Name: Eastworld Spotlight: The Chinese auto industry bounces back
Uploaded: 2020-06-12
Duration: 17 min 43 s
Description: Auto sales in China fell 80% in February due to COVID-19.

[MUSIC PLAYING] CLAY CHANDLER: Michael Dunne is the CEO of ZoZo Go, an investment advisory firm that advises automaker suppliers and investors on doing business in Asia. And we are thrilled to see you, Michael. We've invited you to have a chat about the auto industry in China and the rest of Asia. But let's start with China, the world's biggest auto market. How do you see the coronavirus affecting the market in China? MICHAEL DUNNE: Well, the comeback has been remarkable. If we go back to February, the entire industry and the market came to an absolute standstill. Factories weren't building cars. And no consumer was going to a dealership. Sales tanked 80%, 80% in the world's largest market. CLAY CHANDLER: Wow. MICHAEL DUNNE: They usually move 2 million cars a year. So, suddenly, just everything stopped. April, V- shape came back to level with 2019. So you really had a tremendous recover after that standstill. And in May, sales are up again, not by a lot. But, hey, we'll take it. CLAY CHANDLER: So what's your outlook for the second half? MICHAEL DUNNE: If you look at the full year, we think between 10% and 15% down. Keep in mind that at the beginning of this year, the estimates were that the market would be down 5%. So if China can get out of this down 10%, 15%, I think we're all going to be happy in the industry. CLAY CHANDLER: So the larger context for this is that auto sales in China peaked in 2017, is that correct? MICHAEL DUNNE: They call it the golden era. From 2000 to 2017, there was nothing but growth and profits, growth, and profits. And then, in 2017, a couple of things changed. One of the things that hit was exports to the United States started to wobble as the trade war escalated. So export industries were not the cash cow that they used to-- the cash driver that they used to. But more importantly, consumers weren't able to get access to that easy financing to buy new cars. And without those third, fourth, and fifth-tier cities as engines of growth, the market has really sputtered CLAY CHANDLER: Let's talk, instead of about the supply side of this and the demand side of it, in turn. Supply-side factories in China, auto factories production lines, have all, more or less, swung back into action, is that right? MICHAEL DUNNE: They have. Production is not a problem in China. Workers are back. Supply chains are more or less in order. And because China is largely an industry in which the supply chains are here, inside China, it's not an issue of relying on a lot of parts coming from overseas. So factories are up and running. Supply chains are intact. Production is not a big issue in China. The question mark remains, where is demand going to be in these coming months? There is a cloud of uncertainty that's hanging over the Chinese economy. US trying to trade tensions. There are job losses in the economy. People are unsure. And they're being quite careful about the way they spend. The confidence level just isn't the same as two, three years ago. CLAY CHANDLER: I've heard some suggestion that, actually, there's a new kind of phobia of mass transit in China that maybe has been sparking some of the recent demand. MICHAEL DUNNE: Yeah, that's a great point. That's a great point. In fact, much of what we see in April and May, we think, is attributable to the fact that Chinese families at the dinner table would say, are you crazy? You're going to take mass transportation to work? No, no, no, you're going to take a DiDi to work? No, go get a car. Go get a second-hand car. Get anything that's private and safer. So, short term, we believe there is a kick from that. Again, do the consumers have the income and the confidence to sustain that demand? Really, we're in uncharted territory. Nobody knows. CLAY CHANDLER: You mentioned DiDi. This is China's equivalent of Uber, of course, and ride-sharing-- huge phenomenon in China before the outbreak. MICHAEL DUNNE: You know what? There's a little bit of a disconnect here in the United States. Uber and Lyft, no question-- they have taken a huge hit. Because consumers individuals are unwilling to get in that vehicle. Who's been in it just before me? Is it clean? How do I know it's clean? In contrast, and to my surprise, DiDi has really gotten out in front of this. They have protocol within the car. As you've seen, the taxis have the plastic wrap that separates the front and the back. And they'll have these stickers showing that we've actually sanitized the car. Who knows? But, at least, they're taking proactive steps. And to hear DiDi tell it, yes, they have. Rides are down, but not by a lot. And they're still very bullish that they'll deliver-- get this number-- 10 billion rides this year, in China. So it's not growth, but it isn't the freefall that Uber and Lyft have experienced here in the US. CLAY CHANDLER: If we could talk a little bit about the implications of this for global auto manufacturers. I mean, obviously, GM, Ford, Volkswagen, Renault, everybody has big automakers that have got alliances, partnerships in China. MICHAEL DUNNE: Yes they do. CLAY CHANDLER: How important do you see the China market as being in the wake of the pandemic to the big global manufacturers? MICHAEL DUNNE: What I'd like to do here is carve out China's car market into two parts. And the first part is luxury cars. That's your Mercedes, Audis, BMWs, Porsches, Lexuses. They've never slowed down. Even the last couple of years, they're still growing. And this year, they're growing again. So if your brand is in luxury in China and your business is cars, you're still in very good shape. And you will be for years to come. Now, where things get sticky is in the mass market and tougher. You have a case of the Chinese brands much improved over just a few years ago. So names like Great Wall, BYD, Geely, in particular, are coming up from below and taking market share from traditional mass-market brands like Ford, like Chevy, like Hyundai. If we look across, by country of origin, the Germans are solid. The Japanese, led by Toyota and Honda, are still doing quite well. It's Ford, GM, and Chrysler that are really taking it on the chin. Their market share in China, since 2017, has fallen by about half. That equates to millions of lost vehicles. They're really under pressure like never before. CLAY CHANDLER: And how is the outlook for the likes of Ford and GM then do you think? MICHAEL DUNNE: Well, they've got to come up with something inventive or creative or innovative moving into electrics or connected or autonomous vehicles. The business of manufacturing and putting together vehicles is old hat, old school-- simple stuff. The game has moved to digits, to connectivity, to autonomy. And here is where the US automakers must lead if they hope to remain competitive in the People's Republic. CLAY CHANDLER: In the United States, there continues to be a lot of discussion about this idea of decoupling, that the world's two largest economies, after becoming more and more dependent on each other-- see that in the auto industry, can US carmakers afford to shift supply lines out of China or stop selling into the China market? MICHAEL DUNNE: You can't ignore the world's largest car market. No one can. And you can't move supply chains easily outside of China because you have tariffs to contend with. China still taxes those parts when they come in. So if you are game, if you want to play the game inside China, you need to have a supply chain intact inside China. There's no second China. There's no junior China. We'd all love to think that Vietnam is a miniature China. But it's really hard-- no, it's impossible to match China's scale. CLAY CHANDLER: Contrast for us, if you will, the outlook right now for the US market. Because it, I think, maybe helps us to understand why the growth in China is so important for our global manufacturers. MICHAEL DUNNE: If we step way back and look at the global automotive market demand in a given year, the US and China account for almost half of total production and sales. So they're the dominant players by far. US was humming along doing really nicely up until about January of this year, building and selling about 17 million cars. Everyone's making profits. But now we were hit by this hurricane of a storm, COVID 19, and everything's been thrown up in the air in disarray. And no one genuinely knows how quickly things will recover. There is reason to be optimistic because the economy heading into the COVID 19 storm, which was running nicely-- sales were doing well. And profits were good. So the optimists think, maybe by the fourth quarter, we'll return to something that resembles fourth quarter of last year. Factories are reopening. They're being very careful. They have learned a lot from reopening in China-- protocols, temperature checks, spacing. Now it comes down to how disciplined are North Americans at following those rules. That's the question mark. CLAY CHANDLER: Well, so let's come to this topic and some of these new vehicles and new technologies that will be used in autos. Obviously, one area that's really fascinating in China is the electric vehicle. What's your outlook for electric vehicle sales in China in the wake of the pandemic? MICHAEL DUNNE: China will get to about a million electric vehicle sales this year, which is more or less in line, a little bit down from last year. But given COVID, it's still pretty good. And one million will account for almost 50% of global EV sales. So China is number one in terms of production and consumption of the EVs. If you look at the market, it's almost all Chinese brands. That its top 10 models on the market are all China-- BYB, SAIC, BAIC, and others. But sitting atop all those brands is Tesla. Tesla is now the best-selling electric vehicle in the China market. They've had a phenomenal run since opening their Gigafactory in Shanghai in January. They sold about 20,000 Model 3s in the first quarter. Just killing it. Really doing exceptionally well. And I think an important thing to share with people worldwide is what's behind Tesla's success. Well, on the one hand, they have the support of the Shanghai government and the central government to build this Gigafactory. On the other hand, they have this massive luxury car market, with consumers ready to spend big bucks on what they see as an exclusive brand. That's where Tesla's magic comes in. CLAY CHANDLER: So this is a very crowded sector. Something like 450 different electric vehicles in China. That's pretty cutthroat. Can it-- MICHAEL DUNNE: That is insane. CLAY CHANDLER: --keep that many producers much longer? And how does it shake out? MICHAEL DUNNE: I think the founder from NIO and XPeng, both of them agreed on one point. Of all those 450 EV startups that have blossomed in the last few years in China, maybe one or two will survive. One or two, that's it. They will all come under massive funding pressures. Because, after all, no one really makes, aside from Tesla's start-- very difficult to make a profit on electric vehicles still. Because the battery costs remain high. So you have companies that are startups, like Tesla, who burn through cash for years and years and years before they can really get going. Tesla seems to have crossed that river, but EV startups remain enormously fragile. CLAY CHANDLER: The interesting variables in this equation has been, obviously, government subsidies for the industry that has put a floor under a lot of these players. MICHAEL DUNNE: They were supposed to end this year. They've been extended for two more years to 2022. But at the same time, and importantly, the government has substituted a new measure to sustain electric vehicle demand and production into the future. And that is quotas. So while they're taking down subsidies, the Chinese government has said, basically, if you want to sell cars in the China market going forward, 10% of what you sell should be electric. If it's not, you'll face penalties and fines similar to what California has done with the carbon footprint quotas. CLAY CHANDLER: [INAUDIBLE] MICHAEL DUNNE: As subsidies go away, these quotas are kicking in. And global automakers really-- this time there's no workaround. There's nowhere to run. They really have to comply. CLAY CHANDLER: In the US, obviously, a lot of the pioneer purchasers of electric vehicles were affluent celebrities, techies-- that sort of thing-- that wanted to demonstrate their concern for the environment and sustainability. My sense is that Chinese drivers are not that romantic about the environment when they come to making a purchase. MICHAEL DUNNE: You're absolutely right. Different story in China, very pragmatic consumer. One of the biggest consumers of electric vehicles, of course, are taxi fleets. For example, in the city of Shenzhen, all taxis and all buses are now electric by mandate. So that's government top-down decision. China has, by far, the largest network of electric car chargers of any country. And Tesla, for example, has a huge network that goes North, Southeast, and West, not only between cities but inside cities-- a supercharger network. So look for China, come hell or high water, to be number one electrics, to remain number one, and be the export hub globally for electric vehicles. That's the vision from Beijing. CLAY CHANDLER: There has been a lot of discussion, obviously, about when China would become a major auto exporter. When do you foresee China being a significant export player in the global auto market. MICHAEL DUNNE: Well, they're sitting on so much capacity now. As the market declines, they've got capacity of up to 40 million vehicles a year, with demand at home at about 20 million. So do the math, and you think there's just enormous pressure for them to push out. And they will push out, starting not with the United States or Europe-- maybe in small volumes-- but with a-- really have their eyes on Southeast Asia, Africa, and South America. Those are markets where the consumer is more price-sensitive, is willing to have a, it gets me there, it's fine, it's functional type low-priced car. That's where supply will meet demand for these Chinese automakers. So in terms of United States and Europe, it'll be another five years before we really see Chinese cars on American roads. It's going to be a while. CLAY CHANDLER: Let's talk about, also, Chinese investment and alliances beyond China's borders. We've seen a little bit of that activity. The most notable, of course, is Geely's investment in the Volvo. MICHAEL DUNNE: It will be difficult for Chinese to build their own transplants in other markets. But the approach that Geely took with Volvo has been phenomenally successful. Volvo has record sales, record profits. They now have built a plant in South Carolina where they build first-class sedans-- gorgeous sedans. They're firing on all cylinders. And the key there is that, rather than trying to build their own brand, which in many consumers' minds might be tarnished, to begin with, let's just acquire another brand. So SAIC has acquired the MG brand. Geely has acquired, not only Volvo, but also Lotus and Proton in Malaysia. And remember that Geely is also a 10% shareholder in Daimler, arguably the most prestigious car brand in the world. So acquisition is going to be a key tool for Chinese as they go abroad. CLAY CHANDLER: Do you expect that there will be some backlash to that politically-- there will be some restrictions placed on Chinese investment? MICHAEL DUNNE: No question about that, especially here in the United States. For the last three years, my company, ZoZo Go, has done research where we identify how many Chinese auto parts makers, tech companies, and automakers are actually operating here in the US? And when we first did this study in 2017, we were stunned to discover that there were over 100 Chinese-owned firms operating in the United States. Most of them are parts makers. Most of them came in through acquisition. But, whoa, who would have guessed there is so many Chinese companies operating in the US? Since 2017, that needle has not moved. We're still at 100. They haven't gone home yet. But we're not seeing new investments into the automotive space. And that's largely due to the fact that there's perceptions that US is no longer an easy and friendly place to step into. 

Eastworld Spotlight: The Chinese auto industry bounces back

International

Auto sales in China fell 80% in February due to COVID-19.