We’re celebrating Labor Day here in China so we’ll have an abridged version of the newsletter this week. My wife is running a half marathon on Weds so the Le family is currently in Suzhou to support and spend a bit of time outside of the capitol.
A couple of things I forgot.
How crazy it is to travel during national holidays. My kids are older (7 & 9) but that didn’t stop mom and dad from holding their hands as we battled our way through Shanghai Rail station and some of the touristy areas of Suzhou.
I also forgot how long it had been since the boys had been on a plane - almost a year and a half! They were pumped to take a trip that didn’t involve a car or bus although we HAVE done the planes (to Shanghai), trains (to Suzhou), and automobiles (Didi to travel locally) thing.
Secretary Pete, if you can wrestle away the US historical travel narrative that driving is the best way to get around for family vacations, it could spark a lasting renaissance for domestic travel in the US. There are so many beautiful places in the US that many of us only get to ‘fly over’ and never actually get the chance to see. Riding in a comfortable, fast, and efficient people mover could remind us of how pretty many parts of the US are.
The Gao Tie (高铁) aka high-speed rail (HSR) here in China makes things much more convenient for A LOT more people. The keys to adoption in the US of course are having Secretary Pete define what is ‘enough’ rail line, where enough of that rail line should go, and what pricing makes things ‘affordable’ for most than getting enough money to make it all happen, easy enough right?
Currently, China has about 38K kilometers (~24K miles) of HSR with trains that can travel at up to ~350km/hr (~218m/hr), generally the fastest in the world. In 2019, the high-speed rail system transported 2.29B passengers. Secretary Pete has to know that the ‘build it and they will come’ strategy isn’t going to be enough. There are competing interests (airlines, carmakers) to name just two that would rather the US govt. NOT invest the time, effort, and capital to make HSR a viable transportation option so we will have to wait and see how much of Secretary Pete’s ambition translates into actual rail lines & cars. I am hopeful that we do reconcile this technology and make it a part of the US system.
Since we are more than a quarter into 2021, there are some themes that are establishing themselves as possible pinch points hampering further EV adoption and development of the AV sector that are worth noting.
First is the chip situation. The assessment across the board is that the chip shortage is going to affect almost all major automakers and that it’s serious enough that sales forecasts need to be amended. The situation at some automakers seems more dire than others but generally, we should continue to monitor which of the larger legacies are able to contain the ‘supply’ issue sooner rather than later since it’ll be reflected in better revenue for 2021 ultimately.
To put it bluntly though, if supply issues linger for more than a few months, it’s not a supply issue as much as it is a capacity issue. Capacity issues take longer to remedy and a lot more capital. It’s not just about switching some lines over, working some overtime, and shipping premium to make first shift as you would do to alleviate ‘supply’ issues. There is also now some talk at the automakers about bringing chip design in-house. I think for those that have the available capital, access to chip design expertise, for the US that generally means significant presence on the left coast (or the Boston area), the ambition to take that HUGE responsibility on, and internal momentum to make it real - then this makes some sense. How many automakers US or otherwise, have ALL those boxes checked though?
The second is ALL about the data. I deep dive it a bit in a piece down below but this should be on EVERYONE’s radar since it affects EVs, AVs, and mobility services within the sector. Globally. It’s already affected tech companies (not just the data for them) and how they approach China (see Google, Apple, and Facebook) but as more Chinese EV startups vie for attention abroad, will they be restricted due to their tech stacks? If your tech stack includes names like Huawei (and others we’ll highlight in future newsletters) it likely does.
This is again one of those things where policy needs to catch up to innovation. Nobody is talking about it but the smart companies are planning contingencies for when policies change since they undoubtedly will.
Finally, the number of new EV brands from startups and established legacy & SOE automakers is clearly too much for the Chinese market to handle. And there’s even more on the way. If the powers that be, likely local govts., do not allow nature to take its course and eliminate the weaker players from the market, it will be a lot less likely that there will be National Champions, let alone World Champions, that the Chinese govt. so desperately wants to step up. This in turn could keep the foreign automakers like Tesla and the ABBs atop of the sales heap since too much choice tends to mean the incumbents get a closer look, especially in the auto space since trust plays such a key role.
Consolidation will force more consumers towards fewer brands and that may be the only thing that gets NIO, XPeng, WM, and the other hopefuls to the sales numbers that merit their current valuations. Fact: None of the China EV makers may be successful outside of China. I don’t think that’s likely but I do think there will be less than <4-5 that play any significant role in the US or EU markets.
TESLA IN THE NEWS
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One of the better ‘pictures in time’ of the Tesla situation. This piece, which coincidently I was interviewed for does one of the better jobs of detailing how Tesla got into their current predicament and the environment that they’re playing in with regard to China, the government & all the competitors. Till now, Tesla has been solely concerned about speed to market and taking share. That mindset will have to shift if it plans to be a ‘player’ in the China market long-term. As you can see from the next post, it seems that the strategy was forced to evolve a bit but can a tiger really change its stripes?
IN THE NEWS
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Cross-border data transfer in the spotlight. Last week as Tesla vehicles were highlighted as being persona non grata at Chinese military facilities because of their cameras, the National Information Security Standardization Technical Committee (NISSTC), a Chinese standards-setting body issued a draft rule on how ‘smart’ vehicles’ cross-border data management should be handled. Effectively, and no surprise here, the NISSTC says that data collected on Chinese consumers should be stored locally and that it shouldn’t leave these borders. What’s not clear is whether or not this data can be accessed from abroad, BUT there was no clear direction on whether or not that data could be accessed from abroad.
Therein lies the rub since that’s likely what many Chinese EV & AV startups are doing, transferring the data they collect in the US with their pilot programs there for use in China by their development teams. There is no clear restriction that I am aware of that does not allow this so this is for now – completely legal. For the data that’s collected in China, companies can likely still access it from the US even as it sits in Chinese ‘clouds.’ This leads to a terrific advantage currently for the Chinese startups that a have a significant presence in both Shanghai, Guangzhou, Beijing, Shenzhen as well as Sunnyvale, Palo Alto, Mountain View or San Francisco.
Currently, none of the main players in the US AV space (Argo, Waymo, Aurora, Cruise) have any significant presence in China but that’s clearly not the case the other way around since companies like Pony.ai, WeRide, NIO, AutoX, TuSimple) have significant dev teams on both sides of the water.
This leads to the question of whether or not this loophole will be closed (by the US govt.) or not and what’s the EU’s play then? For those companies whose valuations depend on both the US & China being viable markets for their products and services, eliminating their ability to access & utilize the data to strengthen their ML algos could be a real downer (literally) for that valuation, no?
The bottom line here is that vehicle purchases are still for most people emotional buys. The heavy emphasis by NIO early on those elements has likely allowed them to win sales when Chinese consumers are comparing them to other Chinese EV brands since they’re much more familiar with NIO. The fact that NIO has really leaned into the ‘community' aspects of their brand also reinforces their positioning and builds that trust between them and potential customers.
Whether the NIO brand can win more of the one-on-one battles between their ABB (Audi, Bimmer, Benz) competitors remains to be seen. My take is that the brand needs to likely gain even more trust from the consumer before it can consistently come out on top of those battles. This means that NIO will need to continue to launch competitively priced, well-designed vehicles that have high quality and reliability.
With more products from numerous competitors launching in the highly competitive luxury/premium segment over the next 18 months, it’s not going to get any easier for NIO but again, they are building significant brand recognition in the market and are way ahead of other companies who haven’t invested as much capital, time or effort in. They need to keep doing what they’re doing. Although that’s likely not going to be enough in the future.
TRENDING ON SOCIAL MEDIA
- A fight between two tech giants that portend how other battles in the future between titans play out. This one is about the heaviest of heavyweight fights – Apple vs. Facebook!