Episode #158 - Li Auto Surprises (not in a good way), The Role of Social Media on EVs in China and the EV100 & Nvidia GTC Conferences

Li Auto adjusting their Q1 sales guidance downward was the first topic of discussion in this week's podcast. Of the three WeiXiaoLi triplets, Li Auto has been the darling of Wall Street but their sales have very suddenly hit a wall 

Tu then gives a short lesson on master production schedules, ordering parts and lead times and how any sudden change in that schedule can complicate things and lead to issues with the supply chain and inventory levels. 

Tu and Lei move back to a conversation about Xiaomi and their staying power and the power of social media in China and how it can help and hurt you in a very fast and severe way.

Lei moves the discussion over to the annual press conference from BMW and how they also would like to continue with free markets for Chinese imports into the European market. 

The podcast closes out with some quick hits about some photo ops between CEOs, the EV100 and Nvidia GTC conferences, who spoke at them and what they said. 

Transcript

CEM #158 Transcript
Recorded 3/21/24

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 global 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. For those that are new to the show, welcome. And to our loyal listeners, welcome back. We ask that you please help us get the word out about this podcast to other enthusiasts and tune in again next week. 

My name is Tu Le. I am 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. 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, good evening, thanks for being flexible. Can you please introduce yourself?

Lei Xing:
Yeah, sure. Hey, good evening and good evening to a cruise hopping Tu. I got to have some for you, right? This is episode #158. This is your co-host Lei Xing, former chief editor of China Auto Review. This is episode #158. It's march madness again. And for those of you that watch college basketball, you know what I mean, but in the China EV world, it's march madness every single goddamn week, if not every single day. And the MEGA, Li Auto MEGA madness, the MEGA mess, the MEGA misses continues. Maybe we should start there.

Tu Le:
This week, Li Auto had to adjust their guidance for Q1, because sales numbers for March weren't coming in where they thought they were going to, rather than 100,000 units for sales for Q1, which is respectable considering that Chinese New Year is part of Q1 always, they lowered their guidance to 75,000 units. So, partly weakness in its current lineup of EREVs, but also a bit of weakness on MEGA sales. Now Lei, can you enlighten us on what you think some of those reasons for the softness is, outside of the normal seasonal Q1, Chinese New Year sales drop.

Lei Xing:
Yeah, that, I mean, first of all, I don't remember the last time I saw, let's say, a public listed, let's say a startup and there's only three of them if we talk about the China Big 3: NIO, Li Auto, Xpeng, issued a statement, revising or reducing the guidance for quarterly delivery. I don't remember the last time that happened, if ever.

Tu Le:
I do not either.

Lei Xing:
This is quite rare, I think. I think it's, Li Auto is dumbfounded, because it totally, I think it was probably out of everybody's expectations, certainly out of their own expectations of how this turned out. But then again, in retrospect, the Chinese, the competitive world of China EVs, companies often like to exaggerate things and Li Auto being one of them. And the case in point, when they say at the very beginning before launching this even revealing this model that this is THE best vehicle of any energy type, ICE or BEV or PHEV or EREV under RMB500,000. And when you have that kind of lofty expectations, I was chatting in the group, right? It's a case of the higher expectations you have, the harder you fall. And that's what happened to Li Auto.

Tu Le:
Yeah. That's, I would agree that they set themselves up for this, but also that they learned from the best, Li Xiang learned from the best. And that's Elon Musk. And with Elon, lot of bold statements have been made, most of them with regards to product introductions, with regards to technology advancements for his services or his products and features, have not come in the timing that they originally were announced to have come, but also at the level of capabilities. It's a little Trumpy, it's a little Elony, but also, Elon is non apologetic about this. Whereas Li Auto, before the end of the quarter are updating their guidance, which is a little bit unusual, as you've mentioned. So. And all I can say is up until a social media post that compared the MEGA to a coffin, all I saw was pretty positive reviews and initial takes on the MEGA. So I think you and I think that has nothing to do with their other products, the EREV products but the MEGA not being as successful as they originally thought. I think that social media post plays a role because it basically went viral.

Lei Xing:
It went south.

Tu Le:
And it's been very consistent over the last few weeks. So.

Lei Xing:
And down goes or maybe my prediction at the beginning of the year that they're going to beat BBA or ABB and down goes that 800,000-unit sales target. They didn't explicitly say it, but it's obvious. I think the expectations must be tempered down now that they put out this statement.

Tu Le:
Now they need to start and I'm sure they're doing this later. They're likely looking at price reductions.

Lei Xing:
I would expect it's something that they'll play, whether it's a direct price cut or not. From your experience working at the OEMs. I mean from a supply chain perspective, this is like a huge swing. Isn't it? Because the suppliers they have certain expectations, they prepared. Now to see this happen, it just messes everyone up. Doesn’t it.

Tu Le:
So one of the important things that I think should be noted is that to your point Lei, OEMs are huge companies. They book hundreds of billions of dollars of revenue each year, selling millions of cars. And Li Auto, it's a startup, but still a $14 billion company. So it's a big company. Most Chinese and we're talking up market, probably tier-2 to tier-4, tey're going to be in a third tier city and it's going to be small factories. They don't have the credit lines that a lot of these tier-1 companies do. So when Li Auto master production schedule hits their forecasts, they are out there buying raw materials in order to build to that master production schedule. So when Li Auto is cutting their forecasts or master production schedule or pushing out, sometimes you can't cut it, so you push it out, meaning that if it's a 12-week schedule, and you're supposed to build 500 MEGAs in week two, 500 in week three and then change the mass production schedule to say 200 and 200, and then push those 600 into the later weeks, that screws up the whole supply chain, how it affects the lower tier suppliers is, you've bought 500 pieces, you were supposed to ship them in week two and week three. Now you can only ship 200. So that's 300 pieces that you're probably sitting on in inventory for a number of months or a number of weeks. Again, it might not sound like a lot, but when you are going paycheck to paycheck, that's money that you could have used for something else that you can't use. Now, that's capital. And so that's how delicate when you move higher up into the supply chain at a tier-2, tier-3 level. That's how delicate it is.

Lei Xing:
This Li Auto update is, I think also a reflection of two things. One, the current economic head wind that China is facing; two, how difficult it is to crack the BEV MPV segment. Remember the X9 is currently the top selling BEV MPV but models like the DENZA D9, their DM-i, the plug-in models sell a lot more. So I think it's a reality check of how difficult it is, especially at that price point like RMB560,000, which is what, $80, $90,000, is not what Li Auto expected. So that's why they're talking about this 0 to 1 as supposed to 1 to 10 jargon. I don't think the West really understand it, but…

Tu Le:
Here’s my question to you Lei. Is there not a market? As big as Li Auto thought?

Lei Xing:
There is.

Tu Le:
Or is it completely on the MEGA that it missed the market? That’s what…

Lei Xing:
I think there is the market, there is the wrong expectations, there is the right market. I think that's the (point).

Tu Le:
I agree, because I do think even a small market for an MPV in China, that's going to be a huge market for MPV in any other country.

Lei Xing:
Because at the end of the day, MEGA is not a volume driver and the upcoming L6 which they will likely launch in around the Beijing Auto Show. I think they're expecting at least 20,000 units a month for that model.

Tu Le:
But you know what's crazy Lei is that at the Beijing Auto Show, there are not going to be a ton of questions about the Li L6. It's going to be all about what happened to MEGA, what happened to your sales in Q1. That's what the questions are going to be.

Lei Xing:
Hopefully the MEGA saga will be long forgotten by then because there will be other sagas. That's always…

Tu Le:
Yeah, likely from other automakers.

Lei Xing:
But so far at least 3 weeks into March, it seems that MEGA, maybe plus the Xiaomi SU7, have been the only two prolonged topics that have been really getting a lot of attention. So…

Tu Le:
Well Lei Jun has said. So they've been getting a ton of western press too. Xiaomi. So this spotlight can turn into a heat lamp if it's not managed properly. And Lei Jun this week, he admitted that there is a lot of downward pricing pressure for his SU7 however you want to call it. And I was interviewed this week by I forget what outlet, they specifically talked and asked me about the Xiaomi SU7 and what my expectations are. But you and I believe it's going to end up between $30 and $50,000. I was told that there's going to be at least three or four different models within the SU7 like trim levels with the highest being over $50,000. So we will know next week, exact pricing and complete feature set for all the vehicles because they're going to be begin delivering them, I think, which is kind of weird, because if you are a consumer, you generally don't know what the price is, why would you want to buy something like this? But I don't know, have you heard anything else about potential buyers and what they find out relative to the March 28 date?

Lei Xing:
But this MEGA saga has been quite long, longer than I expected. And the sudden turn of narrative is also a bit surprising, but I guess not surprising given the current competitive environment and how narratives are artificially swayed.

Tu Le:
Well you and I think, believe that there is some other powers at work that are keeping this narrative in the social media sphere.

Lei Xing:
Maybe or it could just be a case of the riding on the tails of a hot year, 2023, right? And we, I mean I expected, especially after the earnings call that they are the best coming out of those others, they still are. But at least, I guess, not at the volume that they were expecting, so.

Tu Le:
This just tells you the amount of pressure that's on each and one of these CEOs in this environment, not only because of the price war, because of the economic funk that the Chinese economy is currently going through. So there's macroeconomic issues that they have no control of. And then a crazy price war because one of the sites that I look at that I trust is Jiri’s cite the Car News China and they always post all the new cars. There always seems to be 3, 4, 5 cars every week posted on this website. So.

Lei Xing:
You know there's another even smaller BYD model coming, you know what it's called? It’s called the Sea Snail, Hai Luo. I don't know whether that's it the English, Sea Snail, right? But what the heck.

Tu Le:
It's going to come in at freaking Wuling Hongguang MINIEV prices.

Lei Xing:
But yeah, it's funny while, so Wang Chuanfu is in the limelight with Tim Cook opening the newest store in Shanghai, right? And then William Li is opening up his own channels, live streaming about the ONVO.

Tu Le:
The interior size of the ONVO.

Lei Xing:
These CEOs I mean they…

Tu Le:
And then Xpeng this week, in order to stay in the news, announced that they are launching.

Lei Xing:
Dropping the bomb, right?

Tu Le:
They're launching a mass market brand that goes below the current Xpeng pricing.

Lei Xing:
I mean what I wanted to say is that we've seen this story before: the latest happening to Li Auto MEGA. We saw when P5 came out 3 years ago, how much expectations we had for that model. We saw the ET5 when Qin Lihong said we're going to beat BMW 3 Series. What happened? And now this MONA and which in the earnings call of Xpeng, I think Brian Gu really lifted that expectations again to very high, as well as Xiaopeng for the RMB100,000-150,000, this so called AI smartification model for the young generation.

Tu Le:
Basically, they're saying we're making ADAS affordable to everybody. That's what he effectively hey said.

Lei Xing:
Then, again, okay, it's difficult to believe. And now with the prices for the Xiaomi SU7 flying all over the place. The funny thing I heard, the latest funny thing I heard is they are launching on March 28, which on the lunar calendar is February 19, which means their starting price is going to be RMB219,000, and the top trim is going to be RMB328,000. 

Tu Le:
Geez, which is just under $50,000. So.

Lei Xing:
Yeah, reading into these, but I mean Lei Jun recently, he's come out again and again saying that we apologize that this model is going to be priced probably a little bit more expensive than you expect. Could still be smoke. 

Tu Le:
I think it will be. To show that you and I are not picking on the Chinese EV makers, BMW when they launched the iX3, they thought there was going to be tremendous fanfare. There wasn't until they reduced pricing. And even then, while we're talking quite significantly of their EV models and then…

Lei Xing:
RMB70,000, $10,000.

Tu Le:
And when the Tesla Highland Model 3 refresh was launched, I think Tesla thought it was going to really jump start some of their sales, but it didn't. So it's not just the Chinese EV makers that create these massive expectations as the foreign automakers as well. I think the foreign automakers have just been humbled to the point where they are pleasantly surprised, hopeful that the Chinese market gives their new products, new features and services a warm welcome. But the Chinese EV makers, the godfathers at least, are still trying to create that sizzle. And the only one that you don't see in social on the Chinese side really, among the, let's say, more flamboyant founders is Wang Chuanfu. So it's just nonstop and it's just completely nonstop. So.

Lei Xing:
Speaking of BMW, they had their annual kind of the press conference today, and I want to quote, I listened in to the recording a little bit. And there was a question on China on the EU Commission’s anti-subsidy probe, right? Here's what Oliver Zipse said.

Tu Le:
Who’s the CEO.

Lei Xing:
Yeah, the CEO. He said the European automotive industry when it comes to BMW Group, is NOT massively damaged by the import of Chinese automobiles, nor is it in the interest of the EU to further impose customs. I think it meant tariffs, on these products. So I think within 10 days, all three German, Volkswagen, Mercedes, BMW Group, the three leading German automakers, have basically had similar messages starting off last week when Ola said to, in the FT article that he would actually have EU reduce tariffs on China EVs and Oliver Blume last week, saying that they do not seek protection. And I mean. 

Tu Le:
 This is a message to the EU but it's also a message to the German government, the German local government.

Lei Xing:
We can't forget the fact that they are, all three companies, their biggest market in China.

Tu Le:
Exactly. So that's what I was actually alluding to. I was saying that this is a reminder from each of those CEOs that to the German government that we rely on the China market for so much from your largest companies that you need to help us fight the EU and I don't think they are going to win the fight of no tariff, but I think they'll win the fight of reducing the tariff to something that's negligible to the Chinese EV makers. This doesn't bode well for the Peugeots, Renaults. Would you consider smart a premium? Would you consider MINI a premium? Because they're kind of tweeners to me? I see risk for them specifically, not so much the BMWs, the Audis, the Porsches and the Mercedes, but the brands under them. That will compete more directly with the Chinese brands. The other thing that we should talk about Lei is maybe the EV100. What did you get from the EV100?

Lei Xing:
Yeah, well I was going to ask you about that because I didn't pay too much attention over the weekend, I was a little bit of jet lagged, to be honest. But the only thing I’ll say was every, at least the recent events at this type of event. It's always a venue to kind of see the kind of the brotherhood of these smart EV startups. I think there was that video of when William Li sitting next to He Xiaopeng talking about William being the ambassador for the X9 and He Xiaopeng giving him a personal 50% discount. I mean these are the things, you kind of love to see, but at the same time, it's also marketing for their own purpose, right? Aside from the bloodbath, it's nice to see. But then there's these silent dunkings, I think whenever you have these CEOs speak at these public events. So I think He Xiaopeng dropped the MONA bomb. And then if I remember Yu Chengdong, which is the Huawei guy, he's like well, He Xiaopeng, Xpeng, you might be in the lead in smartification autonomous driving, but we're going to surpass you. I think that's what he basically said. Other than that, I don't know, any particular interesting sights and sounds you picked up. 

Tu Le:
So, same things. I think Huawei also said that they would be profitable, and which is a bit surprising to me to be quite frank. But the social media post, right, Li Bin and He Xiaopengand this also was the opportunity for Wang Chuanfu and Tim Cook to have a photo op because a reminder to the people that do not know or remember, BYD has had a longstanding relationship with Apple before the car days. So that shouldn't be a surprise to see them together.

Lei Xing:
I think it's still a surprise to a lot of people like what the heck is BYD have to do with Apple, right?

Tu Le:
So the crazy thing is, Lei, is that you look at those two people, they control two of the most influential companies probably of this century. And they are the most unassuming CEOs you'd ever seen, cause they have to be to the top ten in the world. Now, we don't, and it's still early innings for AI but up until 2024, BYD and Apple probably have made, and a Tesla, who else what other companies should we name? If, X, maybe have really been the most influential to their sectors in the last…

Lei Xing:
NVIDIA.

Tu Le:
NVIDIA. Yep. So and then NVIDIA had its GTC which is their global technology conference. And friend of the show, Maxwell Zhou was a presenter at GTC yesterday I want to say, Maxwell Zhou is the CEO of DeepRoute. It looks like NVIDIA is full steam ahead, man. They seem to be the company for the next 25 years. And I think there was a little sour grapes because NVIDIA seems to be the one that is also favored by the Chinese EV companies and AV companies. They were saying that how come Intel and Qualcomm aren't favored by NVIDIA, and so that's a little bit of sour grapes. The other thing that I wanted to mention to contrast what you were saying, you would not see a selfie or a short video that had Zuckerberg and Tim Cook in it that had Tim Cook and Elon Musk in it, that had Elon Musk and Mary Barra. You would just never see that. So to your point, I think there's a healthy respect between each of the Chinese EV makers. They want to crush them in business. But I think there's a healthy respect between all of them. Maybe Wang Chuanfu is probably the odd man out. But Wang Chuanfu is also the elder statesman of this group of people. He toiled and toiled for years, for 20, 25 years before making BYD what it is. And so most of these other CEOs or technology CEOs and founders. And so they just have a different type of vibe and how they use social media to their advantage. So.

Lei Xing:
Yeah, and I just remembered one of the headlines from the China EV 100 was Wang Chuanfu saying that within the next 3 months, you'll see EV penetration reaching 50% in China. Now. I think CPCA just came out with the early numbers for March, expecting that take rate to be 45.5%, which is record high for a monthly take rate.

Tu Le:
This is not only for the sake of watching NEV growth in China. It's also looking at how fast ICE rate is declining. And remember, for the past 35 years, who's dominated in the ICE space, it’s the foreign automakers. And so, as ICE sales fall off a cliff, there's more risk for a Volkswagen, a General Motors, a Toyota. So it is also important to remember that as NEV sales increase to 45%, we're going to see a proportionate amount of ICE sales decline, generally speaking, right? I'm making general statements. There could be a couple of percentage points difference, but because the used car market and things like that. So we have to remember that. So Oakland Golden Grizzlies is a university in Michigan that both my brothers went to. And so it's the Oakland, and Oakland is like a small school. It's not a big school. So it's huge upset, but let's open the room up if anybody has any questions. And then I will look at my trusty newsletter that I sent out today to see what else that we can talk about. I'm reading Burn Book Lei, by Kara Swisher. I think it's a good read. I recommend that. And then the Biden administration has revamped its carbon emissions and EV sales requirements for the us automakers to now push out the stiff requirements of BEVs and now are including PHEVs. Okay? I actually don't think that's really going to help, that actually is not going to have the intended consequences. Now, the one thing I did want to ask you is that the Indian government now seems to be softening its stance about importing vehicles, electric vehicles into the Indian market. Now, do you think, the details are you can import 8,000 cars a year as long as you commit to investing half a billion dollars. And that half a billion dollars needs to be invested before the third year. If you invest more than that, you can incrementally increase the number of imports by a little bit. So 8,000 is not a lot. It's less than 1% of Shanghai Giga’s capacity, but my question to you actually is, how far gone is the Indian Chinese relationship? Do you see anyone with the exception of one company you and I know of that is Chinese that would have the capital to be able to invest and actually might be looking at the Indian market as an export market and manufacturing hub, with those requirements in mind.

Lei Xing:
It's hard to say, I don't know if it, I think this would be good for Tesla obviously. I don't know, like India as a hub is just not on the map. It's not as clear or as strong of an attractive location, given the current environment as it is in Southeast Asia.

Tu Le:
Sure. So I'm going to push back on that a little bit, because in 2022, India became the 4th largest market in the world from a country standpoint. So we always talk about Europe as kind of a place, right? But it’s a region with 27 countries. And if we look at the largest market by country, it used to be the United States. It used to be China, the United States, Japan, Germany, and then India jumped both Japan and Germany, I don't know, and is now number three at 4.3 million units. That's miles away from the United States and miles away from China. But back in the envelope calculations and 8,000 units a year is not going to do anything to Tesla sales numbers, but if they come out with a $25,000 car and are able to building in India ship it to Singapore, ship it to. It might be more practical. Because at the end of the day Lei, if we get to the 45%, 50%, 55% take rates in China, that 1.2 million, 2 million units can conceivably be, 1.2-2 million units in Shanghai could conceivably domestically be consumed. That’s barring any politics or assuming that Tesla continues to launch new vehicles into the market, right? So that's why I think that the Indian market is actually kind of a huge, has huge potential for them and it's a counterweight, right? Because if there's any challenges in the China Chinese market, at least they can kind of dial up the India, the Gujarat Giga, maybe. So.

Lei Xing:
I'm just seeing this statistic given out by one of the OEM presidents. He said, this is very interesting statistics that we've never kind of calculated this way. He said that in 2023, there were 403 NEV models on sale in China. And if you break out, excuse me, if you break it out, in terms of average sales per month, it's only 1,500 per month. That's crazy. There's too many models. And there's more coming. So basically, I think this is 403 multiply by 1,500 or you know let's say, 7 or 8 million vehicles divided by these models and divided by 12 I guess to get to the average monthly sales. It's crazy. That's why going back to the earlier topic on the MEGA. It's very difficult to have a blockbuster model let's say, a single model that's taking significant sales. I think the only model I would say, I think Wuling Hongguang MINIEV would be one of those blockbuster models in the early days of the pandemic, like 40, 50,000 units a month, one model, right? But it's very difficult to have this in this environment to have a single model that sells that type of a sales range. Volume.

Tu Le:
You could say the Model Y is the only car that does that. And that would be globally because it's the best-selling vehicle, 1.3 million units I want to say last year so that to Tesla should be applauded for that, number one. Number two, I don't know of any Chinese brand right now, that could get to 1.3 million units globally in the next 5 years, not with any current vehicles that they have. So remember the Model Y is not the $20,000 car, so that makes it even more impressive.

Lei Xing:
And then I think Polestones, not Polestar, Polestones came out with a statement saying that the media reports that their sales were zero was wrong. I think they put out a statement saying basically, so far in the first two months, they sold like 2,500 units. 

Tu Le:
It’s not zero but it's not.

Lei Xing:
it's not zero but..

Tu Le:
It's better than zero. 

Lei Xing:
It's not that much, right? It's better than zero, but not that much. Hanging in there.

Tu Le:
That kind of makes your point, right? There's just too many of these vehicles and brands that sell next to nothing every month.

Lei Xing:
And they still survive. And that's the paradox.

Tu Le:
Well did you see that there's two brands that are going to be revived in which province, there's a brand that “hao…” there's a couple brands that are being revived by the provincial governments and Xi Jinping had a speech about it.

Lei Xing:
I have to look it up.

Tu Le:
Zhidou electric vehicles.

Lei Xing:
Zhidou we talked about it last episode, right? We already talked about it.

Tu Le:
The other one was Haima. So those two brands are being revived. So.

Lei Xing:
Haima used to contract manufacture for Xpeng was it, in the early days?

Tu Le:
And was it Ford or maybe not Ford. But anyways.

Lei Xing:
And just looking ahead were just about a little bit more than a month until Auto China 2024 or the good old Beijing Auto Show. The last time I was there was 2018, the last time there you were there was 2020. You did go right? It was kind of a toned down, tempered down, September Auto China.

Tu Le:
Yeah it was ghetto,  it was not worth going. So.

Lei Xing:
So I think this will be interesting because I mean it's been 6 years. I can't believe it's been 6 years since I've attended.

Tu Le:
Even more of our friends from around the world are going to be joining this time too. So hopefully so it'll be nice to see them.

Lei Xing:
Yeah, and then next week, I'll be checking out the New York Auto Show, because they will make the final announcement on the world car of the year award and the BYD Seal is a Top three finalist.

Tu Le:
Well deserved.

Lei Xing:
It will be very interesting. It will be, I think, would shock the world if it wins, the first time that a Chinese car…

Tu Le:
That will make it official about China EV Inc. taking the global stage. Hey, man, I'm going to send you some pictures of me getting fatter every day. No, I'll catch you on DMs when my phone signal works, alright? Everyone. Thanks for joining us. Good morning, good afternoon and good evening. We'll talk with you all next week.

Lei Xing:
Likewise, bye bye. 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.