China EVs & More

Episode 96 - Ford & CATL vs. IRA, Ranking ABB for 2023, XPeng Products for 2023

December 20, 2022 Tu Le & Lei Xing
China EVs & More
Episode 96 - Ford & CATL vs. IRA, Ranking ABB for 2023, XPeng Products for 2023
Show Notes Transcript

Tu and Lei start out the podcast with a discussion on rumors of Ford building a battery factory that CATL would use to fab cells for Ford vehicles. This evolves into broader discussion about CATL & Huawei's ambitions.

Lei then talks the broader China economy for 2023 and how exports will likely continue to be strong next year.

Tu and Lei move the pod over to Li Auto's ambition and current sales of the L8/L9. 

Tu and Lei then discuss some of the topics they discussed for their Deutsche Bank investor call including how they would rank who would be the most successful in 2023 out of ABB (Audi, Bimmer, Benz).

Tu ends this pod with a brief update on the product rollout for XPeng in 2023 with three new or refreshed products on their way.

CEM #96 Transcript
Recorded 12/15/22

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 of 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, I am the managing director of Sino Auto Insights, a global management 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 sinoautoinsights.com, which I encourage you all to do. 

Good afternoon, Lei. Can you please introduce yourself? 

Lei Xing:
Good afternoon. This is your co-host Lei Xing, former chief editor of China Auto Review. And this is episode #96. So we just got off a panel discussion with our good friend Edison from Deutche Bank. So we're probably going to repeat some of what we said, but let's start off with Ford and CATL. My question to you: is Ford desperate?

Tu Le:
I think that this is a trial balloon to see the reaction from the U.S. government, from media, from their constituents in the United States. And I do think that they really do need, more so than their cross town rival GM, to have successful sales in 2023 specifically in the U.S. market. So I won't go as far as to say they are desperate, but they are in need of some significant wins and continuing on with growth in sales of the F-150 Lightning and the Mustang Mach-E. What about you? How do you think?

Lei Xing:
Just to remind everyone that the latest story is that Ford is considering an interesting tactic, which is possibly owning a plant. So 100% owned by Ford. This is being considered in Michigan and the other one in Virginia. And this is out of a Bloomberg report. So 100% owned by Ford. But with technology provided by CATL, kind of to bypass the IRA requirements. So that's why I kind of asked you if Ford is desperate, but I guess my take is the geopolitical part of it is at huge play here because Michigan, it's kind of an underdog. We already know Gotion and ONE (Our Next Energy) have committed to investment in Michigan. With CATL having had to delay that announcement. A lot of things are played here, right?

Tu Le:
And earlier, Ford made a commitment to Tennessee, or was is it, sorry, Kentucky, significant investment in Kentucky along with their other, one of their other battery partners, I wanna say SK right? It's SK, and then GM is LG? And so I think they need a local win. And whether Michigan sweetens the deal, we shall see, but part of the narrative is now there's this battery belt that extends from Michigan to Georgia. But the problem I think many people will have is that this is a loophole, and it doesn't follow the spirit of the Inflation Reduction Act, right? And so I believe that if I'm extending out that question that you asked earlier about is Ford desperate, I'll say this: I don't think GM or Ford in the United States can be successful with their production schedule or their forecast for 23 and beyond without BYD or CATL on the LFP side. The new, the wrinkle with Ford is that they already have a relationship with BYD in China, because as you know Lei, BYD supplies them NCM battery cells for the Mustang, the locally built in Nanjing, no, in Chongqing, the locally built Mustang Mach-E, so a couple ways to read that, right? But I'll let you kind of talk about it.

Lei Xing:
Yeah, maybe not desperate, but it's clear that this LFP is important to Ford as a specific chemistry route that they are going. And they probably see CATL as the best supplier for that.

Tu Le:
They don't see, I don't believe any of the automakers, whether you're a U.S., a Japanese, Korean, German, if you're building in the U.S. and you want some of that Inflation Reduction Act money, you have to get it from somewhere. And that's where Ford, if they save or create subsidies on the component or the savings and kickbacks on the component side, then they can take a hit on the raw material side and kind of even out on the pricing side.

Lei Xing:
Because it almost feels like Ford is shielding CATL.

Tu Le:
They are.

Lei Xing:
In a way.

Tu Le:
I think they are definitely protecting CATL which, it puts CATL in precarious position with the Chinese government and the U.S. government, right? Because the other thing about CATL being the global leader in LFP and global leader in battery cell manufacturing, let's just say, full stop. In order to maintain that title, they still need to build more facilities in North America, because you can't just supply to China and still be the global leader. I think BYD would overtake them ventually, if BYD was to also build factories in the U.S. So CATL this is not the only factory that CATL will be building. And Ford, you're absolutely right, Ford is providing them cover fire in order to enter the United States.

Lei Xing:
And I guess the other big, major part of this being played is that 35 kWh, or $35 per kWh kind of subsidy being subsidized, right? And that's important. And also, we're still waiting for the treasury to actually hash out a lot of details in the components requirements.

Tu Le:
The ink is still not dry yet, and so they are probably getting an earful from their European counterparts, the Japanese counterparts, the Korean counterparts, as well as the lobbyists from Ford, Stellantis, GM, even CATL and BYD likely in Washington, DC to soften some of the hardened language for the requirements, at least, right? 

Lei Xing:
And then, meanwhile, CATL just signed a strategic cooperation with Huawei.

Tu Le:
Yeah, I saw that.

Lei Xing:
The fine print says they're working on a high-end smart EV brand. I'm not sure if that it's pointing to existing ones or there will be another new brand coming out, but it's interesting to read that.

Tu Le:
I read that as a new brand.

Lei Xing:
I think so as well. And CATL has invested into several OEMs already, so that this play with Huawei is, encompasses, I think, quite a lot of different brands, because Huawei is not only working with SERES, right? They also teamed up with other OEMs so this is could be a potential huge play here.

Tu Le:
And to piggyback on our conversation this morning. Huawei has become a major player in the EV space without becoming an EV maker. And we see that all these companies really, what they want to do is move upstream. They don't want to, they actually don't want to manufacture cars, but they want the data. In order to get that data and the install base, they need to build and design compelling cars. It's not enough to have a contract with Lei EV Company, if Lei EV Company’s cars aren't selling, then it's useless, right? No install base, no data. And so I think because last week Apple announced that they also, they didn't announce, but there's a rumor that they're delaying launch of the Apple Car for another year out to 2026. Okay? Because I feel I've been told, that they're just not seeing a path to profitability. And the amount of effort involved is, at this point in time, still not worth entering the market yet. And when so I made this bet, you'll think this is pretty funny, with a German friend of mine here. I said that Magna Steyr would eventually be building their own cars within the next 5-6 years. I bet money on that. And he was like, no, they supply, they do this, they do that. And I said, look at Foxconn. Well they're just contract….No,  they actually have their own brand in Taiwan. And so all these guys, Huawei wants to eventually be an EV maker, not because they want to build cars, but because I don't think they can trust or rely on their partners to sell enough vehicles.

Lei Xing:
That's an interesting bet. We’ll see. So back to ground zero in China, basically, I think we don't have to go into details, but…

Tu Le:
It's a mess.

Lei Xing:
I guess it feels like they're just going to let it rip, right? Let it play out and interesting while this is going on the Guangzhou Auto Show is being held at the end of this year. And from what I’ve heard, there's it's going to be more of a dealership dealer presence rather than OEM brands announcing launches or reveals, because there's no way to plan it, right? Within 2 weeks. You only have 2 weeks of time to kind of do whatever you want to do. So.

Tu Le:
The only thing that's worth mentioning at this point in the year is NIO Day from a vehicle manufacturer globally, not just China. There are no significant announcements outside of NIO Day until CES.

Lei Xing:
Yeah, so interesting. China no longer reports asymptomatic cases because they can't. And just…

Tu Le:
I’m actually very, very glad I haven't heard about any of my friends, any other family, any other colleagues or associates having too serious of symptoms that it has hospitalized anyone. So I think the Chinese government knew that this variant wasn't as deadly as delta. And all these things align to allow them to let it rip.

Lei Xing:
There was this Wall Street Journal article on 5% GDP growth target next year and this guy from NDRC, He Liefeng, so he’s going to be the top economic tsar, sort of, for next year and going forward. And clearly I think the decisions were probably made to let this happen some time ago up at the very top, because the underlying, the bottom line is economy, right? We have this new guideline coming out to boost domestic consumption. So there's these signals that point to it can no longer sustain the zero-COVID policy. So…

Tu Le:
There is RMB12 trillion on the sidelines right now, because people have not been able to spend any money, significant amounts of money in China outside of the automotive sector fairly.

Lei Xing:
Right. Speaking of, right. So sales remain strong. We talk about EV sales. You want to mention anything, anythying that you want to…

Tu Le:
Yeah, you know, I think that you and I, let's talk a little bit about 2023 and some of the highlights from our conversation, investor call this morning. I think you and I are on agreement that we could see China getting to almost 9 million units next year, which is a lot slower growth than 2021 and 2022. We could see, I can see 50% growth in Europe and the United States. Which would mean almost 3 million units in Europe. And that would be close to a million and a half units in in the United States. And so there is still going to be lingering effects of the recession. Inflation fears for at least the first half of the year. And so this is actually good for the automakers as they line up more supply, consistent supply of batteries and sort out the chip situation. Because now I’m reading and I’m being told that there is a glut of chips on the gray market. So chips should not be an issue in 2023.

Lei Xing:
Much lesser of an issue.

Tu Le:
Yes. And we should see a huge scramble, even more than we've seen, once the IRA language has been finalized, the United States turns the corner on 2022 to figure out who else is investing in the U.S., where will they be investing, who plans to enter the market to take advantage of the subsidies? We already know that VinFast and ZEEKR plans on U.S. IPOs early in the year. I think that's exciting news. The one thing about VinFast is that really, really neg article that was written.

Lei Xing:
Jalopnik. Yeah.

Tu Le:
So I think he's pretty legit journalist. So it's interesting to see as they enter the United States via imports from Vietnam.

Lei Xing:
So they're on their way, right? 999 units on their way. And we had a couple of spin in a VF 8. Thought it's all right, but it was only what couple of minutes so can’t really say too much. But anyways, so next year…

Tu Le:
And we didn't drive, we didn't drive.

Lei Xing:
Right. We were driven. So the general outlook, I guess, is overall total market, including everything is flat, but NEVs will continue to grow, albeit at a slower pace with the export momentum continue to be strong. We just saw LYNK & CO export to Israel, right? So we're starting to see these, every other day, some Chinese brand goes to an international market. So those are the momentum, but the wild card, I think, is back to that guidelines to spur domestic consumption, whether anything will come out to kind of, again, that the ICE portion of the market what's happening, it is still a majority of the market. Will there continuing be stimulus? Watch out. Because at the end of the day it’s not NEV consumption. It's consumption. And automotive has really carried a lot of this consumption, right?

Tu Le:
And this is probably where the European foreign automaker lobbyists are talking to their government counterparts in China as well, because one of the things that you had mentioned in this morning's call was that these subsidies for vehicle sales or vehicle purchase that were launched earlier, middle of this year that weren't limited to NEVs has really helped the ICE makers read closely the legacy automakers in China. It's kind of artificially kept them floating. I think that's an important point to make.

Lei Xing:
Lots of suspense hang in the air because of this guiding outline that's been published. So expect to see details, support, policy support. So.

Tu Le:
In January, we'll also see the finalized language, and then there's going to be all kinds of analysis about the loopholes, the strict restrictions, complete restrictions for raw materials, components, and manufacturing in the United States. 

Lei Xing:
Right. So moving on. So that you mentioned about NIO Day, there's been quite a few news out of NIO. We saw the updated, new ES8. They did 300,000 production milestone. Lihong said they're going to deliver the 300,000th vehicle on New Year's Day, which means theoretically, December we are looking at well over 20,000, 20K in deliveries. I'm expecting nothing less than 20K, which is the record. And finally, kind of a boom moment.

Tu Le:
Sends them into 2023 on very good momentum, positive momentum.

Lei Xing:
And the other rumor is that they're coming out, first with those two brands: one is supposedly dedicated to an export market. So that's been the chatter; and the other one’s kind of been the Maybach ultra luxury model or something. So.

Tu Le:
So, that’s the one thing that I wanted to ask you about Lei. They are only for export. That means they're going to still be built in China, because what I read was they were only for the foreign markets. So I didn't read that it was actually going to be manufactured in China. So that's what I wasn't sure about.

Lei Xing:
At least at the very beginning. 

Tu Le:
Right. Yeah. Not to mention BYD announced that they will be launching another brand, professional and personal brand, whatever that means.

Lei Xing:
Not the Yangwang brand.

Tu Le:
Not the Yangwang brand. So we're talking a third brand now.

Lei Xing:
So right there we have already four or five brands out of a lot more that’s launching, still launching.

Tu Le:
And we can point back to Durant, the GM CEO about vertical integration and all these different brands, right? Because effectively, what BYD and NIO is doing is creating tiered brand so that even if you get a promotion or you get a raise, you can upgrade from a mass market NIO car that might not be branded NIO to a NIO car. And then once you make millions, then you go into the NIO “Maybach” car. I forget his first name, Duran, who was the GM CEO, he effectively came up, yeah, William Durant. He effectively came up with a strategy of when you're young, you buy a Pontiac, you get a raise, a promotion, you go into a Chevy. And as you get older, more mature, more established, more successful, you move into the Buick, and then you end up in a Cadillac. What we're seeing is history repeating itself a little bit.

Lei Xing:
So lots going on. And then whereas if we move on to Li Auto, they had their recently earnings call. Li Auto is a completely, much more focused company, in terms of doing that Russian Doll strategy, which Li Xiang said, in one of the recent interviews, in that LatePost Auto media platform, he said all the successful brands, including Dyson, Braun, Apple, they're all Russian Dolls. So that's what we are trying to do with the L9, 8, 7, and then 6, later on 6. And.

Tu Le:
It’s an Audi strategy, too, because 4, 6, 8, “chabuduo” (same same), they kind of look a lot alike.

Lei Xing:
The thing is all their models look exactly the same except the size.

Tu Le: 
Yes.

Lei Xing:
And he's going to go with the MAX/PRO based on different chip sets. And then the way he segments the vehicles or the markets is basically pricing and seating. That's how he does it and focus on families. I don't think they're going to launch any other brands, at least not yet.

Tu Le:
Their next major move, because of the Russian Doll strategy, is moving to an EV platform.

Lei Xing:
So which, by the way, he says, has a completely different design, styling format, form factor. So we'll see about that.

Tu Le:
And it should because the system is different, right? So it's going to have a bit more flexibility on the design, the interior space, and usage.

Lei Xing:
And then we heard about that, what happened to the ONE, was they had an RMB800 million charge on it, because it was promised to these suppliers and they had to kind of write it off and that impacted margins, vehicle margins significantly in Q3 from well over 20% to 12%. So that was an interesting tidbit.

Tu Le:
But it’s, I think it points back to how decisive about they are about taking that hit in one quarter, right? Because some of that stuff is accounting. So because you could account for it over a number of quarters, or you can account for it over one quarter. And they decided to take the hit right away. So.

Lei Xing:
Yeah, and he talked about the matrix organization that he's kind of still learning on the planning to be a RMB1 trillion company. They'll get to RMB100 billion next year. But he wants this to be a RMB1 trillion company, and remember that target he had, 8 million NEVs above RMB200,000 in 2025. And Li Auto alone wants to take up 20% of that market which is 1.6 million that's still in place.

Tu Le:
And we're talking premium vehicles, so we're not talking mass market here. 

Lei Xing:
Relatively yes. 

Tu Le:
That's an ambitious goal.

Lei Xing:
It looks like they will not get, do anything under RMB200,000.

Tu Le:
Which, RMB200,000 is actually a pretty inexpensive car in China. So if we are Li Auto and I was selling L9s and L8s, I probably would stay away from anything too mass markety.

Lei Xing:
Other than that, I think he mentioned roughly a 1.5:1 ratio of the L8 to L9 delivery. So say 15,000 to 10,000 respectively going forward. So that's over 20,000. So I guess neck and neck with NIO.

Tu Le:
And while they only really have two products currently. So I think it goes to show that resiliency that Li Auto has versus some of the schizophrenia of some of these EV companies.

Lei Xing:
Yeah. So next year, basically the L7 and that one new BEV.

Tu Le:
Edison brought that up today was that their share price seems to be the most resilient out of all the EV companies. We see the challenges that Xpeng have. NIO had some hiccups, but I wouldn't say they had real challenges this year, right? 

Lei Xing:
But again, the debate is on that EREV technology route. It's, a lot of people question it, for whatever it's worth. Maybe if they were all BEVs, I’m sure they probably will get much higher valuation or something, right? I'm good on my side.

Tu Le:
It's getting around the holidays. So I think I don't really have that much else because.

Lei Xing:
People are into that holiday mood already. By the way, it was good to see Ralph Brandstatter, he posted on LinkedIn that there were some FAW executives visiting Germany, higher ups. So I think it's good to see. And then once new year comes around, he'll probably be back with Oliver Blume, because he said he's going to be in China for a week. And we also heard that I think Volkswagen is doing an extraordinary general meeting tomorrow. So we'll see what happens there. All right, before the holidays. And then tonight, later tonight, we'll hear from the FF strategy update from their new CEO, so we'll try to tune in and see where they're going.

Tu Le:
One thing we should mention during the investor call Lei, is Edison had asked us, if we were to rank ABB: Audi, BMW, Benz, who we thought would be the most successful in 2023. I’m in agreement with you, we both said Mercedes would probably be the best out of the three. You went two and three. I just said Mercedes, but I think you also said BMW was number two, and Audi would be number three, I think, right? I actually think the Audi might do better than BMW because BMW has those challenges with their product and their pricing. I don't see any significant changes in that strategy for 2023 yet. I don't know how many times you can over price a product, and then reduce that price in a 2-3 month time period. So hopefully, the products and this is my memory’s not working well today. I don't know which products they're actually launching next year, but it's an own goal to me. It's an own goal that they don't know the market well enough that they would need to reprice their products in such a short period of time.

Lei Xing:
And Mercedes is relatively more independent now that they've pushed Daimler Truck into a separate entity and Audi’s within a larger VW Group, so different dynamics. 

Tu Le:
Because I think the reason, one of the reasons I think you would agree with me is that Mercedes is only really other brand is smart. For BMW the only other brand is MINI, whereas Volkswagen group has a stable of brands.

Lei Xing:
Now just hearing that smart was having some problems delivering vehicles in China, I didn't read too much into it, but I just saw a headline somewhere.

Tu Le:
Like COVID factory shutdown or?

Lei Xing:
No not COVID, I think it's a product related or process related issue. And then we're still waiting for MINI, what's happening with MINI, with that Spotlight Automotive. That's been awfully quiet in recent years. So those are some of the things that we can look forward to in 2023.

Tu Le:
And I mentioned that I could see the ET5 selling easily 20,000 units a month towards the end of 2023. I think you are a bit more conservative, but I think we both were long NIO, because they seem to have launched all their major products for 2022 and now will reap the benefits of a good number of new products for 2023. Fairly new. The last thing Lei, that I wanted to mention was I saw an article on CNEVpost that or was it Gasgoo that Xpeng is now going to be launching three products in 2023. Did you see that?

Lei Xing:
Yes. I think that was their plan anyways, with the P7 refreshed P7 being probably most important.

Tu Le:
Because I didn't get into the details, I didn't have time. So one is a refresh. They're not new products per se. Okay. I think the P7 refresh couldn't be a better time for them because of the challenges that they have dealt with in 2022. So I am good Lei, and let's just offer this up. If anyone has any questions. Please, you raise your hand. If not, we can end a little bit early.

Lei Xing:
Sure, we should have two more episodes, two more weeks. And then we'll be, I guess, now, probably sometime next week, we'll drop our latest MAX episode. It's pretty much finalized, just getting the last kinks out.

Tu Le:
We try not to drop MAX episodes at the end of the weekend, I think, right?

Lei Xing:
With Zack Anderson, CTO of ClearMotion, who, by the way, is in China right now as we speak. So it's an interesting story on suspension.

Tu Le:
Meeting with people. Meeting with people, pressing the pumps, he had to quarantine for 8 days. And it sounds like.

Lei Xing:
I think he went at the most interesting time. So, business, it's still it, right? I mean we talk about everything being stopped. Business is still going on.

Tu Le:
My buddy, Bill Bishop had mentioned to me that January 9 is the rumor to get 0 + 3?

Lei Xing:
I feel like every week there's going to be, going forward, there's going to be some new policy that point to more further opening up. That's the sense that I get. So whatever is going on it, it's natural that there's no point in quarantining, right?

Tu Le:
I think it is a common courtesy, though, that if you have COVID because people are still testing, right? Sure. There have been a couple of companies that have reached out to me and said that they were happy to send me testing kits and masks because they ordered enough for their staff. And so I think that Chinese New Year coming in mid January or late January or whatever.

Lei Xing:
January 22.

Tu Le:
In 2023 is a blessing in disguise. It'll help with that herd immunity that China needs to get to. I'm still fearful for a certain percentage of the elderly population that have not been vaccinated. I think there's still a lot of risk there and I was watching CNN last night and the journalist said that China has four intensive care beds for every 100 patients or one for every 1,000 patients. The United States has 24. So any major outbreak among the elderly, then the hospitals will be very, very flooded. And so I'm hoping that does not happen so far.

Lei Xing:
We haven't seen it becoming too extreme. I mean people are getting COVID, but…

Tu Le:
And you and I have a Beijing, Shanghai bias. But if we talk to our friends in Shenzhen, business is normal, life is normal. There are no COVID ripping through that community yet. So it'll go in waves, and it's going to be at least through Q1 before anything really kind of normalizes I think. So. All right, then man, hey, thanks for listening, everyone. I'd like to think Lei that you and I could put in a little effort for the last episode of the year to kind of do our Top 10 like we did last year. So for those listeners, the last episode of 2022 we are going to do our Top 10 of the year and our outlook for 2023. We hinted at some of that in this week's episode, but we'll get into more detail at it in two weeks.

Lei Xing:
Yeah we still have a little bit more than two weeks left. So I'm still hoping that there is a wild card, some kind of a wild card policy that would come out, that will kind of shift the trajectory a little bit. So we'll see.

Tu Le:
If nothing else, the IRA is going to get finalized and the Chinese government is also going to wan to, just because it's the Chinese government, they're going to want to counterpart that somehow. So, but that might not be until after Chinese new year where something gets launched.

Lei Xing:
Two Sessions.

Tu Le:
Yes. But hey, thanks again everyone for joining. Good morning, good afternoon and good evening. And Lei, I will talk to you on WeChat buddy.

Lei Xing:
Thank you all. And we'll talk to you next week.

Tu Le:
That brings us to the end of this week 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 this again next week as we track down all the latest news on China EVs & More.