The Phenomenon of Semiconductor and Battery Shortage in the Automotive Industry Accelerates the Fragmentation of the New Energy Vehicle Market

Since the beginning of 2021, the shortage of chips and batteries in the automotive industry has further intensified. Against this backdrop, the fragmentation of the new energy vehicle market is accelerating, with the proportion of new energy vehicle sales exceeding 10% for the first time in March. Many believe that this is a turning point for the development of new energy vehicles.

Recently, new players in the automobile industry successively announced their sales data for May. The first-tier carmakers such as WEY, Li Auto, and XPeng have already achieved delivery volumes in the first five months of 2021 that are close to their delivery volumes for the entire year of 2020. However, in this context, NIO, which was originally in the second-tier, received a delivery volume of 4,508 vehicles in May, a year-on-year increase of 551%, which even surpassed that of the premium brand, NIO.

On May 11th, Zhou Hongyi, the founder and chairman of 360 Group, announced that 360 Group would strategically invest in NIO. After completing the entire investment, it will become the second largest shareholder of NIO. In the initial stage, the two parties will have significant strategic cooperation in the capital level and smart car information security field.

Behind these pieces of information, what “chemical reactions” have occurred within NIO? Therefore, we interviewed NIO’s CEO, William Li, and the following is the interview record.

Selling a Little More Than Others is Expected

42Garage: This month, NIO has achieved the sales performance of the top three new players. How did you achieve that through a very low-cost operating mode?

William Li: I have to clarify that our internal team did not think it was particularly special to lead in sales for a short month, so we cannot directly say that we are in the top three. Moreover, our brand positioning is originally in the mass market, so it is expected to sell a little more than others.

As for how to achieve such sales performance through low-cost operation, I think first of all, NIO is still a tech and product company that knows how to do the product well at once. In addition, we have lean production now, and our R&D and production costs for the whole vehicle are relatively strictly controlled.

Secondly, I think from the perspective of the operation of the entire enterprise, whether it is sales, brand promotion expenses, channel construction expenses, or operating expenses, we have strict internal control. For example, including the executives, we all fly economy class and stay in economical hotels.

42Garage: Does NIO have some difference in Know-How to achieve such sales performance?

William Li: This is another topic. First, we need to choose the target user group correctly. Second, the product needs to be recognized by the target user group and can be sold. Third, the product that can sell at this price range must have gross profit or low enough operational costs. I think we need to think about these three things carefully.

42Garage: But originally, NIO was mainly focused on the travel market. How did you consider this change?

(Translated by the AI, corrections are welcome if wrong)## Translation

张勇: There is still some misunderstanding about it. Our first product was the NETA N01, which accounted for over 50% of the to B market and 40+% of the to C market. It was difficult for us to target the to C market due to the insufficient competitiveness of this model.

Another thing is that I am worried that the N01 will affect the brand image, so I basically don’t allow it to be sold or distributed in mainstream cities. Therefore, I think we can target the to C market after the launch of the NETA V and NETA U models. As of May, our to C market share has reached 82%, and we are standing firm. Of course, I don’t think the to B market is a bad business, and I will continue to do it.

Car Garage 42: But aren’t you worried that doing business on the B side will affect the brand image?

张勇: I don’t think so, why? Because we need to focus on the proportion issue here.

If 30% or 50% are both to B markets, then there is a problem. But now that we have already occupied over 80% of the to C market, why shouldn’t we do the to B market? In fact, in the taxi and ride-hailing markets of Beijing, Shanghai, and Guangzhou, there are Toyota Camrys, Honda Accords, and even Audi serving as ride-hailing cars, and no one says that they are affecting their brand image. So it doesn’t matter.

Secondly, I think that doing the to B market can quickly enable our product to be used in the market, and the driving environment is extremely harsh in the travel market. If the market response is good with controllable quality, it means that the product quality is good. The to B market, on the other hand, tests the durability, reliability, and service quality of the cars more. The current to C market requires better comfort, higher degree of intelligence, and stronger individuality. It is indeed two different directions, but I will do both the to B and to C markets, and we will increase our efforts in the to B market.

We can’t be like Wei Lipeng

Car Garage 42: Do you think NETA’s current organization structure can adapt to the smart era?

张勇: I think it mainly depends on adjusting timely according to the different stages of enterprise development. Our internal organization is actually adjusted every six months to let the company have the ability to respond quickly and meet the needs of the market, product development speed, and efficiency.

For example, our sales company used to manage everything, including brand, channels, delivery, service, user operation, and direct sales. Later, we found that the system was too large, and it would lead to a lack of focus and priorities, so we separated the brand and direct sales.Translated English Markdown Text:

For example, we separated the intelligent cockpit and intelligent driving departments at the research institute some time ago, but later found that many shared technological platforms, such as software teams and testing teams, remained unchanged. Therefore, we merged the intelligent driving and intelligent cockpit departments again.

In fact, this organizational structure needs to be adjusted according to real-time dynamic situations. In different stages of enterprise development, the depth of understanding of business and capabilities varies and needs to be continuously adjusted. There are no absolute advantages and disadvantages. If we copy Apple and Amazon’s organizational structure, we would be finished because they may have super strong individual combat capabilities. But we are different. We need a systematic army to fight together and cooperate. Different enterprises have different organizational structures and cannot be copied. We and WM Motor and Xpeng Ideal are all different, and we cannot be the same.

Garage 42: When you founded this enterprise, what was your ultimate goal?

Zhang Yong: Of course, there is a certain pursuit of the scale and market value of the enterprise. But my small aspiration is to make a good car for ordinary people. It was difficult to achieve this in the era of gasoline cars, but it is possible in the era of intelligent electric cars. It is to serve ordinary people and not to make toys for the rich.

Garage 42: You previously said that your goal for 2025 is to survive, why is your goal still just to survive?

Zhang Yong: I think everyone is still on the path of survival. The current situation is at best the early stage of the Spring and Autumn Period, far from the Warring States Period. You see, of the five hegemons in the Spring and Autumn Period, only the Qin state survived in the end. Therefore, we cannot say that we have survived.

I think the first step to survive is to reach a scale of 500,000 units before 2025, with a market share of 8 to 10%. It is difficult to have a market share of 8 to 10% in the early stage of a market, but as long as you have this amount, you can stand firm.

But scale alone is not enough because scale is based on enterprise efficiency, low-cost operational capabilities and user insights. In addition, the technology line must also stand firm, and there must be some accumulation and characteristics in intelligent technology.

Thirdly, there must be some brand personality. In the future, young consumer groups still need a different label. Although a car will not be a symbol of identity in the future, it should reflect people’s personality. So I think the shaping of brand personality is also important.

Garage 42: How does NETA plan to build its brand?

Zhang Yong: Fundamentally, it is to build user reputation. Consumers say your service is good, your product is good, and you have technology. Only with these can you have a brand. A brand is not created by high investments.

Garage 42: Has NETA ever thought of being a high-end brand?# Translation

Zhang Yong: First of all, we are very good at this field. Secondly, our resources are not sufficient to support us to do high-end brands. Thirdly, I don’t think high-end brands can truly form a scale in the future. These various factors drove us to finally choose the market under 200,000 yuan as our main battlefield.

In fact, at the beginning, including investors, shareholders, and social media, they all didn’t quite understand it. They all thought that there were greater opportunities in high-end brand development. With so many traditional car companies on the mass production track, does NETA Electric have any chance? Although I can’t say for sure that we will definitely succeed now, at least up to now, I think this road is feasible or suitable for us.

42nd Garage: Do you have any small goals now?

Zhang Yong: I think in terms of volume, I will firmly stabilize and not be less than 5,000 units. I think it is highly likely that I can reach a very good number by the end of the year.

100 Billion Fund and 1000 Employees

42nd Garage: Why did you choose 360, besides money, was it for technical reasons?

Zhang Yong: First of all, I think it is because the philosophy of 360 is recognized because I think many investors have different opinions on the positioning of the mass market. Zhou Hongyi especially identifies with our positioning. Secondly, because 360 is a software company, it showed us knowledge, methods, and ecological coordination in technology. Another thing is that I think that in the next step of intelligent electric vehicles, consumers will pay more attention to safety issues. And 360 in software security is undoubtedly the number one in China.

42nd Garage: You previously said that you will not participate in the arms race. How will NETA invest in intelligent technology?

Zhang Yong: I think that first of all, we have to choose what to do and what not to do, because the energy and resources of an enterprise are limited, and we must focus more on what we should do. Second, we may not be so aggressive. Consumers’ lives and safety are still the top priority. We need to improve the user experience, user service, and entertainment system. Thirdly, we still think we should not participate in the arms race.

Our investment in intelligence does not necessarily mean that we have to pursue such high computing power, because all of these are costs that users have to pay. If it does not significantly improve the user experience, why use such high costs? Lastly, we still need to seize the momentum. For the intelligent track, we need to invest at least 10 billion yuan in funds and 1,000 employees.

42nd Garage: What is your opinion on full-stack development?

Zhang Yong: I still have some questions about full-stack development, because even if an enterprise has a team of 1,000 people and does everything by itself, it is still quite difficult.Some things can be done by ourselves, such as the first core technology, the second one closely related to user experience, and the third continuous development of data platform and data accumulation. However, do we really need to do everything ourselves? Do we need to create our own operating system? Do we need to create our own middleware? I believe we should focus our resources.

Of course, others may have valid reasons and considerations. All the work we do must serve the consumers. If a supplier can do better and at lower cost, why should I do it myself? What I need to do is to provide users with higher value, to create things for the accumulation of our future core technology, and to create things that allow me to iteratively develop faster. These are things we need to do ourselves.

Garage 42: So what kind of position does NETA need to hold?

Zhang Yong: I think we still need to be the first in terms of user experience, user services and any perceptible technologies. But being the first does not necessarily mean we have to do everything ourselves, and I do not agree with this logic. So my humility does not mean that I will compromise on user service or fall behind others in core technologies. I am not willing to make meaningless investments.

Garage 42: You previously said that research and development investment should not be cut even when we lack money. What do you invest the most in research and development?

Zhang Yong: It’s still a new platform. In addition to investing tens of billions in NETA V and NETA U, N01 has also invested a lot of money. Currently, we are investing 10-20 billion in the new platform NETA S and extending some intelligent technologies on this platform. I hope to achieve all these goals in the next five years. I think that only then can we consider ourselves as surviving, and if we don’t have 500,000 cars, no one can say they have survived.

Garage 42: NETA has always been promoting transparent A-pillars. How do you view the transparent A-pillar now?

Zhang Yong: Transparent A-pillars are a very good technology. I think they will adapt to different components in the future. For example, electronic rearview mirrors use the same technology as transparent A-pillars.

Of course, from the perspective of reviewing, I think we still need to adhere to two principles. First, technology must be continuously upgraded. Second, cost needs to be reduced. The reason why consumers previously purchased fewer transparent A-pillars was mainly due to high cost. If this technology can be improved and cost can be reduced, it can be developed, promoted, and applied.

Garage 42: So do you really want to promote transparent A-pillars based on its safety features?

Zhang Yong: I think it is safe. It can solve many blind spot problems and provide clearer vision in winter and rainy seasons when using cameras. Currently, it is mainly being developed for safety considerations.## 42Garage: NETA wants to emphasize emotional technology on intelligent cockpit, which requires accumulation of technology and scenarios to be done well. Why not start by doing some basic functions of the cockpit first in the limited resources?

Zhang Yong: This is two topics. One is the problem of the emotional cockpit positioning. Generally speaking, we still hope to make the car more humane, including the vital signs in the car, transparent A-pillar, making the car safer and warmer, but we need some continuous technological upgrades and iterations to support this positioning.

The second is about the intelligent cockpit. Now everyone is really concerned about functions like voice control, navigation, entertainment, etc. Why are we still trying to do something new? That is to say, when everyone has done these basic works of voice control, navigation, entertainment, etc., we still need some differentiation and highlights, so everyone is exploring. Because I believe that when the era of autonomous driving comes, our future core competitive differentiation will be in the intelligent cockpit. Therefore, we still want to explore some new things based on the user’s driving scenarios.

42Garage: Do you think that assisted driving will gradually become a more standardized thing, so you don’t need to compete with each other on the hardware redundancy of assisted driving, what about the hardware of the intelligent cockpit?

Zhang Yong: Then I may have to make some advances appropriately, so we have now chosen the high-performance chip of Qualcomm. In this respect, I will pursue it. So, as I said before, you have to choose what to do and what not to do.

Zero inventory is a false proposition

42 Garage: Do you think channels are a problem for traditional automakers?

Zhang Yong: I think it is a problem, and it is difficult to shake off the interests relationship.

42 Garage: Will this system change in the future?

Zhang Yong: I think it will definitely change a lot. I have already started to change it now. I operate directly in first and second-tier cities, which can improve efficiency and speed up the brand image and unify prices, including user data, information, and services, being highly consistent. For third, fourth and fifth-tier cities, we go through the distribution channels, but I break the original channel model and basically do not use the fuel car channels. They are all newly built, with unified planning, management, and input management tools.

We will require dealers to input management. And for important personnel, we participate in recruitment, but the people are still the dealers’ and they can still make money. Even in the future, I consider the boss to provide the venue and I provide the people, but this is not what we will do this year because I am too busy.But I think this model needs to be changed, the most important reason being that we must serve our customers well. The original channel model pursued short-term profitability, but our manufacturers can overlook short-term profits, and I can even subsidize these to the dealerships. We have implemented unified management standards and guidelines to satisfy our customers, in order to cultivate a unique combat team. I believe that channels are the core competitiveness apart from products.

Garage 42: When did you start thinking about this problem?

Zhang Yong: To be honest, I started thinking about channels from the Chery era in 2010. Later, it continued to the Beijing Automotive Group and now, and I basically believe that the success of sales in the market is a big factor, with channel innovation being very important.

We have spent a lot of effort on channels, and I think it’s worth it. I will have 300 channels by the end of this year, with 80 direct sales stores and 220 dealerships, which should radiate 90% of the target market in China. This is in preparation for next year’s target of 100,000 cars, which I think is very hopeful.

Garage 42: After canceling the dealership channels, won’t the pressure on inventory management be even greater?

Zhang Yong: The dealer’s original role was to act as a water reservoir, but we can’t do that anymore. We must control costs. With so much inventory, we have to find a way to turn it over. The cost of capital for turnover ten times a year versus three or four times a year is different. In addition, too much inventory is a loss, as the car will depreciate. So in terms of operation, it is better not to have inventory.

To be frank, we suffered a lot from this aspect this year. We couldn’t deliver every month because we didn’t have inventory. Now we are thinking internally that we should have made one or two cars last year to wait, as we are currently facing shortages of chips and batteries. But it also has pros and cons. Originally, we wanted to operate the production line with zero inventory, including the parts for the production line. Now it’s not feasible, we need appropriate inventory. In order to deal with unexpected market changes, you can’t have none, but you must have some, because consumers still need to see the actual cars. So zero inventory is a false proposition, but too much inventory will also hurt you.

Garage 42: So how do you balance the inventory now?

Zhang Yong: Originally, the suppliers were required to deliver to the production line, but I have now set up a zero inventory parts warehouse that can meet production requirements for 2-3 days. Then, the dealer’s inventory can’t be built up now, and some of our secondary dealerships have to sell cars with pictures, without even a test drive car.As the situation eases, I believe we still need to have inventory of at least half a month to one month, which is a reasonable amount. Without it, we cannot be flexible because we have to consider logistics and the time it takes for customers to see the car and register it. If there is no inventory, the efficiency of the system will be slower. On the other hand, having some inventory with a coefficient between 0.5 and 1 is the most efficient and cost-effective. Zero inventory is a false proposition.

Range extender is a good solution within 3-5 years

Garage 42: Why did you choose to develop a range extender for the next NETA S model?

Zhang Yong: I think developing a range extender is mainly driven by customer demand. As the problem of difficult charging in urban areas is hard to solve in the next 3-5 years, as many households do not have a fixed parking space or convenient charging facilities, and public charging stations are often not readily available.

So the first option is fast charging. Previously, it took one hour to fully charge, but now it only takes 15 minutes. However, this is a longer road to travel, as the technology needs to be developed and charging infrastructure needs to be gradually improved.

The second option is range extender. Our range extender model has a pure electric range of 300 km, meaning it can run more than 200 km in both winter and summer, which is enough for users for two or three days on city roads. But if users want to take a long trip, range anxiety would be a problem. However, range extender can solve this problem for users, although there are charging stations on highways, it is always a guarantee.

Moreover, developing a range extender does not add to our costs, as models with a pure electric range of 300 km plus a range extender system are actually cheaper than models with a 700 km pure electric range. Of course, the starting point is still to solve the user’s pain point of charging difficulties.

Garage 42: Is range extender a transition solution?

Zhang Yong: I think it should be a good solution within 3-5 years. Looking further ahead, we may still need to consider fast charging.

Garage 42: Will NETA invest in fast charging facility?

Zhang Yong: Definitely. I am already preparing, although there are some issues with the choice of location. But I think it is worth investing in, if the profit margin is high enough, I believe companies such as State Grid Corp can also invest, as its efficiency is too high. Moreover, I believe a fast charging network will become the industry standard, so I am positioning myself to pursue this race, starting from now.

In addition, we will also develop a battery swapping model for the B2B market. We are expected to launch the battery swapping model in August. So I will not give up on the B2B market as it has a market size of several million.

Garage 42: Will the battery swapping model only cater to the B2B market?## The Next Ten Years Belong to Chinese Brands

42 Garage: Do you think the accumulation of the C-end market in the range of 100,000 to 200,000 yuan has been achieved?

Zhang Yong: Actually, the electric vehicle markets that have already started are the high-end and low-end ones. However, most of them are for the C-end market. Instead, the middle market is where both B-end and C-end are parallel. But I believe that if the market share of 100,000 to 200,000 yuan, which accounts for 50% to 60% of the entire target market, cannot be initiated, it is not a real start, and electric vehicles cannot be considered truly popular.

I think someone must fight on the main battlefield, so we not only have NIO ES8 which costs more than 200,000 yuan and NIO EC6 which costs less than 100,000 yuan, but also we will definitely enter the market of 100,000 to 200,000 yuan, and make differentiated electric vehicles compared with gasoline ones. At the same time, I will also fight in the B-end market.

42 Garage: When do you think this market will start and what proportion do you estimate?

Zhang Yong: I think this market will become the mainstream market within three to five years, but it is hard to estimate the specific proportion, probably more than 50% to 60%.

42 Garage: Competitors in the 100,000 to 200,000 yuan range will increase in the future. What do you think is the competitiveness of NIO?

Zhang Yong: Not only in the range of 100,000 to 200,000 yuan, I think the smart electric vehicle market in the next ten years belongs to Chinese brands, and I am not optimistic about foreign brands.

First of all, their decision-making efficiency is too slow, product iteration and updating are too slow, and their grasp of the trend of intelligence is not accurate enough. Their insight into the consumption needs of the Chinese people is far from enough.

Secondly, after electrification, the levels of Chinese and foreign automakers are almost the same, and we are all pulled to the same starting line. When our products are equivalent, our product iteration speed and efficiency are higher, user services are better, and young consumers tend to recognize domestic brands, then the advantages of Chinese automakers are naturally greater. Just like the Shanghai Auto Show, many foreign brands were very cold, but Chinese brands were enthusiastic. Therefore, I think the next ten years belong to Chinese brands.

Now, without naming a fuel-era king, the electric vehicle products produced by that company are very poor, and they simply do not provide consumers with any reason to buy them.

42 Garage: What do you think is the reason why they don’t sell well?

Zhang Yong: First of all, the product power is still not enough, and consumers think it still looks like the same old thing, without any fresh feeling.markdown
Of course, there are so many new and old forces in Chinese brands that everyone has to rely on their own abilities. Now I can't say that I am better than others, I can only say that in addition to making good cars and cost performance, I also have to do a good job in user experience, be prepared for smart technology, provide good user service, and do a good job in channel development, etc. In the end, everyone is still competing based on their overall capabilities, and it is unrealistic to say that a single point can make you win. So let's see, we can review once every year.


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.