AAH #707 – Crisis at Hand: China’s Strategy for Global Domination

Speaker 1: I'll online after hours. It is brought to you by

bridge Stone Tires Solutions for your Journey.

Speaker 2: All right, mister Gary, how are you you got something to surprise me with this week?

Speaker 3: I've got one that is going to be impossibly hard or dead easy, it's the same thing.

Speaker 2: Okay, do you want the hard one?

Speaker 3: Sure? If I give you the easy one, you'll guess, right, Okay, Okay.

Speaker 4: So there was a guy who is.

Speaker 3: A chief engineer, which is a pretty good job, chief engineer, right, And he had a job and he quit his job on August fifteenth, which is today's August fifteenth. I'm not

going to tell you what year was, but August fifteenth, okay.

Speaker 4: So this is a chief engineer, and.

Speaker 3: You guys would everybody in the studio would know who this person was.

Speaker 4: So he quits his job.

Speaker 3: So a few years later, he's at a car company and he's part of the development of a vehicle that everybody here knows.

Speaker 4: Who is this person?

Speaker 2: So when you were first talking, my mind went to Walter P.

Speaker 5: Chrysler.

Speaker 2: But but then you said he was working at another cut But well, of course he was working at another company, but it was his own. So this sounds like somebody

who did not start his own company. I'm not giving

you clues. Okay, so everybody's got to know. We got

Mark Wakefield from alex Partners and keep not from Blueberg.

What do you guys think any ideas got him?

Speaker 5: And uh. One person who changed jobs. Let though I

don't think he was ever a chief engineer was Bob Lutz, and he fathered some famous vehicles.

Speaker 2: He was never a chief engineer. Mark. You got any

stabs in.

Speaker 4: The I mean no, I don't keep track of the dates that people. Sounds like it's a it's a startup

guy though, like a Tesla Rivians started Beginning started started.

Speaker 2: Peter Rollinson's he was chief engineer.

Speaker 5: He was chief engineer on a lot Less.

Speaker 3: Okay, all right, okay, I'm going to give you the I'm gonna I'm going to give you the date, and then you'll immediate See if I gave you the date for she'd immediately know what it was.

Speaker 4: Okay.

Speaker 3: Eighteen ninety nine.

Speaker 2: Ferdinand Porschot, Not Ferdinand I got.

Speaker 4: I thought you'd auto. Yeah, yeah, Auto, you can go.

Speaker 2: Henry was in the business at eighteen ninety nine.

Speaker 3: Yeah, But actually he was working as a chief engineer for Edison. Oh yes, yes, if Edison did make cars,

they did not at that time.

Speaker 4: Not at that time.

Speaker 5: He didn't make a successful model. Later, yeah, a different companies.

Speaker 3: But I always I always find this interesting that you that you know that.

Speaker 4: So he leaves.

Speaker 3: August eighteen ninety nine and goes to work for the Detroit Automobile Company, which had a eighteen month run before it went bankrupt, right, and it made trucks, and then he started the Henry Ford Company, right, and and well it sort of went he left, and then it was turned into Cadillac, correct, and then in nineteen oh three started the Ford Mortar companies.

Speaker 5: It shows you startups are hard.

Speaker 2: That's that's as right, Yeah, that third company, yeah yeah, right.

And in fact, who's the guy that uh started Cadillac was the Henry Leland. Henry Leland, right, there's you know,

so Henry was Henry Ford was miffed at Henry Leland because and you know, fast forward to was it nineteen twenty six, I think when Henry Ford bought Lincoln. And

there is a picture of Henry and his son, Edseel with Henry Leland with his son and Henry Leland looks like he does not look happy, and Henry Ford looks like the canar, the cat that just state the Canary.

I mean it's like he was so pleased he was yanking this company out from under Henry Leland.

Speaker 5: A little stressed at times. Yes he could, yeah, but

that was because of Dad.

Speaker 3: So speaking of companies that are successful in companies that may go bankrupt, Mark, how are you?

Speaker 2: Yeah, I'm not sure which.

Speaker 4: I like working for both?

Speaker 3: Well, no, no, not working, but I mean you're you guys recently did another study of the industry, which, uh, yeah, leads me to believe that there is going to be some churn in this industry where than there is now.

Speaker 4: Yeah, and and yeah, the future probably does go to the brave.

Speaker 2: Because so let let's check the stage a little bit more and have you pick it up from there. So

you guys are looking at the Chinese auto industry and man, this thing we juggernaut. This thing's a steam roller. And

what you guys essentially came out and warned the legacy industry.

I don't want to call it the western because this includes Japan and South Korea too, but the legacies and you're a better change or else.

Speaker 4: Yeah, in a quantum way too. And we've talked last

year about some of this ways to maybe separate and do other things. This year we try to bring it

up a level to talk about particularly product development, but about just getting out of the boiling pot.

Speaker 2: What do you mean by that?

Speaker 4: Well, it can feel good with you know, and there's some people are feeling very good about the lack of BEV takeoff and how this is all playing out and how much demand there is for ice vehicles. But the

competitive dynamics that are going on in China and BID's ascension in that, not just them, though the Auto a few others are pretty impressive, are painting the picture of a new operating model that even if it's held out of the US, and even if it's held out of Europe, which is less likely with building factories there and such, someone else could replicate that. And it's a winning model

and it's tried and true in China and now somewhat scary if we don't do more quantum changes to the fundamental approaches and how we're organized, not just going a little faster or being a little more innovative, like it's not whipping people harder or hiring smarter people. It's changing

how we work, and without that, we could wake up in five years and be too late because the compounding improvement and changes that are going on in the knife fight that is China will eventually spill over.

Speaker 5: So you see the Chinese automakers having what thirty three percent of the market of the global market by twenty thirty.

So they lead in evs, they lead in technology, they lead in supply chain, they lead in cost. I'm struggling

to see the opportunity for anyone else and feeling that thirty three percent is low.

Speaker 4: Well, yeah, you have protectionism, so that's still in play at that point. So in our twenty thirty we had

a one percent market share in the US, like a twenty something percent in Mexico as an example. But the

bigger issue is there's it's not written yet. You know,

there's enough things to play that there's time to move and time to do things. The market in Europe and

North America is not heavily bev yet we aren't really on what we call like a level four of STVS with real time immersive connections. These things are still being written.

The autonomous side still being written, and even the battery electric side. The chemistries are moving fast. It's not like

it's you're too late now. But let a few generations

go and run just for cash and instead of running for a decades long winning strategy. And they may not

be decades longenes up there.

Speaker 3: So you guys found that they have a cost advantage as much as thirty five percent, product development times twice as fast, as little as twenty months higher, vertical integration as much as seventy five percent twenty times over the air updates post launch. Okay, couldn't someone in a Western

company simply say, hey, you know, China's car companies are basically state owned. That's direction from the top. It's it's

you know, government controlled. We're free market. That's just ridiculous.

Speaker 4: We're not going to do it. Well, we're not free market,

or else they'd be here. It's probably a thankful thing

for many. But you know, byd the auto g Le

others are not the state owned ones. Yes, they have

support locally and otherwise, nel a lot of support, others substantial support, but they aren't thesaic traditionals. Right, it's actually

a new breed in China that are winning in this and that are actually taking share from the traditional Chinese brands in China as well. It's just that the two

of those combined are demolishing the western auto brands in China.

So it's it's you were saying that the you know up tos, and not all of them are up to quite that amount, but there's a competitive advantage to the way they're organized. And it's not just saying I'm going

to launch in twenty months. It's saying I'm going to

launch in twenty months and setting up the things required to do that and to be able to do the OTAs afterwards, and being willing to do those, being willing to prioritize and focus on just what matters in the requirements to customers and to a competitive nature. And then

a fundamental belief that if I don't launch this in twenty months, it's dead. So it's time is not a

variable because there's not an opportunity to compete with a one year old vehicle launching in China. You'd be a

technology pasted in the generation. Everyone looked at the Shaomisu

seven and went, oh my god, you know, let's go faster, let's put more in. They looked at all these different vehicles,

each one that comes out reinforces the idea that to win in the NYV market in China, time can't be variable.

You must launch and it can succeed or fail, but you're guaranteed to fail to take an extra year mark.

Speaker 2: When I talk to people about this need for the legacies to change and these advantages that the Chinese have, there's so much denial, and if it goes beyond denial, it's like, well, you know, they get all access to these low cost loans, the government is supporting them, We your labor, all this kind of stuff.

Speaker 5: What do you real?

Speaker 2: What's your response to that?

Speaker 5: So what.

Speaker 4: You know compete? I don't know if that. There are

aspects of that that matter, and there's also brand legacies that matter a lot and that have an advantage of some brands that mean a lot and have a lot of trust in luxury and quality in other areas that the Chinese don't sell on that they sell on features and this sort of thing. It's like, there's not an

Apple based selling piece. It's more Neo's trying to do

a bit of that, but it's much more of a Samsung style cell phone sell of look at this feature, look at this stuff that I can do. So there's

an opportunity to leverage some of those things. It's not

that there's only one one way of doing it and only one set of competitive advantages. You could take a

different approach, but to ignore twenty months, to ignore the totally reorganized product development without chassisbody dot instead hardware and software at cic D a continuous development, continuous software development layer that just has a you know, a hardware connection layer to it, but it's not coupled to the hardware and is able to continually innovate along agile cycles. This

this exists. It's real, and it's and it's better, and

it's producing better vehicles, and it's vehicles. You couldn't you

couldn't have done this twenty years ago because the software, the electronics wasn't available. It's easier in the EV's, but

it's happening in the in the reefs as well, the extended range ones. And so I would say you still

have to look at the advantages of the what are people doing and what can I do or do better with or without some state subsidies or other things going on, and even the cultures, the nine nine to six. Culture

is live and well in what do you mean nine ninety six, nine to nine, nine am to nine pm, six days a week. The sort of the shtick in

China for these startups were we were talking to a Western company who was trying to hire a new team in China, and they were dismayed because a lot of the people they were interviewing were excited to go work for them because they wouldn't have to work so hard.

And so there is other aspects there that that are are daunting when you say, okay, how do I set up my culture and my structure and my processes and be willing to clean sheet it enough to make something that that fights this off and takes advantage of it.

Because even if you know, if you and I are both making cars here and no one actually does come in, but I do those changes and you don't, I'm going to beat you. So I don't really even understand the

focus of will there won't they come? And it's not

so much about a Chinese player like B by D comming as much as it is the quantum changes that are that are being shown to be better.

Speaker 5: I want to ask about one aspect of the the clean sheet, though, so organized labor is innocent in this country.

The UAW in particular just negotiated the most lucrative contract in decades. They just organized Volkswagen. So how do you

overcome those labor costs? How do you get competitive on

labor costs without somehow severing ties with the United Autoworkers, which doesn't seem likely in this country.

Speaker 4: I don't think it's labor isn't a huge portion of the cost structure compared to say a battery chemistry. Battery chemistry,

for example, if it's a billion dollars to launch a vehicle and I take an extra year, I've spent a couple hundred million extra. If I don't do virtualized tests,

I've spent another couple hundred million there. So there's other

big things that are there. And then the labor piece

comes down to economics of the automation cobots, what's the labor rate in Mexico, and taking an approach of fortunately coldly looking at what's the best outcome for the industrial apparatus that I want to put together. We talked a

bunch last year about different ways of setting up a factory and these sort of things. And those are things

you could do. There are a lot easier to do

if you do a structural change like this, But those also reduce the number of heads needed, so it can be less, which you know, a union can choose to say, I'm going to try to hold on to a number of jobs and create on economic waste, or I'm going to try to organize other things and make sure sure everyone has good rights and hasn't taken advantage of but the economic players in terms of how many jobs are

actually needed in the humane retraining or severing of employees.

So I don't think it's incompatible with a u a W progressive ua W approach. Sorry with my phone out there,

but my watch still stuck me.

Speaker 2: You know, we had Merrick Masters Masters in here. He's

an industrial relations expert, and his observation, I totally agree with it. By the way, is it's not so much

the wage rates. It's the lines of demarcation, it's the

work rules. It's the inflexibility that the union brings to

any kind of shot. That's the real issue.

Speaker 4: It is the US versus them is a real issue.

You know, you you've walked the go down Honda floors with the jumpsuits and not relytelling who's who other than who everyone pays attention to. You know, there's a there's

a sense of everyone in it together. In good factories,

some union factories too, it's a little easier to be us versus them and two parties in In a unionized one, and particularly one where jobs are shrinking, that's a difficult situation. Remember,

unions came into play not because of, hey, we need this to do this thing. It was because of abuses

of the automakers and others to protect. So if you

believe your fundamental role is to protect, it can be limiting and you can get to a local maximum pretty quickly instead of the global maximum of actually working together.

So I think it depends, but I think that wage rate doesn't help. It's it makes automation in Mexico more attractive.

Speaker 3: Does Does nine ninety six also include the engineering staff that's doing these things?

Speaker 4: Yeah?

Speaker 3: And so so the thing that I wonder about is is that you know this this isn't an issue of just a trade union movement, whether it's your other European in European countries, but I mean it's it's a whole cultural thing. I mean, whether whether you're in Germany or

in England or France or the United States, if somebody told you you're working, you know, twelve hours a day, six days a week, they'd be against it. Whether you

know this is it at Starbucks or Walmart or General Motors.

Speaker 4: It would be unless you know, you have, particularly you know, China and the US very aspirational culture that wants to succeed, that wants the hero entrepreneur and the hero business person and you know, aggrandize. Is that compared to a European

it's maybe more doctor lawyer, formerly priest kind of a grandized thing. And the you know, the capitalist is a mercantilist,

you know, second tier person. Particularly, you know, Silicon Valley

has tremendous history of people working to the bone to accomplish fantastic things. There's always been a pot of gold

at the end. But even in this town, I mean,

you guys have all been through some launches that people put in heroic amounts of effort to get out the door and to do tremendous things. Vehicle. I was when

you when you started your chief engineer thing, I was thinking of a certain chief engineer that just retired to work through something with his team was fantastically devoted to launching that vehicle, and that mode sort of propagates itself and reinforces itself and then becomes success. When things are

allowed to settle, you know, it gets uncomfortable because somebody else isn't comfortable.

Speaker 5: Sorry, go ahead, Well, I was just wondering. Everything that

we're talking about is how the legacy automakers can catch up to what China's already doing. I'm just wondering if

there are any opportunities to leap ahead. You know, in

the United States, the domestic automakers do pickup trucks better than anybody else. Right, somebody always has their area of

expertise that gives them an edge and keeps them alive.

So what is the edge that the legacy automakers would have over the Chinese.

Speaker 4: I wouldn't say it's an edge. They have brand edge

in many different ways. They have a homogeneous, a fairly

homogeneous market that has FMBSS type walls around it and other things that make it somewhat unique market compared to others.

It allows them to grow to scale, like in China.

There's yeah, there's a few profitable there's a ton massively unprofitable right until you get to like four or five hundred thousand units, you've no prayer. So it's.

Speaker 5: There.

Speaker 4: There is a lot of that going on there too that make it more difficult than here. It's nice not

to have one hundred and thirty automakers competing with you in the United States. However, it's thing that the bigger

reaches are the broader out there. I'm talking about more

nuts and bolts of what needs to be done now for the five years from now vehicles and approach the twenty years out thing. You get into you know, autonomous

pods that are built for three years of life and then disposable. You get into multimodal and taking out train

and plane and autonomous on highway in betweens, all the fun moonshoddy things to think about, and then expanding the pool of who's mobile into goods and people to make sure deadheading isn't as much there handicap old young, autonomous unlocks a lot of those things, which is the fun iPhone moment to think about in the auto industry, and the US is very well poised to have a great

shot at that.

Speaker 2: Let's go back to what you've been talking about though, of how the legacies essentially need to reinvent themselves or restructure themselves. If you were a CEO looking at a

legacy company, where would you start? I mean, here are

companies in most cases that we're talking about been around one hundred years. They have one hundred years of policies

and procedures and ways of doing things. How do you

start even the process of change and what changes do you make?

Speaker 4: Well, you don't do it by consensus. Probably you do

it with a plan, and you do it recognizing that you want those vehicles that are out there in the market now to continue to be producing cash. But you

need to make fundamental changes going forward. So the sunk

cost of oh but I validated this, and I have this platform and I'd like to reuse this, those pieces have to be killed and it has to go into a step change of Okay, I'm going to totally revamp my product development into hardware and software, and these are going to be completely separate types of organizations, the software being continuous, the hardware being launch and leave type of things.

I'm going to set my manufacturing in a different way to do more vertical integration and to think of a supply chain in a completely different way as a network of things versus a vertical supply chain that I'm trying to get the right cost. I'm trying to dual source

and trying to have economic leverage rather than sort of abusive leverage over my supply chain. And I'm going to

build in things that allow me to be flexible with volumes and scale and build units of scale and capacity rather than trying to go for the big thing that looks great on a spreadsheet, but if it's off twenty percent up or down, it's a disaster of industrial economics.

I would figure out how to revamp my branding to go after. It's a lot easier on an NEV to

say for a reef or a battery electric vehicle, really to start with a different brand or a brand that isn't also trying to sell an old style vehicle and kind of separating the company into two approaches. There's a

whole bunch of stuff that has to change for the future ones. And even then, if I'm killing a evolutionary

vehicle that's going to launch in two years for something that's going to launch in three that's ground up, you know, so be it. But those kinds of things would change

right away, and it would be doing it in a way that's got a plan in place to be able to execute, not with a hope that it produces something good.

There's a bit too much of the sort of well, if I do agile scrums, that'll just work itself out.

It has to be in concert with the architecture. It

has to be in concert with the way you're going to do the manufacturing, and the way you're going to do the OTAs after, the way you're going to even interact with the customer in the vehicle, and the way you're going to get revenues. Then to match more recurring

revenues that match my recurring costs of those services of providing and lesser costs, not just added revenue, lesser costs in the hardware side, but I.

Speaker 3: Mean, what becomes the moment when someone decides they need to do this. I mean, it strikes me that you

guys discovered that when you surveyed in China, that there was basically price parity with an EV and an ice vhere, that there was a good charging network, and that there was a benefit in terms of licensing. Okay, so advantage

advantage advantage here and in Western Europe, you guys discovered it's a thirty five to fifty five percent price penalty to get an EV So what are we seeing in Europe and what are we seeing here? Oh, a greater

interest in hybrids and plug in hybrids. Right, So if

someone is saying, gee, we were all in on evs, but now we want to be able to provide hybrids and plugins because this is what the market wants, I mean, how do you reconcile these two things? You know, because

it seems to me that you would immediately default to the legacy approach in order to provide those hybrids and plugins.

Speaker 4: That's where I think it likely makes sense to somewhat separate companies, and more so than people have done today, like just a bit more customers.

Speaker 2: When you say separate companies, you mean you need an internal start along with the legacy ops.

Speaker 4: Probably it is more than that, an actual as an actual separation of parts of the company into two separate companies.

Speaker 3: So not saturn in the rest of General Motors and not the.

Speaker 4: Skunk works or pilot things or not the Yeah, it's good to pilot things in those sorts of things to see if an approach works given the freedom of it, but to then do it at an industrial scale, it takes a new company, a new company and really a carved out piece that operates with the freedom to change the way it's operating.

Speaker 2: Interesting what you're saying, because we're seeing GM and Forward take two different approaches for doing the skunk works. Maybe

going to grow a new company. GM saying no, we're

keeping it integrated.

Speaker 4: I think it's really tough to keep it integrated. Both

of them are still fairly integrated. Yes, too much so, Yeah,

they're fairly integrated, and I think that holds them back considerably.

There's no real difference in how a supplier sells to Forward an ev part versus a nice part. For example,

the relationship isn't much different. The approach to validating and

going through a vehicle isn't terribly different, and it needs to be. And the way requirements are set, business case

is said and decisions get made that needs to be different, and that's hard to do in an evolutionary way. Maybe

it's not impossible. We'll see. It would seem to be

a lot easier to burn a bridge than be tempted to go back across the bridge each day.

Speaker 5: I'd like to continue that.

Speaker 2: We've got to take a quick commercial break right now, we're going to give a shout out to Bridgestone, the sponsor that makes the show possible when the elements are working at gasking. Being confident in your grip on the

road is what for you matters, lends, it hires improved acceleration.

Speaker 4: In wet conditions.

Speaker 2: Okay, we're back talking with Mark Wakefield from alex Partners.

Keith Notton from Bloomberg's here with us too, So let's just finish that thought. Then I'll let the other guys

jump in. But okay, so your advice is start a

whole new company within separate from but you know it's it's still your your effort. Well, what do you do

with the legacy?

Speaker 1: Then?

Speaker 2: I mean, how do you wind that down? What do

you do? Do you cross poll and I what.

Speaker 4: Do you do? It doesn't go away for a long time,

but it's operating in a different context.

Speaker 2: Has anyone ever done this?

Speaker 4: Not really?

Speaker 2: No, even outside the.

Speaker 4: Yeah industry, absolutely, I mean you look at it, IBM, you look at Microsoft, you look at a number of companies that went through significant pivots. They didn't completely abandon

and stop. They sort of created new you know, the cloud.

And Microsoft was a big difficult change because they were making great money those DVDs, those CDs, they were sitting the Microsoft office. Do they regret making the change? God? No,

you know, moving from moving from selling the DVD games or the CD games also to the Xbox environment. Do

they regret that move? Absolutely not. You know, does Kodak

regret not moving to digital? Yeah? Problem? So yes, Outside

of automotive, there are some some good examples, and there are people trying different flavors of it within automotive, but it's the temptation to go back across the bridge and not be as as quantum and as as distinctly different is very much there.

Speaker 5: I wanted to talk a little bit about the role of government and all of this. We touched on it

a little bit. Government is currently US government keeping Chinese

evs out. I have this story that you're quoted in

this Week and Business Week about the extended range evs.

And I can't tell you the number of people I've heard from saying how can I get one of these?

And I said, well, move to China. So L six

L nine's yes, yeah, you drove around in Eliotto L nine in China. So is government helping or are they

leading to the the industrialization of America?

Speaker 4: Well, at least there is more of an industrial policy now because that was a bad, dirty word for a good thirty years, I think, and it's no longer really on both sides of the aisle, the idea that government can be involved and shape it, while different views of how that goes is sort of a recognition that you know, what China was doing and has been doing in their five year plans and their longer plans isn't necessarily playing fair, and one needs to fight fire with fire to a degree.

So I think there's an there's definitely attempts at it.

Some of it gets a bit blunt, and it's tough not to be blunt, I think as a government when you're doing things, but the focus like the IRA on batteries and battery things maybe pushes on economic stuff if there isn't charging, a charging network and infrastructure there. It's

better in China. It's not great, but it's better in China.

It's it's tough to do a chicken an egg thing though, if you're trying to do what the US government is trying to do and trying to sort of protect jobs somewhat, protect companies somewhat, but not put too many thumbs on the scale. And yet put these stretch goals out and

you know they've backed off and backed off and backed off on the both California as well as the federal as they hit the wall of realities time. The IRA,

if that were to go away, would change dramatically. I

hope it doesn't, because whether it's good or bad policy, stable policy is actually probably the most important thing. First. Secondly,

what is that policy? So we're seeing more industrial polity good,

the charging network and infrastructure is well behind. And then

the over focus on battery over other aspects of the industry is a little blunt, and it's it's protective versus front footage.

Speaker 5: I wonder if it's we talked about protecting jobs and protecting companies. I wonder if it's even consumer friendly. I

come back to e revs. You can't get one here

and people would like them.

Speaker 4: Yeah, I think part of that comes from and it's going to be somewhat addressed in the cafe targets. You know,

it's no longer, a three x or won't be a three x benefit for ABEV on the e MPG anymore.

It's going to be like one point five by twenty twenty seven. I think that starts to go down. So

that normalization, you know, that was a big thumb on the scale of BEV. Right, You've got also the truck car,

you know, split, that's a big thumb on the scale of truck and big heavy. Even the footprint curve is

another big thumb on the scale of make a big vehicle.

So there are regulatory thumbs on the scale that leads away from an e REV. The extended range piece though,

it comes down to I think you will be seeing many more coming in the next five years. So I mean,

what role does the market have.

Speaker 3: I mean we're talking about government, okay, so there you know the seventy five hundred dollars incentive. I mean, what

if that goes away like that, what happens to this market in terms of the demand for evs. I've got

to believe it'll be significantly lower.

Speaker 4: It will be lower.

Speaker 3: And yet, as you point out, the auto companies are competing with some fairly quick, agile, savvy Chinese companies.

Speaker 1: That are full bore on evs.

Speaker 3: So if we look five ten years into the future, what then.

Speaker 4: So is their market right, their market is fifty percent ANYV in China. And when we surveyed people in China,

ninety seven percent of them said yes, they're they're considering or intending to buy in any V vehicle. When we

did it in the US and in Europe we got thirty five to forty percent, I think, and it was flat from the last few years to this year, whereas China's basically gone to full When you say, well, why is that? Why are people different in China? As I

went back to, I can buy you a wid Song for less than a comparable ice vehicle. I can't do

that here. So consumers in China are making somewhat economical

logical decisions. And if you've then got a charging infrastructure,

or if you're concerned about charging and you buy an extended range EV, that's not you know, twenty miles, it's like one hundred miles of range on the battery before even you're using much of it, and you've got a thousand kilometer range on these things, you've got a very different choice. You're giving to the consumer for them to

make a rational decision about that was generated somewhat with some government support and somewhat with you know, one hundred and thirty companies fighting to the death to innovate and come up with something faster, better, cheaper. The prices of

a vehicle here, we're thirty five, forty five, you know, it's hugely increased at the same time period China went up a bit and then it's come down quite a lot.

There's a price war going on in China and has been started by Sessla, then the Chinese louto makers, the 'BYD that's consumer friendly to have that level of competition, and then if they're faced with a faster, better, cheaper, you know, choice, they'll start making those choices. If, yeah,

the government's incentives went away, it would it would damp and demand for sure. We're still in the early stages innovative,

early adopter kind of stuff.

Speaker 5: So Aki A Toyota says, natural demand for pure electric vehicles who will top out around thirty percent. They're going

all hybrid with their company reportedly, and I just wonder, is that alex partners here the world or do you think it goes higher?

Speaker 4: Our data is different. It depends obviously by segments and

use cases in regions. But if you looked at countries

in the US, we saw natural demand, where you see a bend in the curve of do you how much cheaper does it have to be or how much more expensive does it have to be. We saw a natural

bend around seventy percent in the US, so the last thirty percent in the US would suggest that it's difficult to convert. It was higher. It was like high seventies

in Europe, so natural asimp toating higher. But of course

you can regulate that out of existence too when you get to that point. But no, thirty I think that

would be a fairly narrow instead of or you know today's price, today's price. It's not even thirty zero. It's

you're doing it because it's an innovation. It's neaterter, it's

better in some small different ways, other than some passenger vehicles that are pure commuter, second third vehicles, some last mile delivery situation. It's very specific use case. It's uneconomic

right now, Mark, what.

Speaker 2: Are your ideas of as legacy automakers or suppliers. Even

working with the Chinese.

Speaker 4: So we've seen.

Speaker 2: Carlos Tavares run to Leap Motor in China to get to get vehicles. We're seeing Chinese suppliers looking to set

up shop in Mexico. In fact, reportedly there's twenty nine

of them who collectively are investing seven billion dollars to build all kinds of components, not just you know, advanced eight ass things and included. Do you run to them

or you know, Shaomi and Huawei seem to have the lock on UX right of you know, user interfaces and everything that goes along with it. What would you do

as a legacy automaker, would you do what Tavares has done and run to the Chinese? Would you use these

Mexican Chinese suppliers? Would you you run to get their

UX or would you say, you know what, I'm just going to become dependent on those guys. They're going to

become my dealers, you know, I'm going to be hooked on them. Or do I try to do it in house?

Speaker 4: Well, I mean, buid is making more than seventy percent of their content, so they're not dependent on these guys, and they're in China. There's a lot of dual sourcing

to put pressure on suppliers in an economic way rather than in an artificial way, and so there's different dynamics to selling to Chinese automakers, but you can make good money on it, and you definitely want as they are going into Eastern Europe to Mexico, if you're a supplier here or a supplier in Europe, you'd want them not to feel the need to open a plant doing what you do here and bringing someone over. Now, if that's buid,

that might be a little bit more difficult with fin dreams and others. So you may be in a situation

where you are a second source and you're you've got to prove yourself and fight. But proving yourself and fighting

might make you a more competitive company cooperating in a sense like what Stalantis has done. I think they probably

felt they needed to do that. They hadn't really done

much themselves, so this was taking something that you know, the motor is not a tier one of the of the automakers, but you know had cost competitive small vehicles and are are pretty cost conscious as as a company, so able to hit price points and launch dates pretty well, and they needed money, they needed a partner, so it sort of fits closer for them, given they really didn't

have much to work on and they pulled back from China, you know when jeep business wound up, and I guess last year there really wasn't It's not like the Cannibal Eye something to do that. So it can be it's

just you don't really cebo Id or Tesla doing that.

So I certainly don't need to do that to succeed electric vehicles. A more ambitious thing would be to sort

of plot a path if you had the balance sheet to do it. That makes you the winning player in

a network in a different way in a three to five year window.

Speaker 3: So getting to the balance sheet. One of the things

that you guys asked rhetorically, and this was based on powertrain, it was how can I afford the cost of financing multiple approaches? Meaning that here in this market where when

one of the car companies reports as financials, they always say, we made a lot of money on our full sized pickup trucks and full sized SUVs and we're using that for our electric vehicles. Okay, so they're spending money all

over the place and your talking about doing focus. So

how do you achieve this focus when you have this admitted dependence on the other stuff, and then you're saying yourself, oh, I got to cover all of these bases and spend money here, here, and here.

Speaker 5: And you have to spend more on hybrids now, right, because yeah, there's a finite pot Yeah.

Speaker 3: And oh, by the way, I've got to do aid ass and I've got to do you know, autonomous and I've got to I mean, it's just it is tough.

Speaker 4: And this is the first year in a decade where collectively the investment in CAPEX and R and d OR last year was was significantly up. It was quite flat

for a decade before that, even with the shifting to more case oriented investments. So that is a tough one.

It's a tough one though that needs to be done saying I'm not going to try to do everything for every person, but I am going to have different horizons.

I have my things now, I have to build my things for the future. Need to be competitive everywhere I am.

I can't accept a subsidy into one. It may not be.

It may not be that your vehicle succeeds, that you launch in an extended range vehicle or a bed, but then you can't be wedded to it. You've got to

stop it early, cut it and make a new one that's better and not be wedded to being in a segment for a dealer. So the dealer has a full

stack of things to sell, and you know, if you want this car or this big suv, mister dealer, you've got to order ten of my things. I'm having tough

time moving. You have to break those incentives and be

willing to take the one step back to take two steps forward. And then what you hit with the you

hit the market with has to win. It has to

be competitive. It has to be a step change better.

It can't just be getting exposure to it, learning a bit how to do it. It has to be winning

product that everyone believes in and it's taking enough reach that it will will lose or fail, but it won't be the fifth best vehicle or tenth best vehicle.

Speaker 5: Insight, So that sounds like ruthless winnowing. Do we end

up with much smaller legacy automakers that offer far fewer models.

Speaker 4: They've been winnowing somewhat now as the Europeans that are sort of I've never met a segment they don't like, well, they're they're waking up to that. I think they are.

I think the body style tweaks of every let's coop everything with a light off the back and try to raise the price by five thousand. You know, it's probably

played out.

Speaker 2: It's played out, and that's it. They did it because

they made money at it. I mean, especially the luxury brands,

the German luxury brand. They were masters of finding little

niches and as long as the customer paid for it, it was great. But let's go back to what you

were just saying. Because higher cap ax, in fact, you

know BYD's cap ax last year was nineteen billion dollars, you know, twice as much as anybody else. It's staggering

amount of money. Shorter product cycles, you're talking one and

a half years, two years. You may not be able

to recoup your investment in that time. Wall Street will

excoriate you. You're going to hurt your margins if you

do that, right, So, how do you, as you know, the officers of a company, commit to a plan where you know that Wall Street's going to garret you.

Speaker 4: You hire engineer, business people that don't just put it as a stretch target that bottom up understand what they're doing to make that work. So, for example, if you

look in under the hood in Chinese a lot of the Chinese vehicles, the engineer in there would say, the packaging is awful. What's all this space everywhere? It's because

they're using very standardized components that they're not revalidating that the suppliers have tested, and they're not then doing a ton of vehicle and a great and so when you use a standard component, you can do less vehicle integration.

If you're not allowed to go tell that supplier, well, I want the torque curve to be this way, Well, then you don't have to go tune in the torqu see it is what it is. Now, go figure out

in your software how you can deal with that in a different way and make a ninety five percent good vehicle instead of the ninety nine percent good vehicle and do it on time, on budget, and without the pride of having to tweak every last thing and having ride and handling be better than the last vehicle. It might

have been good enough the last vehicle, but your technology, your style does need to be fresh and does need to change. You know, your shock technology is not dramatically

changed A lot I don't say that, they will not say that we disagree. But if you compare that to

the entertainment, or you compare that to some other aspects that are more software based, you'd say, no, it's completely different.

And you know, just the opening platform things of having everything going to zonal and central and then being able to COREHOP and being able to adjust everything in the vehicle, being able to have that all accessible as an OTA so you can always you can actually adjust and improve over time and change over time. Those things just didn't

exist in the past, right, And so making sure you're staying on the leading edge of those is a lot more important than hitting your requirements on passenger comfort and noise and some ride and handling and some of these.

Speaker 5: Other aspect And where do you think the legacy automakers are on the software defined vehicle compared to the.

Speaker 4: Chinese Well behind? I mean Tesla is a somewhat exception.

It's the legacies are well behind. And I think you

only have to see every CEO that goes to China and sits in like the Shami Su seven or other ones and goes, oh wow. That drives home that nature

of it. And part of is that clean sheet benefits

easier to do the clean sheet benefit. It's easier to

run hard when there is no other option. It's harder

to do when there is another option, when there is a full sized pickup truck, you know, making more money than the rest of the company combined.

Speaker 3: Is there a possibility that the Chinese companies are going to fall into the same pattern that Western companies have in terms of like, oh, we've already got that, you know, let's just make that incrementally better and we'll be fine.

Speaker 4: Not until there's like twenty twenty five of them, if there's over one hundred of them, probably not. I think

they're terrified of that, and I think they look at what's happened in the rest of the industry and intensively don't want to become like that. I think Tesla also

looks at the industry and doesn't want to become like that either, and trying to put enough pressure on the system, positive tension on the system to stay in the in the more nine ninety six environment than the bunching of clock environment. So yeah, I think they're definitely afraid of that,

particularly that it's difficult for the Chinese brands that are that are legacy Chinese brands that are the ice brands or the state owned ones that are having to compete with Shaopung. There's and B, Whitey and Neo and and

other ones that are seen as more innovative and are taking share.

Speaker 3: You know, getting back to John's question about Wall Street, when you were described a company that is willing to kill products rather than you know, embroidering the seats and putting some stickers outside and selling it as a special addition because they've already paid for the tooling and they want to keep that thing for as long as they can.

And companies that are dedicated to achieving more than can be imagined. You know, I began to think, well, you're

talking about the car industry or the computer industry.

Speaker 4: I mean, it just seemed like a disconnect there.

Speaker 3: But okay, so right now, you know, there are three companies within twenty miles of the studio, and they've got executives, and the executives have lots of experience, and they probably don't want to go anywhere. So what you're talking about

strikes me as being such a massive change. You would

have to get many of these people to decide to leave, which then goes to John's point of like, well, would Wall Street feel comfortable with non car people running car companies in order to achieve these.

Speaker 4: Yeah, I don't know that you need non car people running car companies. I think there needs to be, and

generally there tends to be. At the top of most companies.

People who want to make change. They're not usually just

those aren't clock punchers. Those are intense people that are

very competitive and want to win and want to change.

Some a bit stuck and some undermined by the evolutionary nature of change in a big organization that hasn't had a fundamental change to the product development process and the sequence of what people do, how things are organized in big ways, Like all those three companies still have a chassis group in purchasing and in engineering that is doing chassis stuff and is interacting with vehicle programs the same

way they've been doing plus or mind is for a long, long long time. You go to these nav company ANYV startups,

you go to test that you see much more systems approach and connectedness. You see software teams that are doing

things in a very different way, in a very different sprinting way. That's decoupled from what these vehicle teams are doing.

It's different, and that quantum change is a really difficult one because it's so holistic and you need to change so many different pieces. While you have an industrial machine

and gear turning, it's tough to say no, no, I need a new gear.

Speaker 2: And what you're getting at is, going back almost to the beginning of this conversation, is why you said you need to grow a whole new company.

Speaker 4: I think it's easier that way, and I think it's easier to prevent the millions of little decisions that can undermine the big goal.

Speaker 2: Well, you know, but another thing, to reorganize the company, it's usually a nightmare.

Speaker 4: You know.

Speaker 2: I think back to the GM reorganization of nineteen eighty four.

It essentially destroyed the company as it knew as it existed at the time. They got rid of Fisher Body.

You know, they changed everything. People for several years had

no idea. You know, there was an old ad hoc

relationship in the old GM. People knew, Hey, if I

got to I got to go over to Bob here, or I'm going to call Sue. They they, they, And

when the reorganization happened, nobody knew where anything was going.

And so to restructure an existing one that's been around for one hundred years and everything, you're asking for a lot.

Speaker 4: Of trouble, especially if you do it without a really detailed out plan, like if you go and hope you'll work it out as it goes, that's going to be not so good. And that's where some of those come from,

when they're really top down like that, when they aren't asundamental driven and thought through. You know, what Malali was

doing was very thought through, right, and what Sergio was doing was also very thought through and also very contained.

There was nothing that escaped either of those two, right, There was no there was no escape out of the boundary of this is the only way it's going to go and going forward. And so I would say that

those two situations, Forward's revamp and avoidance of bankruptcy and how they organized, what Sergio did with with the Chrysler Group and an infiat an FCA are examples of some things gone right as well with a plan.

Speaker 5: But in the more recent Ford reorganization that Farley did, they looked at spinning off the ev business, but they couldn't do it for family ownership reasons. So I guess

I just wonder, you know, can they get over some of the really fundamental things that keep them wedded to the past.

Speaker 4: I think the question becomes, do you think you're going to be able to sort of react your way through and that's going to work out better, or is it worth the one step back to take two steps forward?

And I like when we've looked at this, we've looked at spinning off engine pieces of a business, look at other pieces. There's ways to do it in ways that

aren't you know, second class citizen, first classes and approaches, because there's enough there's enough value there, and there's enough things to do, and there's enough honorable work to be done, but there's also decisions that you need the right motivations to make. If you try to do this just by dictum,

you would run into a lot of motivations that are and metro and other things and other limitations for it that in the middle of a company would go in the middle, and the bottom of the company would would turn it into a paper exercise.

Speaker 3: So you mentioned the possibility of some people feeling like second class citizens were a new company to be started, and I mean and we can see, you know, in history, and again going back to the General Motors Saturn situation, that the people who were back in Detroit and who are not in spring Hill, who were working for brands like Osmobile, which of course no longer exists, they were just ranting up and down like why are they spending the money there? They should give that money to us.

We deserve that money. So, I mean, I cannot imagine

that if there were a startup of something out of General Motors or for It or even Stilantis that were separate, that the people left behind wouldn't say, that's our money, why are you spending it over there?

Speaker 4: That's the see, that's that's the problem. It's not left behind.

There's a mission for people to do. If it's really

a left behind, then there's probably more transparent, humane and and courageous ways to deal with those pieces rather than sort of hoping it sort of trits it way its way out kind of thing. But those pickup trucks are

fantastic vehicles. There's people that know a ton about how

to engineer those, how to sell those, how to make those, and they should be really proud of what they do because they're Toyota's tried for quite some time and they can't do it. They can't break that stronghold. Nissans tried,

others have tried, so there's reason to be quite proud of what they're doing and get great returns from those.

There's also reason, though, to say there's a better way of doing some of this. You don't need necessarily on

an STV for it to be an electric vehicle. The

next pickup truck could also be an STV. You can

have a powertrain that's decoupled from the software that.

Speaker 2: Is sotal computing the whole nine yards, so it's it's systems engineering the whole nine yards.

Speaker 4: So it's not so it's not that there has to be like the freeze in time business that then repeats and iterates on that it's changing the way a business works.

And so you know, whether you take the GM approach and say we're all going to change this way, or take the approach to saying, oh, I'm going to separate somehow and make a change. I don't think the story

is written on whether one is easier than another. It

seems straightforward and more easier to me, and more clear to me, and less prone to the frozen middle to do it in a separate way, but with clear motivations, clear financial pieces, so that there isn't the you know, does Saturn Orros would be all squawk louder to get the next vehicle. That that dynamic is one of the

reasons why I think a more clear separation with a constitution of what's what's spent on what.

Speaker 5: Is a lot more? And do you see that in

your five year outlook that some of the legacies will spin off parts of their businesses to sepbrate the more autonomous and independently. Yes, real good.

Speaker 2: Hey, look we're at the top of the hour. We're

gonna have to wrap this up. Mark, awesome having you

on the show. This is really good stuff. It's amazing

to watch what's going on right now.

Speaker 4: It's fun. It's a fun time to be in the industry.

Speaker 2: So m's change it is, right, Keith, great having you back, Thanks for having me, and let's do another show next week.

Speaker 4: You do that, okay.

Speaker 2: I want to thank all of you for having tuned in.

Speaker 1: I'll Don't Line After Hours is brought to you by Bridge Don't Tires Solutions for your journey

AAH #707 – Crisis at Hand: China’s Strategy for Global Domination

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