I wasn't going to write a newsletter this week so think of this as my musings on a few things that happened this week. 

Talked to some entrepreneurs that order components pretty regularly on Amazon and other B2B sites and guess what, they aren’t getting responses from their regular suppliers and the ones that do are being told to expect delays.

I’ll put my interpreter hat on for this - What the suppliers are really saying is: ‘We are all on Lunar New Year holiday and won’t be back for another week or so and won’t restart the factories till the last week in February or so, then it’ll take another week or so to get deliveries going in earnest again’ – THIS is why it’s a VERY slippery slope if the US govt wants to put up too many restrictions and trade barriers.

I am not a politician though and am looking at this through the lens of the customer. One that will have to pay extra for a lot of what I buy in the future potentially. Talk about inflation. How patriotic will US consumers be if the average vehicle price hovers around $48,247 or if competition isn’t allowed in, even higher.

We can’t hope to get manufacturing re-shored for everything we used to build here so that narrative should be shut down completely. The products / commodities / rare earths that we are prioritizing that will eventually be re-shored will take time and investment, much more of both than anyone is ready to admit.

We took this week off so no China EVs & More this week since we are technically on CNY, but I couldn’t help myself and just started riffing on a few big topics that came up this week in the West. I will focus my attention on these few subjects this week that may seem disparate but are certainly all related.

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I have a pretty strong opinion about when I put my old sourcing / part chasing hat on.

Each major corporation that’s publicly traded has a Risk management department. In the current political and diplomatic environment (read: tension between the US and China), the Risk management teams at each of the OEMs / tier 1s should be identifying any current or future potential business or operations that could fall afoul of the US and / or China regs and laws. With the US / China continually fine-tuning their policies based on what the other does, it’s certainly a full-time job for these folks. They also monitor for potential global conflicts and help manage when a conflict (think Ukraine or Israel) affects the company’s operations or employees.

Sometimes the internal risk management teams are small and the actual monitoring is outsourced to risk management consultancies. They charge a mint too BTW. VWG operates in 153 countries, so the Risk management team is likely HUGE, very international with local consultancies helping them manage at the regional and depending on size or rev share, even country level.

Additionally, VWG should've known about the potential for a major disruption of operations, which I would definitely call ~1.5K cars held before reaching their final destination because of a non-compliant part as. If the average MSRP of the vehicles was $50K which, in all likelihood is much lower than actual, that’s $75M tied up for at least 30-45 days.

VWG should’ve been speaking with their govt contacts and / or US counterparts. To either get a heads up or negotiate some exception until a new ‘compliant’ part was qualified and approved to ship. The fact that they are playing the ‘we didn’t know’ card about complex supply chains is completely on THEM. It’s their JOB to know where parts are coming from whether that’s at the tier 1 or 3 level. Toyota follows the supply chain of their parts / components to the raw material level and has a database to track it.

You better believe there’s language in VWG’s MGA – Master Goods Agreement - along with a small clause on each PO’s (purchase order) T’s & C’s ship – Terms and Conditions – that’s accompanied with every approval to ship that pushes the responsibility of using compliant raw materials and components to the supplier. This is their CYA – cover your ass – clause.

If they use the same part for China bound vehicles as they do ex-China vehicles, they’ll now need to dual source that part, an ECU I believe that should've already been flagged. If you’re wondering why they would use two parts instead of just switching over completely, there’s a couple reasons for that.

First, no automaker or maker of products for that matter wants to single source, it gives too much power to the supplier and again creates a lot of risk to the OEM, but in certain cases there is only one appropriate supplier either because of the specific technology or because of the cost, more specifically the TCO (total cost of ownership). If they switch suppliers on this part completely, there could be ‘other’ issues they’ll need to deal with on the China side.

Moving forward, VWG needs to look through their entire supply chain flag ALL other potentially risky parts, find alternate sources for them, make sure that they are acceptable or compliant to the US govt (and other governments they ship the vehicles to) then qualify them to ensure they provide the same functionality as the parts they are replacing and if the cost is higher, beat up the supplier - who knows they have the leverage - to try to reduce it close enough to the price they were paying for the part being replaced. Then VWG will also need to make sure the part is available in the quantities they need it to be, when and where they need it.

If they don’t do it soon, they could hold up manufacturing of ALL the vehicles that use that component. That’s a headache for another day to explain!

It's because both sides know how each other work. They trust each other and know that together they can get the job done. Also, the parts are already qualified in Shanghai. They’d need to be qualified again for MexicoCityGiga, but that shouldn’t be an issue.

The whole WIN WIN situation is terribly overused, but I think in this case it’s appropriate because this gives the suppliers an opportunity to expand and in this case, to another market and region. For Tesla, they don’t have to train another supplier and can create even more economies of scale to push piece cost down further.

This was ALWAYS going to happen. It makes too much sense. Here’s why though. These suppliers are also in constant contact with the Chinese OEMs they supply to as well as the foreign automakers in China. They are the first to know when a Chinese automaker they supply decides to launch operations in other locations, in this case another country that happens to be a neighbor to the US, the 2^nd largest passenger vehicle market in the world. That means they can not only supply Tesla, but they can supply another OEM potentially, one that can speak their language, share their culture and diplomatic priorities that they also may already supply to in China.

The US is caught between a rock and a hard place. Does RMB not fold or spend as well as USD, KRW, JPY or EUR? They’ll need to decide whether or not they want that FDI (foreign direct investment) that Mexico is happily hoovering up with their largest Dyson available.

See the Bloomberg article about details on FDI growth and the amount of factory square footage owned by Chinese companies has increased. Currently, since actions speak louder than words, it’s doesn’t seem like we do. Will that change after this coming election, it doesn’t seem so. President Obrador, we’d like a word…

Here comes the frustrating part. The investors in the Midwest are generally VERY conservative. And aren’t very openminded. Most of them just want to be part of the ecosystem without really rolling up their sleeves to get anything done. Some are just dead weight.

On the coasts the entrepreneurs have more leverage due a combination of factors including the boldness of their ideas, the track records of many (2-3x exiting) entrepreneurs, and the competitive nature of the venture community and the amounts of capital they’ve raised that needs to find a deal.

That’s not happening here. With folks not needing to be entrepreneurs, the automotive sector (in the rustbelt states anyway) has afforded people a VERY nice living. It hasn’t created too many obscenely rich individuals, but a lot of people have cottages and head ‘up north’ on the weekends with their boats in tow. A great living that’s a lot less stressful but still fairly fulfilling for the most part. I determined that I am just not wired that way and the entrepreneurs I am helping aren’t either. In Michigan, there are transplants boomerangs (like myself) and homers that want to catalyze positive change.

What the rest of the ecosystem and community doesn’t understand is that taking pictures alongside these entrepreneurs at all the events that ‘celebrate’ them so you can see yourself in the local papers doesn’t actually move the needle forward for Detroit or the state of Michigan. They still don’t realize – in Elon’s words “Chinese automakers will demolish global rivals” if there isn’t any protectionism established by the US govt and the EU.

Trust me, I am trying every day and I am starting to see more people reach out to learn about what’s going on in China, but learning about something and doing something about something are completely different things.

And to do something about it, we need to admit we are behind, way behind. I want to pat myself on the back a bit since I saw this wave coming from China since before I launched the newsletter and this consultancy. Now that Elon and just this week, the COO of Ford Model e are all finally acknowledging it as well, maybe folks will look at many of the older newsletters for the roadmap that will tell us how to do something about it.

CHINA EVs & MORE (CEM)

We took a one week break to celebrate Lunar New Year, but we’ll be back next week, same time same place. To join the live show, follow me on X: @sinoautoinsight and at 9am at the top where the Spaces rooms show up, you should see our show. You can any questions you have.

If you can 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.

INTERVIEWED / QUOTED

Autoline After Hours. I always have a terrific discussion with John and his guests, who this time were David Welch from Bloomberg & Michael Robinet from S&P Global on Autoline Network - After Hours.

In between our discussions on the meaning of life and the Detroit Lions winning next year's Super Bowl, we spent a few minutes touching on what's really going to trip up Legacy Auto - Software.

We also had a good debate about what role #autonomousvehicles (AVs) will have in the future after Cruise's recent (major) challenges.

There was also a lively chat about what many analysts have called #EVs inevitable demise, which as all of you know isn't what I believe at ALL.

Great points made by ALL parties, but I still need to work on David a bit about the commercial opportunities that will emerge for #AVs here in the ���� and the rest of the world!

I am certain many of you are curious to hear more about the above topics and all the other stuff we discussed so click the link in the comments to get to the episode.

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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 global automotive and mobility sectors. We also provide a point of view that we hope educates and sparks debate.

The Sino Auto Insights team