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A Deep Dive on China's Automotive Industry (Transcript 4-16-21)

Welcome everybody to another of episode of Ganbei, I'm your host Art Dicker. And today we have the pleasure of being joined by Bill Russo. Bill is the founder and CEO of Automobility Ltd., a strategy and investment advisory firm that helps its clients to build and profit from the future of mobility. Bill, I've seen you on CNBC and the like many times as a globally recognized automotive and mobility expert. You've got, I know nearly four decades of experience, including 15 plus years as an automotive executive, 15 plus years in China. And I know you even were vice president for Chrysler Northeast Asia. You're also currently serving as the chair of the automotive committee at the American chamber of commerce here in Shanghai. Welcome Bill. 

 BILL 

Thanks so much Art. Pleasure to be here. 

 ART 

Yeah. If you don't mind, give the audience a bit more insight into what you guys are doing these days at ad Automobility. 

BILL 

Automobility is a strategy and investment advisory firm. We try to help clients see-through to see through the fog of disruption. Toward where the future of this industry is heading. And we're in a period in history, in a place in time in, in the world where we're a lot more experimentation is happening. A lot more technology is being deployed into an industry that has, I think, a long history. And I think a very traditional mindset as the business thinks about the opportunity for profit. 

What we're seeing is an era where companies are viewing the automobile as a platform to be profited from service beyond just the transfer of the assets of the owner. I think the industry business model is geared to the vehicle itself. We're seeing a shift now to where the users are, the focus for them. Profit opportunity and the usage of the vehicles, what happens after it's sold? So our firm is specialized in helping clients to see through the technology waves that are occurring to shared, connected, electric and autonomous. And I put it in that order intentionally, which I'm sure we'll talk about in more detail. We help clients who are deploying capital to prioritize and focus on the key disruption areas in technology opportunities. We help corporations who are going through this kind of see their way through to how they survive the disruption. What are the pathways forward for them. 

 ART 

Great. Yeah. And, we had a pre-recording call where we talked about a lot of the issues that we'll get into in a minute. And in that call, we talked about some of the stock valuations of Tesla and Chinese EV companies like Neo and Xpeng and Li Auto, they're all listed in the U S. Some of these stocks are overvalued, which probably is fair. That they're a bit overvalued. It's clearly a sign of all indications that the age that electric vehicle is here. You described it more as the age of the smarter EV based on our prior conversation. Can you explain more what you mean by that? 

BILL 

Yeah. As I said, I think the world of automotive, it had been, it just look at the name of the industry automotive. It's a product definition. That's why I call my firm Automobility, that shifts the focus from the automobile to the utility that comes from it, which is the primary utility is mobility. But when you think about a smart device, you're not looking at what it was. You're looking at what it's becoming. If I say phone, you might think of a, if you're from the 20th century, you might think of something with a dial on a cord. If you think of a smart phone, you see a device that unlocks digital services. We're in the smart device era, we're in the internet of things era, the car is it's the last domino to fall. It happens to be the largest computing platform that we will be interacting with on a day-to-day basis. 

And when we're thinking about the industry business model, we need to think about the car, not just as an asset, that's manufactured and sold to a customer, but as a platform that provides utility mobility is just one utility that the car can provide. If it's an electric vehicle, it has batteries. Energy could be stored and traded from it. A platform that can store and manage energy. It's also a digital device. It's also collecting information through its sensors and through its interactions with the human beings that cause it to move. So as a as an industry, we have to be thinking about what are the ways in which the platform of the car could be monetized beyond just the sale. And that's why these companies, these new companies that have emerged on the landscape are interesting to the capital markets because they have that multidimensional monetization dream. Tech is about selling the dream. Automotive is about selling the asset. So that's the industry disruption that's happening right now. 

ART 

That's why the market valuations are shifting in the way that they have. And do you see the, there, as I understand, there's basically three buckets of kind of the players that are coming into the market. There's the kind of the internet software companies. We can include Xiaomi in that group. There's the traditional IC the traditional automakers, the big 3, the GM's of the world and Toyotas. And then we have these kind of EVs from birth, like Tesla and others. Do you see any of them having an advantage or disadvantage when in this kind of three-way struggle and is it, is one, is there going to be over time, more and more continuing more and more entrants into the market? Or is it going to see some consolidation at some point? 

 BILL 

In, in all areas of disruption, there's always a wave of new players in, especially in China, big market fragmentation can exist for a long time with us when there's enough pie to be consumed, then there'll be many mouths that will show up to try to eat it. It's just as China, it's just the place that makes the pie bigger. It's just demand for mobility in the place where most human beings, in a country that houses the most human beings on the planet, mobility is a product that vehicles are, again, you got to think beyond the automobile industry has been growing it's big pie, right? In terms of how many you might be able to sell.  But the demand for mobility extends far beyond the people that can afford to own a car here. It's everyone, right? Every human being moves and every human being causes things to move, they don't have to own the equipment that's moving in order to do that. Our physical movements are served through some platform, whether we own the platform or not. So that's, the landscape that we're in and what's created the the entry of some of these new players is they seen the ability to aggregate demand for that mobility. 

 The automotive industry is, was an efficient aggregator of demand for automobiles. They're not an efficient aggregator of demand for mobility. The efficient aggregator of the demand for mobility is the mobility as a service company or the internet company that provides the app that summons the mobility to occur. That's either an internet company, an e-commerce company like Alibaba or Didi is the mobility company that they've invested in or it's a company that provides. Mobility of goods, right? An e-commerce company or mobility of food. Because when we order a lunch to come to our office, that's also mobility in the algorithm for the movement is the same independent of whether it's moving us or moving the package or moving the meal. So the demand aggregators, some of whom have invested in automotive, new automotive companies. 

All of which are EVs, by the way, nobody born in the 21st century is starting a company that's powered with a propulsion device that was invented in the 19th century. Carl Benz invented the internal combustion engine. God bless his soul. It's survived for 136 years as the dominant propulsion technology and IP. Of the combustion of the carbon based economy, right? The internal combustion engine powering transportation has dominated the 20th century and supply chains that are efficient, have been built around transporting energy in the form of fuel. Fast forward to today.  If you're going to be the most efficient aggregator of demand. The vehicle technology of choice to move those things around that demand for mobility is going to be an electric propulsion system. 

So that's why I differentiate between EV and SmartTV, everybody's going to want to make an EV, but not everyone can make a smart thing. And the winners are likely to be the players that can make the most efficient aggregation of demand for the mobility to be delivered. And that's why you see a new competitive landscape forming. And there are three types of companies that you said there's the internet companies, there's the tech companies. And then there's the traditional automakers. The traditional automakers are at a disadvantage. Why? Because they have a whole lot of legacy. They have a whole lot of deep roots in the old way of designing and selling vehicles that are really being challenged by the new players. 

ART 

And when we get into the new players, especially if you're talking about aggregating demand and mobility, yes, for example, Tesla was founded in the U S and is obviously widely regarded as one of the most advanced still called automakers in the world. And then you have. Uber started in the US and Uber, of course, I know from the beginning in the back of their mind had this idea of one day building a kind of their own vehicles or having a different fleets, which are autonomous and so forth and robotaxis and whatnot. But then it seems like China is well positioned in the last 5 to 10 years with this whole kind of e-commerce plus services revolution from the likes of may Twan and going back to a simple example of Mobike, right? The idea of aggregating demand and mobilizing huge fleets. Again, Uber has done this as well, but I almost think that in I'm curious if you agree that China might have the scale, the adoption, the consumer demand for new ideas and technology to leapfrog the U S in the rollout of this kind of a model. 

BILL 

I think you could find parallels. The smartphone was not invented here. But has found a different path to exponential delivery of I'd say, convenient services to a population of 1.4 billion people. I think last count there were 986 million internet users in China and 980 million. Oh, so of them are consuming the internet primarily through a smartphone virtually everyone who's on the internet uses it uses the mobile device. So the smartphone is the precursor to this revolution because it introduced the world to this convenient app based consumption model, which has become the more efficient aggregator of demand. But when we think about. This in the context of automotive the leaping from this internet demand aggregation to now vehicles and manufacturing. 

You've got a whole lot of legacy around the integration of the technologies into a device that moves people, that, that's what the automotive industry has in addition to being able to power the wheels, protecting occupants, doing all the things that make a product aspirational for the users in it. That's what the automotive industry's legacy is born from. So I think when we think of the new business model, there is definitely the value on both apps, right? There's the ability to aggregate demand, which China is very good at. And there's the ability to engineer the technology and the innovations that are within the device. China didn’t invented the smartphone. It hasn't invented the high-speed train either. But it's mass commercialized in ways that we haven't seen anywhere else on the planet, the smart devices, the smart phones and the the high speed train network. And I think we'll also the smart electric vehicle smart TV. 

Why? Because it has this not only ability to aggregate supply chain, it has a large market for whatever product is being manufactured. So it aggregates the supply chain around it, and it aggregates demand much more efficiently because of the way people use the internet and the way they consume services. That's what's driving the innovation. We tend to in the West, think about innovation in the form of two things, product innovation and technology innovation, what China does much more effectively. Then we give it credit for is his business model innovation. It's taking those technologies and those products and iterating the way they're used in ways that change the business model of the industries that, that proceeded the business model innovation, right? It's through this more efficient way, we consume products and services that we commercialize at a much greater scale. The products of these industries. 

 ART 

But it's interesting because, it sounds like you might give a leg up to the, like I said, the aggregators of this demand, which might be more of the Didis of the world or the internet companies, the app companies of the world. And maybe less so for the traditional OEMs, but then I know there's probably also some pushback. For getting these companies to all work together, for example parallel industry, perhaps, in the logistics trucking industry, there's the story of Cainiao which is the Alibaba invested logistics company smart logistics. And I believe if I get the story right, they signed up a lot of these disaggregated trucking companies to better optimize their routes. But in the process they created a system which these companies were beholden to the operating systems. So do you see a similar kind of scenario playing out in the auto space? 

BILL 

Oh, absolutely. The goal of the tech disruptor is to create stickiness to their platform. Th the aggregation platform when you see Xiaomi, we, or Apple even, it's purely about China, right? When you see it, when you see a tech when you see a company that, that does tech in innovation, step into a new industry. They're coming, not just, they're not coming to manufacturer. This is often the mistake. And I got to say a lot of people who report on this industry completely get this wrong. They're talking about, oh, Apple's becoming an EV company. They’re coming in a automotive company. They're not they're becoming an auto company. They're basically extending the reach of their digital ecosystem into another smart device. And they're ensuring that when they do, but by the way, that device is going to be the largest computer platform that a person's going to be interacting with on a day-to-day basis, one that connects them between the places they live, work, play, and when they step in it, they want them to be stuck to their own ecosystem. 

So what I just said to him, Apple is also true of show me Baidu, Tencent, Alibaba. So if you want to understand why they're investing in Baidu's case I-CAR X or Alibaba's case there’s the HMI infotainment and vehicle platform. It's because they want people to be stuck to their ecosystem. When they move into their vehicle, the biggest computer they're going to interact with on a day-to-day basis that collects all the information about our movements. I want it to be inside my ecosystem. So think of the disruption is not purely about how sophisticated is the device. The device probably is going to be different segments of the market. Where it needs to be really sophisticated. If you're going to take it home and show it off to your friends, and if you're just taking it to and from a place, it doesn't need to be that sophisticated. It's about the user experience for the second part. It's about the bragging rights for the first part. 

So I think there's going to be a new segmentation model of how we think about the mobility business model. There's going to be the premium, brag, take it home and brag about it. Because you, you were able to afford that trophy and there's going to be the, I really want to be productive in the time that I'm spending when I'm moving around. And is the real margin for companies in this space, in this value chain is the real margin in the providing of provision of those services versus some of the traditional manufacturers might is that part more likely to be commoditized at some point or to some extent. Yeah, exactly. I think that the risk that you run is if you're relegating yourself to that premium blank where I only served the market of ownership, not usership. 

Cause that's where the traditional industry is today, right? It prioritizes retail, not fleet, it's prioritized the ownership of model, not the usership model. If I'm in the business of prioritizing that, my problem is my business model is centered on one thing. That's the factory. How many units can I build at what scale, how much does it cost for you to invest in build that vehicle? And can I do it with enough, cost efficiency that it aggregating the demand for ownership to be able to make a profit that's the automotive industry business model. In a nutshell, the internet model is how many users can I get stuck to my ecosystem? And how many transactions am I going to generate from the day-to-day interactions I have with that user? And the device needs to be effective and efficient, right? Because the operational cost of that device is probably really important. I've got to, I've got to put enough of them on there with low fuel consumption, low maintenance, its digital. Data and analytic data collection and data analytics, to be able to profit from the intelligence I'm getting off of the way people are using that platform or the content that they're streaming when they're using that platform. 

So the business models are fundamentally different. And the question you have to ask us, Are these the same? Is this the same industry? Is it are these discrete segments of an industry that is being transformed by technology and can traditional companies jump from being manufacturing centric to being a relevant player in the new digital, internet or mobility business model? I'm not sure they can't. Some, can't the ones that have the market cap bump that we talked about earlier. The Teslas, the Nio, the Xpengs, what the capital markets see in that company is the dream of a digital platform. That's the game sold the dream. The automotive is sewing the reality of a hardware centric business model that could be going away because the internal combustion engine doesn't define the IP of that anymore. It's the data-based intelligence of vehicle that defines the IP of that new car. 

 ART 

But do we still give them a fighting chance? I agree with you of course, and never would even remotely try and call myself an expert on this but from everyone, everything I've read up in prep for this, it seems that's, that's the trend, but are there ways that they can stay relevant. For example, maybe corporate venture capital investment in some of these players. And also I've read up that they're bypassing a lot of other traditional Tier one suppliers and bifurcating the hardware to hardware and software. Maybe get a little more leverage. 

 BILL 

Yes. There is ways to stay relevant. First of all, they need to become services centric, not just product centric. I'll give you an early in my career. I worked for IBM. I watched IBM go through a very similar disruption, right? Apple came along in the late seventies. I started working for IBM in the eighties. IBM made the chips that went into personal computers. IBM stayed a hardware company for a long time beyond that point. Big blue, right there. We're a big guy. We can call it that. 

They made equipment that filled data centers. Water-cooled not, exactly democratized information at that point. But then along came the nineties with the, there with the commercial users the internet was made available as a consumer product, largely because of the PC revolution. Devices became smarter. Services became the focus of the computer industry, right in 1992, a fellow who was hired by IBM called Lou Gerstner. And he said within 10 years, we're going to be making more money selling services, then selling hardware. And nobody knew what he was talking about at the time. 

Basically it was saying on the block, I'm gonna sell off the manufacturing center businesses and we're going to become cloud based information, a data center management outsourcing asset management business. I went to work for Chrysler, nothing timeframe, but I would say today IBM survived because of those moves. Now, is it the market leader for information technology? No, Apple is, has become that. Apple was that little mouse that scared the elephant learned how to dance. I think he even wrote a book by then. They all had a dance, but it's still an elephant, right? That mouse became the dominant species on the planet of tech, in the smart device category tech player. So that's what we're dealing with. We're dealing with an industry that's being disrupted by tech and you got to ask the question. 

That you've just asked. Is there a role for the traditional company? Yes, but they have to, the elephant has to learn how to dance. The elephant has to learn how to play the tech game. They need to learn to sell the dream, not just the product. It's what other things can the product do besides be a trophy for you? What else can you monetize around its utility? After it's born? It's not just a cow that's sold and slaughtered as beef. It's a cow that's milked is dairy, right? It's life matters. What happens after you sell it matters. And you have to monetize that and incorporate that as part of your business model. It makes total sense. 

ART 

We were talking off and on now about data. And I wonder this may be a couple prong question here. So if you think about automotive is becoming maybe similar to a lot of other tech industries right now where you see this potential for bifurcation. You have different markets, especially with our data-driven and I guess it's just people, countries, and people realizing the sovereignty and sensitivity of data sharing and so forth. So I wonder if traditionally you had Toyota and GM global company. They made one model or however many models and sold it around the world. I wonder in this new kind of a business model, if we're going to be able to have global champions where they're so data-driven and people are throwing up walls right now. 

BILL 

That's a great question. I think part of you, you asked what makes China special in terms of why it might, even if it doesn't invent the technology, why might it have the edge in the new business model, one is there are less risk, there's less legacy and less baggage associated with data monetization as a concept. The assumption of individual right to privacy is not in the, it's just not in the vernacular here. You don't think of that. And not, that's not to say that's good or bad. It's just true. It's just fact. 

So the ability to capture through whatever inputs, information about how people are being served with smart devices. And then monetize it is something the internet economy does your without, any pause, it's just the way it works. There may be some checks on that at some point, but they didn't start that way. So I think the question of then, is there bifurcation likely to occur or not as strong data, but also around sort of national security interests? Absolutely. China just happens to be a. A burning sun with high gravitational pull for the companies that want to sell products and services tends to be a little trickier for foreign companies to participate in. 

But if you want to sell products, you have to be partnered in with the services ecosystems that exist here. And that gravitational force is going to be pretty high. So I think the assumption we have to make is that if you're trying to create a competitive brave from China, how are you going to match that efficient demand, aggregation capability that is so much in China strikes off? If the demand aggregation is about data monetization and you say, no, we don't do that. You're automatically at a disadvantage, right? You're automatically dismissed the automotive industries, claim to dominance in the West was born out of the ability to manufacture at scale the intellectual property of a. Vehicles sold to an individual owner, right? W what Henry Ford democratized was mass production of automobiles. Which meant that people in middle class earning level could afford to own a vehicle, that was in, in the moat that existed around the industry was the intellectual property associated with it. 

The brand and the internal combustion engine the propulsion system within that vehicle, because it was about the driving experience. Fast forward to 2020, put yourself in China and say, okay, we're now moving into a world of mobility on demand, right? Where people don't have to be able to be rich enough to afford a car. Anyone can sum it up. Mobility with an app that could be a bike that could be a car that could be food delivery. That could be anything. You've completely democratized mobility now, right? You've made it available to many people could afford to buy one of these that efficient mechanism combined with the switch to electric propulsion is basically breaking the two modes that existed around the industry, right? 

The larger population of people could afford and have the habit of ownership. You don't need that anymore in China to be able to get, people in motion. And now you've got electric propulsion where you've completely taken the supply chain dominance associated with manufacturing at scale of the internal combustion engine. You've replaced it with an EV battery supply chain, which China has already 60% share. So it's quite a different world that we're embarking in. And if the West is going to keep up, it needs to create a way to match that, but it needs to create another, you could say maybe we can out innovate and jump to the next propulsion technology. But you're always going to fight the problem of how do you replicate the advantage of the economies of scale of China? 

 ART Exactly. Yeah. And the, it seems like the rollout is faster here. CATL is the company I think you'd be listed first as far as one of the major battery suppliers globally. I think even now they just reach an agreement with Tesla as well. Contemporary Amperx Technology is the full name. I'm not surprised they abbreviated it. The, but so you have the battery companies here. Which, which probably have some advantages in the ecosystem that's developing here. You have maybe the consumer demand driving innovation slightly faster here. You have the witch and the internet giants here mixing in and moving quickly into different industries and services. 

Then you have in the US I'm still the U S core competency is software, right? Genuine, like not business model adaptation of software but more on advanced software as hardware, software integration with sensors, I imagine in self-driving car technology, do you still see. That as a, as an advantage in the US is it, are we even framing the conversation in the wrong way of this country as an advantage and this, are we still, maybe I'm worrying too much that we're not going to be able to work together that down the road. 

BILL:

I think that I'm just, yeah, I think you're absolutely right with China is still I think a technology dependent. On external sources place, right? It's it, the product and technology. If I said those three dimensions, I said earlier, product innovations, technology innovations, that business model innovations China's strength is business model innovation. It has no legacy of, I've done it this way for decades. Therefore the businesses are set around the established business model, whatever they've great. They'll throw it away and replace it. Because you don't have this multi-generational, especially as it relates to the automotive industry, you don't have this decades long history of financial controls that are weighing you down. But it does lack here the product and technology innovation capabilities. And that's partly, this vibrant academic and venture capital backed. Business that exists in primarily the U S that's still the U S is, dominant advantage is its ability to breed and incubate innovations. 

My concern is innovation is not enough, right? A lot of tech dies as a baby. If it doesn't have a place to scale. And good or wrong. A lot of the technology and innovation that comes out of places like the U S and Israel and Europe the gravitational pull ups of the big market. The one that's much more willing to, experiment is going to cause more and more of those technologies to orbit the bigger sun. If you bifurcate. You forced technology to have to either die because it doesn't reach scale or choose the bigger sun's orbit in order to collect enough, force to be able to survive. And this is basically, we're trying to has another big advantage, which is it has the investment capital in its internet economy to be able to deploy much more or rapidly. 

And it also has the advantage of, lack of legacy, of not being wedded to it a dated way of thinking about the business model, but what is going to give the West a chance to, or a hope is that you still have that technology and innovation incubator, you still have that capability set. I would say you can't rest on that forever. Because China can do that too. I, over time, what I've witnessed in the 17 years I've lived here is that China and Chinese companies you just can't underestimate their ability to learn how to get better at whatever they're doing. And even out in the innovate, you in areas that you would sometimes be surprised. 

ART Yeah, we just did an episode on the semiconductor industry. And there's also in that sense on the software that's used to drive designs China's way behind, but no one for a second on the discussion, doubted that China overtime would have the wherewithal to narrow that gap. And I imagine the same as the case here. Bill, this has been fantastic, really. I it's been such a treat to have you on as a guest is if people want to reach out to you after the show, what's the easiest way to contact you LinkedIn or any other way? Oh, LinkedIn is always from a business and professional networking standpoint the best way, but this is China. 

BILL Wechat is the best, maybe LinkedIn first and then find you and then connect on Weechat might be, yeah, I agree. Everyone's erased to all. Let's just go to each app, right? Yeah, exactly. It's replaced business cards. That's for sure. Or you can look us up on the automobility.io. Got it. Okay. And I'll put that in the the show notes as well. 

ART Thanks so much, Bill. Really a treat to have you on. Thanks so much for joining us. 

 BILL My pleasure.

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