Ray Dalio's take on trade war, NIO gets bailed out, AVs will make money right? - SAI Newsletter #21
Looks like I will likely be headed to Detroit next week for some meetings and conferences so if you plan to attend the same conferences in Detroit and Ann Arbor, please get in touch! Am looking forward to it, summer in Detroit metro area is always great, especially if the Tigers are doing well.
A pretty interesting week here in China with a special event by Tesla marking their intro of the locally made Model 3 that’ll be launching later this year / early next, to the media. At around a $47K starting price, I think it’s in parity with what folks are paying in the U.S. so unless they nickel and dime Chinese customers with expensive options, good for Tesla to try to keep global pricing aligned.
The other big news came out of FCA and Renault, two companies a bit behind their competitors, announcing that they may tie the knot.
See you in Detroit maybe!
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
Ray Dalio, founder of the world’s largest hedge fund – Bridgewater Associates, with almost $125B USD of assets under management, utilizes a global macro investing style so he gets paid a bunch of money to know what’s going on in the world and make bets based on how his team believes things will play out.
I chose this one particular note he wrote because I couldn’t agree more with his point that the trade war is much more than a one-off conflict between China and the U.S. and is actually the continuation of a trend that will last long after the Trump administration leaves office.
It’s in both party’s interests to rely less on the other as it creates vulnerabilities that can be exploited and against them, see ‘Huawei’ and ‘rare earth metals’ as a for instance. Rare earth metals are used in electric vehicles batteries, chips and just about anything that uses software to run it so limiting the supply would be a major escalation from China. Further, the deep economic interdependence between both countries makes decoupling from one another a deeply painful and drawn out process that will affect most of the rest of the world.
This is a situation where cooler heads will certainly prevail and right now, due to the interdependence between the two global powers ANY escalation will likely hurt both sides so any ‘next move’ by either party should be thought through and carefully considered.
This car review from Dan Neil, one of the more recognized auto journo’s, tells us what we’d have guessed if we’ve been following my newsletter. Audi’s first effort is admirable, that it's built off an existing, older ICE platform that’s a few years old and that the interior/exterior styling is what you’d expect from Audi.
The battery, heat, and energy management systems are fairly inferior when compared to Tesla’s, again what a fairly astute individual likely would’ve surmised considering Tesla has about a 10-year headstart on most of the companies launching NEVs over the next several years.
All the product launches by these OEMs signal a major pivot for these automakers toward NEVs, first in China followed quickly with the U.S., then the EU.
I assume that most of these OEMs, due to their conservative nature, will just try to hit ‘singles and doubles,’ and not go for any TRUE home runs. This is a missed opportunity since, in Audi and the VW Group’s case, they are trying to leave the diesel-gate scandal far in the rearview mirror. They should be stepping up to the plate and try to swing for the fences!
It would be great if (at least) one or two of the OEMs take the opportunity to embrace the challenge of redefining the company and its products and services in order to be a leader for the EV/mobility services era. Batter UP!
For those that aren’t familiar with GM and its history of dominance and rebirth in the U.S., this hits pretty much all the highlights. Each one of the U.S.’s Big Three (Ford, GM, FCA - now an Italian company) has a great deal of history and influence that touches most of the world, including having sold tens of millions of vehicles!
There is NO mention of GM’s impact as the current #2 foreign automaker in China where it’s history really took off in the mid-’90s when they formed the Shanghai GM (SGM) JV with SAIC. My brother was part of the sourcing team that flew from Warren every 6-8 weeks to get suppliers online, parts sourced and local employees trained. His signature is on the first (SGM) Buick that rolled off the line in shiny new factory way back in the late 90’s that’s now in a museum somewhere in a Shanghai suburb I believe.
There have been many stories about GM’s history with one of the most famous being ‘My Years with General Motors’ a memoir written by Alfred Sloan, GM’s CEO from 1923 – 1946. Now, if they can get the present and future right!
EVs & EVStartups
According to market research firm IHS Markit, U.S. demand will reach about ~1.26M vehicles with most of that going to a few brands, dominated (no surprise here) by Tesla. With over 130 NEVs scheduled for launch over the next several years, there will not be a lack of choices and competition for dollars for those in the market for an NEV will be fierce. So fierce that most companies will not have a profitable NEV.
China, on the other hand, is forecasted to sell over 5M (~20% of all vehicles) units by 2026 with OEMs spending the bulk of their global R&D and marketing budgets on launching their NEVs - initially in China to take advantage of, while they last at least, the incentives offered by the Chinese govt. and to avoid the penalties for not producing enough of them.
If I were an OEM, tier 1 or a supplier to either, I’d be watching closely what’s happening in China over the next several years since it’ll soon cross the pond once U.S & EU demand begins to increase and accelerate.
All signs point to NIO having a tough go of it, having only sold 3,989 vehicles in CQ1’19. They were crunched for cash so this ‘investment’ comes at a very opportune time for them since Job1 of their 2nd vehicle, the ES6 just rolled off the line. They’ll need that cash to order parts for both vehicles, assuming that there are significant enough sales for either of them.
Beijing E-Town Capital has committed up to 10B RMB (~$1.48B USD) meaning that there are likely hurdles or milestones that must be met in order to receive the full committed amount.
Nio indicated that they received 5K refundable deposits for the ES6 at last month’s Shanghai Auto show so maybe they’ve begun to turn the sales corner? If not, with the slowing economy, trade war, reduction of EV subsidies, and more competition on the horizon, the cash infusion from Beijing E-Town Capital, essentially the Beijing municipal govt. could be throwing good money after bad.
What I’d like to know is at what valuation did they invest this capital, I’d bet it was a down round which made all the founders and original investors pockets a little lighter.
AV and AI
The predictions from Elon, Waymo and the traditional OEMs were way too optimistic, some might say, disingenuous even. Even the ‘smart’ Silicon Valley guys got the timing wrong.
The main reasons for them getting it wrong is their hubris, first of all, but external factors include:
- the Goals – Each individual company, sector, municipality, country, and region has a different set of goals and timelines and until goals are more aligned, autonomous vehicles will continue to be out of reach.
- the Tech – it’s available but it’s expensive and a lot of it is still REALLY BIG
- the Data – No one has enough and collecting it takes time, especially for those edge cases that happen less often but tend to involve the most dangerous driving situations
- the Policy – Convincing a handful of cities where the sun shines perpetually for 365 days/year is a mile away from states, provinces, and countries providing entire traffic systems to utilize as a testing ground
- the Public – All companies that are directly, indirectly or adjacently involved in getting AVs on the road need to convince (read: market the benefits) to the public that having AVs on the roads is in THEIR best interests. If that acceptance tide starts to turn in significant numbers, that’ll help with ‘the Policy’ factor
- the Special Interests – Whether the OEMs, current transportation service providers, and their unions, or anyone else who’ll lose out due to autonomous vehicles, you can bet they’re working behind the scenes to push adoption as far out as possible
One key message that should be heeded by the traditional OEMs though, is stated very clearly in the article. The tech companies would be content to turn the GM’s, Fords and BMW’s of the world into contract manufacturers that provide no value add, just manufacture to spec(ifications). In this scenario, the tech companies would wrestle away the customer experience and hence the data and opportunity to monetize it.
All these companies will get there eventually but if I were OEM management, I’d be sure to remind my folks that ‘We CAN and will be replaced unless WE provide the ‘right’ solution via a compelling, user-focused, affordable solution ourselves!’
I really do love using Didi here in China and when in the U.S., either Lyft or Uber. With that said, as a businessperson, I just don’t see a clear path to profitability for ANY of the ride-hailing guys, or for that matter any of the ‘last mile’ providers like Bird, Lime or Spin either.
This article spells out the specific flaws in their business model, that the numbers, no matter how you spin them, just do NOT work, whether it’s a person driving customers around or a robot.
So I am more than ever convinced that these companies will continue to plod along until they really truly change forms. They could acquire a struggling OEM, they could merge together, or other. That’s where it gets interesting can any of them find a way to make a buck, consistently?
The author of this article clearly believes that Waymo is going to pay off BIG TIME for Alphabet (old Google) in the near future, especially if they’re spun-off. Quite a few analysts on the Street agree with that assessment, although future looking valuations vary wildly. Again, these valuations are WAGs, a term I used in my last newsletter, and should be taken with a grain of salt. If we look at one of the other articles in this newsletter, we also know that autonomous vehicles (AVs) are quite a ways off and in some very smart people’s estimation, may never make the AVs companies any money.
I also believe that Waymo has the talent, funding, and runway to be able to make mistakes, course correct and try again and again, not in perpetuity but for a very long time. With that said, I think Waymo would be the last to tell you that they’ve been mistake-free since their inception.
The automotive sector is indeed VERY capital intensive and this is one of the main reasons why car companies tend to be much more conservative about important decisions and taking on unnecessary risks since it creates exposure. That brings us to how the OEMs can teach themselves how to build products and services for the digital world, they’ll first need to un-learn how they did business before.
That’s why as opposed to deriding GM for mismanaging their Maven car-sharing service, I applaud GM for taking the risk, although I would’ve liked them to give Maven a longer look even if it was bleeding money. As we know, failure most of the time is the best teacher so I am certain that GM took copious notes and will undoubtedly incorporate those lessons learned into a new business. Maybe with this data, a bit of ingenuity, some perseverance and luck their next try will lead to more success.
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.