• Tu T. Le

SAI Newsletter #12 - October 23, 2018

Updated: Jan 31, 2019



Back to our regularly scheduled Tuesday newsletter delivery.


If there were one overall theme over the last few weeks it’s been speculation about the impact of the trade war between the U.S. and China. Having just participated in the China Mobility Tour in Michigan, I can say everyone is treating the uncertainty with a ‘business as usual’ attitude, which IMHO is the right approach.


For this newsletter, a few of the articles I’ve grabbed aren’t specifically focused on the China market but the substance of the articles can definitely help explain how the China market will evolve. The players involved will be the same in China as in the U.S. and they’ll need to make the same tough decisions here, most likely sooner than they do in the U.S. and Europe.


If there are any particular topics you’d like us to cover, feel free to send over your suggestion to tle@sinoautoinsights.com. Would also love to hear feedback or comments on anything that’s been written whether you agree or disagree.


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


#SinoAutoInsights #Momenta.ai #FF #layoffs #Tesla #teardown #Munro #Audi #softwarebug #LGChem #batteries #Detroit #MotorCitytransformation #OEMshaveittougher



AI

One of China’s newest Unicorns. (www.medium.com)

Momenta.ai is China’s most valuable autonomous vehicle startup, according to themselves.

I am still unclear what these VCs are evaluating to help them justify their valuations & investments. Will dig a bit deeper and hopefully have a meaningful explanation to give to everyone about this.

Let me repeat, hopefully meaningful.


EV Startups

Faraday 没有 Future? (www.engadget.com)

Haven’t heard about anyone willing to take over the investment or headache that’s associated with Faraday Future (FF) so we will have to see if YT has any more rabbits to pull out of his hat. If FF can’t find a white knight, YT will have effectively run two companies into the ground.

Have friends that work at FF so hoping they’re able to quickly land on their feet should this not work out. Even if it does, how do you keep the best talent when something as basic as keeping the lights on is so challenging.


OEMs

Tesla teardown is very revealing. (www.bloomberg.com)

With all the attention the Tesla stock price and Elon’s behavior has gotten from the media, this article does a good job of summarizing the challenges that Tesla created for itself by overdesigning their vehicles and manufacturing processes. This is basically the real reason Tesla hasn’t consistently made a profit since being in business.

With any product, whether it be an iPhone or a Model 3, there are always going to be design vs. manufacturability tradeoffs. Manufacturability is just another way of saying how easy it is to manufacture.

When it comes to Tesla’s Model S & X, their price points and sales volumes allow for the designers to hold sway over its manufacturability. Higher margin, lower volume products will normally sacrifice some manufacturability in order to emphasize the design necessary for customers to be willing to pay a premium for the product.

When you get into lower margin, higher volume products, manufacturability needs to be high in order to eke out even the smallest of margins. Think of traditional OEMs and their lower priced vehicles, in order to hit their sale & profitability targets the design needs to appeal to a larger cross section of people and that’s a big reason why many of their designs are more generic and less risky. If designers had more say it would likely increase the time, and consequently, the cost to manufacture each unit.

Munro basically told Elon that he OVER designed his Model 3 for the sake of overdesigning. If we look at the Model X, this seems pretty obvious because of the Falcon doors. I don’t think Elon will be making that a feature available on many of his other vehicles moving forward since it’s such a manufacturing and potential quality nightmare.

There are rules in automotive design & manufacturing, and they all revolve around fit, form and function. If the customer doesn’t see it, touch it or feel it, there shouldn’t be too much time spent on its design and better yet, let’s find a part that’s already being used on another vehicle.

Let this be a lesson to all the StartupEVs out there, are you spending your time on the most important aspects of the vehicle? These features that you’re going to launch the vehicle with, are they necessary and fulfilling a customer’s current unmet need? Not making the same mistakes as Tesla is a qualifier. Tesla’s mistakes MUST be avoided if you’re going to have a successful launch and march towards profitability.

Finally, have you hired the right design engineers?


Audi delays launch of electric SUV in order to debug system software. (www.reuters.com)

Would Audi have delayed launch of this vehicle had they not had to re-certify the software? I think we will see this happen more often as vehicle software takes on more and more responsibilities in electric vehicles until OEMs are able to build that expertise up internally within their engineering teams.


Batteries

High demand of LG batteries leads to price increases (www.cleantechnica.com)

Although this article specifically states that Audi has been hit by the price increase, the likeliest scenario would be that ALL LG Chem’s battery customers would be hit with a price increase unless they’ve reached a certain commitment of volume that would mitigate that price increase.

The battery is already the most expensive part on an EV so this exacerbates an already difficult situation and pushes profitability out even further.

Two things have to happen before the customer regains the leverage against the supplier. Overall battery capacity from the Korean and Japanese suppliers needs to increase and OEMs need to increase their overall production quantities, both annual and overall, so that the R&D and capital investments for increased capacity made by the battery suppliers can be amortized over a larger number of units.

For China I think the problem is going to be more of quality and reliability driving up costs rather than demand, at least initially.



Other

What about Detroit? (www.wsj.com)

I worry about Detroit. Having grown up in a suburb of Detroit and been around the automotive industry for much of my life the thought of GM, Ford and to a lesser extent FCA not being one of the leaders in the industry is difficult to process.

I worry because with all that’s happening in the sector I am still not sure that the OEMs are moving fast enough nor taking enough risks, the ‘right’ risks. With how most automotive OEMs calculate risk, none of the business cases that they need to take a ‘risk’ on would be moneymakers. Despite the long return on investment, they need to take these risks and do it sooner rather than later.

Second, I worry because I know the automotive mindset is to push out the inevitable until you can’t any more and then take on the smallest amount of risk as possible. The Silicon Valley guys take risks because they can, that’s their mindset.

Finally, I worry because if the automotive OEMs really, really wanted to embrace transforming their businesses it would be reflected in their management teams. Most of the people managing the OEMs, with the exception of a few examples like the hiring of Jim Hackett, are people that have NEVER worked outside of the automotive sector. Einstein said ‘insanity is doing the same thing over and over and expecting a different result.’ The guys that got them into the mess are the ones that’ll get them out?

The reason I know this is because I also spent a good amount of time in Silicon Valley as well. These people move fast and thrive on risk. They want to win. They really want to win.

That’s not to say that the automotive guys don’t want to win because they really do as well, I am just not sure right now they’re playing the same game.


Why its tougher for the traditional OEMs. (www.insideevs.com)

In the previous post I said that the OEMs will take on risk only when absolutely necessary, and this article does a good job of explaining why. Designing and producing EVs will not be profitable immediately, and probably not for quite some time so why risk profitability when there is no clear indication of when the right time to switch over from ICEs to mostly EVs is?

OEMs need to balance all their current sales, capacity, R&D spend and focus until the ‘right’ time, which right now is anyone’s guess. Switch the product lineup too early and risk shuttering plants due to the lack of demand. Switch over too late and it could mean launching vehicles into a market that has been flooded with EVs that have all already carved out their positions in the market and grabbed significant market share.

This article specifically focuses on GM and Tesla but ALL OEMs face these tough decisions and ALL StartupEVs have the advantage of not having to unwind a legacy business. The StartupEVs main challenge will be execution.


Bikesharing sector in China is BRUTAL. (www.scmp.com)

Ofo has proposed merging with Hellobike which would allow them to be the largest bikesharing startup in China, ahead of Mobike.

With about 20M monthly rides between Ofo and Mobike but growth slowing and cities limiting the number of new bikes that can be put into circulation competition has become fierce and both are burning through piles of cash while still chasing profitability. So much so that Ofo has been sued by suppliers who says Ofo hasn’t paid them.

The path to sustainable profitability for these companies seems quite unclear unless they become acquisition targets at lower valuations. The scooter wars in the U.S. could take on a similar storyline as well.

China: +86 13 811672141

USA: +1313 290 3880