Tesla's Autonomy Day, Unicorns not so mythical, OEMs moving slowly - SAI Newsletter #16
Not too much to report up top here. I think Tesla’s earnings announcement and the New York auto show were pretty well covered by the media this week so we won’t get into those things too much. I am back in Beijing for the foreseeable future so for those that are traveling here, happy to meet for a catch-up.
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
EVs & EVStartups
Elon decided that he’d show off, at a closed event, some of the technology driving his vehicles, which impressive enough wasn’t the highlight of the event.
Elon also made some BOLD statements and predictions about the tech, namely LIDAR, that is currently being used by most of his competitors and how it’s ‘expensive and worthless.’
The other BOLD statements are all documented in the article so I won’t list them here. Let’s just say that I feel bad for the staff and engineers who are going to be responsible, and working their butts off, in order to make Elon’s statements, in the timeframe he outlined, true.
ECONOMY & MARKET
A long but a pretty insightful read regarding the flood of Silicon Valley unicorns that plan on IPO’ing in the next 12-18 months and how things have changed so much since the original dot com bust about 20 years ago.
The bottom line is that unless or until there are other, more potentially lucrative investments that can compete with these ‘unicorns,’ private money will keep moving to them and pumping up their values. What makes the valuations on this crop of unicorns a bit concerning is that most of them have not made a profit. It’s not unusual for some startups that are ready to IPO to not be profitable but this article states that of the 12 that are studied, 11 of them have not made a nickel.
In the near future, there will be many busts and consolidations in the automotive/mobility sectors since the VC money has already begun to dry up and CEOs and management teams finally realize that designing AND building in volume, an affordable vehicle or service that people want and are willing to pay a lot of money for, is REALLY HARD.
The evolution that’s starting to change the sector and the investment, acquisition and partnership decisions being made today by the companies involved, will not be significantly felt for another few years.
Most of the mobility related startups will also struggle to be profitable since the ‘network effects’ that are supposed to help with reducing costs likely won’t materialize, so quite a few of them will be acquired and folded into a larger company’s suite of products or services for multiples of what was originally invested even if it wasn’t able to make any money on its own.
The weakness in the Chinese automotive market is starting to be felt around the world. This particular occasion should be just a hiccup since some of the tax breaks the Chinese govt. handed out earlier this year should begin to take effect and help stop the 9-month long decline in car sales but the longer term prospects of the sector still seem uncertain.
As sales volumes increase, specifically for EVs, the market will be too attractive for new entrants to ignore and if deep-pocketed, these new entrants will do whatever it takes to carve out a substantial position in whatever commodity or service they supply. In order to play defense, and keep that capacity utilization high, incumbent companies will cut margins in order to hold on to customers, the ones who order the most parts anyway.
With everything they’ve done to encourage EV sales, the Chinese govt. likely pulled in EV adoption by at least 7-10 years so although there has been a lot of investment from the OEMs and some of the major tier 1’s, a return on that investment is likely many years away which makes for a challenging few years ahead for everyone.
In all fairness to the OEMs and oil companies, they’re in a bit of a catch-22
because if they decide to switch their traditional moneymaking businesses over to the ‘new’ gig-economy ones too soon they could really leave a lot of ‘RMB on the
table’ via lost petrol and ICE car sales but if they switch over too late, they may box
themselves out of the opportunity to transform their businesses and carve out an
updated/amended positioning in the transportation 2.0 economy. Most OEMs will need to kick this can as far down the road as possible so that they can generate the profits necessary to fund the R&D and marketing that’s going to launch their ‘new’ products and services to the market.
It’s true that the EVStartups don’t have any legacy issues to concern themselves with, their challenge will be to have enough financial runway to wait these OEMs out, assuming that they can build high quality, reliable and affordable products, something Tesla still hasn’t been able to do consistently.
OEMs, oil companies, and startups are all in business to make money. If/When consumer demand for EVs outstrips the demand for big, gas-guzzling pickup trucks and SUVs, you better believe the OEMs will have launched new products to fill just about every need. In the U.S. at least, where there isn’t as much concern about pollution or traffic jams, that point of equilibrium will take longer to reach than in China, especially if the U.S. govt. decides to stay on the sidelines, unlike China.
Further, let’s be clear about the numbers involved with these EVStartups. Rivian, for instance, has received a great deal of positive press since intro’ing its vehicles to the public last year. I think an ambitious target for their R1S/R1T first-year sales would be ~120K units. Tesla sold a total of ~250K vehicles globally in 2018 and that’s after 11 years of being in business. VW Group sold 10M cars globally in 2018 so how they think about the market, customers and customer segments might be similar but how they run their organizations in order to address them is fundamentally different so comparing them against one another is really oversimplifying the challenges that lie ahead for each of them.
For those Americans and Chinese that track GDP and when China’s will surpass the U.S.’s to become the world’s largest, this article postulates why this measure shouldn’t be so important for anything other than ‘bragging rights.’
As someone who’s lived in China for the last almost 11 years, I’ve seen firsthand the amazing growth and ability for this country to change in the blink of an eye. 30 years of double-digit growth is really difficult to comprehend. I don’t believe we’ll ever see anything like this again in the world, not even in India, even when they’re able to get their affairs sorted and all start moving in the same direction.
I also know that high growth, when the denominator is small, is a lot easier to achieve than when that denominator is much larger like it is now for China. Growth will also play a HUGE role in whether or not China can actually implement and become the leader in EVs and autonomous vehicles.
Most people have been told and now assume that since China has the advantage of being able to accumulate and access mountains of data, their AI and machine learning systems will eventually surpass the U.S. in accuracy and ability but I’d argue that the U.S. and China’s will be two totally separate systems and should be treated as such so in other words ‘One World, Two AI Ecosystems’ with China and the U.S. likely competing for much of Europe and the rest of Asia.
China does currently have the momentum of over 1 billion people and the government on their side but there will be many unknown challenges that lie ahead that will make it an interesting story to follow.
This is a brief essay that succinctly states, and backs it up with statistics, why autonomous vehicles will eventually be our children’s normal mode of transportation. Chris Urmson, the CEO of Aurora, cites U.S. statistics, and I’d speculate that failure rates (read: fatalities) are even more than 1.5 / 100M miles here in China, but the stats paint a picture as to why most people, if not the large OEMs and petrol companies, would welcome a less stressful and more productive commute to and from work.
We are still a ways away and I’d argue that in order for autonomous vehicles to really catch on, the failure rate would need to be much lower than the 1.5 / 100M miles, say .5 / 100M miles before people really felt comfortable inside a vehicle without someone they can touch, see, and hear at the wheel or in the case of level 5, no wheel at all.
The race is on but it’s going to be a joint effort between municipal governments and private enterprise, and acceptance by the consumer because of the safety, convenience, and affordability that will push driverless vehicles to their tipping point.
This author does a pretty good job of articulating the main scenarios most people engage in on a daily basis and compare getting from point A to B using a scooter, bike or rideshare for getting the job done.
For most people, there isn’t a ‘one size fits all’ solution but a pretty reliable method depending on the situation, that could include multiple modes of transport for getting to your final destination.
For those that have followed my newsletter, you know that I think that electric bicycles will eventually replace the Bird/Lime type e-scooter as the preferred mode of transport for the ‘last mile.’
Take SF, who would want to take an e-scooter up and down Lombard, Geary or Van Ness when you could jump on a bike pedal it until you hit a hill and then have the battery take over and help you peddle up it, seems like a pretty easy answer to me.
I, like many others who follow the sector, am a skeptic that ride-hailing as a standalone business can be consistently profitable. This is even before we take into account all the traditional OEMs launching their own versions into the market which will squeeze margins even further. Before we know it, we’ll have too many options and in order to compete for rides, prices will likely be pushed down good for the consumer but not for the competitors in the space.
That’s what makes Didi’s disclosure about expenses a bit alarming. For every ¥1 in revenue they produce, after paying the driver, Didi keeps ¥0.19. Their overhead totals ¥0.21 so for every ride they book, they lose -¥0.02!
Now at a certain point, and who knows what that number is, they will reach a break-even but at 550M users on the system and over 30M rides/day, they still don’t seem to be that close.
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.