Each of these new businesses will be starved for capital and even if they’re not they’ll all need strong GMs that can make sure they have a ‘seat at the table’ when board discussions about company strategy and how their business contributes to Didi’s get more and more common.

I do not know what their partnership terms are between the traditional OEMs but with everything else they’ve introduced over the last 18 months; their balance sheet should begin to look much different than it did 1 1/2 years ago.

#anewlookDidi #BAIC #newpartnership #pivot #newbusiness #Didi


Uber’s launches a frequent ‘rider’ program. ( www.citylab.com)

Due to the increased competition from other services, lack of stickiness or loyalty of its customers and increasing number of options these customers have for getting from point A to point B, it was only a matter of time before someone launched a loyalty program which Uber just has.

Uber says that it is meant to reward those who use Uber a lot and those that spend a lot of money ‘Ubering’ around.

This obviously disincentivizes people to share rides and the article argues will likely increase congestion in cities. This could be especially true if other services launch similar loyalty programs which they’re likely to do to play defense against Uber.

If Uber has not consistently made profits yet and these loyalty programs can be fairly costly to manage, will this move them closer to consistent profitability? I wonder how they square that circle, especially if they’re IPO’ing this year.

#Uber #loyaltyprogram #frequentrider


EVStartups

NIO, right on schedule raising more money through a convertible bond. (www.reuters.com)

Seems NIO is starting to run out of money. They just announced going to the capital markets with a $650M USD convertible bond offering, a recently popular financial instrument for many startups in need of more growth capital.

Not a big surprise here. Their share price is up 16% since it’s September 2018 IPO and would probably be up more than that if the overall market had a better outlook so they seem to be right on track with their launch and growing sales of the ES8. I haven’t heard about too many issues about delivery or quality so for now, let’s assume that the smaller volumes they are delivering allow them to manage those challenges fairly efficiently.

$650M doesn’t sound like enough to get the ES6 launched as well as setting up their recharging stations, and buying land and building a plant. They’ll probably be back tapping the markets in the next 18-24 months I bet.

#NIO #convertiblebond #needmoremoney #fixedincome


XPeng ‘borrowing’ generously from the Model X? ( www.drivetribe.com)

For those that have driven, been driven, or have been inside a Tesla Model X I’d love to hear your opinion on whether or not the XPeng G3 outright copies the interior of the Model X.

For those that have not, scroll through the 3-4 pictures in the article and see for yourself.

Not just the physical layout of the interior, but also the design of the center console (user interface as the author describes it) since I think it’ll look familiar to many of you Model X owners out there.

Is this fair? Is this right? Should Tesla do something about this? Let me know what you think.

#Sincerestformofflattery #poormansTesla #Telsalight #Xpeng #Tesla


OEMs

Tesla tries boosting sales by reducing prices of its Model S & X. ( www.cnbc.com)

Clearly, a multi-pronged strategy to position Tesla in a more financially sustainable situation. There’s a ton of investment that’ll be necessary just so Tesla can compete in the China market and they’re going to make up for that 7% reduction in staff in the U.S. by picking up a launch and support team in Shanghai. There are already lots of job descriptions on the floating on interwebs here in China and recruiters reaching out to anyone with a hint of automotive experience and a bit of ambition.

The needle on pricing didn’t move significantly so not sure it’ll have that much of an effect on increasing sales for those two products but it should help simplify the supply chain a bit. Anytime you reduce part numbers going into a plant, that’ll happen although this seems to be one part and software so that may not be as significant when compared to a traditional assembly plant.

#Tesla #pricereduction #simplifyingthings #gettingthehouseinorder


AI

Roadstar.ai co-founder gets got. ( www.equalocean.com)

Shenzhen based Roadstar.ai fired one of its co-founders, Zhou Guang, on January 21st. Still not a lot of verified background information on the why, except that there was corruption involved and that he was pretty self-absorbed which makes this like any other bad breakup of potential unicorn startups.

We will track this and send updates as we get them. I don’t believe this to be the ONLY drama in the very lucrative China EV/AI space and we’ll update you on anything else we hear since the pressure is only going to increase on these co-founders to produce as time is ticking for them to put a viable product or service on the road.

#fakedata #ununicorned #needanewboss #Roadstar

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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