Tesla, GM and BYD: Three China Strategies

Mike Smitka

SeekingAlph published an article by yours truly today comparing the stategies of Tesla, BYD and GM in the Chinese market. As you may know, GM has far and away the best-selling EV in China in the Wuling Hongguang MINI EV, which sold over 40,000 units in August 2021, and has held the top slot since launching in September 2020.

In the article, I noted that GM has a long history of leveraging successful inexpensive vehicles to sell more up-scale and profitable models, going back to the formative period of the 1920s under Alfred Sloan and his "a car for every pocket" product portfolio. But when I wrote the article, there was as yet no evidence on how they would do that for the Hongguang, which is made by the SAIC GM Wuling joint venture, but did not carry the GM logo.

Now we know: Wuling has a new logo, with GM at the center.

In my mind, that puts GM in a strong sales position in China, as the market for EVs expands by leaps and bounds. In contrast, Tesla has no coherent strategy, with only one "fresh" model (the Model Y) and an uncertain future for the Model 3. (We won't know until September EV sales data are out, because Tesla bunches sales in the last month of the quarter.) As a firm, they seem to be in no rush to build a product portfolio, and instead are placing a huge bet that the Model 3 and Model Y will remain strong sellers indefinitely. They amplify that with a US-centric product strategy: their next vehicle will be the CyberTruck, singularly unsuited to the Chinese market, where pickups are an unstylish niche. Worse, over 50% of Tesla's sales are in China's 10 largest cities, where the CyberTruck is an even worse fit. As a firm, their stock price depends on rapid expansion, which is only possible if they can gain share in China and Europe. With everyone but them launching product aimed squarely at the core market segments in China and Europe, that is not going to happen.

In contrast, BYD ticks all the boxes for success. They have a broad product portfolio, and a regular cadence of renewing old models. They have commercial vehicles (thanks to SeekingAlpha comments by MaxedOutMomma for the link to BYD's commercial products). They have broad geographic coverage. And they're currently the #2 EV producer in the world's largest market.

All for now, to not abuse SeekingAlpha's exclusivity. Look for a long, detailed article there in about a month. Note that my most consistent COVID lockdown project [alongside caring for 2 young granddaughters] has been to learn to read Chinese. I've progressed enough to follow Chinese-language automotive news on a regular basis. Well, the news output there is huge, so far my focus has been the new energy vehicle passenger car market – I've bookmarked about 30 sites, and look at a half-dozen almost daily. I'll be expanding my purview to include commercial vehicles. Consistent with that, let give a plug for Richard Doner, Gregory Noble and John Ravenhill's The Political Economy of Automotive Industrialization in East Asia, which includes a really nice chapter on China. Of course Peter Warrian and I also have a chapter on the Chinese auto industry in our 2017 book, link here.

Cars selling at MSRP is an outrage?

Mike Smitka Retired Economist and Judge, Automotive News PACE Awards for supplier innovation

This is an edited version of an overly long comment posted on "This Conversation With A Dealer Will Hurt Your Brain" on Jalopnik.com.

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I am shocked, totally shocked, that someone should be asked to pay MSRP for a car. Surely you all routinely negotiate a nickel off of every ear of corn you buy from Walmart or Food Lion?? – “I wanted one a little larger, but for a bit of a discount I’ll make do with this one.”

Now to the world of a dealership in August 2021 in the US.

1. In many regions of the US there’s excess demand for certain vehicles at MSRP. With a phone call, they’d be able to sell every vehicle on their lot to another dealer within the hour, without discounting or having to take another, less desirable, vehicle in return.
2. Most dealers are in business for the long haul and thus don’t want to sell over MSRP because it won’t generate repeat business or service business. (Note all of the 18,000 dealerships in the US are well-managed, so those most vocal in complaining about dealers are likely encountering an exception. Or are the sort of customer who, at the end of the day, has annoyed others right and left.)
3. So you as a dealer want to sell to someone local, as you have decided NOT to charge what the market will bear, and not to empty your lot today of all cars.
4. So asking someone to come in is both reasonable and fair. If you aren’t going to raise your price and thus must turn away customers, then turn away the one who isn’t local, because you certainly won’t get their service business and you’re unlikely to get repeat business. (The Jalpnik writer was complaining about not being given a quote over the phone.)
5. But you still have excess demand and right now you can’t get another dealership to swap inventory. You can’t replace that F-150 on your lot. (Change the model name to match the local market.)
6. So what are you to do? You favor someone who has used your dealership before.
7. You also favor someone who gets financing through you. For my last two cars, I got a better rate that way, too. My local credit union and bank weren’t competitive. But despite the lower rate, the dealership still got a finders fee – and I’d rather they got a cut on the deal than my local bank getting to pocket everything. The dealership was active in the local community, supporting this and that. The owner lived locally, as do the employees. But my banks ... they all now have their own foundation, to let them fund “socially responsible” ventures that they can trumpet in their investor PR. No money for the local food bank, or youth sports team.
8. You especially favor someone with a good tradein, because used car prices are at a historic high. Some models are hard to find at the used car auctions of Manheim and Adessa, leased vehicles are being kept by their owners, and rental car companies are holding onto their current fleet because they, too, have a hard time buying new cars. So you can more readily make money on a tradein, if it's anything decent. You can give a bit of a discount, you can pay a bit over KBB or some other used car price guideline on the tradein, and have a both a happy repeat customer and a bit of profit. (The price increase there is the biggest component of the recent uptick in inflation in the US.)

China's Auto Industry: There Will Be No Winners in the EV Race

Michael Smitka
Prof Emeritus of Economics
Judge, Automotive News PACE Awards (for supplier innovations)
Steering Committee, GERPISA global automotive research network

Please read my post on China's EV industry on SeekingAlpha, an investment blog.

Here I summarize a few points covered in my SeekingAlpha article published this morning, and provide data in a more readable format – I found it hard to reformat tables on SA for readability. I will also try to provide more data on the new model effect, and a foretaste of a planned SA article on the Wuling Hongguang.

...the success of the Wuling Hongguang is great news for the environment...

First, here is a nicer table on segments. The data come from different sources, which obviously categorize vehicles differently. So it's suggestive. For reference, the Tesla Model 3 is a "B" segment vehicle, and the Model Y is a "B" segment SUV. The Model Y in particular faces a lot of competition, while the Model 3 is getting stale and appears on Chinese automotive websites only with reports of quality issues. Profits will be hard to come by for all players, but that's generally the case in the automotive world, which is cyclical, capital intensive and generates thin margins.

Class	All Models	EV Models	March 2021 EV Sales	All 2021 Sales	EV Share
A00 微型车	16	14	64,189	61,333	105%
A0	20	4	9,515	47,273	20%
A 紧凑型车	94	21	17,021	467,553	4%
B 中型车	44	4	38,251	226,260	12%
C 小大型车	16	1	7,956	70,293	11%
Sedans	190	45	126,932	872,712	15%
A0 小型SUV	64	20	7,314	136,724	5%
A 紧凑型SUV	112	15	15,148	476,866	3%
B 中型SUV	79	15	19,018	227,550	8%
C 中大型SUV	20	4	7,588	31,350	24%
MPV	39	4	1,263	75,702	2%
SUVs	314	58	50,331	948,192	5%
Passenger Vehicles	504	103	177,263	1,820,904	17%

But first, EV sales dominate the minicar segment, the most prominent of which is the GM Wuling Hongguang MINI. My thoughts on why that's the case lie below. Second – ignoring the very small A0 car and the luxury C class sedans and SUVs, the other segment with high sales is the B segment, where the bulk of China's higher-priced models are found. In other words, EVs sell in the minicar segment, and in high-priced segments.

Second, the EV market is quite large, but the small share in several segments suggests lots of room for growth. But why are sales in the A segments of sedans and SUVs so small? It's not for a lack of models. I argue as well that that's for the same reason that the A00 segment sells well.

Here's a neat photo that shows just how small the drive motor can be for a very small car:

The key is costs. Minicars, due to their small size and their target at commutes (with ranges of just over 100 kms) allow them to be built and sold on a commercial basis. However, all other segments try to address a wider market, emphasizing range (or rather range anxiety.) That leads to a viscious circle: range requires a big battery, batteries are heavy so those vehicles also require a more robust frame and suspension, which adds further weight. And both add cost, including beefier drive motors and drivetrain components that can handle higher torque, and more capable power control modules. Quite simply, EVs are more costly than ICEs, and sell only when large subsidies are available.

In practice, that means EVs only sell in cities that impose license plate restrictions in the name of controlling congestion. While 71 Chinese cities have over 1 million registered vehicles, it's only the Shanghai's and Beijing's of China that impose operating restrictions on vehicles that lack local "Class A" license plates. This is similar to London's restrictions on vehicles entering the center city. Now those cities allocate some plates via a lottery, but the chance of winning is very low (0.5% in Hangzhou in February 2021, for example). So in practice car buyers must buy a plate at auction, which can run up to $12,000. That's enough to offset the high prices that EV makers need to charge to cover costs.

Then there are the A00 models. Perusing descriptions of the vehicle on an array of Chinese-language websites suggests that the Hongguang uses 3 batteries: a standard lead-acid one to run lights and infotainment, and an LFP one supplemented by a small NCM battery. Furthermore, GM uses 5 different suppliers for those batteries, they have enough volume to avoid making themselves beholden to a single supplier.

All of this means that A00 EVs are commercially viable without subsidies. They have a vast potential market in the countryside, where dedicated parking / access to an electric outlet are less problematic. They also fit the use case, the top two of which are short-range commuting and taking your kid to school. They're a great 2nd car. Both are points made in surveys cited in the latest "blue book" on the Chinese NEV market, 中国新能源汽车大数据研究报告 (2020).

But will this market generate a "winner," to match the current mindset among investors? No, because there will be a lot of players, and because even if profitable, per-unit profits aren't great on a vehicle costing well under US$10,000.

However, from an environmental perspective this is great news. Large, long-range EVs aren't great for the environment, even if the rise of "green" electricity means that in more and more regions of the world they are probably a modest increment over a gasoline-powered car. Chinese consumers are discovering that a very small vehicle actually meets there needs. We can hope that consumers in the EU and US make a similar discovery, as surveys make it very clear that most round-trips are short in distance and involve at most one passenger. So while it may not be a great boost to GM's bottom line, the Wuling Hongguang is a major step in improving the environmental footprint of vehicular transportation.

Sources:

1. getting out of car https://n.sinaimg.cn/sinakd2020123s/120/w1081h639/20201203/0fc5-ketnnaq7361120.jpg
2. small size of drive motor http://www.020h.com/uploadfile/2020/0801/20200801103440585.jpg
3. cutaway of chassis / componentry: http://www.020h.com/uploadfile/2020/0620/20200620032359548.jpg
4. supplier list https://n.sinaimg.cn/sinakd2020123s/278/w1141h737/20201203/de0c-ketnnaq7361124.png

The Automotive Model Cycle: The Battle Against Fading into Irrelevance

Let's play around with the model life cycle. It's fundamental to the industry, indeed we see it in other consumer durables: computers, cell phones, cameras, bicycles, skiis, exercise equipment. Then there's clothing – in most statistical systems, clothing is classed as a current consumption good, but I've t-shirts I've been wearing for 20 years, and dress shoes that are even older. The only reason to buy new clothing is so that I don't look my age. (Yeh, dream on...)^{Note 1}

...what you see: information on the latest models...

The life cycle is intimately connected with the concept of progress, and it's linked as well to the differentiation that comes from being in fashion, and the influence of what's fashionable on how we look at things. But rather than delve into the abstract, that newer is better, and that as social creatures style matters, here I reflect upon the process a car purchaser goes through, and how that leads to valuing the new.

So how do you go about searching for your next car? And you do search, because it's an expensive purchase, and model characteristics mean that some won't fit your normal use, and they won't fit your wants. Even if you are part of the minority that limits yourself to a new vehicle, there are roughly 350 models available at any given time, each with multiple trim levels. Pickup trucks are the extreme case. With the Ford F-150, do you want a 5-1/2, 6-1/2 or 8 foot bed? Now if you want that 8' bed, you can't get the SuperCrew® with a full second row. Oh, and there are engine choices, for that 8' bed SuperCab you have 3 choices. There are multiple towing options, multiple driver assist camera options, and infotainment packages. You need to sort through all this.

So you turn to the many car sites and car mags. Support your friendly automotive journalist! They make the round of the auto shows and early test-drive road-and-track meets, all while being dined and wined (in that order, no drinks before getting into one of our five pre-production test vehicles dedicated to PR). Having had a fun day or three, it's off to write. Automotive News has AutoWeek. Then there's Car and Driver, Consumer Reports, and on and on. Go to Europe, or Asia, and you see the same. During 2019, before Covid set in, I was in train stations in Italy, France, Germany, Korea and Japan. Kiosks all display a rack's worth of car (and computer and camera and fashion) magazines, to guide the purchaser. Want an EV? Then buy the Green Car Magazine and read through their Praxistest [it's a German, not an American publication]. Want to off-road? Every country seems to have at least one publication devoted just to that segment.

Then there are the online resources. If you're in China, the world's biggest new vehicle market, you might go to Gasgoo to look through their new car reviews. (Those aren't available on Gasgoo's English-language site.) Alternatives include the auto section at 163.com, which resembles visually the car review portion US sites such as Edmunds.)

Now, think about what you see: information on the latest models. Yes, if you want to find information on that car that launched 2 years ago, you can find it. But maybe not in the latest issue of MotorTrend that you picked up at that 7/11 at your local gas station, or in the latest episode of Autoline Daily. What you find most readily is information on what's new.

Now at present automotive technology is changing rapidly. My wife's car doesn't have an autodimming mirror, my slightly newer car does. Mine has a turbo, and gets vastly better gas mileage. I would really like adaptive cruise control, but back then it was only available on cars above my target price range. Now it's pervasive. I really appreciated the heads-up display on a rental car in Germany, particularly as it kept track of the frequently-changing speed limit on roads around Freiburg. Since I seldom drive in places I'm not familiar with in the US, it wouldn't be high on my wish-list. But the diffusion of driver assist systems, and the 2+% annual increase in fuel efficiency, mean that new really is better.

Of course styles also change. In the US, pickup trucks outsell sedans. I do own a pickup, but I live in a rural area, unpaved roads included, and have to cart things to the garbage dump myself, and then there are downed tree limbs and DIY construction projects. But are pickups really needed in the suburbs? No, we want to stay in fashion. We may not notice new cars as new, but no matter how pristine in upkeep, we certainly recognize 10-year-old cars as old. I certainly do, and I'm hugely uninterested in fashion, I'm an industry nerd, but not a car guy. But survey the range of car mags, and it's clear that I'm the exception, not the rule.

There's another influence at work: cars are durable goods. The longer a model has been on sale, the more plentiful the used cars become. This was well understood in the 1920s, when Ford's biggest competitor for his sole product, the Model T, was not an offering from General Motors or Hudson, but a used Model T. Companies adopt two strategies. One is to phase out old and launch new models on a regular basis. The other is to reduce prices as a model ages. An example is a study from the Federal Reserve, "Prices, production, and inventories over the automotive model year." They find a 9% annual drop in prices. By the end of 3 years – remember to compound! – that is a 25% drop in price. Even with the reduction in costs over time, with the amortization of the fixed costs of development and tooling, that rate destroys profitability by the 4th year or so. A mid-cycle "refresh" helps reset prices, but it only helps. Car companies need the new to stay in business.^{Note 2}

All of this comes together, mutually reinforcing our focus on new models over old. It shows up in how we shop. It comes from our sensitivity to style. It's reinforced by car company's product strategy. It's reflected in the vast array of car magazines and car sites, found in every market. Finally, it's a challenge to every new entrant to the industry, the Geely's and Tesla's of the world, who need to finance work on replacement models even as a new car enters production. For Tesla the Model 3 is already old hat, what those searching for an EV will find is – today's headlines – the forthcoming Hyundai Ioniq.^{Note 3} Dig a little further, and you'll find reviews of the Model Y. Even though the Model 3, Model S and Model X continue for sale, for all intents and purposes Tesla is car company with but one model.

To sum, models sell best at launch. That's particularly noticeable in China and Japan, but there's certainly plenty of hoopla in the US. So keep the new models coming. And from an industry perspective, start production with the high-margin models, and pray that the launch goes well, because the PR begins well before the target date.

Notes and Digressions

1. Clothing is now so inexpensive that ordinary Americans have a "wardrobe" – but if you pay attention, older houses didn't have closets, all one's clothing fit in a piece of furniture called a "wardrobe." Our house has walk-in his-and-hers closets.
2. There is an empirical literature on how car prices decline across the model cycle. See Copeland, A., Dunn, W. E. and Hall, G. (2005) Prices, production, and inventories over the automotive model year. Finance and Economics Discussion Series 2005–25. Board of Governors of the Federal Reserve System (U.S.). Available for download at https://www.federalreserve.gov/pubs/feds/2005/200525/200525pap.pdf
   Subsequent studies using more recent data find a similar 9% rate of price decreases.
3. First up on Gasgoo is Hyundai's Ioniq 现代汽车IONIQ(艾尼氪) 5全球首秀 开启环保电动出行新时代. On the German Green Car Magazine, it's the "Volvo XC40 Recharge Pure Electric AWD im digitalen Dialog. And so on. But there is a pure news story on the Tesla Model Y, reporting long lines at dealerships and a wait of 4 months or more for delivery.