The Chinese Are Coming - #41

RETALIATION RISK

Page 1: Retaliation Risk
Page 2: Electrics • Autonomous • Ride-Sharing • New Deals


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Will leaders of the People's Republic encourage Chinese consumers to boycott GM, Ford and FCA products as a form of trade war retaliation? That is the question Bloomberg TV’s Rishaad Salamat and Yvonne Man posed to me on Monday’s show.

China's top officials would not hesitate to pull that lever, in my opinion. Just ask Korean and Japanese automakers. Their sales plummeted in recent years during periods when Korea and Japan made political decisions that were not aligned with Chinese interests.  

But the reality is that the Detroit Three are already in trouble -- even before any direct fallout from trade tensions. 

Just look at the sales numbers in the first quarter of 2019:

• GM dropped 18% to 830,000 units.

• Ford sank 36% to 136,000 units. 

• FCA tumbled 41% to 21,000 units.

Yikes. At this rate, GM, Ford and Chrysler's combined sales in China will fall below 4 million in 2019. That would be almost 2 million fewer sales than their peak in 2016.

Imagine the costs of all that idle plant capacity. 

Detroit Three - China Sales: 
2016: 5.8 million
2019: 3.9 million (extrapolated from Q1) 

Industry executives were hoping that April would be a turning point for the market, the start of a rebound that would gain strength through the second half of 2019.  But the April numbers came in ugly. The overall market fell 18%. SAIC-GM sales tumbled a stunning 27%. 

Early May’s market readings indicate even more gloom, with further double-digit declines,  according to respected investor outfit, Evercore. 

What is behind Detroit's abrupt and steep declines? 

1. Chinese Automakers Coming Up. Chinese automakers’ design and quality are vastly improved over just a few years ago.

Geely, China's number one private automaker, is selling more than twice as many vehicles as FCA and Ford combined. This is a tidal shift considering as recently as 2016 - a mere 3 years ago - Geely sold only half that of FCA & Ford combined. And Great Wall, the "Jeep of China", now outsells Jeep 10:1 in China's SUV market. 

2. No Man's Land.  Mass market brands like Ford and Chevy (and Hyundai and Peugeot) are getting squeezed from below by Chinese brands. They are unable to move their brand positioning up fast enough to compete with more highly-respected brands like Toyota, VW and Honda. While China's overall car market is down, Toyota, Honda and VW are winning more market share. 

2. Pacific Gap:  For many of those GM, Ford and FCA  executives who are on the front lines in China, Detroit feels far away. Do the company leaders at HQ fully support what it takes - capital, resources and people - to compete and win in China? How else to explain Jeep's giant missteps in the world's largest SUV market? Or Ford's abrupt reversal after a nice run in the mid-2010s?

Given the significant market pressures the Detroit Three already confront in China, a Beijing-directed boycott would deliver real pain - possibly even a knockout blow. 


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Learn more about the “China Genius” series, our executive briefings on China’s global auto tech ambitions. For a pamphlet or further explanation, contact Bill Endemann, Senior Advisor at ZoZo Go, at bill.endemann@zozogo.com


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- PAGE 2 -

ELECTRICS • AUTONOMOUS • RIDE-SHARING• NEW DEALS 

ELECTRICS



>> EVs Way Up (Again). EV sales in China climbed to 254,000 in the first quarter of 2019, up 118% over the same period in 2018. China is extending its electric sales lead over America. EV sales reached just 50,000 in the U.S. during the first quarter. 

>> Takeaway: Think of China's EV market as separate and distinct from China's overall vehicle market, in which sales fell 15% in the first quarter of 2019. Driving EV sales: Strict national and city-level EV quotas. 

>> BYTON. Premium EV start-up BYTON expects to raise $500 million in a new round of fund-raising led by First Auto Works. 

Photo: Byton’s infamous 48-inch touchscreen dashboard

Photo: Byton’s infamous 48-inch touchscreen dashboard


>> Takeaway:  BYTON will also produce premium electric vehicles for Hongqi, FAW's luxury brand. This brings both scale and political clout.  It’s another example of the cozy relationship between new tech companies and China's massive state enterprises.


>> Tesla. Construction of Tesla's Shanghai Gigafactory is moving fast. Tesla could start production as early as August, 2019. Tesla secured $520 million in loans from Chinese banks to start building the facility. 

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>> China Speed. With Chinese tariffs on US imports set to increase, Tesla cannot wait to start production in China. Good news for Tesla: The Gigafactory is being built by the Shanghai Construction Group, a state enterprise owned by the City of Shanghai. When the Shanghai mayor sets a deadline, construction companies deliver.


AUTONOMOUS


>> Alibaba. Alibaba is joining mega-tech competitors Baidu and Tencent in the race for leadership in autonomous vehicles. 

Take:  McKinsey says that China will emerge as the largest market for autonomous and mobility services by 2030, worth more than $500 billion. Look for BAT (Baidu-Alibaba-Tencent) to lead the way.  



RIDE-HAILING



>> AutoNavi.  This mapping and navigation company owned by Alibaba has launched a super aggregator app that lets customers choose from an array of ride-hailing apps to shorten wait times and get the best price, including Didi.  

>> Takeaway: "Invest in, learn from, compete with." Alibaba is a major investor in both Didi and AutoNavi. Look for AutoNavi to enter the ride-hailing industry more directly in the coming moths. 

>> Didi.  Lost an estimated $1.7 billion dollars in 2018 despite delivering 10 billion rides and controlling 85% of China's ride-hailing market. 

>> Delays IPO: Didi initially planned an IPO in 2018. Now, everything is on hold.  The company, tarnished by safety issues, layoffs and giant losses, has gone quiet on IPO plans. Despite the setbacks, Softbank invested a fresh $1.6 billion in the company in the first quarter of 2019. 


NEW DEALS 

>> Volvo deals. Volvo has inked deals with two battery makers, China’s CATL and South Korea’s LG Chem.

Takeaway: Another step in Volvo’s goal for 50% of their total sales volume to be EVs, by 2025.


>> BAIC/Daimler. Beijing Automotive is reported to be pursuing a 5 percent stake in Daimler, a move similar to Geely's $9 billion Daimler stake taken in 2018. 

Takeaway: Like BMW, which plans to take a controlling share of its JV with Brilliance, Daimler might be considering dominant ownership in its 50-50% venture with Beijing Auto. And Daimler could, in turn, increase cooperation with the privately-owned Geely. So, think of this as Beijing Auto's effort to lock itself at the hip with Daimler. 

>> China Mobile Blocked. America's Federal Communications Commission blocked the giant China Mobile from US market entry on May 9th, citing China Mobile's connection to the Chinese Communist Party. China Mobile has 899 million customers. 

Takeaway:  The Trump Administration sees Chinese telecom companies as a clear and present threat to U.S national security. China Mobile is 100% owned by the Chinese government. 


>> China Retaliates. China is raising tariffs on $60 billion worth of goods imported from the US. 

Takeaway: The Detroit Three already build inside China 95% of what they sell in China.  Lincoln and Tesla will be subject to the increased duties until their respective Chinese plants become operational later in 2019. 

>> Sequoia Capital Layoffs. The Sand Hill Road powerhouse is reducing its China operations by 10-20 percent or about 70 people. 

Takeaway: Down But Not Out. Sequoia China, founded in 2005, has quietly built up a significant role in China's VC world, investing tens of billions of dollars in more than 500 firms including JD.com, Alibaba and Bytedance. 

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