Episode #60 - March sales, BYD's Evolution, How the Lockdowns will affect the auto sector

Tu & Lei go over March sales and BYD’s continued strength despite all the prevailing headwinds and challenges that the other EV makers seem to be running into. 

Tu explains that the China EV space is being told in chapters starting with Tesla is coming to the current chapter of BYD begins to dominate. Lei continues on with a brief history of BYD and the important milestones in its brief but eventful history and how each inflection point in its history builds up to the announcement that it’ll no longer build ICE vehicles. 

Tu also points out that the current direction of the auto sector, investing heavily to bring in-house battery cell R&D & chip design, BYD has been a pioneer in those two areas. 

Lei then turns to some of the challenges that BYD faces and what they still need to confront if they’re to continue to build momentum, gain share and finally enter foreign markets with their passenger vehicles. 

Tu and Lei move the talk over to Geely and how they’re trying to turn past issues with Chinese build quality on its head by building Smart, Lotus, and Polestar brands in China for the foreign markets. 

Tu and Lei close the pod by talking about what they expect and how severe the lockdowns in Shanghai and Jilin will be to the automotive sector in Q2’22. 

Transcript

CEM #60 040722

Tu Le:
Hi everyone, and welcome to China EVs and 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. We will open the room up at around the 40-minute mark to anyone who's keen to ask us any questions. 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 focus 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. Lei, can you please introduce yourself?

Lei Xing:
Hey, good evening. This is your co-host Lei Xing, former chief editor of China Auto Review. This is episode #60. Tu, I hope you had a nice Tomb Sweeping Day holiday break, what, a 3-day break. So you have a short week this week. I know Cyber Rodeo is coming up on the top the hour, so hopefully will be done by then and catch some action down in Austin.

Tu Le:
It's exciting man, it's exciting news, right?

Lei Xing:
I mean exciting, considering what's going on in Shanghai, it's been shut since, Giga Shanghai has been shut since March 28, I believe, quite a long time by Elon’s standards. So recently we reached a milestone of 5,000 downloads for our podcast. 

Tu Le:
Nice. 

Lei Xing:
Officially we published our first one on May 20, 2021. So we thank those loyal listeners and people who've downloaded and listened to the show, big thank you. Couldn't do it without all the people tuning in. Today it’s episode #60, it's opening day here in America for baseball, Masters this week, Australian GP, grand prix this weekend in Formula 1, so shaping up to be a nice week for sports, at least.

Tu Le:
I’m going to get on my soapbox for a second. All the rest of the world has moved on from COVID and we are still here. I think China pushed it out 2 years basically. 

Lei Xing:
You're in Beijing, so you're ok for now. 

Tu Le:
Safer, for now.

Lei Xing:
 That's the keyword. I listed basically, it's I’m not going to go through the headline details, but the topics listed in the spaces name, March EV sales, BYD, Volkswagen, Polestar/Hertz, smart,  today obviously Tesla. That's the topics. Where do you want to go first?

Tu Le:
I want to congratulate GoGoro for IPOing earlier this week. Of course, Bruce and team, good job with that. I know that there were some anxieties from the team and for the sake of full disclosure, the CFO Bruce Aitken, he was interviewed by CNBC this week, so have a look at that video, but he's a buddy of mine from Beijing days, and so the next beer’s on him.

Lei Xing:
 Oh, that's really close, you guys.

Tu Le:
Yeah, so before he moved back to Taiwan, a quick story about him, he actually grew up in Gao Xiong. His parents are Scottish missionaries. So he grew up there, went to uni and grad school in the U.S., he's American, and then he move back to Asia basically to take on leadership roles at Intel Finance. So he and I were, this is about 4 years ago, playing on the same AmCham basketball team. And he's telling me this story about interviewing for this company in Taiwan. And I was like, sounds like a great opportunity. So anyways, long story short, super happy for them.

Lei Xing:
We should get him on the MAX if possible, I mean it’s relevant.

Tu Le:
Yes, I will do that. We've been trying to do that behind the scenes, but with the IPO and SPAC, he's just been just slammed but exciting time for them. They are a company to watch, for sure.

Lei Xing:
It makes me think of all the power bank sharing that was quite popular a few years ago in China, right? For mobile phones, right? But anyways, March EV sales, we really can't talk about March EV sales without talking about BYD, so they are pretty much one and the same and what BYD announced, ending production of fully ICE vehicles and 100K club, as we say here at China EVs & More. I just felt everybody got out of Q1 like safely, and now confronting this Q2. So Q1 really, it was okay.

Tu Le:
And let me add to that, Lei, that statement that you made: safely. I actually think if we look behind the scenes, they were working their butts off to get that. I don't think it was easy to actually get that safe number, right? And part of it is also that it was just historically a slower quarter in the year.

Lei Xing:
Right, and BYD is just, I mean, I had some doubts about them doing 100,000 in March because of the (COVID outbreak), but they did it. So congrats to them, that's a psychological milestone for them. And right, if you look at the rankings, they're far, head & shoulders above everybody else, and they control their own destiny. That's the bottom line.

Tu Le:
And I want to talk about how the China EV story has evolved from Tesla coming, Tesla building a Gigafactory, Tesla is building its sales volume to, wow, what is this $4,000 Wuling Hongguang MINIEV and so it shifted from Tesla to Wuling. And then now it's about BYD's story. That's how quickly things happen, and that’s happened over a two-year period, essentially, right?

Lei Xing:
Speaking of BYD’s announcement, I think, first of all, the way I look at it, obviously, it's a huge PR win. And second, what's so different about BYD is, this is not some company that talked the talk first and said, I’m going to end, I'm going to do this by a certain year. BYD has never announced anything pertaining to, let's say, 2030, I'm going on electric. They just did it when the time came, they just did it. I think that says something about BYD and this is 14 years in the making. 2008, the F3DM was launched as probably one of the first, or world's first plug-in hybrid, 2006 when they had the F3e, a concept with their LFP battery. So this is 16 years ago, and 2003 is when they acquired Xi’an Qinchuan Auto to move into the auto business. This is right, 19 years ago. And 1995, when Wang Chuanfu founded BYD, it was supplying batteries for Motorola and Nokia.

Tu Le:
Everybody else. 

Lei Xing:
And the way they did it was because the batteries was half as cheap as everybody else. And so if you look back to the history and see where this announcement that came this week, it just all everything was natural, right? It just happened at a certain point in time. They were ready to move to the next step, and it wasn't like something that was announced, I’m going to do this by a certain year. It just happened naturally. I think that's the significance of it.

Tu Le:
Not only that Lei, cause BYD’s story is amazing, and I think you summarize it really quickly with that one missing piece. It's amazing how Warren Buffett knew way back when 2008 to invest heavily into BYD, because that's why Warren Buffett is who is, right? Just for him to have the foresight and the determination to stay with BYD even during the tough, tougher times, right?

Lei Xing:
I mean all over the last, BYD’s plug-in hybrid technology route, it's been scrutinized all these years. It wasn't smooth sailing, but they stuck to it, right? And now with the DM-i, it’s basically they're making this technology, the next ICE basically, right? So that's why they no longer need the ICE. And that frees up capacity, because their DM-i demand is huge.

Tu Le:
And one other thing that I need to point out that you know about is the fact that, for the two most important commodities on electric vehicles, they're vertically integrated. So all of the legacies are currently looking at moving away from just-in-time, bringing battery research and development, and bringing chip design in house. BYD is already doing it. It's the OG.

Lei Xing:
It’s proven its model, that everybody is doing what BYD has been doing, or trying to do what BYD has been doing.

Tu Le:
We have to remember that as BYD scales, as they start building more products internationally, then they're going have to evolve as well, right? We're not saying that the system, the processes they have in place currently will always work and optimize production, optimize margins, optimize output. They'll have to evolve too. But what we're seeing is that the legacies are moving away from just-in-time because of the global issues and the reset of the entire automotive industry to EVs. When BYD was already kind of doing it and then Tesla came in and is doing it as well. 

Lei Xing:
You mentioned about margins, so we give credit where it's due, but we criticize where it's warranted. So I think the downside for BYD going forward, as if you look at their annual report, their margins was, got hit compared to 2020. If you look at the numbers, margin numbers, I think it was down quite a few percentage points. Obviously, BYD like everyone else, is also exposed to the raw material prices, right? And you can't get around it and, even though it is highly vertically integrated, but it showed in the numbers, Geely, Great Wall, BYD these three, if you compare their profitability. BYD is not doing that well, and BYD does also depend a lot on the subsidies as well. Obviously, they have more volume, but these are the things that going forward, BYD has to figure out, right?

Tu Le:
To piggyback off of your statement about the subsidies. There were a couple of years, I believe, 3, 4, or 5 years ago when BYD was generating $1 billion off of those subsidies. So they're no different than the other automakers when it comes to that stuff. And actually, I would argue that on the margins, they're actually more sensitive because most of their vehicles are under RMB250,000, so any material pricing increase is going to cut into their margin a lot more than a premium brands margin because they can eat some of that, right? That's where scale to laser focus on really understanding and figuring out that whole risk management, from a global standpoint, is going to be helpful for a company like BYD.

Lei Xing:
That's why I was saying earlier that this ending production of ICE vehicles to me and maybe to BYD itself, it's really insignificant because it's just natural that their development has reached that point that they can do that. It is a PR win but yeah it's not something that was forced that they had to do this on a certain day. It is just natural, and now…

Tu Le:
And I'd said that to Danny Lee, I was quoted in Bloomberg, and interviewed by Bloomberg. I said this is mostly symbolic, because and I pointed back to your chart, right? Going away from ICEs was happening years ago. And this is just like making it official and I almost feel like it was also a poke at some of the legacies saying you guys are talking it, we're getting it done.

Lei Xing:
Walking the walk versus talking the talk.

Tu Le:
And the other thing too, and I got an opportunity to talk to our good friend Nori. Last week, I told you guys I had that Li ONE. I picked up Nori and we drove around, and he was pretty impressed with the Li ONE as well. But we started talking about BYD and one of the things is some of the challenges that BYD is going to have moving forward, especially as they enter foreign markets. I told Nori and you know this, BYD is kind of cheating because they already have international operations. We should remind people that they build electric buses in Lancaster, California. 

Lei Xing:
They're an American company virtually.

Tu Le:
So whereas the Chinese consumer is still much newer to cars in general, European consumers and American consumers expect a certain amount of reliability, fit and finish for even their economic vehicles. And so I've seen significant improvement in the quality and the fit and finish of their vehicles. So if they can maintain that, they're going to be fine in Europe, in the U.S.

Lei Xing:
This is a perfect point to move to smart, and to your comment earlier, and just now about quality, an interesting observation on the smart is that Geely has done the kind of the unthinkable. Their Polestar, smart, Lotus, the next generation vehicles are all going to be made in China for the world, right? That's I think when we talk about the smart in the new age and utilizing Geely’s SEA platform, Mercedes design, made in China for the world. That's the symbol.

Tu Le:
I'm going to give probably a little bit of an unpopular take. Because I believe with everything that's happening in the world and the negative connotation that globalization, that word carries nowadays. I don't know if Geely, Geely is going to have to be manufacturing locally anyways, if they want significant share of the European market or the U.S. market. And so I think a lot of that Chinese capacity is going to end up being consumed domestically. And then as they gain momentum, because they're effectively new brands, right? Because Lotus is kind of rebirthed, smart is kind of rebirthed as EVs. And so that the domestic Chinese market should be able to take up 100,000 units or 150,000 units of Lotuses, no problem, right? It'll help them dip a toe, just like NIO, just like Xpeng, shipping from China for the initial couple of years, until they get a critical mass of demand, then they really have to start looking at greenfield sites in Eastern Europe, in the UK, in germany. So we have to remember that. And the one thing that just triggered in my mind is Geely is truly China’s first global automaker, right with all these global brands that they have, kudos to them.

Lei Xing:
And Polestar and Hertz. Another one of Geely’s brands. I just think for Polestar, I've had the personal experience of renting a Tesla Model 3 on Hertz. And I’m just thinking Polestar is going to be an entirely different experience if I were to rent it. The killer is the charging part of it, because I don't have that peace of mind anymore.

Tu Le:
It’s KISS: you got to keep it simple, stupid, right? If you want people to rent it, it's got to be easy.

Lei Xing:
The reason why Tesla was put on Hertz, I think, is a lot different than why Polestar is put into Hertz.

Tu Le:
The one thing I will say Lei, when I saw that announcement, is God bless them because now they've sold a third of their capacity which takes a little bit of pressure off. But because they're not selling well in China, they're not selling well in the U.S. And let's be clear here if they're shipping. So I’m not sure if it's Polestar vehicles or Polestar 2s, because, in the contract, it's got to be able to shift to maybe the SUV in the U.S.

Lei Xing:
Well the Model Y is getting on to Hertz as well.

Tu Le:
Because they can't ship Polestar 2s from China to the U.S., because there's a 27.5% tariff, I don't know how that's going to be sustainable. So are they going to start building, or eventually start building Polestar 2s locally in their U.S. factory? I don’t know.

Lei Xing:
Well Polestar 3 is built in their South Carolina factory.

Tu Le:
That would make sense. I don't see that tariff being lifted. Let me just say that. And the other thing to your point about not the same UX for Polestar versus a Tesla when you rent at Hertz. The other thing is remember that Tesla has this reality distortion field where selling fleet cars into a rental agency is actually a cool thing for Tesla. I don't know Polestars going to have that reality distortion field.

Lei Xing:
I guess it's now becoming more cool for these EVs, maybe to get onto Hertz. And it's rebranding of Hertz its itself. But I don't know, if I get a chance, it won't be available until later this year. But if I get a chance, I definitely am going to rent one like what I did before with the Tesla.

Tu Le:
The other thing I want to mention is that this creates more options for Hertz, if they want to become a subscription service, as opposed to just a rental agency, right? 

Lei Xing:
Volvo does that subscription thing. I don't know how it's going, but

Tu Le:
Porsche is the only one that I think has kind of stuck with it because they're able to, the subscription cost is really high, because if you have all these inventory, you need this car for this month and this car for this month that we're carrying it on their our books. Unless you're getting that service fee, subscription fee pretty high, it's not paying for those cars on your books on your balance sheet.

Lei Xing:
So yeah, I listed Volkswagen, because I didn't feel like this was reported that much in the western media. So that decision to invite these 20 Chinese tech companies, to be the suppliers, not of the vehicles based on next generation SSP produced for China, but for the U.S. and European markets. And this announcement, I think, came right around when China’s securities administration, what, the CSRC, right, announced. When they announced that we allow these Chinese companies to have the freedom to select where they want to IPO and that new rule that they announced. So I felt like, Volkswagen is really throwing down the gauntlet. This is like open, I'm going to have Chinese tech companies being our suppliers for the SSP for the European and U.S. markets. This is very sensitive. 

Tu Le:
There is a lot of risk on that. 

Lei Xing:
And I'm sure Huawei is going to be one of those 20 companies. You can bet.

Tu Le:
We should note that Huawei is designing their own chips now. They're going to be launching a set of mobile phones. So the irony of that statement that you're talking about for Volkswagen Lei, is that there is that article in FT a couple of weeks ago regarding Volkswagen. There's another article this week in the WSJ about how the sourcing, the head of sourcing is now going to look go away from just-in-time to local sourcing, to mitigate the wiring harness issue. So that is probably part of the announcement that you're talking about using Chinese tech suppliers, right? But they did say that they're going to try to double market share in the U.S. from 5 to 10% for Volkswagen brand. And the ID.4, I feel is probably the perfect electric vehicle for these Americans that aren't as tech savvy, as the average Chinese consumer, that don't have a lot of expectations or high expectations, I should say, of their entertainment system, right? They just need to get it done. And instead of physical knobs and buttons, they have this entertainment that can kind of help them kind of navigate through what they need. So I actually think the ID.4 the ID.6 will do pretty well in the U.S. but the one thing that's challenging for Volkswagen is that the WSJ article said in 2019, or 2020, they lost 14% of their production, and then in 2021, they lost another 7%. You can't, because your cost base stays the same right now. And when we talk 14 & 7, we're talking hundreds of thousands of cars. So if your team is supporting 3 million cars of production a year, you lose half a million units, now your costs are extremely high per vehicle. It's not going to be easy for Volkswagen to move away from the China marke.

Lei Xing:
Going back over to China a little bit. You look at the companies right now that are being impacted the most of the Shanghai lockdown are in fact, Tesla and Volkswagen. Volkswagen has to deal with the one in Jilin in Changchun, it's also shut down. It's been shut down. And I know the other news is the Tesla recall, but Tesla recall in China is just another huge PR win for Tesla, right? If you read the fine print OTA solves the problem. Who does that?

Tu Le:
To me that just means that Tesla just got many more cars on the road than everybody else.

Lei Xing:
But I’m sure, I know Elon’s partying tonight, but in the back of his mind, I'm sure he's thinking about Shanghai every day the longer it stays shut down, that he can’t say much.

Tu Le:
The longer it stays shut down, and ramp is slow for Berlin Giga, it's kind of a double whammy right? Yeah. Because the one thing, the saving grace that Tesla has is that it's April and they still have two more periods in Q2 to try to make up for it. But let's be clear based on your inside information Lei, and me being here, the lockdown in Shanghai is going to be longer than 4 and 8 days. We're talking through the end of April likely, which is unfortunate, right?

Lei Xing:
And it's going to reverberate right throughout, if we talk about the industry, it's going to affect a lot of people because even for companies that do have these employees who are kind of on site, they live at the factories, but they can’t produce because the supplier down the road, they can't supply the parts.

Tu Le:
That's kind of what we mentioned, right? Last time I was like the OEM having the factory open is only one part of the story, right?

Lei Xing:
Exactly. And Kunshan, down a few dozen miles from Shanghai is also in lockdown. And Kunshan is a huge component manufacturing hub for not only the Shanghai region.

Tu Le:
And the Shanghai lockdown has sucked all the air out of the room in regards to the seriousness of COVID in China. But we have to remember in Jilin province, all the Germans manufacture up there, Audi, Volkswagens. So if you're really wondering about production output, you got to look at Jilin province as well and see how long they're locked down.

Lei Xing:
Did you see that recent Amcham survey that what, 80% of the executives surveyed said that they expect revenue to be reduced or to drop. And also Joerg Wurtkee, right, he sent out a long I guess LinkedIn post or something that just said for Western companies who are so much leaning on planning, that when things just stop, it’s just nightmare. We didn't foresee this, maybe a month ago. We were talking about the start of the war. We weren't ready to talk about the Shanghai lockdown now.

Tu Le:
And the other thing that we should educate our audience on is that Shanghai actually has a very important port and there are ships piling up that can't be off loaded because drivers, we are talking, people are taking COVID tests every day for 20 days, 30 days. 

Lei Xing:
This morning, I saw quite a few my WeChat contacts posting that they were woken up in the middle of the night to do first an antigen test at home, kit, and then followed by another test. Yeah, I can't imagine

Tu Le:
Lot of this to me is a lot of this to me and friends here is a bit of a head scratcher. So I'm not sure I don't want to get into it too much, but this is likely going to last into the summer.

Lei Xing:
Yeah, Clinton, he's gone, but I think he was asking a question about Q2 prospects. I don't know, April doesn't look good from so far what it's been like, at least for a lot of companies that have high exposure to Shanghai, BYD may be okay, right? As we said earlier, but it's going to be different for different companies I’m sure, but overall it’s going to affect…

Tu Le:
We have to remember that the legacies are going to be more exposed than the startups just because of the volumes that they produce.

Lei Xing:
Look at the overall vehicle sales that have been reported, right? It’s double digit drops for Q1 numbers. Although these premium like Mercedes and BMW they do say their EV sales are like 2X or 3X, but their base are so small, right? They never report the numbers. And also you talk about, let's say Mustang Mach-E, for example, I wonder what kind of numbers Ford is going to report, because they only report quarterly numbers in China, whether they'll report numbers at all. I don't know for the Mustang Mach-E, I don't know.

Tu Le:
There's a lot of important launches. There's the G9, there's the L9, there's the LYRIQ. So God bless the sourcing teams and the supply chain teams.

Lei Xing:
The L9 reveal was delayed, right? It was april 16, but they delayed it.

Tu Le:
And Xpeng moved their G9 launch to June as well. Everyone still raising prices. Chery raised it twice in three weeks now.

Lei Xing:
I say a few weeks ago, we're talking about cloudy with a chance of rain. Now, it's not a downpour yet, but is definitely raining.

Tu Le:
Yeah. But this goes to show how the world is flat, right? What's happening in the Ukraine is affecting or what's happening in the Ukraine and Russia is affecting the rest of the world. It's unavoidable. Because if they localize production and suppliers, and sourcing, there's challenges with that, too, right? Because if the Euro gets too strong or, or weak, if USD gets too strong or too weak, then we talk about importing and exporting costs, getting higher, right? So there's this balance that needs to be had, especially with the legacy automakers who are producing in multiple countries, multiple regions. What's, they have to look at 3, 4, 5, 6, or 7 years, their product portfolio, and then look at their forecast from a global macroeconomic standpoint and make decisions based on that. Like you said, nobody was likely predicting a high probability of Russia invading the Ukraine on January 1, 2022.

Lei Xing:
And nobody's thought of the Shanghai lockdown.

Tu Le:
You know this Lei, for sure, for Shanghai to get locked down. It's kind of sort of out of control. Like Shanghai is so important to China.

Lei Xing:
All this image and being well managed, right? These, yeah.

Tu Le:
That veneer has been cracked, cause it's not just that they lost control. It's that the orderly management of trying to get it back in control is not there, right?

Lei Xing:
And also that announcement from the UK government, right? The tiered proposal on percentage of EVs by a certain year. You saw that, right? That's interesting kind of following a China model.

Tu Le:
So, you and I kind of have some inside Information on this stuff. UK is getting aggressive with trying to attract investment into the region.

Lei Xing:
It's a signal.

Tu Le:
It's effectively just announcing a commitment.

Lei Xing:
It's come on over.

Tu Le:
We are open for business.

Lei Xing:
I do plan, by the way, we look forward a little bit, I do plan to check out the New York Auto Show next week. Since it's pretty close, 3 hours.

Tu Le:
You going to drive that Buick?

Lei Xing:
Yes. And then check out some of these new brands, right? INDI, DEUS, VinFast is going to be there, the ID.BUZZ is going to be there.

Tu Le:
So make sure you wear your China EVs & More swag, and maybe get one of the CEOs to come on our show. I'd love to talk to the INDI guys, right?

Lei Xing:
They were at CES, I just realized, but I'd only heard of them recently.

Tu Le:
The one thing that I complain about is just not enough newbies to compete against the legacies. 

Lei Xing:
Then, there's the Hindenburg report out on Mullen, right?

 Tu Le:
I saw that. Every single EV company in the U.S. has had challenges with their financial statements, right? 

Lei Xing:
And look at what's happening with the FF right? They've been quiet, I guess, a little bit more recently, because they still haven't posted, what, posted the a numbers yet.

Tu Le:
And I'm going to be quite frank and I could be totally wrong, I doubt it. But Jia Yueting is Chinese. He could get away with a lot of that stuff in the past in China, but the level of scrutiny in the U.S., the Chinese managers aren't used to that, right? And he was an entrepreneurial success story in China. He's just become this PT Barnum a little bit, right? Making these bold promises. And like Elon said, making that first prototype is easy. That's nothing, but that's where you and I should probably go meet these guys and see how we can help them. So many startups I'd love to help a startup in the U.S. figure stuff out.

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 at @leixing77. If you wouldn't mind rating and reviewing us on Apple Podcast, Spotify or wherever you grab your podcast from, we'd appreciate that as well. Even better if you enjoy the show, please tell your friends about it. Please join us again next week as we track down all the latest news on China EVs & More.