• Tu T. Le

SAI Newsletter #17 - November 28, 2018

Updated: Jan 31, 2019



As I stated in a previous newsletter, automotive OEMs will need to begin the process of transforming their companies starting with getting smaller. GM has made several announcements now over the last few weeks regarding staff reductions and last week further announced some plant closures.


These are the things that illustrate to me that a company is taking their future more seriously. This may not help them win, but at least they’re starting to play the same game now and are building the towards the future.


Acknowledging that they’re not currently built to successfully tackle the future is just Step #1.

I’ve touched on what else needs to happen in order for the Auto OEMs become equal combatants, but overall EVERYTHING needs to be done faster. The risk appetite needs to increase substantially and the ‘wait and see’ strategy will only lead to certain failure. Unless your idea of winning is taking the future out of your own hands and putting it into a partner’s that 12-18 months earlier either didn’t exist or that you didn’t know did.


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


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OEMs

Tesla is NOT for everyone. (www.wsj.com)

During my recent trip to Silicon Valley I had the chance to speak with some old colleagues some of whom either work, worked or know people that work at Tesla. What I consistently was told was that there were a number of people, engineers mostly, who had no interest in staying on for the launch of the Model 3 as they knew it was going to be a lot of overtime, with those overtime hours being pressure packed with solving seemingly impossible issues in order to move to the next impossible problem to solve. Many of them left right after their options vested.

This is one of the main reasons I believe it’s really tough for the auto guys to deeply understand what’s coming their way. With the recent GM announcements, management knows what’s coming and have FINALLY acknowledged it, but the many rank and file employees who’ve been afforded a terrific life due to their many years at these OEMs, whether they be German, American or Japanese, really don’t appreciate the tsunami that’s coming at them. Fast, it’s coming fast.

The people that fill the Tesla and other tech teams want to be the ones that come up with that breakthrough. These people REALLY want to win and they’re willing to do what it takes, work weekends and never see their kids in a consistently high stress environment, in order to move on to the next emergency so that they can launch on time.

For those that burn out, there is a LINE of people at the door waiting to replace them. Unless you’ve experienced that fire yourself, it’s easy to think that you can handle it …so I would invite those that think your auto job is pretty stressful, to apply to Tesla or one of these other tech companies and let me know what you think after 6 months on the job.

GM is finally doing it. (www.cnn.com)

GM recently announced that it will lay off 15% of its salaried workforce, close 5 (or up to 7 depending on which media outlet you read) assembly plants and put more focus on manufacturing and selling SUVs.

This is very meaningful and my prediction is that you will soon see other OEMs following along with what equates to their ‘restructuring’ announcements, specifically the other American OEMs. There will be too much pressure from the sector, the Street, competitors (like GM) to ignore.

Make no mistake, all the global OEMs have run the numbers, done the analysis, played out different scenarios, however you want to describe it they all know how many plants they need to close, how many people they need to lay off and how much money needs to be saved. IF they haven’t they’re in a worse state than even I could imagine. Some OEMs like VW and Ford have made moves toward their new realities but haven’t yet said anything out loud about how extreme the restructuring will need to be.

Ford has danced around the subject a bit since Hackett has come on board but they’ll soon need to announce the tough decisions I know they’ve already analyzed and know they need to make behind closed doors. FCA has been in a holding pattern since Marchionne’s passing but they’ll need to really step up their game in the next 6-9 months to illustrate that they STILL WANT to be a global player.


Tesla preparing for war? (www.ft.com)

What I glean from the flipflopping on pricing in China for the Model S and Model X is that Tesla’s initial read on the tariffs were that they wouldn’t be around for long and that has now changed. Further, Tesla believes that the slowdown in auto sales as well as the overall Chinese economy will affect sales of high-end/luxury vehicles. They’ve probably seen a hiccup in China sales of their own vehicles over the last few months that reinforced this conclusion.

Finally, Tesla decided that it needed to sharpen its pencil in order to grow their market in China. 26% price reduction for the Model X is pretty significant. Since most Chinese StartupEVs will launch their brands with an SUV, Tesla’s strategy could be to not give any of them any AIR upon launch. At a 30-40% premium vs. the new Byton or NIO, many customers would opt for the cheaper vehicle. With the price reduction, now the Model X is truly in play for the consumer. With that said, if they’re only selling the most optioned out (most expensive) versions to the China market, which I believe they are, then this might not be as big a hit to margins as people think.

These Chinese StartupEVs are probably working overtime to revamp their marketing campaigns (and budgets) in order to help pave the way for their vehicles to have robust pre-sales while maintaining that momentum after their vehicle has launched as announcements & vehicle launches from other carmakers make the rounds on a weekly basis moving forward.

I would not concede margin voluntarily since it’ll be difficult to increase pricing post tariff unless the Tesla pricing team see significant weakness in future sales then this makes quite a bit of sense. That and they want to make sure they’re making it the most difficult environment to launch new EVs in.


Tesla’s batteries better and cheaper than the competition. (www.insideevs.com)

This cost advantage is NOT insignificant at ~20%. With the efficiencies Tesla has already built in due to their experience in manufacturing (from very tough experiences), their retail network advantage in China and the U.S. and most importantly, being able to manufacture locally in each of these markets, Tesla’s leadership in electric vehicles will be extremely difficult to surpass in the short and medium term.

My big assumptions are that their manufacturing issues are in the rear view mirror and that they continue to design and market the types of vehicles that have already built them a loyal following in the U.S. and China. The Model 3 launching in China will be a gamechanger for them and will most likely increase their TOTAL sales by 2-3x.

I’ve already discussed my reservations on their pricing strategy for China but that’s only going to put even more pressure on the OEMs & Chinese StartupEVs to price aggressively, market better and launch flawlessly in order to compete.

The wildcard will be what Tesla’s Chinese battery partner can bring to the table. Let’s assume for now the quality does not equal what the Japanese and Korean are able to provide which could lead to lower customer satisfaction and higher warranty costs.

Secondly, until the Chinese battery suppliers can substantially increase capacity, demand will put upward pressure on pricing and will make it substantially more expensive than what Tesla gets from Panasonic in the U.S.

Tesla’s battery sourcing team, I am sure has met with each potential supplier and is pounding them on price, supply and quality on a regular basis. From a marketing and validation standpoint, any of these Chinese suppliers would LOVE to be able to say they supply Tesla with all their batteries for the China market so there is some leverage here if they play their cards right.


BYD – Tesla killer? (www.cnn.com)

This is actually a video and it hits at the fact that the bulk of EVs that will be sold in the U.S. and China will be at much lower price points than what Tesla and many of its competitors will be selling for.

BYD has been building affordable EVs already for quite some time and they will continue to sell many due to the lower price points. I think nowadays, if an automotive OEM or Chinese EVStartup announces a vehicle the manufacturer and/or the media tries to attach them to Tesla, but in the case of BYD’s EVs, I don’t really think that a Chinese consumer is side by side comparing the features or performance of a Model S vs BYD E450.


StartupEVs

Chinese StartupEV launching with a 2 door coupe. (www.electrek.com)

Having raised over USD $350M (RMB 2B last week as part of their Series A), Leap Motor has officially thrown their hat into the EV ring.

With an estimated starting price at ~RMB 200k and production start sometime next year, their 2 door coupe, the S01 is targeting the lower end and if build finish and quality are right, it shouldn’t take too many marketing RMBs to sell their estimated 200K capacity.


Other

Waiting it out. (www.businessinsider.com)

I think it would NOT be wise to underestimate the Trump administration’s resolve on holding firm or even adding more goods to the tariff list and/or increasing the tariff rates in the near future. The current deadline of Jan 1, 2019 looms as Trump and Xi will plan to meet at the G20 summit to discuss an amicable resolution.

Even if the Chinese govt decides that their strategy is to wait out the Trump administration, that’s a minimum of another 2 years of tariffs that are hurting both country’s economies.

Implications include the Chinese EVStartups more than likely will have to raise more capital in order to weather out this storm. They’ve probably also had to revisit their initial IPO target dates, sales forecast, and proforma financial statements and P&L’s to incorporate these negative sentiment to both the U.S. & Chinese economies that will affect everything from EV demand, technology and parts costs as well as the MSRP of the EVs they plan to sell.


Will investors feel this way about NIO and the other Chinese EVStartups? (www.cnbc.com)

For a company that’s never made money and recently announced an earnings loss of almost USD $497 last quarter, I find it very difficult to justify Meituan Dianping’s almost USD $42B market cap.

They’re likely many quarters away from sustainable profitability and most people that have followed the Chinese tech sector know that these mile high valuations are not really merited. The Chinese market these tech companies play in is brutal with intense competitors so when you hear about another Chinese startup IPO’ing, you have to wonder how many of their competitors had to run out of money in order for them to successfully go public.

Now it’s still too early in the race to determine which are the gems and which are the dogs in the EV/AV race for China but we’re starting to see how the competition is going to shake out and it looks like it’s really going to be unprecedented. Car companies traditionally have not been able to survive and consistently do well unless they’re selling millions of vehicles across multiple countries.

Whichever Chinese EVStartups are able to carve out a profitable market share domestically, chances are they’ll need them to also successfully sell in volume in at least the U.S. market in order to justify what will undoubtedly be their sky high valuations.

Not even Tesla has ever sold a vehicle without some sort of government welfare so the successful companies that have some longevity will be able to convince consumers to buy into their dream at full freight.

Acknowledging that they’re not currently built to successfully tackle the future is just Step #1.

Step #2: If companies are able to ‘right’ size, identifying the skills and experience necessary to achieve future success, then hiring people with those skillsets is another challenge. They’re probably not located where most of the OEMs are so how to address?

Step #3: With the combination of current and new employees in place, management teams need to create new work streams that externally emphasize, price, convenience and user experience. Internally they’ll need to focus on everything moving faster, specifically when ID’ing opportunities, analyzing and deciding on how to attack opportunities then finally precision execution and real-time course correcting.

For the sake of this POV, I’ve oversimplified this process a bit since within each of the major milestones there would be a lot of intermediate tasks that would need to happen in order for the BIG things to happen. Further, a lot of this should/could and would need to be done in parallel in order to save time and money. Many companies are already trying to do this under the radar so as not to upset, for instance, American Presidents, etc.

All this and these companies could still fail if they incorrectly identify the opportunity, develop a service that doesn’t fulfill a need, costs too much or doesn’t have the user experience that’s required to be successful.

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