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VW's Big(ger) Bet, BYD & (not) the UK, Nvidia's Importance to China - SAI Newsletter 11



 

For those wondering, I am a BIG fan of the new-ish Land Rover Defenders but not the 130, which is the long wheelbase version. I think the shape and simple interior are great but the proportions on this one and the overhang out the back behind the rear wheels is not great. They needed to make it though to compete with the Tahoes, Expeditions, Escalades and Navigators that sell like hotcakes in the US I suppose. For those wondering, we are in a full-blown price war in China, one that Tesla instigated. In an article last week, the headline read “Nearly 30 Brands Join China’s Price War” but it should’ve just been ‘…Most Notable brands’ since it includes the Who’s Who of foreign brands including BMW, VW, Honda, Ford and even the mighty BYD was not immune, although their price cut (¥6.8K/~$1K) seemed more like a nod to customers than any real move to follow others down the rabbit hole. Some are outright price reductions; some rebates or other incentives or a combination of both. They’re not only coming from the brands but the dealers and local govts have joined in as well in an attempt to prop up the sector. Some examples of what/how much:

  • BMW i3 reduced by - ¥100K/~$15K (~20% reduction)

  • Ford Mustang Mach E - ¥40K/~$6K (~16% reduction)

  • VW ID.3, ID.4, ID.6 - ¥40K/~$6K

  • Nissan Ariya - ¥60K/~$10K (~20% reduction)

If you’re a Chinese consumer, I’ve never seen a better time to purchase a vehicle. It’s a terribly brutal market out there right now. I’d said on Twitter that the SOEs could do this all day so it’ll be the startups with less support from their provincial and municipal govts where they reside that’ll likely fall into a death spiral that they can’t get out of. Most of those will be Chinese EV companies westerners will not have even heard of. But we are on watch for a few brands - like WM Motor and a few others. Remember that there are more products and brands launching well into 2024 so buckle up, we've not even hit the meat of the action yet! The price cuts aren’t existential for the foreign legacies, but it’ll definitely maim a few of them. I say this because if you price something (X) and then you offer a steep discount (X – Y) for long enough and it’s not a year-end type of clearance promotion, people will begin to see (X – Y) pricing as the new normal and they’ll feel that something is too expensive when you try to put the price back to (X) it’s original MSRP. Now, if you add features and perceived ‘value’ then perhaps you can bump that MSRP back up. There’s a distinction between the price war though and what the premium German automakers did which is not being able to read the room and launch OVER-priced vehicles. If BMW tries to sell the iX or Merc tries to sell the EQS at the pricing they originally launched in the China market with, they’ll never be able to sell them at the volumes pre-EV. The other major news last week was that of Silicon Valley Bank blowing up and leaving some uncertainty in the US financial markets. The Biden administration has stepped up to try to make everyone whole but the markets are still a bit rattled despite those assurances. One interesting aspect of this is whether or not and how far/deep the US govt wants to dig into where the actual deposits originated from. There’s likely a decent amount of Russian & Chinese money that’s allowed to be hidden through the maze of BVIs / Cayman Island holding companies that invest with the VCs so I don’t believe that the US taxpayer would be too happy making some Russian Oligarchs whole so let's see how much they want to open of that can or worms. On to this week’s news. CHINA EVs & MORE We are scheduled for Thursday, March 16th, 3pm ET this week. Will update on topics on Twitter so stay tuned for that. Join us if you want to ask questions and / or interact with us. For those that can’t join the live show, I invite you to listen to our recorded China EVs & More episodes at this site. And as always, we appreciate any feedback that will make the show better. Also, if there are any companies you want our thoughts on, let me know. INTERVEWED/QUOTED - Investor’s Business Daily. I spoke with Aparna Narayanan for her article about the China price war and the implications it has long-term for the China and EU markets. It’s a really comprehensive piece that’ll get you updated on what’s happening in 3K words or less. Once you’ve caught up, let me prescribe reading this newsletter every week along with listening to the weekly China EVs & More pod – that’ll keep you better informed than anything or anyone out there! I agree largely with most of what she wrote so it’s definitely worth the click. Friend of Sino Auto Insights Edison Yu from Deutsche Bank is also heavily quoted.


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TESLA - For Tesla owners – your key now works for ALL Tesla’s? A Tesla owner in Vancouver mistakenly used his app to enter another person’s white Tesla Model 3 and was able to drive off without any issues. The person who owned the white Tesla was able to also enter the other driver’s Tesla using the app as well. This should be VERY concerning for Tesla owners and the fact that the owner tried to let Tesla know about the security & safety issue, because that’s what it is. Of course in Tesla fashion, they effectively gave him the 'Heismann' and couldn’t be bothered. Of the many challenges that Tesla faces, what I consistently hear from Tesla owners is that they are THE LEAST responsive company regarding customer complaints or issues. If Elon and his team aren’t addressing this in a serious way in the near future, it’ll lead to lost sales, especially in the China market whose consumers have MANY more choices than they do in the EU, CA and the US. What’s notable is that when the legacy OEMs read about this, they likely triple-checked that they weren’t having any types of security concerns like this with their vehicles. Now, is this a one-off for Tesla? Perhaps, but as more and more Tesla’s hit the roads, we will find bugs and edge cases move into more of the mainstream of customer issues. That’s how that works when you sell products in the millions. Bugs that normally wouldn’t pop up when you have 100K of your vehicles on the road become major issues when you have almost 4M of them roaming the streets all around the world. Here’s another thought – I bet if this happened in China, there would’ve quickly been some type of assurance to Tesla customers (that would actually be pointed at the Chinese govt) that it was a unique problem with those particular vehicles and doesn’t point to a major security flaw. - Buttigieg thinks Full Self Driving isn’t an accurate name for Tesla’s L2 ADAS system. And he’d be right. But till now there haven’t been any real consequences for the naming confusion and the accidents allegedly caused by a faulty FSD. NHTSA is seemingly in a continuous investigation into all of the Tesla accidents that occurred while FSD was activated but it’s not entirely clear whether or not they really were? Since we’d mentioned in the previous post that there are now almost 4M Tesla’s on the road all over the world, it is about time we stopped being unwitting beta testers for Tesla’s ADAS ambitions. NEWS THAT GOT OUR ATTENTION THIS WEEK - Amazon just isn’t that into Rivian anymore. Rivian and Amazon decided to cancel it’s Rivian exclusivity arrangement with the e-delivery vans. Amazon says they're still committed to purchasing 100K of them by 2030 but pushed out orders as Amazon is itself looking to reduce costs and get smaller. First, the Amazon delivery vans were custom to Amazon’s specs I was told and its unclear who owns the IP. If Amazon owns it, would they be willing to license it to Rivian to use in non-Amazon manufactured delivery vans. Next, this is a decent sized blow to Rivian since it, on paper at least since this was guaranteed, predictable production volume while new products ramp. It’s really disappointing to see how much Rivian has struggled to ramp the R1T & R1S. They just have NOT been able to turn the corner on this stuff, perhaps RJ and team were drinking their own kool-aid? I guess they didn’t take too seriously Elon’s story about manufacturing hell. As they continue to struggle with manufacturing, this leaves Rivian open to competitiors being able to launch products and get more of them out to customers more consistently unless by the end of this year, Rivian can figure how to build these things at >15K / month. Remember that ShanghaiGiga can churn out MIC M3 & MYs at about 100K / month. Rivian won’t get to 100K / month anytime soon if ever but they need to get at least to a respectable 20-22K sooner than later if they want to be able to sell a ‘high runner’ aka a sub-$40K R2 let alone set up another factory. Finally, with the delivery van, these will become lower margin products that help the factory maintain higher utilization rates and now that Rivian needs a sales team to go out and get these things sold knowing that they are competing directly with Ford & GM (with Brightdrop), it’s not going to be easy booking those large orders like the Amazon deal. RJ sold us on $90K trucks but can he sell us on $80K delivery vans? - Tesla and BYD breaking up too? A Korean media site reported that Tesla will not be renewing its battery supply deal with BYD because of some quality issues that led to some Tesla battery fires. The article goes on to state that Tesla’s other battery cell suppliers, CATL, Panasonic and LG would all take up the orders left from BYD no longer supplying Tesla. It should be noted that BYD denied this as well as Elon via a tweet he sent yesterday. What a tangled web being weaved. And my thought is that it's not true until it is which we'll find out by next quarter. TRENDING ON SOCIAL MEDIA - VW announces its going even bigger on EVs & batteries. To the tune of €180B over 5 years, which is a bump of 13% compared to last year and of which €122B will be dedicated to building out their SW and battery capabilities / capacity, specifically in China where catching up to the competition is going to be a ‘major challenge.’ The article states that VW sold ~40% of all their vehicles in the China market last year. Its too simple to say that VW rely on the China market so allow me to be a bit more dramatic. Failure in the China market means that VW Group doesn’t look the way it does via brands, # of employees, # of products, # of markets, etc if it fails to stem the volume / share losses in China. VW lost 4% points of share between 2020 and 2022 now controlling 15%. Those massive investment numbers that were outlined (still dwarfed by Tesla's investment forecast of $275B BTW) means they need to raise capital which equates to more IPOs in VW Group’s future with PowerCo, Lamborghini, Bentley as the top candidates. Worse case (but really realistic) scenario for VW Group, Porsche, Bentley and Lambo continue to do well but the more mass market brands like Skoda, Seat and VW continue to struggle in China pulling the entire company down. It’s realistic to envision Skoda leaving the market entirely in the next 10-18 months. Audi is also a bit of an odd-man out in China because it’s widely regarded still as a government official vehicle although they haven’t really been that for some time. The premium segment is where the EV sector hasn’t yet really gotten that competitive compared to the mass market but that’s going to change coming into the 2nd half of 2023 and it won’t be just Audi that may struggle but all of the ABB. - Li Auto rolls out price protection for their vehicles. The new policy protects the vehicle’s sale price for 90 days meaning that if Li Auto cuts prices of the vehicle a customer just bought within that 90 day window, then they’ll be refunded the difference. Li Auto plays in the premium SUV sectors where competition isn’t near as intense so I don’t see this being too much of a drag on them but it’s definitely a PR and customer friendly put option for those in the market for an SUV. - A product of the IRA, a VW battery cell plant in O, Canada. Ambitious plans emerged from VW’s Investor Day this week including that it’s going to park a battery cell factory in CA about 115 miles from Detroit proper. This tells me that MI was likely in the running to land this thing as well and they decided that the Ford CATL deal made more sense or perhaps VW got a better deal from CA. Both could be true. And I wonder if Ford being American had anything to do with MI getting the Ford factory? Remember that CA has taken a hard stance towards Chinese companies investing (read: acquiring) Canadian mines so that animosity may have bled over to battery cell plants too. And if that was the case, MI could’ve perhaps landed both factories if they’d thought it through? The announcement did emphasize a partnership with the Canadian mining sector so perhaps that's something that MI couldn't offer. All speculation but we’re talking billions of dollars and thousands of jobs so being thoughtful and doing a post-mortem is an important step in putting you best foot forward the next time opportunity comes knocking at your door (that message is for Michigan BTW). - BYD’s next factory in Europe still not known yet but it won’t be in the UK. The UK has a few different things going against it already including, RHD or right hand drive vehicles, high(er) labor rates than their eastern European counterparts and a history of strong unions. Brexit just adds to it and more because it makes for an unpredictable business and social environment. Now, there are still great reasons (pros) to invest in a factory there: large domestic market (and opportunity to export to other RHD countries like Sing, HK, Thailand, Oz, Japan and India), skilled auto workers, London being the Silicon Valley of Europe to name a few but if they’re too recruit one or more of the China EV Inc, they’ll likely need to sweeten the deal by a decent amount too. GET SMARTER - Nvidia is the key to China’s AI ambitions. There was some major attention being given by western media to Xi Jin Ping’s call out of CATL last week but what they really should be focusing on specifically is the chip ban and how it’ll affect China’s most cutting edge HW/SW that for AI. AI modeling takes an enormous amount of computing power to process all the data inputs in order to produce articles, artwork and even code and music that we've seen some AI tools like Chat GPT do recently. This has #FOMO to a fever pitch as other tech companies around the world all scramble to launch their own versions. This pushes forward and increases the importance of chips and other products that suport the sector from companies like Nvidia and let’s be very clear here, there aren’t a handful of companies that can design the ASICs to run them like an Nvidia can. When I worked at Apple, Nvidia and ATI were my main two suppliers so I’d speak to them on an almost daily basis as they were the ONLY two players in town for high-end. discreet graphics chips that could support the PowerBook/Macbook Pro and Mac towers. ATI was eventually acquired by AMD and Nvidiia continued on its path towards designing the most cutting edge graphics chips in the world using multiple cores. Fast forward to present day, bitcoin mining and AI have pushed the importance of chips designed by companies like Nvidia to the forefront. But what really makes Nvidia different from their competitors is the development of the proprietary software that helps run the AI chips called Compute Unified Device Architecture or CUDA for short. It makes building AI models much, much easier for the user and purchasing Nvidia silicon allows you access to these SW tools. That changed when the US govt in October 2022 banned the sale of the most cutting edge chips to China. Why it hurts even more is that the software they used to help them build those AI models - CUDA - has been taken away as well. The combination of the two could really be detrimental in China keeping up with the US on AI technology. And therein lies the rub. It’s not just the design of the silicon and the tools needed to fabricate it that China needs to get figured out on its own, it’s the software that enables the silicon to be used at its most powerful state that they’ll need to get right as well.

BY THE NUMBERS - 5K. That’s how many EVs UK car rental company Octopus EV has announced it’ll purchase from BYD who happened to also announce it’s entry into the UK passenger vehicle market. BYD just keeps #GSD. ___________________ 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 Team


 

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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