VW's Mea Culpa, EVStartups funding dried up, Trade War's lingering effects - SAI Newsletter #23
Updated: Jun 23, 2019
We’re back to our regularly scheduled programming. Took some time to narrow down the highlighted articles since there seems to be so much going on despite the fact that we’re getting into summer vacation.
One thing that's keeping people on their toes is the 'trade war' between China and U.S. While no one can predict what will happen or how long it will take, the longer it goes on the more likely companies begin moving their manufacturing out of China if they've not already begun to that is, whether it’s automotive parts, textiles or consumers goods. Many in China and the U.S. are hopeful that the upcoming meeting between Xi Jinping and President Trump set in the backdrop of the G20 summit will help defuse some of the tensions. My bet would be that we can expect more companies to Exit Stage left and likely never come back.
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
This article does a good job of summarizing what each of the foreign OEMs operating in China is doing to prepare for the transformation occurring in the world’s largest auto market, which will, in turn, have ripple effects in the EU & the U.S.
A couple of areas where I’d like to add some color. VW will be investing the bulk of that $150B total into China and if you’re wondering why it’s because they HAVE to.
As mentioned in the article the VW Group consistently sells over 4M vehicles/annum in China so they need to stay around that run rate for the foreseeable future or they’ll need to start shedding costs in order to maintain competitiveness, which in turn will not allow them to invest in the necessary R&D to develop the EVs that should help them maintain their share in China.
Same for most of the other major OEMs. China’s volume and profits give the foreign OEMs flexibility, especially when the U.S. and EU markets aren’t growing. These OEMs are starting to acknowledge that China is their most important market. Full Stop.
In VW’s case, they still have a black eye in the EU and U.S. markets as well as uncapped potential liability from the diesel-gate scandal so their management believes that whatever they can do to get the scandal quickly behind them, including establishing themselves globally as leading the EV charge will help people forget. See next post for more detail.
Let’s file this under the ‘Never let a good crisis go to waste’ category. VW, who is still trying to distance themselves from the diesel-gate scandal, recently launched a new commercial that acknowledges diesel-gate and makes the claim that they’ve seen the error in their ways and are making up for it by producing ‘clean’ energy vehicles, aka electric cars.
I saw this ad for the first time while in the U.S. a couple of weeks back and I think it does a good job of deflecting a bit, the seriousness of what the company did in the U.S. and Europe and tries to convince potential buyers to look forward to what’s coming from them.
I am not sure I agree with the author’s logic about VW coming late to the electric market, primarily because electric vehicles still don’t make money, just ask Elon Musk, so I’d say they’re right on time.
I just thought it was a pretty compelling, thought-provoking ad that will likely force you to reflect on what VW did and whether they’ve truly seen the light, for their sake let’s hope so!
Oh, and for those interested in watching the commercial, click here.
VinFast, a few year old automotive startup has rolled out its first product, the Fadil a couple of weeks back with starting price at ~$17K. I won’t get into too much detail here other than that the Vingroup, who started VinFast, have some pretty deep pockets and decent relations with the Vietnamese govt. so although VinFast has a very LONG, STEEP, and WINDY road ahead before we can call them a success, I wouldn’t count them out.
VinFast is run by a bunch of ex-GM’ers, and a few Ford guys I believe, so the team should know how to build a car in Asia. Whether they can create enough excitement for the brand that Vietnamese car buyers would rather purchase a VinFast over a Toyota, Ford or Honda we will just have to wait and see.
EVs & EVStartups
As has been mentioned in previous newsletters, this Reuters article makes it O-fficial. The ‘capital’ well that was abundant in 2017/18 has officially dried up for most of the 500 or so fledgling Chinese EVStartups.
On the sales end, even the well-established, well-heeled EVStartup frontrunners with the big backers like XPeng and WM Motor are finding that the market isn’t as hungry for their shiny new products as they had forecasted just 12-18 months prior, especially since the govt. handouts are being pulled back, pushing prices for their vehicles higher.
It’s been a HUGE challenge for NIO, who was recently thrown a ~$1.5B lifeline by the local Beijing govt. On the outside, the EVStartups are all acknowledging that it’s a challenging market currently but that they’re officially ‘not worried.’ In their meeting rooms though, they have to be freaking out since none of the models that are currently on sale from WM, XPeng and NIO have really resonated with consumers in the form of substantial month/month sales growth.
Without that top line growth, combined with a lack of external funding, the startups are unable to invest any further in manufacturing their current vehicles, R&D for new ones, and/or adequate support for the vehicles already on the road.
All these challenges are taking place even before the big traditional German and American OEMs start launching their products into the market and from the earlier article in the post, they aren’t just standing still.
One thing the OEMs are good at that the EVStartups need to be keenly aware of is that they know how to fight a pricing war. If this trade war continues, the EVStartups that lack the necessary capital will not be around for very long since they’ll just be squeezed out of the market by the competition. When the dust settles there will be A LOT of losers with only a few winners and those winners will likely be substantially wounded.
AV and AI
With the continuing improvement in EV/AV hardware and software, it’s only natural that the major OEMs incorporate the latest tech into their newest vehicles, it gives them an opportunity to test it, monetize it, and use it as a differentiator that sets their vehicles apart from their competitors. Besides, this how it’s always been done, new tech gets put into the luxury cars then as costs decrease and awareness and acceptance increase, the tech gets bolted on to cars the average consumers buy.
This article posits that since one of the primary goals of autonomous vehicles is increasing safety, providing this tech to current buyers actually makes the cars on the roads safer thus, pushing out the timing for mass adoption of ‘transportation as a service’ (TAAS) and autonomous vehicles. I’ve actually never thought of it like that so but this makes a lot of sense.
The initial ‘buzz’ from the OEMs, mobility and AI companies about getting to level 5 autonomy has faded pretty dramatically since most believe it’s still a good 20 years out.
My view is that the slower the adoption rate from car ownership to TAAS, advantage goes to the traditional OEMs since the OEMs have more money, they’ll have more breathing room to adjust strategies, right-size their companies/manufacturing footprints, while also beta testing the new tech (and gathering data) in millions of vehicles they sell annually so that they can combine, refine it, and use it to develop new monetizing opportunities.
You can bet that the Ubers, Lyfts and Didi’s, not to mention the EVStartups want this transition to occur sooner rather than later since their pockets aren’t as deep and the primary differentiating attribute of their product or service is just a ‘nice to have’ and not a ‘must have’ for consumers.
We learn more about Niu’s plans for world domination one country at a time, and it so happens to be the U.S. this go around. They’ve found a local partner for distribution and will also set up an e-commerce site so that the scooters can be ordered online then picked up at their local retail dealer. A pretty conventional model that should prove successful since they’re targeting cities that are rich in millennials, their target market. Niu will be launching 3 different scooters that will range in cost between ~$2 – $5K, which seems pretty steep so maybe it’s trade war adjusted? I would assume modest sales at least the first 1-1 1/2 years due to this price point and getting the word out, but I could really see Niu eventually taking off in the U.S., that’s unless e-bikes undercut them on price, safety, and convenience.
This made waaay too much sense so BRAVO to the GGR team for making this happen. One of their goals has to be to, at least in Taiwan, increase the install base for their swapping systems to get those utilization rates bumped up, so licensing that tech to a big player like Yamaha is a MAJOR step forward.
That means GGR can amortize the batteries and kiosks over more rides and kilometers, pull data from more people and beta test how it would work with a partner before taking it to an international stage.
I am a BIG fan of the GGR scooters, team and their unique approach to helping people solve that ‘last mile’ challenge. I have a feeling that GGR has a few other things up their sleeve and wouldn’t be surprised if we hear a few more major announcements from them before the end of the year.
Just under the radar, but a vertical within the ‘last mile’ micro-mobility space that I am long on, this three-way mashup between Hellobike, CATL, and Ant Financial could be one of the catalysts that get more e-bikes on the road, at least in China anyway. With CATL onboard, pricing for e-bike batteries and hence e-bikes should start to decrease pretty substantially very soon.
For those new to the newsletter, I think e-bikes will be one of the businesses that will take off in the next 12-18 months, replacing e-scooters as the preferred mode of transport for that ‘last mile’ because they’re safer, more comfortable for longer ranges increasing the opportunity to monetize each ride, even with a smaller install base.
Like the whispers heard months ago here about the funding drying up for the EVStartups, there have been numerous rumors about companies across the board ‘exploring’ options for diversifying their manufacturing footprints out of China for the last few years, long before the ‘trade war’ hit.
China long ago lost its luster as the cheapest place in the world to build things, with many Southeast Asian (SEA) countries now being able to compete on price.
That, along with the fact that the +600M people that inhabit the 10 ASEAN countries have also grown their buying power making a compelling reason for moving at least some manufacturing out of China, shifting that capacity and sales to those domestic markets. As long as the threat of a trade war between the U.S. and China exists, there is significant risk to having most of your manufacturing in China. Free trade agreements like the Trans-Pacific Partnership will ONLY make moving manufacturing to one of the ASEAN countries that much more attractive.
As a microcosm of what’s happening in many other sectors, this article highlights the challenges that tariffs are creating for bike importers and in the case of Detroit Bikes, one of the last, maybe only American bike manufacturers.
No matter which side you fall on the ‘trade war’ the reality, as echoed by Zak Pashak, is that China will continue to be supplying at least some finished goods and parts for various industries for the foreseeable future, there is just no way around it.
Further, there will NOT likely be a renaissance of manufacturing, and the jobs that come along with it, in the U.S. and that much Southeast Asia is poised to benefit from any continued economic conflict between China and the U.S.
On the positive side, these are the types of disruptions that create opportunities for fledgling companies struggling to compete against the established, 800lb. gorilla-like companies that normally dominate sectors like bicycle manufacturing so for those entrepreneurs and SMEs that think they can carve out their own piece of the pie, here’s your chance and good luck!
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.