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SAI Newsletter #16 - November 22, 2018

Updated: Jan 31, 2019



I am going to get this timing thing right. I will so please bear with me.


Last week I participated in the CEC Capital Summit 2018 at the Rosewood in Menlo Park. A great facility for a tech conference although due to the fires in NorCal the AQI levels reached higher there than in Beijing on most days. This summit is normally held in SoCal but since the theme of this year’s event was about AI and transportation so they decided the more appropriate location was on Sand Hill road in the heart of Silicon Valley.


Highlights included keynotes from:

Kai-Fu Lee, AI expert and CEO – Sinovation Ventures

I didn’t think this was that controversial but Lee said that they’d pretty much stop investing in U.S. based AI companies if the current environment worsened and made investments difficult. SCMP thought it was a big enough statement to write an article about it here.


Carsten Breitfeld, CEO – Byton

One of his memorable quotes was that 50% of Byton’s revenue in 10 year’s time would derive from their digital services within the vehicle with the other 50% coming from vehicle sales.


Raj Kapoor, Head of Strategy & Business – Lyft

The most dynamic speaker of the bunch. Was pretty impressed with how he articulated Lyft’s future.

· Raj said that most cities dedicate about 14% of their land to parking lots. Their goal is to give back that land for housing and parks.

· Lyft is dual pathing their autonomous vehicle future, investing internally as well as partnering in order to crack that egg.

· Another Lyft goal is to reduce the overall # of vehicles on the road, the true way to reduce traffic and pollution by promoting shared rides with a goal of 50% shared rides by 2020.

There were also a couple panels as well but those weren’t as dynamic as the keynotes and although there were some interesting takeaways, nothing I’ll share at this time.


Finally, it was Guangzhou Auto show week last week so the OEMs cranked up their marketing and PR campaigns in order to maintain credibility among the auto and tech folks while trying to change their current narrative with consumers.


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 #CFIUS #tradewar #Nvidia #USvsChina #CruiseAutomation #Waymo #caraccidents #VWGroup #$50BwithaB #ChinaOEMs #ExporttotheUSA #China #StartupEVs #nationalchampion #MadeinChina2025

AI & other tech

CFIUS to expand into more tech, including AI, machine learning and data analytics. (www.scmp.com)

This was bound to happen and could create HUGE uncertainty on multiple levels when it comes to the further development of autonomous vehicles in China. Right now, ALL the Chinese AI companies have a fairly significant presence in Silicon Valley.

Speaking with the ‘experts’ they will most likely tell you that the AI talent in China has not been fully formed and lags behind the U.S. quite substantially. But, and there’s always a but, the young Chinese talent that are currently working in Silicon Valley have all kinds of incentives to jump ship and either start their own AI company OR join a Chinese AI company due to the easy money available to them and the MUCH, MUCH higher valuations the Chinese AI startups are getting.

On the hardware side, most autonomous vehicle engineers will likely tell you that to get to Level 4-5 autonomous, the sensors, cameras & LIDAR will not only need to decrease in cost but also improve in their capabilities. Many of those hardware firms are American so if there are breakthroughs in those technologies and the U.S. limits access to that hardware it could make things much more difficult for China to advance their global leadership ambitions.

I do not subscribe to being an alarmist but the Trump Administration has been very unpredictable up to this point so all the multinational OEMs & StartupEVs with global ambitions have to be watching this closely and analyzing outcomes, likely dual sourcing ANY hardware & software stacks or at least swapping out the parts that couldn’t be sourced just in case certain commodities become off limits.

Qualifying multiple vendors for a single commodity is a normal course of business for most product oriented tech firms but there’s always one supplier preferable to the other because of innovation, quality, cost, reliability or all of the above. It makes for a much more complicated path to product launch and normally puts more pressure on the gross margin. We will track this for any further clarity, direction and update you as we hear more news.


Speaking of which, Nvidia… (www.wsj.com)

Here’s a prime example of the power that the U.S. govt has, albeit in the short term, over whether or not and how fast China can progress its global leadership ambitions in AI technology.

This article posits that Nvidia, a global leading maker of processing chips for AI systems plays a very large role in technologies such as facial recognition and other AI technology powering the next generation of autonomous vehicles. Nvidia chips powered the last set of Chinese and American supercomputers that have taken on the title of ‘fastest in the world’ so it’s safe to say their tech is some of the most bleeding edge.

It’s no coincidence that Nvidia shares cratered 43% over the last couple months either then. It’s part of an overall bearishness for the tech sector but specifically to Nvidia, of which over 20% of their revenues come from China, so the Street is pricing in the uncertainty of outcomes due to the trade tensions between the U.S. and China.

“China’s ecosystem and economy depends on our technology,” said Nvidia Chief Executive Jensen Huang, at a Silicon Valley event in March. “It’s actually vitally important that the world continues to have a collaborative trading and open business relationship.” Quote from WSJ article.

Ultimately, companies like Nvidia may ultimately have to make tough choices. And remember, this is just one company that supplies one commodity to the sectors. If the U.S. limits or cuts off access to these types of companies, China will have to look domestically and to the rest of the world to supply this tech. In the long run, that’ll be good for China but it could lead to a pretty painful short & medium term for them while they shrug off this dependency.


Cruise and Waymo very accident prone. (www.forbes.com)

The state of California, where most if not all autonomous vehicle startups test their cars, requires those startups to report any accidents caused by their test vehicles and it seems that Waymo and Cruise have reported the most accidents in the South Bay and San Francisco proper.

Those that have been to NorCal know that driving in San Francisco vs. driving in South Bay or the Peninsula is totally different so not sure what we can glean from this article with regards to the numbers.

It’s also not clear, on a per capita basis, if these cars have the most accidents / mile driven but it looks likes it’s a total number. If that’s the case, Cruise and Waymo probably have the highest number of test vehicles driving the most # of miles so is this really worth highlighting?

As a side note, driving through Menlo Park, South Bay and San Francisco, I saw MANY test vehicles driving around and most people didn’t seem very concerned so maybe in order to be more comfortable with AVs people just need to gradually see more and more of them over a period of time.

Finally, I hope China also takes California’s lead and not only tracks but publishes reports regularly on accidents by each of the AI startups that are testing in cities across China.


OEMs

Did VW just push ‘ALL IN?’ (www.thedrive.com)

To coincide with the Guangzhou Auto Show and illustrate that VW is done dipping their toe into the water, last week they announced a $50B investment in R&D for EV, AV and related technologies.

This is important for a couple reasons, first because they’ve acknowledged that they’re willing to take a hit on earnings in the near term in order to create the products and services necessary to be the leader for the future.

Now in China, VW didn’t have to work that hard to sell their cars in the past. Their marketing budgets weren’t huge and brand recognition was a big part of the allure for the Chinese consumer. As Chinese tastes have evolved and the number of quality choices has increased, their inability or lack of interest, depending on who you speak with, in innovating for the local market and changes to management have forced them to push the panic button and you’re finally seeing a BIG reaction to their pending loss of leadership in China.

The second reason this is important is because this will also force the other major automakers to reconcile their want to keep revenues and profits high while transitioning their entire product lineups over to EV/AVs. Where Volkswagen is different, hence had more flexibility, is that their dieselgate black eye led to sales decreases in the EU and the U.S., meaning their numbers were declining anyway.

Other companies have been able to grow share either in China or in the EU / USA / ROW over the last few years so it’ll be much tougher for those companies to make those types of financial commitments and proclamations. But IMHO it needs to be done.

All this pressure will begin to create momentum and fear needed to make more drastic decisions in order to achieve future success.

BTW, everyone’s boogeyman seems to be Tesla and Elon Musk. I guarantee you he’s laughing and can’t wait for all these products to come online. After all, they’re pretty much the only open source company doing EVs as well. His belief is that there needs to be a critical mass of companies and products in the market in order for Tesla to really take off. Elon believes his products are superior and that Tesla DOES NOT have the baggage of making millions of ICE vehicles for the last 80-90 years that color any of his design and business decisions. This has bitten Tesla in the butt but having spoken with a number of my friends in California last week that drive around in Tesla’s, most of the decisions they’ve made up to now have been right.


Is this just a microcosm of many Chinese products that want to compete outside of China. (www.scmp.com)

You can blame the tariffs but until the Chinese car manufacturers can bring to market a vehicle that has the design, quality and reliability that stands on its own and is able to compete with the incumbents this will always be the case.

Japanese car makers had the wherewithal to play the long game since they knew in order to grow they would have to enter foreign markets, specifically the U.S. since it was one of the largest automobile markets in the world back in the 70-80’s. The Japanese brands took their beatings, had terrible products initially but they learned, quickly adapted their products and began to understand the American consumer.

The protection that the Chinese automakers receive in China, similar to the protection the Japanese receive in their home country, makes them unable to compete in any markets where product features, quality, reliability, design and price dictate sales.

It took time for American consumers to warm towards Japanese vehicles but now Toyota’s and Honda’s are always some of the best selling cars in the U.S. China, with the right amount of patience and savvy, could also carve out a little piece of the American pie as well.


StartupEVs

NIO has at least one cheerleader. (www.thestreet.com)

This bodes well for the other StartupEVs that are able to launch on-time and sell incrementally more vehicles quarter / quarter.

To be quite frank, any half decent EV that has modest sales ambitions and is able to actually tie themselves and their product to Tesla should be able to sell 100-150K units without breaking the bank on marketing.


Tesla taking orders in China for the Model 3. (www.electrek.com)

In the beginning, Tesla will only be selling the Performance version starting at a STEEP, $84K. Currently in the U.S. this Performance version starts at $65K. I was driven around in one the first couple days I was in California and I was very impressed. The central console needs getting used to and my friend, the owner of the Model 3, did say it took him a few weeks to do that but he’s been a happy customer since. And this is his second Tesla, his first the Model S, he thought was a bit too big for his needs.

Tesla will begin selling the lowest price version in the U.S. starting in December / January 2018. I would think they’d like to get in front of demand of that version in the U.S. before they launch it anywhere else in the world. This indicates to me a few things.

They feel confident enough in their revised manufacturing process and can consistently hit more than 5K units / week production targets and have resolved any major quality spills caused by the increase in production.

They’ve lined up their suppliers and revised their master production schedule to scale for this additional demand coming out of Asia early next year.

Despite the import duties + transportation costs + EV subsidies which add over 50% to the cost of the vehicle, Tesla is confident that it can sell whatever it can make to the Chinese market.

If deliveries start in March 2019 in China they’ll need to start shipping them by end of Jan / beginning of February in order to get here by then.

Can’t wait to see how many orders & deposits they receive. Will update when I know more.


The next EV you buy could be Chinese? (www.quartz.com)

I wouldn’t have linked to this article except I wanted to pull out a few key points that aren’t explained by the reader.

First, China is the leader in electric vehicle sales not only due to the Chinese govt. wanting it to be that way but that the average price of an electric vehicle in China, like a BYD, is likely less than $20K and the level of quality and reliability of the vehicle and its battery is substantially lower than anything driving around in the U.S. and EU. Those cars would not be able to be sold in other international markets.

Second, the Chinese govt. has restricted the use of foreign batteries in EVs that are being sold in China so BMW selecting CATL as their battery partner should have a BIG HUGE * beside it.

Finally, when most people are talking about EVs that will compete against Tesla, those vehicles will normally have a starting price of over $60K vs. Tesla which would be higher than $100K. Those companies better take advantage of that head start that Tesla is giving them otherwise, as long as they keep innovating and launching products that keep consumers interested, it’s not going to be much of a contest.


Xiaopeng on the way in December. (www.scmp.com)

Their G3 model is scheduled to start being delivered to customers on December 12th. With a price tag starting at 200-280K RMB, the lowest priced models will likely be launched last, the G3 is priced to move!

With a lot less fanfare than Faraday Future, WM, NIO and Byton but a nonetheless big named backer in Alibaba, let’s see if XPeng can carve a space out for itself in the ever crowding field of Chinese EVstartups.


Other

Exacerbating the trade war. (www.scmp.com)

These are the types of proclamations that get Trump’s team fired up! The article doesn’t mention that during China’s ascendancy towards leadership in the various AI fields, a lot of it has been through the use of American technology that has helped them achieve great success in such a short period of time.

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