CHINA Part 3 - CAN AMERICAN & EUROPEAN AUTO OEMS SURVIVE THE EV WAVE?

The China auto market is 26 million vehicles, Europe is 12 million and the United States is 14 million annually. Most American brands are not in Europe and vice versa. Both regional markets are full of competition from national and international brands. China is therefore the common large foreign market for both European and American brands. They are now losing volumes in China that they can't recover in other markets globally, the Chinese are slowly expanding there too. So if the legacy OEMs dont have large markets to enjoy economies of scale, it is expected that their costs will keep going up or margins keep coming down. That's the economics I recall from the university class with Anthony Gichatha and Kesis Rei where we had to understand endless graphs with concepts like 'increasingly more' and 'decreasingly less'...

Meanwhile as Chinese EV volumes keep growing around the world, they will enjoy enough economies of scale to start subsidizing their products in America and Europe to overcome the high tariffs?and penetrate these frontier markets. They could even go a step further and start building manufacturing plants in Europe and America. How soon before some legacy OEMs start asking for bailouts or folding up - 5, 10, 15 or 20 years? Are we watching a Kodak moment in slow motion or is there something that legacy OEMs can do to survive this wave of Chinese EVs??

Here are my 2 cents for legacy OEMs and countries facing this dilemma:

1. Legacy OEMS will need to separate their ICE vs EV business into separate competing subsidiaries,?for example Ford has started doing this. The processes and people needed to produce EVs successfully need to have a different mindset of what this technology is. It is no longer about car ownership. It is connected mobility, mobility commoditized & mobility as a service. Just like a butterfly is a totally different creature to the larvae that it once was, and the computer was much more than an improved typewriter, an electric vehicle is a totally different invention from a fossil fuel vehicle. Trying to put new wine into old skin has never given a good outcome.

2. Some legacy OEMs can partner with leading EV OEMs for skills and knowledge transfer. VW and Xpeng, Stellantis and Leap Motors, & Toyota and BYD are some of the partnerships taking shape.??It is a case of better half a loaf than none. The hard thing about partnerships is that one party often ends up feeling disadvantaged if the market segmentation is not done right to avoid competing products.

3. Some legacy OEMs can work together on electric vehicle production. Research and development costs can be shared to reduce the learning curve, some manufacturers are over a decade behind and can't afford to lose any more time. VW and Renault almost agreed on such a partnership until they fell out at the last minute. Honda and Nissan are trying to work out something. Ford and GM have said they are open to collaboration. Clearly these are examples of 'the enemy of my enemy is my friend'. The fact is that every OEM can produce an EV, but making one with great performance specs, loaded with features, at an affordable?price is where the rubber meets the road. Compare the Tesla model Y has a 74 kwh battery with a 280 mile range, and the Kia EV9 with a 76 kwh battery and a 225 mile range.

4. Countries can use policy measures to encourage the Chinese to set up EV assembly and manufacturing plants in their regions. This will create job opportunities and assist with skills transfer. The more sizeable the vehicle market, the more demanding the conditions can be. I have seen markets which sell less than 10,000 new units passing laws that all manufacturers must have local assembly plants. No OEM will set up a plant to sell 3,000 units when the break even production for such an investment is 50,000 units annually.

5. Some countries have the unique advantage of producing important minerals used in EV production like lithium, graphite, silicon & cobalt. Such nations can put extra policy measures like value addition has to be done in the resident country before exporting. Congo & Zimbabwe which have large lithium supplies would benefit from such a trade off. We need to avoid the tea, coffee & cocoa examples where raw materials are exported cheaply and later imported back as finished goods from Europe at exploitative?prices.

6. Trading blocks like ECOWAS, COMESA or EU can agree on production specialization of various EV components. This will avoid duplication of inefficient investments where everyone is trying to do everything. In Africa for example, Zimbabwe could process most of the lithium, Zambia to supply all the copper cabling, Ghana to manufacture the tyres, and South Africa to build the vehicles. This works very well where the individual country market sizes are not big enough to warrant big standalone investments.

7. Countries also need to remove ICE subsidies and protection measures that limit innovation in their local EV industry. Pivoting is the word here, they have no choice, the old order is going away. The oil producing Arab nations have seen the diminishing dominance of fossil fuels is a reality on the horizon. The mega oil empire of Saudi Arabia is now consistently advertising itself as a tourist destination on CNN. It is boosting its soccer and golf leagues with superstars from around the world. UAE, Qatar & Bahrain are hosting international sporting event after another like there will be no sports tomorrow. Many countries are on course to ban sales of ICE vehicles in the next two decades, while many legacy OEMs are also on course to stop or reduce production of ICE vehicles. So a nation will find it virtually impossible to stop this phase change in technology just with some prohibitive?tariffs.

8. Countries will need to invest in a lot of training and capacity building in order to ride the EV wave successfully. Energy independence is a national security issue because most countries are oil importers, electric mobility will help reduce foreign exchange losses and dependence on OPEC countires. Skills and knowledge are the most valuable investments that can be made in people. Japan, for a long time the leading vehicle exporter globally, did so without having any steel or rubber production. Access to the right skills and knowledge solves almost every other problem.

#VUCA #TheChineseAreComing