Episode #108 - More Price Cuts, VW Group's Long Game, the EU's Answer to the IRA

Tu and Lei start out the pod with a discussion on the latest price cuts that take the current price war deeper into the hole. 

They then talk about the VW unveil of the ID.2all and how it may not be that competitive if it was to enter the Chinese market, which currently it’s not set to do.

Lei puts the focus on Skoda and their shrinking sales in the China market and how they are doing in other regions. He anticipates that they may ultimately leave the China market due to their continued struggles.

Tu updates about the EU’s version of the US Inflation Reduction Act which is called the Critical Raw Material Act or CRMA.

The pod closes out with the UK not making the cut for location for the next BYD factory. They didn’t even make the semi-finals and BYD blamed uncertainty in long-term business conditions due to BREXIT as the primary reason. 

Transcript

CEM #108 Transcript
Recorded 3/16/23

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 device. 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'm the managing director at Sino Auto Insights, a global management consultancy that helps organizations bring innovative and tech-focused products and services to the transportation and mobility sectors. You’d think I would have memorized this by now. 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. A little under the weather Lei. Can you please introduce yourself?

Lei Xing:
Yes. This is your co-host Lei Xing, former chief editor of China Auto Review, and this is episode #108. As you can tell, I’m slightly under the weather, but I’m fine, just a little clogged up. It's March Madness time. It's still winter here in New England and probably where you are as well. It's roughly a month away from Auto Shanghai 2023. See you there. 

Tu Le:
See you there.

Lei Xing:
And the madness continues in China with the price cuts. Did you see this: Volkswagen brand from Saic Volkswagen announces a RMB3.7 billion in incentives. And every single model from the joint venture Volkswagen brands, Teramont, Tiguan, Santana to the ID.s are all on sale as much as RMB50,000 off.

Tu Le:
So that's a $500 million subsidy.

Lei Xing:
Yeah. I put 315 on the topic today. It so happens that exactly 10 years ago, almost to the day, Volkswagen was shamed on CCTV’s 315 Gala for that DSG transmission problem. I'm thinking, wow, 10 years makes a difference, now we're spending money on promotions, rather than recall costs.

Tu Le:
So to give everyone an idea of what Lei is talking about. Every year, on March 15 is customer or complaint day, and the Chinese government calls out, they have a show that calls out a handful of companies. Many of the times there are foreign companies that are not doing their customers right? And 10 years ago, Volkswagen was called out because of, again, it was a braking?

Lei Xing:
DSG transmission.

Tu Le:
So I think Ford has been called out before, right?

Lei Xing:
Quite a few automakers, but I think Volkswagen was the most memorable to me.

Tu Le:
It was actually very surprising to me when that happened, because…

Lei Xing:
Were you in China? You are.

Tu Le:
I think so. Yes.

Lei Xing:
You were in China, right.

Tu Le:
Because Volkswagen for the longest time has been the OG of the China market for foreign automakers. OG because they entered in ‘87 and traditionally before the transition over to EVs. Because GM and Volkswagen were both in early on investing, on building out infrastructure, on hiring and building locally in China. They had really good government relations. And so it was a bit surprising to see Volkswagen get called out on that.

Lei Xing:
Yeah. And I was actually looking forward to who's going to be shamed that this year. It turns out no one.

Tu Le:
They don't want to kick a….

Lei Xing:
Yeah, you know where I’m going with this, because of the price war that's going on, because of the tampered demand it seems in the market and the drive to push consumption. I think CCTV was like, let's not shame anybody on autos this year. So that’s it, there's nothing to talk about on 315.

Tu Le:
Very delicate situation, I think, because all vehicle sales is not national, it's local. And because there's struggles, that means that people aren't working, that means that one of the main duties of an SOE or state-owned enterprise is really keeping people employed, keeping people busy. And so I think what we're going to see and you and I agree on this is some sort of central government stimulus later this year.

Lei Xing:
So that is quite possible. I've also seen some other. So for example, Kia, they put up a poster saying that they have a 90-day price guarantee. So that's another form of not cutting prices but ensuring customers that, you know, please buy all cars and right?

Tu Le:
It's like a put option that says we still may cut price, but you'll be made whole by, we’ll pay you the difference. 

Lei Xing:
Yeah. So all of these things are going on.

Tu Le:
That was initiated by Li Auto, and NETA and Denza have also announced similar policies. And NIO has said that they're not going to cut pricing. And long-term, they're not going to cut pricing. So they feel fairly confident, I think, in their demand book, but also that they know that in order to be premium, we can't nilly willy slash pricing. And so I think it's a strategic move. They're willing to lose some sales volume in order to protect the brand.

Lei Xing:
Yeah so I put up VW and BMW on the topic today, because this week has been the annual press conferences from the two of the biggest German automakers. I don't know whether you followed some of the chatter or not, but

Tu Le:
The chatter is only going to get louder, leading up to April 17 and 18.

Lei Xing:
Yeah, they're all going to be there. We can talk about maybe the ID. 2all. And that's, I think there's both positive and not so positive feedback on this model. It's like a Volkswagen going back to its roots almost. And it's only going to be offered. This car will not compete in China if it was launched today even below 25 or 20,000 Euros.

Tu Le:
Right now, it's a single market vehicle, as far as we know, because it's not going to be offered in the United States either.

Lei Xing:
But, it's a nice little car, little EV, but it's European focused, obviously, and still two more years.

Tu Le:
Yeah it's not going to launch until 2025 and how they get a profit out of that $25,000 car will be interesting to see.

Lei Xing:
I think that was also almost even a shot at Tesla in a way.

Tu Le:
I don't think there's any question. I think they're definitely a shot at Tesla. 

Lei Xing:
And they mentioned the 20,000 or below 20,000 Euro car is also being developed. And then I think the other, I followed some of the press conferences. I think we had a glimpse into, for example, Oliver Blume, his kind of style as his first annual press conference as the Group CEO and as the Porsche CEO putting two hats, right? So it was actually quite a difference compared to Diess. Diess is always talking about Tesla, always out there in the limelight, making these juicy comments. Whereas Oliver Blume is more reserved and getting things done type of guy.

Tu Le:
I think 180 billion-Euro investment by 2030, a 13% increase from last year. I want to say 122 billion of that is going to be dedicated to battery technology and EV and digitalization. That's a hard word for me to always say.

Lei Xing:
I think the addition of the investment from the last planning round is dedicated to that and also the Scout. That's a huge investment, right?

Tu Le:
South Carolina, a factory that should be ready to go in 2026, I want to say, and at full capacity should be putting out about 100,000 SUVs and trucks a year in a very, very competitive SUV and…

Lei Xing:
Porsche announced several new EVs in the pipeline, right? Macan, 718, Cayenne is going to be an all-electric EV, and the D-segment above the Cayenne SUV, I think that has China written all of it.

Tu Le:
Porsche can do no wrong in the China market. They've not been able to do any wrong since they've entered. Porche’s or Porsche’s most important market in 2022, again, was China. I don't see that changing any…

Lei Xing:
Eight years in a row or something?

Tu Le:
I don't see that changing in the future at all. What is going to be interesting is to see how they fund that 180 billion-Euro investment, it still dwarfs Tesla’s number of $275 billion estimated by 2030 on capacity. So they're moving forward, I don't. They are speculating that Lamborghini, Bentley, and Skoda, perhaps will IPO to help fund some of that 180 billion-Euro.

Lei Xing:
Yeah so Monday was Porsche, Tuesday was Group. Yesterday was the Volkswagen brand, today was Audi and Skoda. Speaking of Skoda, I think the biggest news is they are going to produce in Vietnam? Do you see that?

Tu Le:
I did not.

Lei Xing:
They're going to import into Vietnam first and then produce in Vietnam in 2024. So that to me is a major signal without saying that we're done with China. I think they're done with China as far as…

Tu Le:
I saw your post, 44,000 sales in China last year?

Lei Xing:
44,500 last year from 3 years of straight of 300,000-unit sales in China. I think they're done. I think they can focus on the other brands.

Tu Le:
But they can’t avoid competition with the Chinese because Southeast Asia is going to be a lot of cheap Chinese EVs.

Lei Xing:
Yeah. But it's clear that Skoda, internationally, I think they are moving toward that region, right? India, ASEAN.

Tu Le:
Yes. Because they're actually doing well in India, Skoda is.

Lei Xing:
Yeah. And then Audi is starting with a new round of product offensive, starting with the Q6 e-tron, which is the first model from the PPE that will launch. And also the first model from the PPE that will go into production at the Audi FAW, the new joint venture next year. So those are the China factors. 

Tu Le:
You didn’t do your news of this week. So we're just kind of rambling on a little bit, but the Li Auto factory in Beijing should see job number one roll off the line in September.

Lei Xing:
It’s pretty fast.

Tu Le:
It's going to be a BEV.

Lei Xing:
Yeah, that's their first BEV, right? That they keep saying it's in a new form factor, right?

Tu Le:
Near our old hood in Beijing in Shunyi. So man, the hits just keep on coming and coming.

Lei Xing:
And I think going back to the annual press conferences a little bit, I get the sense that these companies are, especially the German automakers right now, the two time lines that are very critical to them are 2025 and 2030. 2025 is when, let's say, in the example of Mercedes, they're launching the MMA with MB.OS starting in 2025, the ID. 2all is starting in 2025. And then, look at BMW group, right? They gave share targets of BEV sales every year in the next how many years up until 2030? Specifically in the BMW group, they talked about this next generation of the electric drive train, depending on three battery players of CATL, EVE and Envision AESC right? That Spartanburg investment that was announced, I think late last year included that Envision plant, right? So.

Tu Le:
Speaking of European and batteries, there's the CRMA, so the Critical Raw Material Act, which basically centralizes sourcing of rare earth metals to try to get economies of scale on the pricing, and then likely sell to the OEM. So this is their initial take on combating some of the Inflation Reduction Act, the U.S. Inflation Reduction Act, I think it had to be done. We were already seeing announcements of shifts and strategy from the European automakers in order to take advantage of those subsidies, if you build locally in the United States. So, man, the chessboard is moving.

Lei Xing:
You mean, if you build in Europe.

Tu Le:
So how that's going to affect the capacity build out on the battery cell stuff is still remains to be seen. So.

Lei Xing:
What, do you think that's a positive or negative, let's say the Chinese EV Inc., including the battery Inc. in terms of possibly producing in Europe?

Tu Le:
So in the short term, it's kind of a non-starter because they'll need to grandfather that stuff in because China just controls so much of rare earth mining and processing. They, one of the keys that I think is a part of the fine print is fast tracking mines and the approval of new mines in Europe and fast tracking the approval of new refineries in Europe from what however long, years long, to 24 months and 12 months. So those are the kind of things that will help, getting rid of that red tape should incentive eyes investment into that mining space and the refinery space, because we knew that the IRA was going to do the exact same thing, was going to promote more mining and more refining of rare earth metals in the United States. We saw that with GM and that $600 million investment in that mining company.

Lei Xing:
Thacker Pass? Lithium Americas, was that what you're talking about?

Tu Le:
Yeah between Nevada and Oregon, I want to say. So we're already seeing some refineries and announcements being made, right? Volkswagen in Canada. That was because there was no CRMA and you had sent me that that news press release that said they're going to work closely with the Canadian Mining Association or whatever it's called in order to secure rare earth metals for that factory. And so Lei, it's just really hard, because it's still conceptual. Will there be carve outs? Will they weaken the language? Because remember, I thought the whole 2035 European Union banning the sale of of ICEs and diesel field engines by 2035, I thought that was a done deal. And now, Germany and Italy are pushing back a little bit, and Termany is pushing back, I guess, because of the eFuels or whatever it's called. And so…

Lei Xing:
Which by the way, Oliver Blume and Oliver Zipse, they both supported it in the press conferences.

Tu Le:
So maybe that's going to be a completely European thing, because we know that diesels aren't super popular in the United States, so.

Lei Xing:
It’s probably a South America thing because of the energy makeup there in the transition to EVs.

Tu Le:
I think this was a necessary move from the European Union. It complicates things a little bit for Volkswagen, I believe, because now do they alter their strategy from importing EVs? Because I think they were looking at some of the lower end vehicles being exported to Europe from China. Does that change that manufacturing footprint and the calculus on that stuff? I think it's too early to tell, but they had to have some sort of influence on that, right? So.

Lei Xing:
So also today Baidu announced the chat, no, not chat, their ERNIEbot.

Tu Le:
ERNIE. ERNIEbot.

Lei Xing:
And I saw a headline saying “Baidu launches its own ChatPPT,” no offense to Baidu, but I thought that was a little dunking on. Because I think their share prices went down while this is happening because they were not able to show a live demo. So everything was pre-recorded.

Tu Le:
The other thing too, is ChatGPT with Chinese characteristics is going to be completely different than…

Lei Xing:
Yeah and we saw that with Baidu generating videos, generating pictures.

Tu Le:
Yes.

Lei Xing:
Luckily, nobody can generate a podcast, not yet, so.

Tu Le:
Well, we'll see, we’ll see.

Lei Xing:
Never say never, but we're safe for now, right? Talk about the China EV price cuts, and a broadcast comes up.

Tu Le:
Of note was the fact that BYD last week said that the UK is not in consideration for a factory in the future in Europe. I think they said that Germany, France, Poland, and Czech, was it Czech or Austria?

Lei Xing:
Probably one of those eastern European.

Tu Le:
So I think there are four or five countries in the running still, but the UK was not. To kind of add insult to injury, the head of European sales from BYD said that they weren't even in the top 10 of countries to consider. So you and I have spoken with some folks out of the UK who are kind of struggling to tell that story a little bit. I still think there is reason for an EV maker and a battery cell manufacturer to build in the UK.

Lei Xing:
Speaking the UK, I think BMW, Oliver Zipse, he did say that the future generations of MINI EVs will be made there, but they're also making those with the Spotlight JV right in Zhangjiagang. That has been quiet. We haven't heard of any news out of that.

Tu Le:
Because every piece of news coming out of the legacies, I feel like it's Star Wars and then the Empire Strikes Back, because the legacies are really, really…

Lei Xing:
Good quote. 

Tu Le:
Yeah, the legacies are really kind of forcefully injecting themselves and communicating that they're going to be there, they're going to be major players and that everyone should take them seriously. And on Twitter, we know who heavily influences that platform. So we hear a lot of the dunking to your point on these ideas and these plans. But I think they're going to be players. I think they'll be much smaller players because and I wrote this about in the newsletter this week that the western journalists, they just don't have a good view into the Chinese market. So I don't think they know how deep, far and how damaged the foreign legacies in China and how it's going to affect them globally.

Lei Xing:
Yeah, that's the sense that I got from this week's press conferences was that they seem to be just fine, and they're all banking or betting on the next generation platforms and models. And financially, they're very healthy. This is something that the Chinese smart EV startups cannot say, right? So you look at these in from different perspectives. And since you mentioned BYD I think we should. I should ask you your thoughts on Elon’s comment. I think we had tweeted back and forth on his comments supporting BYD, so I thought that was interesting. He laughed at BYD many years ago. Right now, he's like, oh, it’s…

Tu Le:
I haven't been able to substantiate the outsider claims that some of the battery fires have been caused by blade batteries or not blade batteries, but BYD batteries. But this also could just be a negotiation ploy, because assuming that they're accurate that the contract is up. This is a negotiation…

Lei Xing:
It's a 10 GWh contract, I believe.

Tu Le:
So it's not unusual to be negotiating through the media and through social media. But if BYD batteries are having any kind of issue. Now, I will say, a lion’s share of the BYD batteries in China are going to be LFP batteries. So if BYD is supplying NCM batteries to Tesla, then that very well could be the case that the NCM are a bit more unstable than the blade and the LFP batteries that BYD fab for the China market. So I tweeted back to you: it’s false until it's true because who knows what because Elon is doing. I don't know if he's telling the truth or not.

Lei Xing:
Yeah we always take a grain of salt whenever Elon speaks, right?

Tu Le:
Yeah. The other thing about BYD, in one side of their mouth, they're like, I'm not so interested in building in the UK, but they did get a contract for 5,000 vehicles.

Lei Xing:
They launched in the UK as well.

Tu Le:
Yeah, the ATTO 3. So I think this ATTO 3 is going to soon be like a million-unit vehicle, because it's entered dozens of markets, I think. So it had a little hiccup in Australia, had that little hiccup in Australia, but it seems to be doing fine now.

Lei Xing:
Yeah, this year we're definitely looking, one of the things we're looking at is how many ATTO 3s they get to sell in Europe, right? And it looks like it will be a big number if everything goes well.

Tu Le:
And do you think the ID. 2all can compete against the Seal and stuff like that or vice versa? Do you think it'll be as of a clearly superior product at 25,000 Euro?

Lei Xing:
I don't know if it will be a clearly superior product, but in the European market, I think this is a great car if they can execute well and deliver on the promises. Because, right, that the heritage, right? They brought back some of the older Volkswagen design ques.

Tu Le:
And hatchbacks are big.

Lei Xing:
Yeah. It's basically replacing the Polo, right, with the new EV model the size of a Golf. So.

Tu Le:
They still, if they're being strategic, they haven't frozen every feature yet. There weren't a ton of details about the vehicle revealed, including the size of the battery.

Lei Xing:
Well, it’s 450-km range WLTP. So you can sort of guess the size of the battery.

Tu Le:
But by 2025 Lei, that's a lifetime way. So that's the weird thing. It's almost 2 years away and they're making these announcements. So again, in the digital world, things change much faster than an analog world. And so a 2-year announcement period would have been fine if you're launching an ICE vehicle, but there are so many changes that will happen and will occur to the European market, to the China market, the U.S. market that will dictate the features, the range, the battery, pricing and stuff like that, so.

Lei Xing:
At least unlike the ID.LIFE, ID. 2all Concept is more closer to a production vehicle.

Tu Le:
Looks like it. But that means you would hope that they could get it up before 2025. And is that and forgive me because I wasn't part of the, I didn't do the press conference, but is that the one that's going to be built in Valencia, Spain?

Lei Xing:
I believe so, Spain, they confirmed it’s going to be built in Spain.

Tu Le:
Ok. Because they're selling that factory in Germany, potentially to BYD, correct? VW moves on, I think, later this year, we'll have a clear idea of what I want to say two brands though, be IPOing, if not have already IPOed. I think it's highly likely that at least Lamborghini and perhaps Bentley, do you, happen? Because those two are premium brands that are still in growth mode, primarily because of China, and Skoda is not going to have a great compelling investment story because it's struggling in China.

Lei Xing:
Skoda’s done, pretty much.

Tu Le:
And Lei, youy and I joke because we're in a WeChat group. I posted that 30 brands reduced pricing. And so to give the audience an example, the BMW i3 has been reduced by RMB100,000 or close to $15,000. So that's about a 20,000 or 20% haircut. The Mach-E is around RMB40,000 or about $6,000. That's a 16% haircut. The ID.3/4/6 have also received between RMB40 and 60,000 haircuts. If we're wondering, okay, Lei and I have been talking about price war, we were wondering how deep this price war is going. These are big numbers and big price reductions. Some of them are temporary. So they won't affect the MSRP but if customers see these numbers stay for very long, they're not going to want to pay MSRP for these cars in the future. Because unless there's a true value proposition that brings that value back up.

Lei Xing:
Like I said, never seen this type of levels of price cuts.

Tu Le:
I don't know if you got a chance to browse my newsletter, but you saw that there were two gentlemen who had white Model 3 in Vancouver.

Lei Xing:
I know your newsletter had a defender or something.

Tu Le:
Yeah but there's an article in the

Lei Xing:
Long wheelbase or something.

Tu Le:
So big fan of Defender, but there's a 130 that's parked in my parking garage. And it's a beautiful Defender is just the long wheelbase is really awkward. But now there's an article I read about a gentleman who is in a hurry to go pick his daughter up. He used his app to open his Tesla and start the car.

Lei Xing:
It happened to be the wrong Tesla. Is that correct?

Tu Le:
Yeah. It was another person's Tesla. And on top of that, the person’s Tesla that he drove mistakenly, the other person was able to get in his car and drive the other person's Tesla. So we're talking major security flaw, and perhaps this is a one off and the gentleman who initially took the vehicle mistakenly, he tried to contact Tesla, no response, and emailed them and saying that he didn't want to make a big deal about this, but nobody got back to him. So he contacted the media, told them about it. He was in such a hurry that he didn't notice the different interior and it's a crazy story and I and joked around, I said every legacy automaker kind of looking at their hardware/software stack to make sure that doesn't happen in their vehicle. So Tesla has some explaining to do, I think, because what's the chance of both of them being able to use each other’s..

Lei Xing:
Or other info.

Tu Le:
And I don't know why this is more of a bigger deal, because this creates all kind of concerns. Because if you haven't heard of it, then Twitter is probably doing a good job of suppressing that article. Anything else? Man? Like?

Lei Xing:
No. I think I'm good.

Tu Le:
I did want to point to an article and it might be behind a paywall. So apologies if it is, but there's an article on the WireChina.com talks about NVIDIA and its importance to AI and autonomous vehicles in China. So I just don't know if many people know the story behind the story and how far ahead NVIDIA is, in general, to a Qualcomm, to a a Mobileye and things like that. It's a great article, something that I kind of knew about, but I think it was worth pointing out to everyone else.

Lei Xing:
Yeah, the other thing I just saw, I want to mention was Hesai announced their 2022 earnings. And in it, it said they had revenues and deliveries of LiDARs more than all of the U.S.-listed LiDAR companies combined. And then they also said they in Q4, they had a major win, including China's biggest NEV manufacturer. Now, who could that be? I wonder.

Tu Le:
I guess we'll see soon.

Lei Xing:
So I just want to throw out that info.

Tu Le:
All right, so now we can close up shop. Thank you everyone for listening, and we will talk with you all next week. Good morning, good afternoon and good evening. 

Lei Xing:
Likewise, bye bye!

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.