The Chinese Are Coming - #38

THE NEXT TOYOTA

Page 1:  The Next Toyota 
Page 2: Electrics • Autonomous • Ride-Sharing • New Deals

At a private gathering of future mobility leaders last week outside Santa Cruz, an investor asked me what should have been a slam-dunk, simple question:

"Which Chinese automaker is the next Toyota?"

"No one is quite there yet," I told him. 

- Fast-growing Geely is definitely impressive.

- Great Wall makes a million rugged, good-looking SUVs. 

- Guangzhou Auto has scored first in quality among Chinese brands for 6 years in a row, per J.D. Power. 

- And Shanghai Automotive produced 6 million vehicles last year, more than Ford globally.

But the reality? No Chinese automaker is strong enough to compete in the US or Europe, at least not yet. They have so far struggled in developing markets like Indonesia, Russia, India and Thailand. 

Despite the fact that China has been the world's No. 1 vehicle producer for almost a decade, it’s hard to identify China's Toyota.  It’s not that China is incapable of building quality vehicles: Buick and Volvo have been shipping China-made, high-quality models to the United States since 2015.

Here are three factors that have stymied China's efforts to produce a Toyota to call their own:

1. Spoiled at Home: The best measure of the competitiveness of an auto industry is exports. Just look at the millions of cars coming out of Japan, Germany and Korea.  China, on the other hand, ships less than 5% of its annual production overseas. 

Unlike their Asian neighbors in Japan and Korea, Chinese automakers didn’t need to export. They thrived for 30 years due to strong, uninterrupted domestic growth. When cars are flying out of the showroom, there is little pressure to achieve world-class standards. 

2. Pampered State Enterprises. China's Big 6 state enterprises have not worked hard to develop their own products because it’s easier - and more profitable - to build and sell Buicks, VWs, Toyotas, Mercedes, Kias and Hondas through their joint ventures.

3. Too Many Fish. China's politically-driven economic system allows regional governments to prop up local car companies with decidedly un-householdy names like Luxgen, Changhe  Neta, Haima, Yudo, JAC, Hawtai, Traum, Zhidou, Cowin and Venucia. Most of them will never see daylight outside of the Middle Kingdom.

Chinese companies and joint ventures produce and sell a whopping 462 different models, according to the Best Selling Cars blog. Of this total, more than 220 achieve sales of less than 1,000 units per month! 

Financial resources and skilled people that should be flowing into a few large, competitive enterprises are instead spread over scores of so-so automakers.  It's messy and inefficient, no question. 

But American and European automakers can’t get too comfortable. Tectonic plates are shifting.

• Chinese firms can no longer rely on the home market for growth. Sales were down in 2018  and  are off to a poor start in 2019. 

• The perennial JV profit-machine is likely to unravel because China will allow foreigners to own up to 100% equity, starting in 2022. 

On top of those major shifts, one other force is at play: China is now sitting on almost 14 million units of excess capacity. Tens of thousands of jobs are at risk. There is serious pressure to find new markets globally. 

My impatient investor friend insisted on an answer to his question, so I offered names of those most likely to emerge as China's Toyota.

• Geely ( Volvo turnaround, largest investor in Daimler, genius founder Li Shufu) 
• Shanghai Automotive (capital and intensely competitive zeal) 
• Guangzhou Automotive (partners with Toyota since 2003) 
• One of the 40-some Chinese EV start-ups like NIO or BYTON or Xpeng. 
• Dark horse: Didi, or another ride-share company. A software-powered, mobility-as-a-service company may emerge and shape the auto industry as much over the next 20 years as Toyota and manufacturing have up until now. 

Which one gets your vote? 


- PAGE 2 -

ELECTRICS • AUTONOMOUS • RIDE-SHARING• NEW DEALS 

ELECTRICS



>> BYD. Electrified vehicle sales jumped 175% in the first two months of 2019. Deliveries of gasoline-powered models dove 48%. 

Takeaway: Look for BYD to sell its surplus "EV credits" to other companies that need to meet the 10% electrified quotas taking effect this year.

>> ArcFox.  Beijing Auto Industry Corp's upscale EV brand, ArcFox, introduced three models at the Geneva Auto Show and plans to enter European markets in 2021.

Photo: The ArcFox electric GT concept, packing 1,200 HP, was one of 3 ArcFox models at the Geneva Auto Show.

Photo: The ArcFox electric GT concept, packing 1,200 HP, was one of 3 ArcFox models at the Geneva Auto Show.


Takeaway: With Magna enlisted as a manufacturing partner, ArcFox product quality will be a sharp improvement over EVs produced at Beijing Automotive today. 

>> Evergrande/Koenigsegg. Plans to start China EV production in June, 2019. 

Takeaway: Yet another non-automotive player plowing into the automotive arena. Real estate developer Evergrande enters China's EV race with investments in NEVS (fomerly Saab), Koenigsegg and E-Traction. 

>> XPeng. Will show its E28 sedan at the Shanghai Auto Show to join its first model, the G3. 

Photo: Xpeng's send all-electric model, the E28, will go into production at the company's own plant in early 2020.

Photo: Xpeng's send all-electric model, the E28, will go into production at the company's own plant in early 2020.

Takeaway: Looks to build tens of thousands in 2019. And "double that level" in 2020, says Brian Gu, Vice Chairman and CEO. G3 is priced at less than half the Tesla Model 3. 



AUTONOMOUS



>> Beyond Baidu.  Ask people about China's autonomous tech and  most will say that Baidu enjoys a commanding role in a nascent industry. But, in reality, there are many more credible players in the arena. Here are some names you need to know: 

AutoX
Momenta
Pony
Roadstar
SenseTime
TuSimple
UISEE
WeRide

Takeaway:  Some argue that China will not develop autonomous as quickly as the US because (1) driver wages in China are still inexpensive and (2) Chinese driving behavior is too chaotic to map and learn. But keep in mind that China can and does collect data, much more data, more efficiently than anyone on the planet. And it's not even close. That is why autonomous start-ups in China continue to attract billions in investments. 



RIDE-HAILING




>> UCAR. Aiming to compete with industry powerhouse, Didi, UCAR has invested $650 million directly into Borgward, the German brand previously resurrected by Beijing Automotive. 


Mobility Trumps Manufacturing: More evidence that tech companies see a future in which they develop mobility service apps backed by a fleet of electric vehicles manufactured at a subsidiary firm.  


NEW DEALS 


>> WM Motor.  Nets a fresh $450 million in a Series C round. 


Photo: WM Motor’s EX5

Photo: WM Motor’s EX5


Takeaway: The EV race will turn into a war of attrition. Who can sustain funding over the long haul wins. This $450 million is an important nod of confidence by investors, led by Baidu. 

>> Evelozcity/Magna. Automotive News and Electdrive report that Magna and Evelozcity have entered an agreement to do production of 3 Evelozcity models in the United States starting in 2021. 

Takeaway: Chinese automakers see access to the US market will likely require producing in America.


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