VW's EV push, FCA & PSA merger, Model Y domination - SAI Newsletter #41
Back in Shanghai for some meetings and wanted to open things up with my thoughts on the current EV environment in China, specifically as it relates to the Chinese startups that are trying to stay afloat. I’ve recently been getting a lot of questions about who I think will and won’t survive this market downturn.
What I will say is that NOT all China EVStartups are created equal. NIO for instance has become the poster child for the entire sector which is very unfortunate since I know that a few of these other EVStartups that were a bit more prudent with their cash and decisions could very well come out of this challenging environment much stronger players.
I had the chance to meet with WM Motor this week who could be one of them. They have their own plant, so they’re already ahead of most of the competition. They decided early NOT to compete in the premium SUV segment which looks wise now since that seems to be where all of their competitors decided place their bets. Ironically, I think they may be TOO conservative in some of their decision-making and in order to increase sales enough to be consistently profitable, they need to concentrate on getting people excited about their brand and products.
With a revitalized focus on identifying their customers, an aggressive marketing campaign and a successful launch of their 2nd product, the EX6 I can see a path for them to be a major player in the Chinese EV market in the future. They’ve also recently hired a Chief Growth Officer so they know that increasing sales is a KEY focus area moving forward.
As for NIO, they’re just having a really difficult time lining up wins. This week, NIO’s CFO Louis Hsieh announced that he’s leaving NIO as of yesterday. In my experience, when the CFO leaves a struggling company, it points to some very serious troubles since it’s the CFO who normally knows where ‘ALL the bodies are buried’ so to speak. This may seem like an obvious statement since all of NIO’s challenges have been widely covered in the news, but Louis being gone might’ve just cranked it up another notch or two.
In this tough environment every carmaker, from large OEM to EVStartup, is struggling to sell vehicles, and most of these EVStartups are likely trying to raise capital to keep the doors open for another 9-12 months with the hope that their products over time will begin to resonate with more and more consumers.
Competition breeds innovation and I hope that each one of the EVStartups is able to survive this challenging market which, in the end will make them stronger but I fear that a few of them are not currently are on the path to success even if they are able to raise the capital to fund it.
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 US, 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/Ride-sharing/Ride-hailing/Bike-sharing, OEMs, EVStartups, Investments, and Other.
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The Sino Auto Insights team
The initial signs that the tidal wave of EVs from the traditional foreign OEMs is going to start hitting (EU & China) shores begins with the announcement that VW will ramp up production of electric vehicles to the tune of 1M units of capacity by the end of 2022. That includes two plants in China with a combined capacity to build 600K vehicles / annum.
Let’s remember that there were ONLY 1.2M NEVs sold in 2018 in China and that was with substantial incentives to the consumer, incentives that have drastically been cut in 2019 leading to 3 consecutive months of shrinking sales in the NEV segment of the passenger vehicle market. If the slowdown bleeds into 2020, which I believe it will, it could take some months to get the prime pumped and momentum building again to get the sector back into growth mode. It could even take a nudge in the form of incentives from the Chinese govt to get things back on track in China.
VW’s announcement should have the management and strategy teams of both the startup and traditional OEMs revisiting their 5-year product plans, potentially shuffling the lineups and pulling in vehicle launches in order to have competitive products in the China and EU markets before the end of 2022, that’s if they haven’t already done that. They’ll also likely need to reconcile their financial planning & budgeting for FY21 & FY22 to include drastic increases in marketing spend in order to defend their share in these markets.
VW has really remained aggressive with their switch over to EV production, essentially eliminating the transition period from ICEs to EVs in their product lineups. This aggressiveness should help the rest of the industry since VW’s buying power should push down the costs of expensive EV parts (read: batteries and motors) across the board but VW’s competitors have mostly taken a much more conservative ‘wait and see’ approach to the shift in the market. All these automakers know that the question is ‘when’ and not ‘if’ the market will reach a tipping point but the more conservative OEMs have a longer time horizon for reaching that tipping point and do not want to leave any revenue ‘on the table’ that can be generated from ICE sales.
VW, on the other hand, is trying to dictate to the market the ‘when’ and pull in this tipping point, and that shift over of 1M units to EV production they’re hoping will be a catalyst for doing that. You could say that VW was forced into this aggressive approach in order to help get the diesel-gate scandal behind them. China is also VW’s largest and most important market, something that can be said for many other automakers as well, and from their actions it seems that VW will NOT relinquish their title of best-selling carmaker there without a major fight and likely substantial damage to its competitors that aren’t ready for their bold moves.
The wild card here that many followers believe, including myself, is that Tesla will be able to sell EVERY Model 3 it builds out of its Shanghai Gigafactory in 2020 – NO PROBLEM. They are also VERY likely working overtime to pull in the China production launch date of their smaller, more affordable SUV the Model Y. Flawless production launches in China of the Model 3 and the Model Y likely in late 2020, which I detail a bit more in a highlighted article further down, will be gamechangers for Tesla and will get them past their 500K global sales goal within the next 2-3 years.
Automotive mergers are ALWAYS complicated, expensive and they rarely create the value they were intended to (see DaimlerChrysler). With that having been said, these two companies, if they were to still go it alone at the same trajectory they’re tracking at, would likely not survive alone for the next 10 years due to their inability to sell well into China and lack of investment in future technologies. FCA seems to have gotten the better end of deal though since they have NOT made any substantial financial commitments in developing any new products.
Merging these two companies may create scale, if we combine sales numbers the two companies sold over 8.7M vehicles last year, which would’ve been the 3rd highest among all the automakers, but it will take a great management team putting together an ambitious plan that sets them up for the future, with the ability to make very tough decisions and lead their teams to execute to this plan while course correcting as the market moves and evolves. Oh yeah, and they’ll need to do it during arguably the sector’s most drastic period of upheaval in history.
I do NOT know that much about the PSA team since they aren’t major players in China nor the US so I will need to learn more and will follow up via the newsletter what I learn and hear. I also have friends and a brother that work at FCA in Auburn Hills so let’s say I am emotionally invested in this transaction.
It’s starting to get crowded in the EV SUV category now that Mercedes has entered the fray and announced that their EQC SUV will begin selling in China next month. Just as I’d highlighted VW production announcement this is another signal that the tidal wave is gaining momentum.
Combined with the Tesla Shanghai Gigafactory beginning to take orders, 2020 is making out to be a VERY interesting, dare I say, potentially ‘tipping point’ type of year for the EV sector here in China.
The EQC, at almost $85K USD, is aimed squarely at the Tesla Model S, the NIO ES8, and Byton once that eventually goes on sale. Merc also has a pretty good reputation in the market so the EQC could take a great deal of sales away from the Model X which hasn’t had any major refreshes since its launch in 2015.
Another notable player that is scheduled to launch in China in 2020 is the Audi E-Tron which would also be squarely aimed at this segment. Some of you may remember the E-Tron as the vehicle my friend had so many issues with. Haven’t heard about too many problems from him about it since he got it back!
In order for Elon to reach his lofty goals for Tesla, they will need to become a volume player and consistently sell hundreds of thousands of vehicles / annum and the combination of the Model 3 & similarly priced Model Y should allow Tesla to do just that.
If Tesla is able to sell a couple hundred thousand units of each vehicle, which shouldn’t be a problem if you factor in the China market, and NOT have any nagging quality or manufacturing issues, they will likely have a controlling share of both the US & Chinese markets. Elon has recently stated that ‘the Model S & X are niche vehicles’ to Tesla and that they’re aggressively attacking the meat of the passenger vehicle market with the more affordable Model 3 & Y.
Clearly, Tesla has the most recognizable brand in the EV space and their vehicles, based on sales, are by far the MOST appealing to anyone that’s considering purchasing an EV. That ~$50K price range just makes it that much more of a compelling reason to move forward with the transaction. IMHO, the secret sauce is their very early entry into the EV market and their ability over the years to position their products as innovative, must have vehicles that just happen to be electric. This is NOT an easy circle to square, just ask NIO.
Even with the blinding speed in which Tesla was able to get that Shanghai Gigafactory up and running, I can assure you that Elon still isn’t satisfied and is pushing his team to pull in production start date on that Model Y here in China as well, likely targeting an end of 2020 launch time frame. The Model Y is the real competition for these EVStartups who’ve launched SUVs into the ~$50K SUV segment so these companies still have some time to get their house in order, create further awareness of their brand and vehicle so that they can try to significantly increase sales and grab some market share because once the Model Y launches, things will become significantly tougher for them.
As a follow on to my opening last week, China has recently begun to reassure foreign firms that they play a very significant role, now and in the future, to the continued growth of the Chinese economy. The Chinese govt. realizes that policies that favor domestic players or prohibits an open, competitive market risks alienating an already weary group of multinationals due to the trade war and uneasiness with the level of fairness in China.
China is likely going to update its industrial policies moving away from the ‘Made in China 2025’ policy that irked many foreign govts. Some of the items they’re looking at to reassure the foreign companies is giving them more and better market access while providing less protections for its domestic companies and allowing the market to dictate winners and losers. An example of that is what’s currently happening in the EV sector as there are a few startups struggling to remain solvent.
Till now, the Chinese govt. has mostly stayed on the sidelines and avoided providing any bailouts to them with the exception of the NIO bailout by the Beijing govt. should that go through.
Let’s remember that Chinese companies have now had almost 30 years to learn, many from their foreign partners, on how to compete so the initial years of being dominated by foreign competitors taught many of the Chinese firms lessons they’ve used to become increasingly more competitive.
For those of us that live in China, what this long read details is nothing new here. We don’t have many Fedex or UPS style trucks clogging up the streets or blocking entranceways but we do have a TON of smaller, normally three wheeled electric delivery vehicles that ignore traffic signals and exacerbate an already congested sidewalk or city street in a hurry to deliver goods, groceries, and/or takeout within hours of ordering it from your mobile.
I often tell people that living in China is like being able to see ‘around corners.’ This is a prime example of what has just recently become a headache for many New Yorkers is something that Beijinger’s & Shanghai’rs had have to manage for more than 4-5 years already. For those that haven’t been or are curious about all that’s happening in China, I personally invite you to come for a visit to see for yourself. Much of what’s going to happen in the rest of the world is already happening here and, in many instances, has likely already evolved into something completely different. The speed at which things happen and change here is staggering, it truly is.
There’s an e-commerce startup called 盒马 that’s backed by Alibaba. They guarantee delivery of any grocery item within 40 mins of it being ordered between 9am – 9pm. The delivery cost is next to nothing and we use it …often. It’s a great service and we know that it’s likely negatively contributing to the traffic in China but we can’t help it! We just don’t have the time to shop for this stuff ourselves because we’re normally stuck in traffic and late getting home.
Let me first say I do believe in some regulation for certain businesses in order to prevent monopolies and avoid any company from becoming ‘Too Big to Fail.’ I am still unsure what the author’s position about mobility services are though when it comes to subsidies and regulation. Is it that these mobility companies COULD be profitable eventually? Or that in order for them to be profitable EVER, they would need some sort of subsidy from the govts in the cities and countries they operate in as well as for them to regulate the markets in order to reduce competition?
Providing welfare to these mobility startups makes me very uneasy. First of all, growing up in Detroit public transportation was SUCH a key service for the folks that couldn’t afford a car but are doing everything they can to support their families including taking jobs miles away from their homes. These are the types of situations when subsidizing these businesses is important and when the local and national govts. should step in to ensure that these services remain affordable for everyone which she does mention in the article so we agree on that.
With regards to Lime, Bird, Uber, Lyft, etc. why should we subsidize them? These companies are already worth billions of dollars and their customers are happy to pay a convenience premium for someone to take them to wherever they need to go. These services are out of reach to most due to price so I am still not convinced why it would make sense to help these companies when their service is only affordable to a small portion of the community. These are 1st world issues that really aren’t relevant when we take a step back and look at who the target market for these mobility companies are.
I am also a believer that an output of fair, intense competition is innovation. For these companies, it’s important to let the market, and ONLY the market, decide who will succeed and who will fail. I’d be open to providing them some financial welfare if part of the deal for providing the welfare would be that they operate services that don’t exclude anyone. OK, I just stepped OFF my soapbox.