SAI Newsletter #7 - September 18, 2018
Updated: Jan 29, 2019
Happy Tuesday everyone,
Let’s get right after it this week. Saw lots of news from Volkswagen Group this week and some interesting forecasts on demand, supply and sales of China EVs.
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The Sino Auto Insights team
Volkswagen is looking to partner with other OEMs to help them create standards for self-driving. The key to creating the standards is agreeing on what / who are the most important factors.
You can think of it as a constrained optimization math problem. What are we trying to optimize, pedestrian safety, traffic flow, minimizing pollution, energy efficiency, etc.?
There should be a combination of public + private sector participation for this group since a bunch of automotive OEMs may not have the best interests of the pedestrian in mind when creating the rules of engagement for the road.
If it wasn’t already obvious, VW is fully committed to China with the increased production capacity from these additional plants. The key is that these assembly plants will have the flexibility to manufacture both ICEs and EVs depending on consumer demand. This ability reduces much of the risk from adding the capacity since they’ll be able to dial up and dial down the mix of ICE to EVs depending on consumer demand.
Now, let’s project this out and assume that all the other major automakers and their JV partners are preparing in similar ways. We already know that there is overcapacity already so this will exacerbate and already challenging environment, especially for the EV startups.
Volkswagen updated the media on its flexible MEB platform of which 27 models, across 4 brands, will be manufactured by 2022.
VW is targeting 80 EV models across multiple platforms for all of their brands by 2025. These EVs will include products that cover most of the market including sports cars, compacts, midsize, luxury and SUVs. 40 of the 80 models that will be launched by 2025 are due for China’s roads. I hope those EV startups have baked this in to their capital requirements. It could get pretty expensive to carve out a position in a pretty crowded market.
NIO stock has already had a pretty nice run since its debut last Wednesday. Although it opened at a disappointing $6.26/share it got a 75% pop the next day and has a current market cap of $12B.
There are some analysts over at Evercore that believe the stock is undervalued and could double to $24B by 2023.
I took a quick look and some of these assumptions, while reasonable, seem to be pretty suspect when dealing with a startup. Their model is basing NIO’s market share in the mid/premium EV segment to be at 42% which IMHO don’t see any roadmap that gets them there. Either via sales or on production side.
I would agree with the analysts that say there will need to be another capital raise within the next 24 months though.
I’ve had numerous discussions with folks about how they think everything is going to shake out in China when it comes to the EV market over the next few years. This article sums up a lot of what I believe will happen over the course of the next 5 years.
The article states that there is currently 5M units of capacity for EVs in China and since they only sold ~750K units in 2017, there’s a HUGE chasm between the customer demand and available supply that’s not going to be made up by government subsidies.
What the article doesn’t state very clearly is that much of the current EV production capacity is coming from the low end of the market not the premium/luxury segments so factories still need to be built in order to fill that demand. With the Tesla announcement about Giga 3 in Shanghai and other EV startups breaking ground in China, the U.S. and EU, capacity is set to increase even more in the coming few years.
For those that aren’t familiar with how the automotive sector has worked traditionally, overcapacity usually leads to downward pricing pressures since it’s normally cheaper to produce a vehicle and sell it at a loss than deal with the expenses of closing a plant and losing that capacity and employees for good. Since the market is cyclical, the automaker will likely need that capacity at a point in the future, specifically when they’ve updated their product lineup and will have competitive products to sell. There an opportunity cost for not having the capacity necessary when the market is up and you’ve got products that consumers want to buy.
Overcapacity also leads to larger inventories which further squeeze margins since in order to compete, automakers will put money ‘on the hood,’ aka incentives and discounts to move product.
These discounts will normally lead to a bump in market share or sales making it difficult to take them away because the OEMs will lose the market share they’ve gained because the customers are used to the new ‘normal’ price and their competitors have decided to keep their discounts in place.
Haven’t heard much about Lucid until recently, specifically now that they’ve secured funding to fully develop a production version of the Lucid Air.
Will try to investigate why it took so long for Lucid this long to secure financing. Do they have a legit management team? Were the terms, ownership or valuations the investors proposed not agreeable to the Lucid team?
Agree with what their CTO says in the article that ‘the convergence of new technologies is reshaping the automobile, but the benefits have yet to be truly realized.’
They will not be fully realized for a number of years so a lot of these EV startups will, as I’ve mentioned before, need backers with deep pockets willing to fund them for multiple years before any of them turn a significant, consistent profit.
This puts a lot of pressure on design and execution since they will be launching this vehicle right about the time that the major OEMs launch many of their EVs as well.
Dealerships would normally alleviate some of this headache since they carry inventory. Carrying inventory, although expensive, is the best way to manage volatility and customer service.
Agree that delivery issues are more manageable than manufacturing issues. Just need to get out in front of production then re-calculate, and re-communicate lead times. Then find a good to great set of logistics companies to manage those outbound shipments.
I can’t get over how some of these problems – manufacturing and now delivery - seem to be more about basic ‘blocking and tackling’ in other words, issues the OEMs would be able to deal with, at much higher volumes, pretty efficiently but have caused Tesla such ‘hell.’
Didi implementing changes to their system to increase safety for its passengers. I would still like to know more about the background checks for the drivers and the numbers of complaints they receive by their passengers.