RedBlue Newsletter: 17Jun22

A concise yet comprehensive picture into all things mobility

The Automotive Analyst Series: Each episode opens the floor to an equity analyst covering the space. We go beyond the latest earnings to dive into the narratives & frameworks to understand where and why the industry is moving.

This episode we speak with Dan Levy, head of US autos research at Credit Suisse. Dan gives an overview of the transformation of autos from a sector defined by its cyclicality to one rocked by existential questions and secular forces. We touch on stories of how Elon Musk shook up the expectations for handling earnings forecasts to where Mary Barra and Jim Farley have struggled or excelled in managing the evolution of their carmakers.

You can listen to a short discussion between RedBlue Partners Olaf & Prescott about the themes in this newsletter here:

At WWDC 2022, Apple unveiled the “next generation” CarPlay:

The updated offering integrates with all the screens in the vehicle (including instrument cluster) and allows deeper control of vehicle functions, including climate control.

I have seen this console - which has a lot of information like a calendar displayed - described as overwhelming in comparison to the minimalist Tesla Model 3. The critical thing is that the comparison is a natural one to make - Apple’s software allows carmakers to offer a customer experience that compares to Tesla’s. It is on digital experience that carmakers have fallen behind, while the digitized driving experience has increasingly come to define Tesla’s brand dominance (see: Is TSLA a tech stock or a fashion product?).

This critique that it is overwhelming also misses the key advantage of software: when Apple owns digital real estate, just like with the Apple Watch, it can mold according to each user’s preferences.

The question is how deep this goes. In 2016, I wrote about the automotive opportunity for Apple. Rather than building the full car, I argued that Apple can integrate deeply into vehicles leveraging its strength in silicon and UX design to capture value while avoiding the liability and pain of vehicle manufacturing:

This integration is still relatively shallow compared to where it may go. The silicon in vehicles is still very distributed and the opportunity for Apple to get deeper into the brain of a vehicle is a fascinating though complicated one.

The power of smartphone app ecosystems have seeped into consumer expectations of their cars. Tesla’s shown consumers they can expect more. But this process elsewhere has been relatively slow in comparison to China. Whereas our grandparents bought cars similar to the ones we still drive, in China, most car-owners were smartphone-owners first. They expect digital integration as a default.

So while Apple (along with Google), a smartphone company, is increasingly moving into the car, it is notable that Geely, perhaps the most important carmaker in China (which also owns Volvo and Lotus) just acquired Meizu, a once-leading smartphone company and seems interested in manufacturing phones (link). Meanwhile, it also just started launching its own array of low earth satellites with the goal of enabling low latency connectivity to its vehicles and positing to enable autonomous functionality. Finally, Geely has launched a JV with Baidu to make an “autonomous vehicle”… creatively named Jidu (as in Geely=Ji and Baidu=du) (link). The company has aggressive plans to commercialize their first vehicle, the delicately named ROBO-01 which they just unveiled (link).

Baidu is the Google of China and has been developing autonomous technology for years. But this car is not designed to be fully autonomous any time soon - autonomy here is a feature targeted at “users who like cutting-edge technologies.” Much like Tesla’s perpetually delayed FSD, the point of “autonomy” in this context is more about cabin experience and brand mystique than it is about changing the business model of transportation as Cruise or Waymo aim to do. But for now, this is a key part of the battleground in order to sell vehicles that are electric and digitized to the masses.

Tesla is seen as the most important company in one of the most important revolutions in a century. It happens to shine brightest in the world’s most significant market, too. Though its global leadership is very strong, at home in the US Tesla is a complete behemoth. Its brand and stock have benefited accordingly.

The revolution Tesla is credited for launching is now bigger than Tesla itself. Much of the growth in the EV market needed for the world to get to 60m new units sold by 2035 (60 times what Tesla sold last year) isn’t coming from Teslas or cars that look like them. Instead, a major portion of that growth has been and will continue to be from mini-cars in China. At $5k, cars like the Hongguang Mini EV or the QQ Ice Cream are affordable for the mass market while solving for the most important trips one takes - short drives, largely by yourself or with one other person.

These are completely unlike the vision for electric mobility Tesla has evangelized. Teslas are fast, sexy and large - everything Americans want. When asked about BYD, a maker of many small Chinese EVs, Musk laughed dismissively, saying “have you seen their car?” (link). Granted, the most popular minis in China aren’t technological marvels - they’re defined mostly by what has been removed than what has been created (link). And they only follow the technological trails that high-ticket automakers like Tesla blazed.

What is groundbreaking is that SAIC-GM-Wuling, the maker of the Hongguang Mini EV, says its car is profitable before government subsidies. That’s a breakthrough as important as anything (link).

EVs designed to succeed in the American market are structurally expensive. The biggest issue is range - to meet consumer preferences, 60kWh to 100kWh packs are becoming the norm. And as scarcity of inputs and manufacturing capacity reverses and battery price declines, it’s obvious that EVs are going to go in the same direction - American EVs now average over $60k (link).

Per our interview with Bloomberg in Singapore last week (link), this is a uniquely American problem of car obesity. Like medical obesity, it stems from our individual lifestyle choices, but it is solidified by how we have designed our food - err, transportation system. The decades-long unhealthy trend of growing car size and urban design built around parking lots and ten lane freeways has made it increasingly dangerous and unpleasant to walk or bike - or even drive a smaller car.

Just as obesity is bankrupting the American medical system, automotive obesity is a vicious tax on everyone and everything - with battery costs to haul hefty SUVs only the latest example. As we discussed in the last newsletter, car obesity is a driver of decade-high rates of traffic injuries & death, too (link).

The result is that American EV adoption not only lags Europe and China, but has little hope of catching up without an astronomical expansion of government subsidies for people to afford these cars.

This probably doesn’t matter for the legacy car makers like Ford, GM, Toyota and the like. They can exit from low cost markets, resigning themselves to the comfortable position of selling what effectively are “luxury” products in these places. So long as the US continues to be a market defined by $100,000 mega-EVs, they can grow nicely.

But environmentally and socially, electrifying the miles we travel is the actual goal. Insofar as smaller, more affordable EVs accomplish this, they’re likely as or more important than Tesla to the decarbonization of ground transport.

Suggestions for news we should be covering, interesting tweets, events we should have on our radar or things you’d like to see covered in future editions? Let us know!

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