SAI Weekly 28 - 24: Persona non grata - Chinese Tech in EVs, Audi's China Rebrand,

We are getting close to the tail end of summer and only really beginning to see the extent of chaos that’s emerging from the global electric vehicle / autonomous vehicle / battery / chip sectors.

The latest is news that the US govt is looking to throttle any ambition that China EV Inc has of entering the US market by cutting off any ability they would have to offer intelligent driving features here. We’ll get to more detail below though so hold on for that one.

Also, it looks like both sides of the aisle regardless of who wins the US Presidential election in November will be backing EVs. Trump finally relented after being endorsed and funded by your boy Elon.

Elon asked for competition – he didn’t realize it was going to bumrush him in China, his most important market. Tesla is on their heels with the Cybertruck having spotty success and no other markets in the world wanting it.

It could sell pretty well in China, but it would take some heavy lifting to alter some transportation laws there for it to be sold widely. And that would likely open the floodgates for Ford, GM, Toyota and everyone else who has a full-size truck in their product portfolio to try to sell it into the China market.

When will we see the Model 2? Will we see the Model 2? If we do, will it be a passenger vehicle or will it be bastardized and shown as a makeshift robotaxi in October? Elon is full of surprises so who knows – what I do know - Since Elon said analysts shouldn’t focus on sales volume that means that Tesla internally is seeing weak demand for its products through the end of 2024. Expect more 1.99% financing and / or other non-price related discounts to try to entice customers to buy in the US and China market specifically.

The incentives may still work outside of China, but inside it they’ll need to do more.

I am starting to see more and more click bait-y headlines and visuals trying to coax you into reading the post and / or subscribing to newsletters, etc. There are a couple of people in particular doing it because they’re getting paid to bash China EV Inc. and / or companies that would lose out BIG to China EV Inc. should they enter certain markets.

A few things to note about one post I recently saw that effectively said that the Chinese govt is kicking the legacy automakers out of China.

First, the Chinese government doesn’t need to do anything, the legacy automakers are doing a bang up job of losing share all on their own. I’ve written about the ‘whys’ and ‘hows’ several times in this newsletter so for those new to it, I invite you to check out back newsletters to see what my thoughts are on that.

I’d invite you to listen to older episodes of China EVs & More, the podcast I co-host with Lei Xing, one of the best in the business. Let me also tell you that I’ve been writing this newsletter since 2017 so that’s when I realized the threat China EV Inc posed to Legacy Auto.

This situation reminds me of a conversation I had with my friend Roger Atkins, a major voice on the global EV sector. I started this newsletter because I thought there wasn’t anything that deep dived into what was happening in China and how the legacies weren’t up to the task to compete with them, either in China or the rest of the world. Along the way, I’ve created some notoriety for myself and the consultancy, that was the entire point, the content helps me create leads for the consultancy.

I’ve never thought of myself as a content creator but that’s exactly what I am because of the newsletter and podcast. It was Roger that helped me define what that really meant. When I was talking to him recently, I used influencer and content creator almost interchangeably. He corrected me by explaining that influencers get paid by the brands, content creators do NOT.

That all said, there are some influencers out there that act like content creators. Further, they know they have to have a really outrageous title for their newsletter and / or really be provocative with visuals, etc. If you’re still not sure which is which but want to know the content creators vs. the influencers just ask them how they make money and who pays them.  

The final point I’ll make about this mistaken narrative about China wanting the legacy automakers out of China is that China’s economy continues to rely on foreign direct investment to grow, so how would it look if all of a sudden there were no foreign legacy automakers selling products in the China market?

Bottom line - China wants to point to a fair, friendly, welcome market for all automakers, foreign and domestic. It’s the foreign legacies that aren’t playing along this time.

BIGGEST NEWS THIS WEEK

-               Biden administration dialing up restrictions on Chinese tech in US cars. After completing a study, the Biden administration looks to ban SW and HW from China that supports autonomous and connected vehicles.

Let’s unpack this because this could be HUGE once its implemented. I’ve read a few articles on this and am still not clear what will be restricted except that if / when Chinese EVs enter the US, they won’t be able to use certain Chinese suppliers or components that will operate their connected and intelligent driving features. Actually, is it just intelligent driving functions or connected as well? Both collect data centers full of data. And will it be Chinese suppliers ONLY or will non-China suppliers that source their subassemblies from China be included?

LiDAR is something we’ve begun to see on even mass market vehicles due to the price being pushed down substantially by companies like Hesai and Innovusion. I had heard that Hesai had made some inroads on closing some legacy clients in China with the (unspoken) hope that they’d be able to become a global supplier, but that looks like its completely off the table now.

This points back to past newsletters when I talked about the China and US world bifurcating.

The other BIG deal about this – It seems to now restrict Chinese autonomous vehicle companies from collecting data in the US. For those that have followed me for some time, I’ve pointed to a number (most if not all) China AV Inc having offices in Silicon Valley and test cars riding around.

Famously, a Pony AI vehicle got into an accident in Milpitas. The heart of Silicon Valley.  

Reminder – WeRide and Pony both plan to IPO in the US later this year. How will this affect their valuations? I’d think the market has not being able to do business in the US priced into it already but let’s see where it shakes out.

Reminder, reminder – There are effectively NO autonomous vehicle startups testing vehicles in China. Never have been.

Big important question is how will this affect Legacy Auto?

Let’s take a step back and consider how much tech is being sourced from Chinese suppliers and / or ex-China suppliers that build their control units or at least parts of them in China. Seems like A LOT.

Since Legacy Auto is fairly conservative, they may try to take a ‘completely’ off limits approach so that they aren’t afoul of the rules and eliminate Chinese suppliers and anything sourced from China from their supply chains. They will most assuredly now need to do some investigative work to figure out where everything actually is coming from.

Assuming there aren’t affordable, innovative (and reliable) alternate sources for the HW & SW, reshoring to Taiwan, Korea, Vietnam, the US, EU, Canada, Mexico WILL be an expensive exercise for the Legacy OEMs which means that it’ll likely be an expensive exercise for us. I say that because if there were, they’d have already sourced from these companies.

It also may not be enough if there is Chinese IP needed to manufacture said HW.

Finally, AND this may be the MOST important thing - this could be (and likely is) a way the US government blocks any Chinese EVs manufactured in Mexico or Canada where it doesn’t have to amend the current USMCA – the United States Mexico Canada Agreement. This could also be used as a template by other countries that want to keep Chinese imports to a minimum.

For Chinese companies to be able to sell into the US, they’d need to reconcile their entire sourcing strategies and effectively have two strategies. One for China and one ex-China. That may finally be a bridge too far.

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-               MG to build in MX. This is happening. More will come. The US can welcome them or see Mexico welcome billions of dollars of foreign direct investment from the OEMs and tier 1s. Either way, there are important considerations, see thousands of jobs go somewhere else and then watch us your biggest rival sets up shop at your next door neighbor.

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-               Merc gets the go ahead to test L4 S Class vehicles in Beijing. L4 or Level 4 Autonomous means that the vehicle is completely in control although the driver can still request it back from the vehicle. The world continues to turn.

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-               Audi looks to rebrand in China? When I first moved to Beijing, what stood out to me was that every Chinese official used an Audi to get around town.

You knew it was a govt or military official due to the different license plate. It seems that their preference for the German premium brand started in 1994 and lasted till 2013 when the Chinese govt reduced the price and engine size of vehicles that were eligible for purchase by a govt official and created a short list of vehicles that could be purchased, Audi not being one of them.  

Nowadays it’s harder to spot a government official with many of them being chauffeured around in Chinese branded vehicles. But that 20 year run of Audi’s being the govt’s official unofficial car cemented in the minds of children what the brand stood for. Those kids that all around China that associated Audi with the govt are now Audi’s target market.

And that target market doesn’t easily forget.

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-               Regional differences make it harder for China EV Inc to sell in this country. Every Chinese passport issued within the last several years has a map of China as part of some of the pages. It shows the 9 Dash Line which China claims is their territory in the South China Sea.

The problem is that some Southeast Asian countries also claim that part of the ocean to be part of their territory. That includes Vietnam, which also happens to have a homegrown EV champion Vinfast. One reason for Vietnamese not buying a Chinese EV. The navigation map on Chinese cars shows the 9-Dash Line. This doesn’t look to be solved anytime soon either.

BY THE NUMBERS

• 50.84%: July retail sales numbers came in and NEVs trended above 50% for the first time in China. So more than 1 of every two cars sold there are clean energy vehicles. If you’re wondering why the legacy automakers are feeling the pain there, this is why.

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• 21%: That’s how much of a haircut BYD gave their recently launched Fang Cheng Bao Bao 5 last week. Let’s just say the early adopters / buyers were NOT happy. If BYD has a weakness, it’s that it’s still learning the ropes on selling into the premium segments. These growing pains will hurt for some time too while they sort out how to work it – and that means pain for others in the space as well.

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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