The Chinese Are Coming - #43

EXPENSIVE BRIDGE TO EV HEAVEN

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Page 1: Expensive Bridge to EV Heaven
Page 2: Electrics • Autonomous • Ride-Sharing • New Deals


In 2017, China devised a clever, even elegant, plan for global leadership in electric vehicles. Instead of stimulating sales via state subsidies, the government would shift the costs of EV growth directly to the automotive companies.

Here is how things are designed to work: 

1. Quotas: Starting this year, China requires all automakers to make electrified vehicles account for 10 percent of sales.  

2.Failure to meet quotas results in stiff fines.  So, automakers are effectively forced to subsidize EV sales from profits made on gasoline-powered vehicles. 

3. Key Assumption: Growth and profits on new cars would continue for many years.

4. New Reality: Demand has gone into reverse. Sales declined 5 percent last year. And they are down double digits through the first five months of 2019. 

China Passenger Vehicle Sales (Jan-May) 
2018: 9.4 million
2019: 8.3 million
(Source: China Auto Industry Associations, Company Reports)

Profits are falling, too. 

5. Problem: Without growth and profits on gasoline-powered vehicles, how to subsidize electrics? Or, in other words, where will the money come from? 

Now remember: China's EV quotas are still in place, which is producing some unusual results: Take a look at the numbers at BYD, the Warren Buffet-invested private automaker based in Shenzhen: 

BYD Sales in China (Jan-May 2019) 
Total: 189,000 (+1 percent)
Gas Engine: 70,000 (-46 percent)
EVs: 119,000  (+56 percent) 

China is not backing away from its quota system. So, automakers will need deep, deep pockets.  But who has that kind of money?

Toyota does, for one. Earlier this week Toyota said that China will account for half of its global EV sales by 2025. But smaller players could be forced to withdraw from the market -- as Suzuki did in 2018.  In an investor note this week, Bernstein identified FCA and PSA as the next most likely to go. 

Expensive - that bridge to EV heaven. 

 

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Page 2

Electrics - Autonomous - Connected - New Deals

Electrics 

L.A. based, Chinese-owned Karma aims for super luxury buyers. Photo credit: LA Times

L.A. based, Chinese-owned Karma aims for super luxury buyers. Photo credit: LA Times

• Karma announces the opening of 18 new dealerships in the U.S.
> Pursuing super luxury market, already gaining initial traction in Hollywood. 
 

• Mercedes-Benz China will take charge of marketing and sales at Denza, the struggling Daimler-BYD electric vehicle joint venture formed in 2014. 
> Denza has been losing money for years. Too small and too pricey. 

• BYD deliveries of EVs and plug-ins jumped 56% while gasoline-powered offering dove by 46%. 
> BYD can sell EV credits to other automakers who miss quotas (like Jeep or Great Wall, for example). 

• New investment requirements make it harder for marginal Chinese EV start-ups to survive.
> Central government putting the squeeze on start-ups by demanding R&D investments and scale. 

• Chinese consumers are now ordering built-in-China Tesla Model 3s with prices starting at $47,000. 
> China could save Tesla - the market is there - provided that Chinese consumers see the Model 3 as a luxury offering. 

Seres has started pre-production of its SF5 at its re-furbished plant in Mishwauka, Indiana. 
> Seres declares that the vehicle will go 0-60 in 3.5 seconds and will have 300 miles of range.  

Photo: The Seres SF5 Crossover will start full production in Indiana in 2020.

Photo: The Seres SF5 Crossover will start full production in Indiana in 2020.


Autonomous

• Huawei enters the autonomous arena in style, with its software powering a Porsche Panamera.
> Look for Huawei to get more active inside China as it faces mounting unwelcome signs overseas.  

• Huawei's contribution to Shenzhen's GDP ($20 billion) is the same as the next 20 largest Shenzhen companies combined - including heavyweights like BYD, Tencent, ZTE and Foxconn. 
> Beijing and Shanghai  remain favorite destinations of foreign investors entering to China. But for the heartbeat of tech, go to Shenzhen. 



Connected


• Daimler ends car2go pay-by-the hour service in China.  
> Daimler early on saw the market opportunity in shared rides. But it fell down when it came to delivering a first-class experience - tidy cars, convenience. 


New Deals


• NIO secures $1.45 billion in new funding from Beijing E-Town a state-owned real estate investment fund.
> NIO shares on the NYSE hit an all-time low this week of $2.60, so fresh infusions like this are crucial to survival. But there are (State) strings attached, to be sure. 

• Toyota will buy batteries from two Chinese makers - CATL and BYD - as it targets building 5.5 BEVs and plug-in hybrid vehicles annually.
> Toyota is coming around (late and reluctantly) to accept China's march to EV leadership. 

• China has recorded investments of more than $30 billion into EV Towns nationwide. 
> Excellent illustration of how China works (and does not work) from the top down. Cities nationwide race for bank loans to create new industries, jobs and tax revenues. Often, they know little about a business. 

• Evergrande/NEVS buys Protean Electric the EV in-wheel motor specialist. 
> Evergrande made its money in property, a sector that has generated immense wealth in China.
 

• Bordrin raises a fresh $361 million from Sinochem International, employer of 50,000 people worldwide. 
> As venture capital gets scarce, EV start-ups Bordrin (and NIO and BYTON) turn to state enterprise for capital. 

• Aiways, an EV start-up with ambitions to enter Europe in 2020 invests $252 million into Jiangling Holdings to secure production license. 
> It is not enough to design and build a great car. In China, you need a license to build or it's curtains. In this case, the license essentially sold for a quarter billion dollars. 

 

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About Us: ZoZo Go advises companies on the future of autonomous, electric and connected vehicle in the U.S and China. Our clients: Automakers, suppliers, tech companies and investors.  

ZoZo Go's core offerings: The ACES Genius Briefing and The China Genius Briefing. We operate from offices in Hong Kong, San Diego and Shanghai.

For more, visit zozogo.com.





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