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The Cost of Doing EV Biz, AVs & China a Good Match, Japan Leaps Ahead in AVs - SAI Newsletter 8



Photo by Joshua Fernandez on Unsplash It’s earnings time for some of the EV startups with Li Auto and NIO both reporting just OK earnings with pretty disappointing guidance. I pulled out a few items from NIO’s earnings call that I thought were interesting but didn’t see the need to do that with Li Auto, even though they eked out a small profit in CQ4’20. I am a bit concerned that they’re taking so long to launch their second product, something I am hoping we’ll get a glimpse of at the Shanghai auto show in late April and which I currently plan to attend. I will be a guest of Paul Krake’s next week, Monday, March 8th 8pm EST as part of his US-China Series on Clubhouse as I catch him up on all that’s happened in the EV financial markets since we last spoke about a month ago. We will get into more details about the current SPAC, IPO markets and what we can expect as we get further into 2021. Also, a reminder for those on Clubhouse that Lei Xing and I are at it again this Thursday 8am EST. For those interested in dropping in for a listen but need an invitation to join, please shoot me an email. I have a few invites that I can provide. We will likely pull some topics from this newsletter and a few others we think of to discuss as well as take the last 20 or so mins. to take on questions from guests so please do tune-in! TESLA IN THE NEWS - Is Tesla getting into battery swapping? For now, no but I wouldn’t put it past Tesla to at least be ‘studying’ how battery swapping could or would increase the appeal of their vehicles to a larger audience and help grow their services revenue. If the commercialization progress for the 4680 battery cells Tesla announced during Battery Day slows significantly, there very well could be a scenario where Tesla, along with a partner, gets into the battery swapping game. One thing is for sure, capital isn’t an issue. It’s still too early to know but that won’t stop all the speculation about it. IN THE NEWS - NIO’s situation is the best of the bunch too. I have no concern about NIO’s ability to raise capital but running 20 jobs / hr. isn’t something that’s sustainable for very long before management starts reaching for that ‘PANIC’ button. Incremental gains in sales quarter / quarter isn’t going to 'get it done’ for any of the EV players that are currently valued higher than the GMs, Fords, and Stellantis’. It wasn’t until Tesla came out with the Model 3 that they became a serious volume player and gained traction in the market so this has to be what William Li is thinking as well. The situations and markets are entirely different for NIO vs. Tesla’s early days so it’s very difficult to compare ‘apples to apples’ with their trajectories. Tesla’s biggest challenges were that NO ONE believed EVs would appeal to the mass market in the US back in 2003. With NIO, the Chinese govt. made huge bets starting in >10 years ago on the sector being a global gamechanger, effectively putting their thumb on the scale for companies like NIO to enter the market. On the other hand, NIO is still only a 6 yr. old company so there’s A LOT of maturity and learning that still needs to happen with the company and its management. Unfortunately, with competition heating up globally and the US perhaps waking from its slumber, can NIO withstand the pressure of justifying its market cap to come out on top in any market it decides to play in? We will find out soon as they’ll likely launch products into the EU (<6-9 months) and US markets <18 months. - The current cost of doing business in the business of building EVs. Here is a summarized view of the top fundraisers in the EV sector. It shouldn’t come as any shock that Tesla, NIO, XPeng, or Li Auto are part of the list but BYD I bet surprised a few of you. These are approximates taken from the article.

All of these companies are publicly traded and have taken full advantage of the frenzy of investment into the EV sector by tapping the capital markets, some multiple times, to build up their war chests. All of these companies are also currently selling vehicles which is generating them revenue even if profits from those vehicle sales is still pretty tough to come by for all of them. BYD is the exception since their business is more diversified than their contemporaries and they have the advantage of scale as well. I highlight these numbers because there are still EV startups in both China and the US that haven’t begun shipping production units yet. Companies like Byton, Faraday Future, Hengchi in China and Rivian, Lordstown Motors, and Fisker just to name a few. Man of those companies have ALSO tapped these same capital markets or are thinking about it in order to raise the capital that will fund the launch of their products. This EV bull market isn’t going to last forever so for those companies whose products aren’t immediate sales ‘hits,’ being able to buy time for their products to establish themselves is going to be very important but very challenging to say the least. The first movers have ALL taken full advantage of ‘welfare’ that’s been offered by the local and central govts. that’s helped them sell their products but I don’t see that welfare lasting much longer as more and more products are introduced and as the private sector is expected to take over. One last thing, the legacies have the biggest checkbooks of all so when you add that into the mix, the competition gets even more fierce! - As I’ve said before, all companies will become software companies. Over the last several years, there have been plenty of announcements about partnerships or investments between the automotive OEMs and the tech companies. These tie-ups have all likely been non-exclusive, and non-binding, as all of the parties sit back to see who is actually for real and who the poseurs are. Some of the more interesting ones are Microsoft + VW, Baidu + Geely, Foxconn + Geely, Alibaba + SAIC, Huawei + Changan, and of course Apple + TBD. As Covid has now pulled a global EV future closer to reality, more companies are starting to ‘show’ their hands. Both the tech cos. & OEMs realize that they still need each other if they’re to tap into a transportation space that has been forecasted to become a multiple trillion-dollar market. This scramble to find the ‘right’ dance partners will only get more frantic as a few companies along with their partners roll out new products & services and put the pressure on the others to keep pace. Unfortunately, many of the current partnerships will not bear much fruit, but the ones that do have the opportunity to become market-topping world-beaters. - Why China still stands the best chance of being the global leader in AV adoption. There are a few key reasons why Chinese AV companies could end up commercializing their robotaxis sooner than their US counterparts. Although I’d argue that generally the US companies, from a commercialization standpoint, are still currently ahead, the lead continues to shrink and I’d point to a few specific reasons for that. First, the US doesn’t have a centralized strategy for awareness, adoption or the rollout of AVs so unless the Biden administration can put together a national framework for AV adoption, the rollout of pilot programs outside of California and a few cities like Pittsburgh, Detroit and Phoenix will be slow to proliferate. As the article states, a few of the larger Chinese AV startups operate in a gray zone that’s tolerated by local Chinese govts. as long as there aren’t any major accidents like what happened in Arizona with the Uber test vehicle killing a pedestrian in 2018. One of those tragedies could really hinder the continued rollout of pilot programs by companies like AutoX, WeRide, and Pony.ai. For now though, those companies continue to be aggressive with getting more of their vehicles on the roads here in China. Driving in China is NOT easy! This allows for a much more difficult testing environment in China than in the US in turn developing a more robust machine learning system as well eventually. Generally speaking, more data + more difficult situations that happen more often = safer AV. The combination of being the largest vehicle market in the world (read: more data) and one of the more complex to drive in (read: more scenarios) is also another advantage for the China AV startups to move towards commercialization sooner. Finally, the Chinese AV startups are able to develop, test pilot vehicles, and gather data in two major regions of the world, however, I don’t currently know of any American companies testing AVs on their own in China in any significant way. If I am wrong, please do enlighten me! The process of gathering and consolidating the data in the US by these Chinese AV companies isn’t well documented and that’s by design since they’d much rather fly under the US govt.’s radar. The Biden administration hasn’t commented yet on where they stand with what seems to be a fairly one-sided openness to technology and cross-border data sharing. This is very much a wildcard, and as we inch closer to actual commercialization, the Biden administration will certainly communicate their official position, my guess is before the end of the year as long as Covid is under control. Depending on how the US govt wants to deal with this issue if at all, could be the difference between Americans being able to choose between a Waymo or an AutoX robotaxi service in the future or US ONLY robotaxi services. I’d say there’s not a high likelihood that Waymo or any other American robotaxi company launches here, at least without a significant local partner or two. As an aside to this, the Chinese robotaxi companies I’d assume have operating in the US priced into their valuations but it may be just that the US & Chinese companies don’t play in each other’s markets but compete to divide up the rest of the world. Not being able to operate in the largest economy and the second-largest auto market in the world would certainly have a negative effect on their valuations. - Volkswagen gets into the robotaxi act. VW has launched ID.Buzz van robotaxi prototypes for testing across Germany with fully autonomous capabilities provided by Argo AI, a company they invested over $2.6B in mid-last year. It’s an ownership stake shared with Ford, which owns a majority share of Argo. Now, if they don’t own Argo outright, doesn’t this effectively make them a contract manufacturer to Argo? TRENDING ON SOCIAL MEDIA - Japan decides, at least policy-wise, that now is the ‘right’ time to jump ahead of the competition in the AV sector. I spoke with Nikki Sun of Nikkei Asia for this article about Honda being the first automaker (in Japan, of all places) that will introduce Level 3 (L3) autonomy in its Honda Legend, aka Acura Legend for my American readers. For those wondering what the difference is between L2 & L3–technology-wise, not much. The key differentiator is that L3 from a legal perspective allows for ‘conditional autonomy’ whereby the vehicle is able to operate without driver supervision. In other words, the driver could read a book, or watch a movie as long as they’re ready to take over at a moment’s notice when needed. A major bottleneck to increased AV adoption is regulatory and legal acceptance, and this is the important part since the Japanese govt was the first globally to step up and amend their transportation laws in order to support this technology on its roads. This is important for a few reasons. First, this is the Japanese govt’s acknowledgment (a traditionally conservative society) that AVs are coming and they’re here to stay. Next, it’s the first domino to fall, which should place more pressure squarely on China, the US & the EU to quickly adopt more AV-friendly laws similar to Japan’s in order to keep pace. Third, there are L2 pilots happening in lots of places but with L3 the liability moves from the driver to the automaker, which changes the game completely. Not even some automakers are ready to take on that responsibility. This is also why Traffic Jam Pilot, what Honda is calling its L3 system, can for now only be activated during traffic jams since the chance of a major accident is minimal. - NIO just announced earnings for Q4’20. I won’t get too much into the numbers since there wasn’t really anything that stood out besides NIO’s weak guidance on Q1’21 sales, but even those weren’t all that shocking due to Chinese New Year. On the earnings call though, a few things did stand out and not because I didn’t expect them but because I did and it was confirmed. We all know that in order for NIO to justify its market cap, it’ll need to sell outside of China. We already know they plan to sell into the EU but William also confirmed that they’ll enter the US soon. This creates a whole other set of challenges for the company including export tariffs that amount to 27.5%. If we assume those won’t go away anytime soon, if NIO passes any significant portion of that on to consumers, NIO’s vehicles will NOT be competitive. NIO all but confirming that they’re looking to make a product for the mass market, something I’ve alluded to in previous newsletters should also be looked at as a net positive for the company. As I’d stated in an earlier post, Tesla really became a player once they launched the Model 3 and were able to get Teslas into more hands. This will likely mean a small SUV/crossover that’ll compete directly with the Model Y & VW ID.4. It will be interesting to see their creativity, what they come out with, and the timing of it. JUST THE NUMBERS - $2.491B, NIO’s 2020 full-year revenue, almost half of which ($1.02B) was generated in CQ4’20 with 43,728 vehicles being sold. For reference, Tesla reported 2020 revenue of $31.5B in sales on 499,550 vehicles sold globally. - 340M people booked a ride-hailing service in the first half of 2020 in China. With a high urban density in many more cities when compared to the US, limited access to vehicle ownership in the tier 1 cities, and a cheaper workforce, ride-hailing is a much more lucrative business in China than most of the rest of the world, if you don’t believe me check out Uber’s last few earnings announcements. Didi Chuxing dominates the local market here so it’s not a surprise that rumors about it going public in the next year at a $60B valuation. The TAM (total addressable market) for the sector is so large that it’s attracted new entrants that believe that they can break through to compete with Didi for riders. Meituan is one of the more serious competitors with <500m active daily users on its platform. Meituan is combining other services like food delivery, bike-sharing, and social media into a single platform in order to create stickiness and an alternative to Didi. Meituan is just one of many competitors looking to carve out a piece of the market. In general, ride-hailing companies are significant and have become a serious alternative to vehicle ownership consequently placing downward pressure on vehicle sales, since owning a car can be expensive and very inconvenient if you live in one of these big cities. Even if you have the means, getting a license plate can be a real challenge. Take it from someone who has participated in the Beijing license plate lottery for over 7 years! I can attest that it’s not a ton of fun living in one of the big cities in China and owning a car, and I’d know because I have lease one (that includes the license plate) that I use no more than 2-3x’s / week. Further, as these OEMs gain confidence in their technology capabilities and begin to feel the downward pressure translating into less annual auto sales, a logical pivot for them would be to offer their own ride-hailing services. And that’s when the market and competition will REALLY get interesting. What if VW Group used their lineup of brands to offer different levels of service, with Bentley being their luxury service and Porsche being their SUV or performance service? I hope the VW Group is already gaming that stuff out because I think it’s more likely than not that that’s where the market is headed. GOING PUBLIC - ChargePoint (NYSE ticker: CHPT) has become the first publicly traded charging network company after combining with a SPAC and began trading yesterday. The company was established in 2007 and currently operates in the US & EU. - TuSimple taking the traditional route to go public. This is going to be a fun one to follow. TuSimple is the first of a pack of commercial trucking autonomous vehicle startups which include Waymo, Aurora, Kodiak, Plus, and others that will be going public. TuSimple is also one of MANY AV startups with strong ties and investment with China. Is this a red flag for CFIUS? I’d think so, but for now, TuSimple has stated that they are ONLY focused on the US market, and if you look at the makeup of their Executive Advisory board, they are all-in with that strategy, of course until they’re not. I was told they’d been dancing with a few SPACs as well but it seems that the final deals weren’t attractive enough to dissuade TuSimple from IPO’ing. A larger question is whether that’s a ‘one’ off or whether SPACs have lost their attractiveness? - Sequoia Capital China-backed Dingdong Maicai (Dingdong buy vegetables) is looking to IPO as early as this year in order to raise ~$300M to set itself up for a fight against Alibaba, Tencent (with Miss Fresh), and JD.com who are all looking to be the dominant player in the grocery delivery market that’s forecasted to be a ~$200B sector by 2025. My family used to go to a market that sold fresh vegetables, dried foods, meat and seafood that is located behind the Westin Hotel near the American embassy but over the last couple of years, especially due to Covid-19 we’ve been using Ali’s service called Hema. Hema has distribution centers that act as defacto grocery stores that also supply groceries for delivery to the local area. Most days, the order will arrive within ½ hour of when you order it. It doesn’t have everything but it has MOST things, and we normally never have any issues with the orders being incorrect or damaged. Think Amazon Prime for the instant gratification crowd. PRODUCT & SERVICE INTRODUCTIONS - Wolfsburg, we have a problem. IMHO, the Ioniq 5 is a pretty good-looking cross-over and it should worry other OEMs who plan to compete in that segment, namely VW Group and Ford with its Mustang Mach-E. It’ll be launching later this fall at around $45K so it isn’t cheap but I can totally see Hyundai, the parent brand of Ioniq selling a quite few of these things. —— 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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