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Tesla's Kryptonite, VW's Software Woes, OEMs - Chips Needed - SAI Newsletter 2


Photo by zhang kaiyv on Unsplash There were two big announcements about China tech + China legacy OEM partnerships and they both made the headlines. The first announcement was about the Baidu & Geely partnership where Geely will provide the EV platform, Baidu the HW/SW stack, bits and pieces coming from the Apollo project stack likely. A couple of things here, as I was told that Baidu’s Apollo system isn’t ‘great’ so it seems that Baidu is trying to set up some backup plans. This probably upsets their Apollo Project partners though since now Baidu is going to directly compete with some of them. Geely is just continuing its aggressive moves towards its global automaker ambitions. The other notable partnership is between Alibaba & SAIC. This is much more straightforward as Ali doesn’t really do hardware so this seems like a straight-up software play for SAIC and for Ali strictly a data play. I haven’t heard anything about Ali having car building ambitions so will keep that as my placeholder for now. I was interviewed for both of these articles and am thinking that as more tech companies plant flags in what was the traditional auto sector, I may have more contact with TMT journos in the future. We are seeing the next several steps in the progression of the ‘connected’ vehicle which China should also be a leader of. We’ll start to see next-level vehicle ‘services’ being launched and intro’d later this year being driven through these ‘partnerships’ is my guess. Again, details are scarce and that’s likely because each of the parties in both partnerships are still feeling each other out. We will be tracking this much more closely though since we’re getting towards the tipping point. But can these guys convince Chinese consumers to pay for services? I think it’ll take some time. These recent announcements about tech and OEM partnerships remind me of the thought leadership piece I wrote for the American Chamber of Commerce – Beijing back in 2018. You can find it here. Overall, I think it aged pretty well, as there will likely be more and more mashups, maybe not of the same size or importance as the Baidu + Geely or Ali + SAIC co-ops, but you NEVER know. In the next few years, we could see a struggling OEM get picked up by one of the big tech companies on the CHEAP. Actually, I’ll plant my seed with that. I predict that within the next 5-7 years, a tech company will acquire a struggling automaker. We are swearing in a new President tomorrow/tonight so what does that mean for EVs, the US/China relationship, the US’s ability to combat the virus and get its economy back on track? We’ll know a lot more about each of these things within the Biden administration’s first 100 days so stay tuned. TESLA IN THE NEWS - Tesla in China – A blessing or a curse? It depends on who you ask but the Chinese govt. seems to love (so far) what Tesla has done for the entire NEV sector. It’s been able to almost singlehandedly (with some help from COVID-19) pull demand for EVs in China up by 3-5 years. Ask the OEMs and EV startups though and it’s – Not so much. Did they think it would be that easy and that auto companies would readily concede ANY ground in the largest automotive market in the world?? I promise that it isn’t going to get any easier in the future, I’ve been tracking them for a long time, we’ve already seen that Elon is NOT going to let off the gas pedal and the legacy autos will fight and scrap just as hard. Tesla is dominating the market, at least in China, and for the most part, can do no wrong here. With delivery of the Model Y starting this week, Tesla is likely to sell >350K vehicles in China this year. I don’t see many hiccups for Tesla in the short term but over the next 4-6 years, I see a few of the Chinese EV companies as well as the legacy OEMs launching products that are going to be able to compete directly for Tesla’s customers. That’s IF they can get the software right (see the WSJ VW article below) AND can break through the aura of ‘Tesla.’ Thing is, by then Tesla will likely have moved on to completely different revenue models and the sector will still be chasing. - So apparently Tesla ISN’T invincible. Could the EU be Tesla’s kryptonite? If we are to take their 10% reduction in sales in the EU for 2020 at face value, then yes the EU is proving to be a tougher nut to crack than the US & China markets for Tesla. Their share of the EV market went from 30% in 2019 to ~13% in 2020, with much of that share being taken by the Renault Zoe, and recently the VW ID.3. Pretty impressive on Renault & VW’s part but if we peel some layers of the onion back we find that the Model 3 pricing starts in the UK at around £40K whereas the VW ID.3 starts at £30K while the Zoe at £25K. Not really a fair fight. I am highlighting the EU sector because it's literally the ONLY region in 2020 where there was growth in EV sales - To the tune of a whopping 123%! That has EVERYTHING to do with the substantial incentives placed by local governments to promote EV adoption. Guess they took some lessons from China. Tesla does better when compared with similarly priced vehicles but it’s definitely the one weak region in their portfolio. They have been VERY aggressive with their pricing in China ever since they started churning out MIC Model 3 & Model Y’s from their Shanghai Giga so we should expect the same once Job #1 rolls out of the Berlin Giga later this year. Further, the Model Y should be a much more popular vehicle in the EU as in the US & China so we’ll monitor Tesla’s progress in the EU to see if they’re able to wrestle back some of that share. The EU is a VERY competitive market though so it’s going to be fun to watch the competition play out, that’s for sure!. IN THE NEWS - A great piece that puts you inside what’s happening at VW Group in Wolfsburg. I’d take it a step further and speculate that this is/was/has also happened at most of the global automakers as well. If it hasn’t yet – Uh oh. Tesla is NOT running in place. All Tesla vehicles started out as EVs so all the frameworks, processes, and workflows used to design, engineer, test, and manufacture the vehicle include software as ‘native’ to those systems and essential to design, engineering, production, user experience, manufacturing, and service. Elon said during ‘Battery’ Day, that Tesla planned to move faster so if the OEMs are having a hard time keeping up now well good luck as the velocity increases. Further, the software that’s being referred to in the article that VW is having all kinds of problems with is really just basic software that makes the vehicle run. No more than that. The software needs to be built tested, integrated tested, and on and on which doesn’t sound like what’s happening. Even if they did create a patch, they couldn’t send it OTA. These tasks are what we call ‘basic blocking and tackling’ that all auto companies should be able to do by now hopefully and if they can’t – Uh oh. If the SW development basics are too complex, then there is NO WAY VW or any OEM for that matter will catch Tesla EVER, let alone in the next 5 years. Did I mention that Tesla said they’re going to move faster? This also means that the way EVERYTHING was done in the past at VW needs to be blown up and rethought through. I am shocked that this didn’t happen yet. It’s not mentioned in the article at least. Not just R&D, engineering, quality, and production but all the support functions including marketing, accounting, finance to sourcing, and supplier quality. I believe Diess knows this but getting a behemoth like VW to cooperate is likely a bridge too far for him. And adding more car guys (did you see that picture, it’s quite literally ALL guys) is NEVER the right answer if you’re trying to build a software developing competency! This article makes some of the people look incompetent, unfortunately. Leaving folks in leadership roles after they’ve failed on a major project is a recipe for future disaster. I was told that Ulrich left so maybe that was a blessing for VW? I don’t know all the details so maybe it’s a bit unfair of me to lay the failure at his feet but man, this wasn’t some small oversight. Make no mistake, VW will still sell a gazillion cars and won’t likely lose their crown as one the largest vehicle manufacturer in China and the EU, but I CAN tell you this. If this is how they’re approaching the mountain of a challenge of ‘catching Tesla’ they’re better off just admitting that they won’t be making cars to compete directly with them anytime soon. - Chips become the gating item for the production of cars around the world. Having lived in this ‘world’ in a previous life, I know this situation well. I also know the sourcing, materials, and logistics folks at these OEMs are probably on daily calls with their plants and suppliers to try and force them to pull in shipments so production can get back up and running. The manufacturing guys are probably juggling production schedules to pull ahead orders so they can build vehicles that don’t need the parts that currently aren’t available. There are probably war rooms in Detroit, Dearborn, Wolfsburg, Seoul, Beijing, and anywhere else these chips are short in order to monitor all the production at the supplier and track each shipment as it leaves Taiwan, down to the tracking number and bill of lading. Expedited freight is probably going to be a large number on the balance sheet over the next quarter or so but that’s what it’s going to take to keep these plants running, a period of the suppliers feeding chips to the OEMs ‘hand to mouth.’ While at Apple, part of my responsibilities were to ‘chase’ parts or in my case chips, but not just any chips, some of the most technologically advanced graphics chips from Nvidia, ATI (now part of AMD), and graphics cards, which were basically a board with an expensive graphics chip on it, from companies like Celestica and Solectron. These were high-end chips that always had lower yields, meaning that the wafer they came from would yield fewer viable chips than a lower-powered ASIC that wasn’t very advanced. It was NEVER good to be one of the top three commodities that threatened production on a weekly basis but there I was, semi-regularly in the top three ‘gating items’ in the materials meetings. Apple back then was a much smaller player in computer sales similar to the automakers now so the operations teams were ALWAYS paranoid that suppliers were shipping parts, be it screens for laptops, memory, or graphics chips first to their larger customers and we were left scrambling for the leftover capacity. It was likely true although they never did admit it. I vividly remember getting chewed out in a meeting one time when my boss asked me point-blank in front of a room full of colleagues ‘WHO is Nvidia shipping our chips too, Dell, HP??!’ My job was to keep contacting them and be just annoying enough that our suppliers would ship the parts in order to shut me up, at least until we ran out of parts again. I have to admit, I got this kinda wrong. I thought that this was OEMs crying a bit of wolf in order to disguise shuttering plants because they were seeing some softness in demand but couldn’t be honest about it from a PR standpoint. Now, I think demand softness is still somewhat valid but there also seems to be a real squeeze on supply, at least in the short term. I can picture it right now in those war rooms - The OEMs are talking to their suppliers ‘….they’re gonna what?? Take a week off in February for Chinese New Year (CNY)?? Tell them they can’t DO THAT!! WE need our parts!!’ On the other side, the foundries are likely planning OT AND working through CNY to try to build ahead and bank chips that they know are in demand. And the GM sourcing guys are wondering right now whether their chips are getting shipped to Ford… - Is Evergrande for real about manufacturing EVs? Had a good chat with the FT’s Christian Shepherd about whether Evergrande EVs and their ambitious plans to produce 14 models will ever get to production and I originally thought their EV play for a land grab. That was a few billion dollars of investment ago so now my thought is that the opportunity and investments are too large to quit now. - How Uber plans to make itself profitable. Lots of cuts going on. Cost cuts, employee cuts, market cuts, business cuts. Sounds like death by a thousand cuts! And yeah, from an accounting standpoint that could push you into profitability but notably absent from Dara’s priorities is ‘innovating’ their way to profitability, there’s a thought. Is Uber already a mobility ‘has been?’ Kinda seems like it. - A car and road free city. Construction of “The Line” development will start later this quarter in Saudi Arabia and will span 106 miles and will be built around ultra-high-speed transit where no location in ‘The Line’ will be farther than 20 minutes away. For some reason, I am envisioning something out of the Jetsons, but for my city planning subscribers maybe it’s time to deep dive into some of their ideas… - CATL & LG Energy Solution (formerly known as LG Chem), the two largest battery cell manufacturers globally are both digging in and increasing cell manufacturing capacity in China. CATL announced that it’ll be investing ~$6B USD into three new factories in China that should increase CATL production capacity by 120-150 GWh. LG plans to double their overall China capacity in 2021 to accommodate what believe will be a growing Tesla business, which is LG’s only customer for cylindrical cells and which LG will triple the capacity of cylindrical cell manufacturing to 60GWh as they try to compete with CATL for China customers. - It’s starting to make sense why the EV sector is worth much more than the traditional auto sector. According to Vinod Khosla, ‘When you get to a few % of market share, the future is settled.’ Right now, in China NEVs account for about 5% so yes, I would agree that we can stick a fork in the traditional auto sector. For those who don’t know who Vinod Khosla is, he’s an OG Silicon Valley legend who co-founded Sun Microsystems and was an early investor in Google, Square, and Impossible Foods. He’s also a Carnegie Mellon grad! Great article that’s worth a read. TRENDING ON SOCIAL MEDIA - Is Grab considering a US IPO this year? Currently valued at $16B, it’s the most valuable unicorn in Southeast Asia (SEA). I’ve used the Grab service in a couple of different SEA countries, and it’s great! This could also be Grab snatching back the headlines from their competitor / potential merger partner Gojek who was recently rumored to be merging with Tokopedia. - I’ll have one of each, please! The best Michigan beers of 2020. Don’t sleep on MI as a beer MECCA, there are lots of great suds in MI! Wondering out loud when I’ll be able to safely head back to try some of these new beers. Thinking just before the end of this year. - The coolest new gadgets from (virtual) CES. The Sony drone (I don’t have one ..yet), the Samsung 110” TV, the Coldsnap ice cream maker, and the trash collecting boat. Yes, please! - Yeah, yeah. Not all of these cars are EVs but they are ALL pretty cool nonetheless. More of what we can’t wait to see as a production vehicle. JUST THE NUMBERS - 8.7M vehicles sold/year. 4th largest automaker in the world. Stellantis’ vital stats. For those who aren’t familiar, Stellantis is the combined PSA + FCA merged companies. The golden goose of that group is Chrysler. Tavares has made an immediate impact at places like Opel and Peugeot so can his magic work again? The combined group is behind other legacy automakers by a mile in the race to an EV & mobility future so Tavares has his work cut out for him. - 10 million vehicles manufactured by Great Wall Motors since their founding 30 years ago in 1991. They have 4 brands that they sell in China: Great Wall, ORA (the EV brand), Haval, and WEY. If you were wondering the vehicle was a Gen 3 Haval H6 SUV. - >$2B of investment. That’s what Cruise Automation was able to raise from Microsoft, GM, Honda, and other institutionals. This brings Cruise valuation up to $30B. - $2.65B of investment. Rivian announces another capital raise that brings their valuation to just over $27B. Rivian is planning to begin production in Illinois of their electric SUV & trucks this summer. PRODUCT & SERVICE INTRODUCTIONS - WM Motor has started production of the W6, their third all-electric SUV which features the Baidu autopilot technology with first deliveries scheduled for June. - The Sonders Metacycle. I’d mentioned last year that due to the explosion in popularity of electric bicycles/mopeds/motorcycles we’d see more investment and hence more bold designs and innovation. Well, look no further than the Metacycle. This thing would be great to have if you lived in a crowded city. Big enough to be comfortable but small enough that you don’t have to worry too much about where to park it. Best thing, it’s made of aluminum so it’s only around 200lbs and it’s just $5K! I could totally see myself on one of these bad boys! - Sodium Cycles Xubaka, there’s probably a market for this. I’d say it’s pretty limited at €5,900 but I appreciate the versatility and attempt at the retro design. —— This weekly newsletter is a collection of articles we feel best reflect the happenings of the week or important trends that have effects on the automotive and mobility sectors here and in the US, we also provide a point of view that we hope educates and sparks debate. The Sino Auto Insights


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.

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