Several hurdles to overcome in the production of new vehicles after surviving the “virus”! WSS

Automotive Industry Hit Hard by the Virus

Introduction: 2020 was expected to be a good year for the auto market, but the sudden outbreak of the pandemic disrupted the work plans of all industries. As a pillar industry, the automotive manufacturing industry was obviously affected. After the car industry’s decline in 2018-2019, it will face another setback.

Content: How big is the impact of the epidemic on the automotive industry? Although there is no clear number, the recent announcement from Mercedes-Benz that it will suffer a loss of ¥400 million a day if it cannot resume work in time, shows the impact on other multinational automakers.

The epidemic is cruel but also a magnifying glass. The strengths and weaknesses of each automaker’s own supply chain management are infinitely magnified. For multinational joint ventures and independently-owned traditional car companies with strong cash reserves, as well as established supply chain, research and development, manufacturing, marketing and after-sales systems, any impacts can be overcome.

To be honest, I believe that most car companies can withstand the losses, but for China’s new car-making forces, this epidemic may be a test of life and death. Then what are the other hurdles for new car-making forces to overcome after overcoming the “virus”?

1. Difficulty in returning to work. How long can the cash reserves of new car-making forces last?

2. Financing is becoming increasingly difficult. Even after the epidemic, how to push forward the delivery plan if it has not been realized?

3. How to overcome the domestically produced Tesla?

4. How to overcome the competition of new energy vehicles from multinational joint ventures in 2020?

5. With uncertain demand, how to move forward with the next sales plan for already delivered cars?

These are all urgent challenges that new car-makers need to solve.

Difficulty in Returning to Work, How Long Can Cash Reserves Last

Whether you have money or not is fundamental to surviving in the car-making industry. For new car-makers, the high cost of R&D, sales, and management in the early stages, coupled with the fact that most of the companies are in huge losses, they have to rely on capital to save themselves, and to stockpile for mass production and realize delivery.

However, the lack of money has always been a problem for new car-makers, and the epidemic has had a significant impact on their cash flow. How will new car-makers support their future development? It is worth noting that the use of existing financing funds has been planned before the epidemic. Therefore, the capital consumption caused by the sudden outbreak of the epidemic was not in the original plan and will inevitably affect the existing work plans.

Financing of some new car-makers in 2019:

March 2019

XPeng Motors
28.22 billion
November 2019

Aiways Auto
10 billion
June 2019

Ideal Motors
37.39 billion
August 2019

Byton Auto
35.28 billion
September 2019

Skywell Auto
20 billion
April 2019

Borgward Automobile
25 billion
June 2019

SWM Motors
30 billion
April 2019

Human Horizons
7 billion
October 2019

Information sourced from public data.

Although some new car companies completed financing in 2019, based on the timing of disclosures, a large portion of this money may already have been spent.

Data shows that in Q3 2019, NIO’s total revenue was CNY 18.368 billion, up 21.8% QoQ and 25.0% YoY. Revenue from car sales was CNY 17.335 billion, up 22.5% QoQ and 21.5% YoY. The profit margin for car sales was -6.8%. NIO’s adjusted net loss for Q3 2019 was CNY 24.512 billion, and with net losses of CNY 32 billion in Q2, and CNY 26.24 billion in Q1, its total losses in 2019 were CNY 82.752 billion.

According to the Q3 financial report, as of September 30, 2019, NIO’s cash and cash equivalents, restricted cash, and short-term investments totaled CNY 19.607 billion, a decrease of CNY 1.5 billion from the end of Q2. NIO stated that its cash balance is not sufficient to provide for the company’s continuous operation for the next 12 months.

As delivery processes accelerate and the industry develops, new car companies will only face more challenges. As a commodity, cars require high levels of comprehensive service capabilities from companies, and also demand high levels of funding.According to the released data, in 2019, WM Motor delivered a total of 16,876 new cars, of which the annual delivery volume of the EX5 was 16,810 (insured), ranking first in the annual delivery volume of new car makers. Xpeng Motors’ total delivery in 2019 was 16,608, and Hozon Auto delivered a total of 10,006 in 2019, which can alleviate the company’s cash flow pressure to a certain extent. However, large-scale deliveries also mean an increase in the outflow of operating funds. Companies like Byton, SkyDrive, and Qidian have yet to achieve delivery, and even Aiways and Nio who have delivered around 1,000 units by the end of the year, the overall number of deliveries cannot support the company’s positive cash flow. Therefore, although new car-making companies have different cash reserves, they all face increased pressure.

This is why Nio chose to disclose the latest $100 million convertible bond financing at this time, and more importantly, this financing can boost market confidence.

For new car-making companies that need more capital inflows, the impact of the epidemic is even worse.

How to advance the delivery plan in the face of difficulty in subsequent financing

The sudden epidemic has caused factory shutdowns, and existing deliveries and marketing activities have all been postponed or delayed. The impact on the consumer side may be more profound, with conservative consumption sentiments further increasing. Moreover, whether the new round of financing can come as scheduled after the epidemic will be the key to the life and death of new forces. Capital institutions will also re-evaluate the new energy vehicle market and adjust their investments, which is a potential risk for the new manufacturing industry’s upcoming financing.

2019 Financing Situation of the Automotive Industry Chain

Looking at the financing situation in the field of car travel in 2019, the proportion of the automotive industry chain is dominant, and the proportion of new forces as host manufacturers is significantly higher. Therefore, the overall financing ability of new forces in 2020 will, without exception, decrease. For instance, Byton’s Series C financing has not been fully received until now. Affected by the epidemic, the original M-Byte mass production plan can only be suspended. The key issue is that while money is being spent, it is unclear when the next round of financing will come.

Of course, there are also two camps within the new forces. One is NIO, which has achieved delivery and is already listed, and the other is new forces that have not yet achieved delivery. It is worth knowing that for companies that have achieved delivery, the pressure of investment funds flowing out purely from financing capital can be alleviated. After all, the inflow of product revenue capital is the foundation for enterprise development.

The patience of capital towards new forces is diminishing. Some institutions predict that new car manufacturers will complete the reshuffle before 2025, but from the current perspective, this time may be shortened. Stockpiling for the winter will be an important measure in 2020, and the new forces may go public as a collective.

How to Face Tesla?

Tesla is a barrier that every new car manufacturer must face, especially after it has been localized in China and its price has fallen further. Therefore, faced with Tesla with the same price as new car manufacturers, how many consumers will stick to the products of new forces?

In terms of product, Tesla has a relatively complete product layout. The Model 3 has been delivered domestically and another heavyweight model, the Model Y, will also be delivered abroad in March, and the domestic version is expected to be launched in the second half of the year. Tesla has opened the reservation of the Model Y on its official website. The starting price for long-endurance version is $52,990, approximately RMB 372,000 (the official price in China is RMB 488,000), and the starting price for the performance version is $60,990, approximately RMB 428,000 (the official price in China is RMB 535,000).

At this point, Tesla’s products basically cover the price range of CNY 300,000 to CNY 1,000,000, complementing sedans and SUVs.

Moreover, the most critical point is that these two models have room for price reductions as they are the high-volume models of Tesla. According to the research report on the Tesla domestic supply chain previously released by Industrial Securities, the production cost of the domestic Model 3 is 20% to 28% lower than the American version. With the gradual realization of Tesla’s localized supply chain, there is a space of 27% to 34% for price reduction in the future.

Even after subsidies are discontinued, Tesla still has enough room for price reductions to cope with potential price competition in the market.# 2020 New Car Models in China

Data from public sources.

Compared to Tesla, NIO has not announced the pricing of its EC6, perhaps while observing Tesla’s pricing strategy. The prices of upcoming production models from XPeng Motors, Byton, Aiways, and Borgward will fall within Tesla’s price range.

If new automakers can attract their own user groups through pricing, positioning, and services, such as Byton’s Model S and Model X with prices up to 1.8 million RMB, then clearly they will need to expend greater efforts to persuade consumers who may ask, “Why not buy a Tesla for 300-400,000 RMB?”

According to the latest public notice from the Ministry of Industry and Information Technology, the “Chinese-made Model 3 with long-range rear-wheel drive” is included. From the 1745 kg curb weight and 202 kW motor power, it is apparent that this is the long-range rear-wheel drive Model 3 (upgraded standard range Model 3 curb weight is 1614 kg).

The Chinese-made version is 8 kg lighter than the imported version, and uses a ternary lithium battery, possibly with 2170 cells supplied by LG Chem in Nanjing. The back of the car still features the combination of “Tesla” and “Model 3”. No one will believe statements claiming that new players are not nervous facing multinational joint ventures.

4 Ways to Survive Multi-National Joint Ventures.# “Speed” seems to be the dead end for new carmakers. In the face of Tesla’s speed, multinational car companies are investing in electric cars. What chance is there for new carmakers? In 2020, electric vehicles from joint venture brands targeting the Chinese market will basically be fully launched. At the Volkswagen Group’s new brand night in 2019, Volkswagen officially stated that its first MEB platform electric vehicle will enter production in 2020.

Audi China’s Executive Vice President, Lu Yi, said, “By 2021, the number of new energy models will increase to nine, half of which will be pure electric models.” Toyota’s electric vehicles based on TNGA architecture will also be released, and electric vehicle products from General Motors, Honda, and Nissan are also expected to go on sale.

However, as industrialization deepens, joint venture brands have strengthened their related support for services, technology, and experience. Once they break through traditional brand cognition and thinking, the crisis of new carmakers will truly come. This is because brand trust has a great influence on consumer behavior. When the “right-of-way” advantage of new forces’ electric vehicles disappears, the trust of multinational joint venture brands may directly determine purchasing behavior.

Furthermore, the risk of new carmakers being acquired has increased again. “Lack of money” is the lifeblood of new carmakers, but traditional car companies have money. For new carmakers with new technology reserves but insufficient funds, strategic investment is likely to evolve into acquisition.

The uncertainty of demand has increased. The most direct impact of the epidemic is sales. During the epidemic period, small and medium-sized enterprises suffered heavy losses, and the income of frontline workers in the manufacturing industry was greatly affected. After the epidemic, as office workers, they will definitely be cautious about “spending money.” Therefore, the impact of declining sales may continue for a long time.

In summary, the cruel reality has already been placed in front of new carmakers. Capital or support alone cannot keep new carmakers alive. For new carmakers, purchasing subsidies are no longer a top priority. In comparison, how to streamline the supply chain, reduce the cost of key components, and truly stand in the same camp as suppliers to reduce costs and increase efficiency are the core issues that deserve more attention.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.