Episode #72 - NIO's tough couple of weeks, the VW ID.Aero unveil and thoughts on the Chongqing Auto show

Tu starts this week’s pod with a quick update on what’s going on on the ground in Beijing. Lei then moves on to NIO’s challenging last few weeks, first starting out with the tragic accident at their Shanghai headquarters that killed two people to this week’s bombshell short report accusing NIO of fraud, specifically for their accounting of battery swapping revenues.

The next topic that Lei & Tu tackle was the unveiling of the Volkswagen ID.Aero, Volkswagen’s entry into the premium electric sedan category that’ll start shipping next year from its Chinese factory. 

They give their initial reactions from the unveil, look at the market segment it’s competing in and predict what challenges they anticipate the Aero having in the China market. 

The next topic is the Chongqing auto show and specifically the Avatr brand which is a joint venture between Huawei and Changan Motors, an SOE based in Chongqing. 

In the final segment, Tu summarizes what he thought were some of the most interesting news from the week including TSMC likely overtaking Intel on revenues to become the largest chip manufacturer in the world, Polestar’s IPO and Tesla incentivizing customers to trade in their ICE vehicles for discounts on Tesla vehicles.

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Transcript

CEM #72 Transcript
Recorded June 30, 2022

Tu Le:
Hi, everyone, and welcome to China EVs & More where my co-host Lei Xing and I will go over the week's most important and interesting news coming out the China EV, AV and mobility sectors. What Lei and I discuss today is based on our opinions and should not be taken as investment advice. If you enjoy this room, please help us get the word out to other enthusiasts and tune in again next week. 

My name is Tu Le, and I am the managing director at SinoAuto Insights, a Beijing-based consultancy that helps organizations bring innovative and tech-focused products and services to the transportation and mobility sectors. I write a free weekly newsletter that we pull many of our discussion topics from. You can sign up for it at signautoinsights.com, which I encourage you all to do. Lei, can you please introduce yourself?

Lei Xing:
Good morning, and good evening from my side. I am your co -ost Lei Xing, former chief editor of China Auto Review. This is episode #72. Before we start, a few anniversaries to keep in mind. Today. It's the 25th anniversary of the handover of Hong Kong, and also the 7th anniversary of founding of Li Auto. They were founded or officially established on July 1, 2015. So it's been only 7 years. And last show you had talked about them, what's the word that you used, disrupting the segments, segment busting?

Tu Le:
Segment busters.

Lei Xing:
They've already become a segment buster. And Elon still hasn't tweeted it in 10 days. Everybody's worried. And so those are some of the anniversaries. And also, this weekend is already July 4th weekend. Is there anything going on in Beijing for the American community?

Tu Le:
It’s unbelievable. So they normally have a barbecue on the weekend, whatever weekend it is. And so I think, remember, Sanlitun had a place called Home Plate. They always have a big barbecue. And this year, the food's really great. Normally, the embassy will also have something, but this year they're pretty quiet. The British Embassy, two weeks ago, was supposed to have a jubilee celebration at the British Embassy right near Ritan park. They had sold 350 tickets, but because of the COVID pandemic, they had to cancel that event. So actually, Lei, let me give a 30-second update on what's going on here.

Lei Xing:
Yeah, please do.

Tu Le:
Shanghai is pretty open. They've started opening restaurants now. I think as of two weeks ago, it was still only dine out and take out. So I think for now Shanghai seems to be off of the medium risk list. So Beijing is also now off of the medium risk list. So I explained the medium risk list as if I was living in Beijing and I wanted to travel to, let's say Chongqing, Chongqing has its own policies for people that come from medium risk areas. If I wanted to go to Chongqing, they might have made me quarantine for 7 days, but if you're low risk, you can travel freely without pre quarantine in the city. So for a long time, Shanghai was in high risk, and Beijing, as of two weeks ago was medium risk. I think they've both gone down, so now I can travel to any city in Beijing or in China without having to quarantine. But you know this Lei, each “xiaoqu” or neighborhood or hotel chain, they also have their own policies because they don't want to be shut down. They don't want to be in trouble by the local authorities, and so, even then, if the official word is the city, there's no quarantine policy. Some of the hotels might not even accept you to stay there depending on where you're coming from. So like, if you were traveling from Shanghai as of three weeks ago, I think there were some hotels in other cities that wouldn’t let you stay there because you came from Shanghai. So we're still dealing with it. Obviously, Xi Jinping that was his first trip to Hong Kong outside of the country in over two years. So from a production and manufacturing standpoint, everything seems to be moving forward. The accelerator is really being pressed hard by the local and the central government to kind of build back the economy and get that momentum going again.

Lei Xing:
And we're all waiting for these delivery numbers for June, and everybody's expecting, what, home runs, about time, right? And it looks like Q2, the entire Q2 was, you know April, May, June, as we expected, that things would be always get better, that it's a matter of time. So far looking so good. This week, one of the topics we are talking is, again, NIO, for the wrong reasons. So last week we talked about the car that fell out of the building, and nobody's talking about that anymore, because NIO is being shorted by this Grizzly Research. And now everybody's turning on this institution that nobody’s had heard of.

Tu Le:
That Grizzly Research is like a chop shop. So I’ve spoken to several people and I’ve read the report and aggressive accounting isn't illegal, right?

Lei Xing:
At the very top of the report, one number was wrong, how much they invested into the joint venture, it said RMB200,000, I think it missed a few zeros.

Tu Le:
Our good friend and friend of the show and friend of the consultancy, Taylor, he got on a twitter space with the Grizzly guys and he freaking called them out on everything so good for you Taylor. Anyways.

Lei Xing:
I just think, I didn't read through entirely the whole report, it is pretty detailed. But I think the jist of the argument was basically, they were overloading these batteries into Weineng, or called me Mirattery, right? But the whole argument has been predicated on that reason alone. But then again, right, you wonder what is a number that's too much? Or there's no, there's no right or wrong or measuring stick.

Tu Le:
Especially in China, right? Because there's do you're never going to get 100 % clarity? Because the businesses in China, so.

Lei Xing:
If you look at the official number, reported by Weineng, which is, I think, as of April, as of May, I forgot the date, they had 6 GWh of asset. You can pretty much do the math, right? 75 kWh of batteries, plus 100 kWh batteries, you estimate a percentage. And then you can figure out how many battery packs that they would need, and considering they are closing in on 1,000 swap stations, and the vehicles that are on the roads. Then why?

Tu Le:
Hold on Lei. The Grizzly guys. You're relying on basic math, and the Grizzly guys got the numbers wrong. So their math was off, just because the numbers they were using were wrong. So right then in there, it was suspect, right? These guys.

Lei Xing:
But on the flip side, I thought this report actually did NIO good, because everybody kind of now, it kind of gave, at least people know the kind of the business model, because this wasn't talked as much on you know what, how that works is basically a customer buys a BaaS model, he gets a receipt from NIO only for the car, and the other receipt goes to Weineng, right? And the customer pays a monthly installment. So I’m not going into details, but I think financially it's fine, there's nothing wrong, but I think also liking it to this Philidor and Valeant was a little bit, I guess you can say it's almost like Amazon and Amazon Cloud, Tencent and Tencent Cloud, things like that, but it's just a little too extreme to liking it to the Philidor and Valeant because Weineng is planning to be not only holding NIO battery assets, but third party, others as well, and they have their internal targets. So NIO came out with a statement as I expected, but again, constant scrutinies, constant, whether it's NIO whether it’s Tesla or anybody else, there's always going to be these type of things.

Tu Le:
It should be noted, Lei, that Edison Yu who covers Chinese autos for Deutch Bank, he quickly tweeted that report was trash, too. And let me emphasize that NIO was never going to hold those batteries on their books. So that's not a trick, and that's not underhanded. The batteries were always going to be off the books and on Weineng’s books, right? That's the only way swapping works from a financial accounting standpoint. So that's not tricky. That's economics.

Lei Xing:
Yeah. And I think the conclusion is, the well-being of NIO is not going to be affected by these short sellers. It's going to be affected by their operational, and you've mentioned as many times, that it’s an operational, management issue, more than anything else. It’s product quality issue, right? So these reports are going to come and go, and we've seen these types of reports for Faraday Future, Mullen. But at the end of the day, it's your products. It's your operations, it’s your management. That's going to be, right?

Tu Le:
This is the thing, right? Let me assure you a d our audience that I see every day, walking around, dozens of NIOs. So when it comes to a Mullen, when it comes to a Faraday, they're still seeing an FF 91 is like seeing bigfoot, right? Because they still don't exist or are illegitimate. 

Lei Xing:
Evergrande.

Tu Le:
Yeah, and so I’m not saying that automatically makes it an illegitimate business, but guess what? These guys are building cars, they're selling cars every month. I'm seeing them on the road. So there is some validation there because of that.

Lei Xing:
And now, as we’ve said many episodes ago, NIO is entering that stretch. And when the numbers come out today. So I expect their cumulative is going to be close to 21,000, or 210,000. They were at close to 205,000 at the end of May. And if all goes smooth, and if they can keep this up, if their ET7s and the ES7s and ET5s get ramped up good, then they can be close to 300,000 units by the end of the year, right? Averaging, they can do 15,000 a month, next 6 months. Then they're fine. But that's a question mark. We still have to see the operational side of it, especially comparing to Li Auto, which has just been phenomenal, right?

Tu Le:
Let's just remind everyone that although Li Auto today is 7 years old in automotive years, they are still a puppy. And so you would expect them, NIO, Li Auto, to still have management issues, right? Because an operational issue. So don't think that they are 7 years old, and now that they are a veteran company. No, because people have talked about and our guest, our next MAX episode guest, he talked about 0 to 1, how they're still at the 0 to 1 phase. I would say NIO is at a 1 ~ 10 phase. Let's say a BYD is at a 10 to 1,000 phase.

Lei Xing:
Li Auto said that also, it’s now at a 1 to 10 phase.

Tu Le:
Yeah, so but that's what I mean in automotive terms 7 years old just a pup, right? Because remember that Tesla is 18 years old now, and they're still having ramping issues and capacity issues and manufacturing issues, right? It's not easy building cars. And so the legacy should be really commended that they are 100-year-old companies and have been able to generally be really successful in the space.

Lei Xing:
And we should remind people that NIO was close of bankruptcy in 2019, NIO had that big recall in 2019.

Tu Le:
Like 4,000 vehicles, right?

Lei Xing:
And Li Auto failed, their first model failed completely, the SEV, then they quickly, this was in their strategy to have that small model and then the big SUV and they made it work. So again, they're still not out of the woods. They have to continue to show that they can ramp up these deliveries into higher numbers, higher patterns.

Tu Le:
Lei, let me give a shout out to Jill Shen from Technode. She's one of the hardest working journalists I know. She writes really good stuff on Technode. And on this week's newsletter, I pointed out one of the articles that she had written last week. And it highlights the challenges by automaker, Li Auto had some challenges, Xpeng had some management issues and changes. And a few managers have left. And so if you really want to know what's going on, most of the Western media looks at it at a 30,000 foot level, 50,000 foot level, I would follow Jill Shen. I talk to her pretty regularly. So we trade rumors, basically, like I trade rumors with you Lei, but if you really want to know and understand kind of the dynamics of how challenging it is, because the other thing we need to think about is there's still companies that are launching. So if you're a manager that has a good reputation in the Chinese EV sector, you're going to get poached or they're going to want to poach you, right? So I think that's also part of the dynamism of this sector. So I just want to give a shout out to Jill because I think she does really good work.

Lei Xing:
Yeah and JIDU just had this rumor that was kind of that somehow Geely exited or and then, right? This just came out yesterday, but I think regardless of what happens, JIDU is going to be a JIDU and if Geely exits? So be it. They have to compete as, right, forget about the parent companies. I don't think it's a huge issue either way.

Tu Le:
That just goes to show that if that rumor is true at all, or even if it hints at being true, that means that there's a power struggle between Baidu and Geely from a standpoint of influence on design and all this other stuff right?

Lei Xing:
On the surface, they denied it. Joe’s denied it. He's still the CEO, but like I said, scrutinies are a constant, every day, every week.

Tu Le:
And that's why people tune in to listen to us, right? To hear about these rumors and help us or let us dispel the ones and bring more heat to the ones that we think might be true.

Lei Xing:
We're done with NIO. ID. AERO, you want to talk that a little bit?

Tu Le:
Let me turn the tables on you, because normally you ask me first for my opinion, let me ask you your opinion on the ID. AERO, because the ID. AERO, I think is going get built in China too?

Lei Xing:
It's first going to get built in China.

Tu Le:
Yes, that’s what I thought. 

Lei Xing:
It's actually the second ID. global model after the ID.4 That's number one and the number two. I think this is the first ever ID. model reveal that was done by Stephen Wollenstein on a global stage. So that was a significance. But I guess one word that I probably would use to describe it was lackluster, because we already talked about this after ROBO-01, ES7 and L9. And it was short, not much was revealed, right? But it's a close to a 5-meter model.

Tu Le:
Lei, they don't have an interior yet. The windows are a bit blacked out.

Lei Xing:
It's a bit early like, right? And they talk about the IQ. technology stack and then some specs. And then that's it and design wise, it wasn't.

Tu Le:
Here is my read into that, Lei. They had an interior, the ET7 was revealed, the ET5 was revealed. The ES7 was revealed, the L9 was revealed, looked at the features, looked at the UX, looked at the design, and the ROBO-01 was launched. They were like, ok, anything close to the ID.4 or ID.6. Interior is not going to do it, and they are positioning this as the premium Volkswagen sedan. So it's not for everybody.

Lei Xing:
This is where it gets interesting because you had tweeted about pricing strategy. The fact is the Chinese brands, the smart EV brands already have a good foothold in the RMB300,000 and above segments. Looking at the ID. AERO or the ID.7 when it's going to be launched in the second half of 2023, what kind of a premium, first, is it going to get? And second, it can't sell for less than RMB300,000. Otherwise it’s not premium.

Tu Le:
But it can't sell for more than RMB400,000 or it's going to get creamed. 

Lei Xing:
That's the issue that's facing these legacies, right? We've seen the Audi FAW NEV joint venture is just what, they started construction, and that won't start production until the end of 2024, or 2.5 years, spending big money, whatever, digitalized smart factories, same for BMW this window is just, right, you become worried.

Tu Le:
I'm just going to say this Lei, if we did a straw poll today and put the Volkswagen ID. AERO side by side with the ET7, because they're both about 5 meters long. So size, they haven't released pricing because guess what? They're going back to sharpen their pencil, to your point, we can't be below RMB300,000, but we can't be over RMB450,000, we cannot be over RMB450,000. So I think at least three out of four Chinese consumers would be like, I’m all about the ET7. At least three out of four.

Lei Xing:
Right, and obviously, Volkswagen has to consider their positioning compared to Audi, right? Cause Audi, it's going to have a bunch of locally produced EV models. And the other part of this is the ID.7 will also have two versions for the two joint ventures like the X and the CROZZ. So I was wrong thinking that it was the first model out of the Anhui entity.

Tu Le:
I guess this is my bold 5-year prediction Lei, because they're already kind of starting to do that. So I don't want to reveal how old I am, but the story will kind of elude to how old I am, how long I’ve been around. When I grew up in Pontiac, Michigan, GM had this, they had two divisions. They had CPC, I think the Chevrolet Pontiac Canada group, and then BOC Buick Oldsmobile Cadillac They came out with these triplets. It used to be a Chevy Cavalier, a Pontiac Sunbird and Cadillac Cimarron. All basically the same car, just the bells and whistles and the bobbles were different. Consumers knew that, so they were trying to sell a Chevy Cavalier at a Cadillac price. What I believe, if Volkswagen can't figure out this sales thing, they're going to start really looking at Audi and Volkswagen and even sharing more in order to save cost, so.

Lei Xing:
This is coming at a critical juncture for Volkswagen because they are having that management change the whole China Board. Ralph is coming over in August. So everything that they're announcing now is going to be executed by these new management from here on out after August, right? So that's another thing.

Tu Le:
There is going to be so much pressure on Porsche to hold the whole boat, or to lift all boats, so much pressure on Porsche. 

Lei Xing:
Just I guess what, big shoes to fill, kind of put it that way.

Tu Le:
Because this goes to the two or three articles this week, because these was basically claiming that by 2025, they're going to overtake Tesla in sales. 

Lei Xing:
With that PPT slide, huh? What, Superman and Aquaman?

Tu Le:
So Diess, he’s still obsessed about Tesla, obviously, number one. Number two, this is one of those. Look at the pretty cool, shiny thing over here. I don't want you to see the challenges that are still ahead of us, because sales volume is not the bogey that you really want to look at, right? Because Tesla is the number one EV brand by far by market cap by all these other measures. And they're the only truly global EV maker like EV first maker. So I think Diess might be starting to get some pressure from the board to get some wins, right?

Lei Xing:
He’s been getting pressure the past few years.

Tu Le:
Yeah, everything that they've been talking about. His 2024, 2025, 2027, nothing in the near term that I believe that they can get some major wins. And so I think he's just trying to put lipstick on a pig, so.

Lei Xing:
So I just saw the latest numbers, ZEEKR, 4,302 for June, and their cumulative deliveries surpassed 25,000 so there's an update. That number looks good, right? So I think we can expect pretty high numbers for all the others. Anyways next topic you want to talk about the Chongqing Auto Show a little bit specifically AVATR?

Tu Le:
Yeah, let's do it.

Lei Xing:
It was basically the Chang’an Auto Show, right?

Tu Le:
Yes.

Lei Xing:
Because all, the AVATR, the Deep Blue or Shen Lan SL03, even Chang’an Ford launched the focus. Can you believe it? The Focus is still thing.

Tu Le:
For folks that are wondering, Chang ‘an is headquartered in Chongqing, number one. Number two, I think they are the third largest SOE?

Lei Xing:
They are, they've been the top five, let's say this, number four or number five consistently over last few years.

Tu Le:
Their major foreign JV partner’s Ford Motor and that Chongqing actually happens to be where the Mach-E is manufactured. And their EV brand chang’an’s EV brand is it with Alibaba or is it Huawei, AVATR. AVATR is a joint venture between Huawei and Chang’an.

Lei Xing:
So I think the interesting thing was I saw their press conference a little bit. It was interesting because you had the chairman Zhu Huarong of Chang’an, was it Eric Xu, the rotating chairman of Huawei and Robin Zeng, the chairman of CATL, the three of them on stage interviewed by the CEO of AVATR. And each of them is like this is Chinese, the era of Chinese brands supported by Chinese suppliers. And each of them, CATL and Huawei, again, they reiterated that they're not making cars themselves. But AVATR, I think is as close or the closest of them being in this manufacturing game. Though I think they are partners, but this is, has elevated their positions as opposed to, let's say, just simply a supplier and this AVATR, right, if you think about it, there's this cockpit, the domain controllers, a lot of it is from Huawei, even the motors. The 3-in-1 motors are from Huawei. CATL, obviously Robin, he was like we're providing the latest and the best on this car. I heard that this is going to be officially launched in August and start deliveries later in the year. I heard this is a RMB400,000 model.

Tu Le:
So it's LYRIQ.

Lei Xing:
So it's going to be up there, at least RMB300,000. And it's the highest, the most premium brand from Chang’an. And they still have this SL which is positioned a little bit lower. They had this Chang’an Benben, or e-Benben, which stopped taking orders because they had this, right, you heard about that?

Tu Le:
Yeah.

Lei Xing:
So this is also a company that has all of these EV models up and down the segmentation.

Tu Le:
These SOEs that are trying to inject a little innovation and excitement into the traditional segments that they were competing in and weren't super successful outside of some of the lower tier cities. I think they see they smell blood in the water, because the foreign automakers in the traditionally stronger segments of less than RMB250,000 or RMB300,000 where you would see a Focus where you would see some of these smaller Buicks, they see opportunity to gain share on the foreign automakers. And I think they're really trying to take advantage of that, because building an EV kind of creates an equalizer for them.

Lei Xing:
And it was interesting to hear the chatter on who's the best model under RMB500,000. And the latest guy to make a comment was Xpeng CEO, he is like the G9 is going to be the best under RMB500,000. And now you have these all three CEOs fighting each other on who's the best.

Tu Le:
Yeah. And it's really tough to get the attention, right? Because Xpeng has not had any real news for the last couple of months, right?

Lei Xing:
The P5, city NGP features have been delayed. This was right, this was a huge thing at the Shanghai Auto Show last year in April. Now it's what 15 months later they, right, it’s, they still haven't walked to walk. Yeah, and they showed this video of Xinzhou and the CEO riding in a what, P5, and He Xiaopeng was like giving critical comments.

Tu Le:
This is what I heard Lei. And you tell me, if you've also heard this, they are reshuffling some of their international team and strategy because…

Lei Xing:
Yeah we talked about this a few episodes ago.

Tu Le:
And I heard that Marie, our friend Marie is super busy, because they are panicking a little bit about what's going on in Europe with the brand and their products. So, yeah, this is where I think Li Auto is maybe doing the right thing, right? Focusing a bit more on the domestic market to build a wider foundation, but there's pressure, external pressures, right?

Lei Xing:
These things come in stretches, for a few days and few weeks. NIO’s going to be hot and next they're not. Right now Xpeng is not, but in a few weeks they're hot, right? This is the, and we still have many brands that are yet to…

Tu Le:
We have, towards the end of this year, we're going to still have some reveals. We're still going to have a bit more excitement. So once we get past, hopefully once we get past, and we create more consistent production, we don't have to really monitor that stuff as closely in the next few months. Because July, August, September, I think we're going to see surprisingly good numbers because of the incentives that have been laid not only by the central government, but the Beijing local government, I think Shanghai local government have also put in incentives for purchase as well, right?

Lei Xing:
So any other topics that you have in mind?

Tu Le:
So I think we're starting this new segment the last couple weeks. I'll continue it. My interesting takes for the week. TSMC is going to be bigger than Intel, right? So by revenue, Intel was the largest chip manufacturer, I think. And now TSMC by the end of second quarter, should have a higher revenue. So I think that's pretty significant. In the short term, TSMC is going to be extremely important, because we've talked about this in the past. Fabs take 18 to 24 months to get put in place, and then to get up to capacity another year, another 18 months. And so most of these announcements that we've talked about over the last year, they probably won't affect capacity, global capacity and chips for another 2 years, at least. Polestar went public, right? We talked about that a little bit.

Lei Xing:
And this Monday or Tuesday they ran the bell.

Tu Le:
The other thing, too is, Tesla is also incentivizing car buyers to trade in their ICE vehicles for EVs. So I thought that was a bit surprising, but I don't know if that has any more meaning to it than to squeeze their competitors.

Lei Xing:
So the policies are kind of heading that way anyways, that whatever that have been announced is kind of to encourage that. The fact that is Tesla, I don't know that does that mean a demand problem? I don't know.

Tu Le:
It's so hard to tell with Tesla just because they exported last year a lot of their capacity. And then this year they just have production challenges, right? So it's hard to tell.

Lei Xing:
Anyway, look for huge domestic sales numbers in June. Still EOQ right? So that's still a thing.

Tu Le:
That brings us to the end of this week’s show. Lei and I thank you for tuning in. My name is Tu Le. And you can find me on Twitter @sinoautoinsight. You can find Lei on Twitter @leixing77. If you wouldn't mind rating and or reviewing us on Apple Podcast, Spotify or wherever you grab your podcast from, we'd appreciate that as well. Even better if you enjoy this show, please tell your friends about it. Please join again next week as we track down all the latest news on China EVs & More.