Explorers’ affiliated media, focusing on the evolution of the automotive travel industry value chain

Author: Zhou Changxian

“Only by laying out for the future can you win; only by striving for now can you survive. If you live for the present without considering the future, you may not live well in the future.”

This sentence comes from the recommendation of He XPeng, chairman and CEO of XPeng Motors, for the new book “Long-termism” by former Honeywell chairman and CEO David Cote. It looks like chicken soup, but it is his profound insight from two entrepreneurial experiences.

In the recommendation, He XPeng also told a story, which will not be repeated here. Interested friends can read it.

If Qin Lihong, co-founder and president of NIO, sees this paragraph, he must be very sympathetic. Many years ago, he proposed a brand black hole theory to explain the crisis faced by enterprises during the development process.

“There is a black hole in the world of brands. When you do nothing, a force will continually pull you towards mediocrity, aging, dilution, and extinction. This black hole really exists, and our business management and operations need to continually do new things to escape from it.”

In fact, the just seven-year-old NIO is walking on the edge of a black hole.

On the one hand, it comes from industry competition. This year, the sales volume and voice of new car forces such as XPeng and Ideal have surpassed NIO, and the sales volume of Tesla and BYD is even more dominant. Traditional giants such as Volkswagen and General Motors are also accelerating their transformation to the intelligent electric era.

On the other hand, it comes from media and capital market pressure. To some extent, both forces are somewhat shortsighted, often looking at heroes from a temporary win or lose situation, as can be seen from many articles’ titles and stock price fluctuations.

On December 5th, NIO held a media communication meeting in Shanghai. Qin Lihong explained NIO’s underlying logic-constructing system competitiveness in a more than two-hour-long impromptu talk.

In fact, those who are familiar with NIO know that this is a routine program for the end of the year to summarize the past year, and to talk about NIO Day that is coming soon. It’s just that this communication meeting seems to have a deeper meaning.

It is both to set the tone from the media’s public opinion and to sound the drum for NIO to escape from the black hole.

A picture that defines the era

In 2015, NIO founder Li Bin, Zhou Xin (NIO’s executive vice president and chairman of the product committee), and Qin Lihong drew a picture, and although it was only one page of the 8-page PPT for NIO’s A+ round of financing, it outlined NIO’s future.# Translation

Qin Lihong said that this page of chart provides a fundamental judgement on the current situation in very few words, totaling only 100 words, but it has never been changed since. “It helps us to recognize what is driving the change in this industry, and why NIO, as a start-up brand, chooses to do so much.”

NIO believes that the automotive industry has gone through three eras since its inception.

In the 1.0 era, starting from 1898, represented by Ford and Toyota, respectively, they brought about the assembly line and lean production. The focus on experience was on cars, the consumer role was an audience, the core competitiveness was hardware, and the industry focus was on manufacturing.

In the 2.0 era, beginning in 2003, Tesla is the representative. The focus on experience was on cars and intelligent technology, the consumer role was a participant, the core competitiveness was software, and the industry focus was on direct sales.

In the 3.0 era, beginning in 2014, new forces such as NIO, XPeng, and Ideal were successively established. In addition to cars, the focus on experience has increased to include services, digital experiences, and lifestyles. Consumers have become owners, and the core competitiveness is full-experience. The industry focus is on users.

Qin Lihong analyzed that Tesla is using a new way to copy Ford as the intelligent electric era. That is, expand scale, simplify product lines and technology routes, add vertical control of the core supply chain, make cars cheaper, and then promote sales expansion in turn.

He admitted that he admires Tesla and Musk for their courage and investment in launching direct sales rather than for going to Mars.

“Behind direct sales is the relationship between the brand and the user. Many things cannot be done with dealers because legally speaking, consumers are not the consumers of the main manufacturers, but the consumers of a dealer.”

At this point, he changed the subject.

“Many people think that the newly established electric vehicle companies in recent years are called new forces and cannot be classified by age. I think that if you don’t have direct sales, you cannot be called a new force. The’new’ must be in philosophy and mode.”

In the 3.0 era, cars began to help realize “differentiation between people.” Therefore, automobile companies should not only produce cars with physical meaning, but also research and develop intelligent automotive technology. Cars should be products that carry users’ lifestyles and self-value positioning.

After studying Tesla’s case, NIO made its own choices, or trade-offs. The same is that NIO chose the electric vehicle track and direct sales model. There are two differences:

One is the use of profits. “We immediately invest the money we earn into various sectors, and then invest it back into services. Tesla puts its profits into entering lower-priced markets to expand its business scope. Therefore, the choices are completely different.”But he didn’t hold a negative attitude towards Tesla’s choice. “After the price reduction of the whole car, Tesla’s gross margin has still increased, indicating its self-developed ability and mastery of the supply chain, which serves as a benchmark for the whole industry.”

Secondly, there is a difference in ecological layout. Tesla is still focused on the car, and doesn’t do much outside of it. It’s Musk, on the other hand, who has been doing everything, from space exploration to underground tunnels. NIO, on the other hand, is more like the Apple of the automotive industry, building an ecological system.

However, he stated that becoming Apple is not NIO’s mission. He said so simply for the convenience of the media.

After defining the characteristics and differences of the three eras, Qin Lihong made three basic judgments on the future competitive landscape of the automotive industry.

Firstly, in the short term, it is a pyramid market, but in the long run, it will be a spindle-shaped market.

“Right now is when the pyramid structure is forming. As different brands solve the problems of production capacity and initial growth, the market will be distributed like this.” Qin Lihong believes that China’s fuel vehicle market has proved this point in 20 years, and electric vehicles will be no exception.

Secondly, in the next 10-20 years, the biggest competition will not be between different electric vehicle brands, but at a higher level, competition between the electric vehicle industry as a whole and traditional fuel vehicles.

Thirdly, in the 3.0 era, the automotive industry is not a winner-takes-all industry, which is determined by the characteristics of the manufacturing and logistics of the automotive industry.

In highly marketized industries, two types of conditions can be observed. One is winner-takes-all, such as in the phone, e-commerce and aviation industries, where competition is at the ultimate level, and there are only a few brands in the world. The other is essentially non winner-takes-all, but with many brands. The automotive industry belongs to the latter.

In the traditional fuel vehicle market, except during times of extreme war, Toyota, who ranks first in the world, only accounts for 10% of market share. In Qin Lihong’s view, even in the era of intelligent electric vehicles, the first place will only account for more than 10%, and the basic situation will not be changed.

Subsequently, Qin Lihong raised a question that goes straight to the soul: if the automotive industry is still a non winner-takes-all industry with many brands, the core question that we as a company need to answer is not about trying to grab someone else’s market share, but about how we can occupy a certain percentage in this market.

NIO’s answer is: system competitiveness.

If the previous graph opened the journey of NIO towards the 3.0 era, the compass-like graph below anchored the direction.

At the media communication meeting, this graph that Qin Lihong repeatedly mentioned and elaborated on in detail is a concentric circle divided into three layers and four quadrants. It can be said that it is the best interpretation of NIO’s system competitiveness.

Let’s start with the inner circle, composed mainly of human resources, manufacturing, research and development, business model innovation, digital management, and design.

The second circle is divided into four parts: the car, services throughout the entire lifecycle, digital experiences, and lifestyles beyond cars.

The third circle includes intelligence, electric vehicles, and cars; NIO Energy, NIO Service, BaaS, ADaaS, official second-hand cars; smart cockpits, NIO App, NIO Energy Cloud, NIO Service Cloud; community interactions, NIO Centers, NIO Life, and NIO Day, among others.

Now, let’s talk about the four quadrants. Li Bin and Qin Lihong are each responsible for two quadrants, but how are they divided? I bet you’ll give the wrong answer.

Returning to this compass that showcases NIO’s system competitiveness, Qin Lihong believes that the strategic compass represents NIO’s judgment of the entire intelligent electric vehicle race and endgame. It is a problem that will continue for 30, 50 years, and even the entire industry’s strategic shift.

“With this overall picture, we won’t lose our direction,” Qin Lihong said. “When leading at one point or being defeated at one point, NIO will know very clearly what its position is in the overall picture.”

Qin Lihong believes that leading at one point does not mean leading overall, and falling behind at one point does not mean the end of the world. He recommends that the media not deny a brand because of a single setback, just as they should not deny a person over one small incident.

“The compass was drawn when NIO was founded and has not changed to this day, but it is constantly evolving. We are piecing together bit by bit, and every point on the outer circle represents what we are doing.”

For example, the launch of the used car business in January 2020 achieved a closed-loop service for NIO’s product lifecycle. This time, the flexible battery swap solution is the last piece of the puzzle in NIO Power.

As part of NIO Power’s “rechargeable, swappable, and upgradable” energy supplement system, the flexible battery upgrade service includes two flexible upgrades per month or year. Users can pay to upgrade their current 70 or 75-degree battery to a 100-degree battery according to their own needs.

Qin Lihong revealed that future battery upgrades will no longer be a one-way upgrade from a smaller battery to a larger one, but a two-way and cross-level upgrade, where users can upgrade to a higher level or go down to a lower one.He reminded the media present not to underestimate the four words “flexible battery swapping”. “Especially the down-swapping, it poses great challenges to our dispatching ability, resource reserves and network layout. It is also the last piece of the puzzle in our vast territory, with the aim of reducing users’ usage costs.”

Regarding the issue of sustainable full-life-cycle services raised by the media, Qin Lihong believes that it should be viewed from two levels.

First, at the personal level, it relies on sincerity and attentiveness. That’s why Li Bin insists on spending half an hour every day sending red envelopes to the user group, interacting with car owners no matter how busy he is. Second, at the organizational level, it relies on values.

In his words, NIO’s task is to create 5000 Li Bins within the organization, not to have 5000 CEOs, but to have 5000 people who regard handling user services and doing a good job of the user’s full-life-cycle touchpoints as their own responsibility.

At the same time, NIO is conducting two experiments in some regions of China.

One experiment is called “24K Fellow”. The company’s sales guidance for 24K Fellow is 0, which means that work performance is not judged by sales performance. NIO has formulated a hard indicator to evaluate these foot-jin fellows, that is, investigating user feedback on “What kind of person do you think your fellow is, your friend, sales, or consultant?” The experiment found that sales volume did not decline in the short term for 24K Fellow who regards users as friends.

In another city, NIO conducted a pilot project to separate the position of full-life-cycle touchpoints of users and Fellows. “We use another specialized service position to do this, and found that it works too.”

As a manager, Qin Lihong said that this is like standing at a crossroads of a major management decision.

“My decision now is to proceed in parallel for a while. Because bottom-up wisdom may be better than top-down commands. We need to observe practices from the front line with enough time and patience and constantly adjust them. There may be setbacks and local imperfections in the short term. We need to learn to regard them with wisdom.”

In the view of AutocarMax, the meaning of NIO’s strategic compass lies in two points:

First, it determines the underlying logic and boundary of NIO, that is, what to do and what not to do.

So, what are the things that NIO must do and what are the things that NIO will definitely not do?

“There is a very critical variable, which is related to the main direction of our strategy. We will not do something that is completely unrelated. Moreover, the scope of our investment is within the gross profit range,” Qin Lihong said.

He gave three examples.

For example, the layout of chips and intelligent hardware. “This is a company that aspires to do intelligent cars, and it is something that will be done sooner or later in different ways. NIO is no exception.”

Taking the example of flying cars, it might be cool, but is it a reasonable expansion for NIO? It seems not, so we won’t do it for now.

“This is the key and compass for answering many strategic questions. As long as it’s on this line, it’s highly likely that we’ll do it, but it’s just a matter of time and cost. If it’s not on this line, then we probably won’t do it.”

Secondly, NIO has established its evaluation criteria or methodology, which is whether something is good or not.

“How do we view NIO? In addition to our sales and financial reports, it’s more important to draw an extension line on our compass for what we’ve done and for our progress. See if the circle of the extension line has expanded, if there are obvious biases, or if there are any cracks.” Qin Lihong said that this is NIO’s self-evaluation, and we also hope that it will be an important scale for the outside world to evaluate NIO’s achievements and progress.

He admitted that with NIO’s ups and downs in recent years, the pressure on the core management is very high. “We often hear the voice and demands, even commands, for short-term KPI.”

As we all know, NIO was once in a difficult situation and had to make some tough choices. In the second half of 2019 to early 2020, there were basically no new battery swap stations, and from the second half of 2019 to the end of 2020, there were no new NIO Houses. However, even when salaries could not be paid, NIO still held「NIO Day」.

And when everything enters a virtuous circle, NIO seeks a 360-degree comprehensive extension, and the end of each sector’s extension line will form a circular chain.

“Managing this company by prioritizing values instead of short-term KPI, and persisting in developing in the 360 degrees of the compass circle, either fast or slow, is a test of our determination.” Qin Lihong believes that NIO’s management has been tested.

“I believe that we will pass the new test in the next round.”

A Divergence

In previous articles, I mentioned that Qin Lihong is very good at using analogies when describing more abstract things. There were at least ten instances of this method in this media interaction.

Among the nearly 30,000 words recorded in the interview, a few examples that impressed me are as follows.Used the child’s education as an example. How many of you would measure whether it is profitable or not by the short-term educational investment for the child? This month, the child spent 10,000 yuan on going to school, including tutoring and nutrition fees, and hasn’t even paid the family yet. Does that mean this child is not worth cultivating? If we look at the child as a restaurant worker, we need to look at the input and output annually and monthly; if we look at the child as the hope of the family, we cannot look at it this way. We need to determine whether this is a short-term transaction or a long-term industry. This is a basic perspective issue.

If this competition is a decathlon, there is a sprinter who runs faster than us in the short run. Some comments may be discussing this point. But the next race is a marathon, and the intelligent electric vehicle competition is a trillion-dollar competition that requires decades of continuous competition to determine the winner, it is not a single event.

When we were young, we all watched an animation called “Hanhou Bird”. When winter comes, it does not build nests and always feels that there is a place to hide. We think that in the foreseeable future, electric vehicle companies that do not provide energy services are opportunists and leave after making a profit. Who do you think will do this task for you?

To be honest, many of these analogies are not black and white factual judgments, but value judgments that differ from person to person. They are refreshing, but controversial and even risky.

These catchphrases reflect Qin Lihong’s personal style and charm, and are also the source of many media article titles, such as the one you just read.

TIPS: Li Bin is responsible for the upper left and lower right quadrants of the compass, while Qin Lihong is responsible for the lower left and upper right quadrants. Did you answer correctly?

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.