OEMs

Volkswagen Group doubles down on China …literally.

So I think the 50% stake in Anhui Jianghuai Automobile Group Holding (AJAGH) seemed to catch a lot of people, myself included, by surprise. I normally hear a decent number of these types of rumors so they did a good job of not leaking especially since this type of transaction likely took weeks if not months of negotiations and tire kicking.

First take for me is that this allows VW to add capacity quickly while also mitigate some risk associated with any volatility and pushback on foreign companies doing business in China which is a real possibility in this current business environment. AJAGH is by every measure a state owned enterprise (SOE) so VW has to be thinking for the cost of adding capacity, ‘we also bought ourselves some insulation from any change in sentiment toward foreign automakers.’

AJAGH also happens to be the parent of JAC, the contract manufacturer (CM) for NIO, who themselves JUST announced their 10B RMB investment round by the Hefei govt. This could go one of a few different ways. VW could void JAC’s CM contract with NIO, leaving them out in the cold OR this could be a roundabout way of VW trying to work with NIO. Maybe they feel there is some worthwhile IP that they could incorporate into their VW Group vehicles?

This also could be the perfect excuse for NIO to back out of the contract that likely hangs like a weight around their neck and snuffs out any possibility of profit at their current sales volumes and move forward with their own plant that they can build in Hefei – the likeliest scenario IMHO. This is all just speculation on my part so we will see where the chips fall and whether or not I was close on my WAGs.

Finally – the investment in China’s third largest battery manufacturer Gouxuan is just to guarantee a consistent, linear battery supply for their aggressive move towards EV production and sales in China. Now there’s likely a defensive component to this as well as they’ve effectively reduced current manufacturing capacity for battery cells by whatever Guoxuan’s is. That may be a wash as there are many other companies investing in capacity which should come online in the next few years.

The question that needs to be answered is – Did VW bite off more than they can chew? I’ve seen competent management teams crumble under far less complicated relationships (see DaimlerChrysler) so we will have to wait and see. An aside to this is that the management teams at each of the OEMs doing business in China not named VW Group, are all now assessing what THEIR next move should be and a few of those folks are probably not going to sleep very well over the next few weeks. Finally – I reserve the right to amend my theories after I’ve been able to noodle on this a bit further.

#VWGroup #AnhuiJianghuaAutomobileGroupgHolding #JAC #Guoxuan #NIO #EVs #batteries #supply

OEMs caught between a rock and a hard place as they try to jumpstart vehicles sales.

As companies like GM, VW, Daimler, Ford along with the Japanese and Korean automakers all prepare to launch NEVs (new energy vehicles) into the China, EU, and US markets Covid-19 poses quite a conundrum for them. Most of OEMs certainly had planned for an NEV filled future but were hoping that the ICE (internal combustion engine vehicles) sales would’ve allowed them to slowly, methodically make that transition as smooth as possible while collecting profit from those ICE sales in order to fund their move over, then like a TON of bricks Covid-19 hits the sector and all their well laid out plans get blown up!

Mike Tyson once said ‘Everybody has a plan until they get punched in the face!’ What & how will OEMs react now that the US, EU and Chinese economies need a bit of help to get back on their feet? Since the speed and length of recovery in each of these regions will vary, that’s another challenge for the OEMs to have to consider that’s also a HUGE unknown. Make no mistake here, most of them rely on China’s profits to drive much of their businesses, with few exceptions and were going to rely even more heavily on China in the future since growth in their respective domestic markets was and is non-existent while the acquisition costs for new customers is also unbearably high.

For the companies who were the MOST aggressive like VW Group - who right now also happens to be rumored to be acquiring stakes in both a Chinese EV and battery manufacturer, it could be a challenging next couple of years globally but if their management can deftly navigate these next couple of years, they will be that much better for it than any of their competition.

For those that were a bit more conservative, it seems that their approach may pay off, at least in the short term since they’ll still have fresh new ICEs to offer consumers for now and next couple of years. At some point though, they too will have to deftly and quickly shift their capacity over to NEVs and that’s when we’ll see if their ‘wait and see’ approach to this inevitable, tectonic shift in the auto sector pays off.

#makingtheswitch #ICEs #NEVs #China #economicrecovery #waitandsee #Covid19

MICRO-MOBILITY

Is NYC missing out on a major opportunity?

So NYC, like many other cities around the world, would like to reclaim a good of portion of their city streets and re-purpose them to be bike FRIENDLY / ONLY boulevards. This would allow commuters when the city reopens, who would otherwise drive themselves because of their fear and apprehension about taking Ubers & public transportation, a real alternative for getting to where ever they’d like to go. NYC officials, like these other cities, are betting that bicycles will be a valid and popular alternative to jumping in a car and driving to work.

Unlike Paris though, NYC doesn’t likely have $330M to throw at the transformation of their streets so they’re a bit behind on this reclamation project. I do truly think they are committed to these upgrades and will give them the benefit of the doubt and more time to get this done, especially since the city was decimated by Covid-19 just a month or so ago.

One final point I will make is that there’s only a short amount of time left for startups that can offer sharing solutions, be it pedal bikes, electric bikes, electric scooters, low speed delivery vehicles, etc. to pitch their solution to city officials.  There was a law change in April that would allow for electric bikes and scooters on the New York (state) streets so companies that have offerings in that segment should be chomping at the bit to launch pilot programs in one of THE BEST CITIES in the WORLD.

There are currently a few companies that I know of: Jump (maybe not anymore), Lime, CitiBikes, and Revel (who offer shared mopeds) that run operations in NYC currently but for a city that covers over 300sqm & has a population of > 8M people, there’s plenty of room in the ‘pool’ for new, even better, and more affordable solutions as demand will certainly grow. And as the saying goes ‘If I can make it there, I can make it anywhere…’

#NYC #morebikelanes  #NewYorkNewYork #bikefriendly #needtogetmoving #ibelieve

ECONOMY

US rental car companies buy about 10% of all vehicles produced in the US and one of them just filed for bankruptcy.

Hertz this week filed for bankruptcy protection and will need to restructure in order to remain an ‘ongoing concern.’ Here are some of the mindboggling numbers that are being thrown around that forced them into this position.

First, domestic US flights are down 94%, no one flies = no one rents cars. Hertz currently owns 568K vehicles that sits on their balance sheet along with the $19B in debt that they borrowed to pay for them. Their 2019 revenue was $9.8B. These types of companies that are highly leveraged, like many families in the US, are teetering and any shock to the economy pushes them over the edge. That’s exactly what happened here with Hertz. To put it more bluntly, the combination of little innovation + a high cost of operation + poor management + economic shock = bankruptcy.

This is why innovation occurs. Because there is a better way, there has to be. The problem is, the carmakers rely on rental car agencies heavily to keep their plants running so if the rental car sector has a hiccup, it could cause the automakers a HUGE tummy ache. Will this lead to innovation in the sector – let’s hope so.

#Hertz #nomoremoney #highlyleveraged #needlesscars #nooneisrentingcars 

Tough times may ultimately lead to price wars to spur sales and steal sales away from competitors.

There’s a unique phrase used to describe when OEMs offer discounts on their vehicles in order to ‘move the metal.’ In industry speak, it’s called ‘putting money on the hood’ and this is pretty standard operating procedure for getting rid of old inventory to make room for the new model year’s products. Unless there’s a significant amount of inventory that needs to get sold, and if that’s the case there’s likely some other underlying issues at play, then discounting doesn’t have that much of a lasting, negative impact on a car’s price, residual values or customer’s impression of that vehicle.

But what we may see in China soon - and will likely see later this year in North America and the EU region as more workers return and plants get fired back up - is a glut of cars being produced without buyers. Let’s game this out a bit, let’s first assume Chinese consumers were ready to purchase about 24M vehicles in China for 2020. OEMs had based their annual production volume on capturing a certain (%) of this 24M units and their forecasts all reflect this volume. The forecasts drive their production scheduling, staffing needs, tooling purchases, orders to suppliers for parts, marketing spend, etc. and PO’s are cut based on the Master Production Schedule which should reflect this forecasted demand.

Now, taking seasonality out of the equation say the automakers have lost a complete 2 months of sales. Simple math says that’s 4M vehicles that weren’t built or sold. Automakers will normally do EVERYTHING they can - they’ll run a third shift, they’ll work OT - to get back to that originally forecasted production #.

If the economy continues to struggle but the cars have been built, the dealers are left with a glut of just built, but unsold vehicles on their lots and balance sheets. So what do they do? It becomes a game of chicken between the OEMs since they ALL know one surefire way to dump that inventory. None of them really WANT to offer discounts but if they can’t sell the units they’ve built then they can’t keep making vehicles which means plants and workers are idled. Again. If they do that long enough, workers get laid off and plants get closed in order to save costs, and that’s capacity they may never get back. Once the economy recovers, that capacity likely gets picked up in the form of sales to another OEM.

In these dire economic situations, there is ALWAYS at least one automaker, normally the one(s) with the messy balance sheet(s), that gives in. That’s where we get back to ‘putting money on the hood,’ but in this case its current model year vehicles that likely launched <6 months ago. This also means that the other OEMs have to follow with their own discounts which triggers a race to the bottom, creating this vicious cycle, squeezing margins while creating other challenges - all in an effort to keep plants running and cash flowing regardless of whether these sales are profitable or not. Selling cars at breakeven / loss > Paying idled workers & closing plants while NOT building cars.

Maybe the most important challenge that needs to be overcome by the OEMs is that discounts reinforce to the consumer that the vehicle that they purchased should cost ($X – $Y) with $Y being whatever that discount is. When the economy begins to slowly recover, the automakers remove these discounts but now prospective buyers think the cars should cost ($X - $Y) and therein lies the rub. Carmakers may NEVER get that $Y back.

I’ve tried to explain in <600 words a decently complicated dance OEMs do to maintain sales in challenging markets. There are a lot of other factors at play as well but I think you’re able to get the general idea. Finally, an important distinction between China and the US / EU is that there are no unions in China so you could argue that it’s an apples to oranges comparison but my retort would be that the scenario still plays out - keeping plants running by offering discounts to avoid layoffs and plant closures. Happy to discuss this in more detail with anyone who agrees, disagrees or just plain thinks about it differently.

#movingthemetal #puttingmoneyonthehood #sales #keeptheplantsrunning #squeezingmargins  

A simple case of supply and demand – for helmets.

There has been a run on helmets due to the new law imposed in April here in China that requires everyone riding an electric ‘bicycle’ or ‘scooter’ to wear a helmet.

We aren’t talking those expensive Bell type motorcycle helmets either. We are talking $5 helmets that you see most people wearing in Vietnam and Thailand that don’t really protect your dome all that well if you do a headplant into the pavement. They are going for almost 2x what they’d normally fetch in the markets.

Apparently, the daily capacity of plants that manufacture these helmets is about 2K units so the demand for an additional 200M helmets is going to take some time to fulfill. If police really begin to ‘police’ this new law, we could see prices go even higher as price gougers horde supply in an attempt to wring out every mao they can from this shortage.

I would think that there are a few manufacturers that are adding capacity in order to capture this increased demand (that should remain indefinitely) so hopefully people won’t get ripped off for too long.

#needahelmet #pricegouging #horders #inshortsuppy #newhelmetlaws

EVSTARTUPs

There are many Chinese EVStartups are in trouble and will probably close up shop.

Let me assure those who read this newsletter for updates on the China based EVStartups, there are MANY that have permanently closed their doors over the last few weeks and there will be many more closing in the coming weeks and months. That’s OK, you really don’t need to know what their names are or what ‘Tesla killing,’ game changing vehicle they were planning to build if they’d had enough capital – I don’t even know most of their names!

There were too many of these startups to begin with but that’s what happens when governments offer free money and / or low barriers to entry, even for a sector as complicated and brutal as automotive manufacturing. If that wasn’t the case, we wouldn’t consistently hear about only a handful of them. It’s always been about cars getting built – it wasn’t and should NOT be categorized as part of the tech sector …yet. That’s still quite a ways away.  

Most of these EVStartups weren’t going to last, not because of subsidies drying up or because of Covid-19 but because they were poorly managed and really had no business trying to build cars in the first place. The companies I cover and share news about are the ones that are the survivors – they’re resourceful and DO stand a chance of making it out the other side when the global economy recovers. And it will recover.

Most of them will require some form of bailout that won’t be called that of course. It’ll be called an ‘investment.’ That said, Tesla has been the recipient of a tremendous amount of charity in the form of subsidies, favorable terms on debt, asset purchases costing cents on the dollar, etc. They are also a 17-year old company that battled and grinded their way to where they are now – the leading EV maker in the world.

And that’s precisely what a handful of EVStartups here in China are doing right now, finding any way they can to survive. Those that do will become stronger, be better managers and learn from their customers so they can design & develop products & services that more people want, maybe even NEED. Will be interesting to see in 17 years, which companies made it out.

#China #EVStartups #survivors #mostnotworthy #nomorefreemoney