AAH #733 - Tiptoeing Through the Trump Tariff Minefield
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Speaker 1: Out online. After Hours is brought to you by bridge
Stone Tires Solutions for your journey.
Speaker 2: Hey, everybody, thanks for joining us on Autoline after Hours.
We're gonna try to figure out what the heck is going on in this is crazy automotive industry. We've got
Mark Wakefield here from alex Partners back because he's got some great insights. We got David Welch from Bloomberg as well.
Great to have you guys both here. Great to be here,
John and Gary. Always good to see you.
Speaker 3: Thanks. John.
Speaker 4: Think I think we have the most prescient man in the industry right now.
Speaker 2: In the six were explain why you say that, Well, because.
Speaker 4: Alex Partners, where he is the global automotive market lead to study their alex Partner's Disruption Index twenty twenty five.
Alex Partner's Disruption Index, which came out November. November, Okay,
so it's longer ago than I thought. And you guys
found that of multiple industries as you looked across lost various segments, that the most disrupted industry, according to the people you're surveyed, is automotive.
Speaker 3: That's right, And that was before the election, before this week, before a month ago, and yeah, beat out all other industries.
It's an executive survey around the world we've done for six or seven years now.
Speaker 2: So these are executives talking about their business.
Speaker 3: Percent are C suite executives. The rest of them are
director and up level, so people who would have exposure to the challenges that the real business would face, not just you know what a department might fix.
Speaker 2: So how do you measure You know, you're talking to people in all different industries. You've got people saying, man,
is business? I mean business? People never say, man, is
it going great? Things are just rocking here. You know,
we see nothing but growth for the future. They're always
complaining about there's this problem or that problem. How did
you poise it all out to say automotive is the most disruptive.
Speaker 3: The interesting is the destruction isn't necessarily negative, and so the things like jen Ai that is very thrilling for a lot of executives. The opportunity first of efficiency and
then on harder to figure out the growth paths of those, but the potential of it is very exciting as an opportunity.
So actually the top four disruptions in automotive were actually seen as opportunities by the executives, and so there's concern about terrorists, regulation, talent and these things. There's also opportunities
though in material science, the automotive industry was very excited about that. It is not the opportunities the opportunities of
AI as I was saying connectivity. These were seen as
disruptive forces, but opportunities.
Speaker 4: So one of the findings was seventy percent said that they saw AI as an opportunity to generate revenue. That
seems a little strange to me.
Speaker 3: It does, but if you think about, know, if you went from the old days of setting a price and a good, better, best price, and then you you know, Capital One and all these companies came along that said, hey, it's much better to aggregate all these things in little ways. Great.
Now you can do on the fly optimization and aggregation of millions of different pricing points of various things, and you can segregate consumers and you end up with more revenue from it. If you can understand consumers better and
understand what they need, you should be able to do a lot better. Not just packaging of features, but even
think about, you know, watching the mouse hover around a configurator.
So instead of just using the configuration. Oh they tried
this and then they abandoned it. In the cart, you
can actually kind of watch the cursor go around and you see what is of interest in what isn't of interest.
And that's very hard to do any data with unless you're going to use the machine learning algorithm that can deal with that level of data and then come out with better solutions that you or I or someone trying to figure it out alone wouldn't have come up with the sales and dealer process, which is pretty primitive still.
I mean, even though you've got web tools and that sort of thing, like you know, configurator has been around for twenty something years and they've gotten better, but they're still not awesome. I was shopping a car recently, so
get you start to use.
Speaker 5: AI tools and you know some of the preferences and you can such a push that toward a consumer.
Speaker 3: Yeah, and it could be used for good or evil when you go through that, but net it can create your revenue through that.
Speaker 4: So so basically when you walk into the dealership and the guy types your name into the computer and he says, oh, this is what he was looking at.
Speaker 3: He's looking for.
Speaker 4: And dynamic pricing kicks in and suddenly you're paying more than John is who's in the next They were.
Speaker 2: Listening, So Mark, you're looking at all these exacts, you're talking to them different industries, and all they're talking about automotive is the most eruptive. Did they see it as positive?
And do you think that they would say that now?
Right now? Today?
Speaker 3: Now? I mean it would be off the charts of disruption, yes,
because of the last month and a bit that we've had, But I think that that's a bit of a wave on the surface. The disruption that we were more talking
about was the currents underneath that go for longer runs, and those again it was sort of balanced opportunity and risk, and it's this sort of Lake Wobecon thing where everyone feels like it's an opportunity to me, but it's a you know, it's a threat to the industry or to my competitors. Maybe. So there's quite a bit of optimism
within the C suite of what can be done, but there is also when you then get down to Okay, how what are we going to do and how to do it? Then you get into the sticky wickets of
the culture of the operating model is one of the things that was of a concern yearn is how much has to change in the operating model in the business model, and that was one of the particularly and automotive one of the big concerns. And that's a real deep concern
because that is a very very difficult thing to do well.
Speaker 4: One of the things that I thought was interesting is that a third of the respondents, Okay, so this is as you said earlier, this is this is pre what's going on now? A third said the cost of materials
and components is the biggest problem they face. And you know,
and now we're looking at the situation with things like tariffs on materials and the difficulty of what components may be taxed or not.
Speaker 3: I mean it's h yeah, and the visibility into that the sort of chasm between the ideal you know, should cost I know everything about this thing and I've I've optimized it versus the you know, three quotes and a cloud of dust and you know, get the right price in sort of thing. There's a chasm between that. You know,
all the executives want fully understand and optimized you know cost for a function, and then if it's a supplier doing it, Okay, what's the what exactly should this cost?
And all of these things, And that's a very difficult thing and it's very obvious to them when they get that wrong. The supply chain challenges of the last five
years have made supply chain and understanding those costs, but also understanding where things are made a much higher priority than the past. If you had ten and you had
conflict minerals, and then you had the semiconductors, you're worried about.
But then when you put a tariff on something of certain regions, now you have to know where everything comes from.
Speaker 5: How much of the concern on supply chain. And I
know we're going to talk about Trump terraffs. Between Trump
terraffs is really that's sort of America's version of what's been happening in the world for the last deck. The
world's been getting much bigger again because trade deals are breaking of breaksit. You have a lot of countries are
you know, they've got more conservative governments that don't like imports, they don't like immigrants, and everybody wants stuff made in their country because it brings in money, it creates jobs.
And Trump is very so far, it's being very aggressive about that. So if you're they're worried about getting chips
from Taiwan over the long term because of China and the whole China as a trade partners is falling apart.
So if you're an automaker, you don't necessarily want to pay American labor and regulatory costs, but you know that you have these difficulties and future risks around the globe.
How much of that is playing in it. They really
have to be students of geopolitics to understand the medium and long term impact on their supply chain and their costs they do.
Speaker 3: The nice thing is that's been a steady thing for several years. So there has been you know, we don't
know the extent of the change, but the direction of the change towards more protectionism has been clear for some time, and so there's been much more near sharing. The challenge
with say some of that is that the decisions were often okay, high labor. Let's put that in Mexico, we
consider this a free trade zone, and so to rip that up, that's a bigger deal because you were sort of operating under a certain set of rules that you thought you were going to be doing but the near sharing, the moving away from China has been pretty steady over the last five years really and been on the top of people's minds and generally feeling like there's not a competitive loss to do that since everyone has to do it.
Speaker 4: So isn't it all the more surprising then that automotive comes out as the most disrupted industry when if you take that for example, you know, look at a company like Apple, I mean, basically everything is China, right, so how does it change its supply chain to be able to adapt to a world where perhaps doing that is not so good?
Speaker 3: If you look at some of the concerns around business model, around electrification, around these things, you know, Apple doesn't have to worry about the iPad, you know, turning into a fuel cell iPad and having spent a whole bunch of money on the battery plants and now they've got to make fuel cell iPads. You know, that's not what they
have to worry about. The business model of Apple has
already changed quite a bit. They don't really have a
massive business model changing some AI JENNYI pieces, but to the degree that automotive does, they haven't had that media is actually the next highest, but behind automotive. But tell
her Maney your job, David, Services was interestingly the least.
Speaker 5: It does surprise me because there's there have been a lot of way off so as they shift how they do things, with the big banks especially, there.
Speaker 3: Is but there's been mostly efficiency place where you kind of know the direction of travel, it seems like in financial services, but in automotive, you know, with the amount of capital you're putting at risk for the vehicle to then do what it's got to do. The connectivity values,
revenue streams you were hoping for the avy of course, the massive tens of billions or hundreds of billions into into electrification that are now at risk. And then of
course Chinese growth, in Chinese starting to export the strongest ones exporting, you know five years ago in Europe or in Mexico is less than two percent market share, and it was you know, eleven percent in Europe and fifteen percent and in Mexico Chinese brands last year. So that's
really not what Apple has to concern themselves with at the moment mark.
Speaker 2: Your survey showed that, and this was before the election when you did the survey. The c suite execs in
the automotive industry, we're not that worried about tariffs. What
was your number there, Gary, you had the exect it was like twenty percent or something.
Speaker 3: It was the fifth concern. Okay, and rank orders.
Speaker 2: I gotta believe it today it's number one.
Speaker 3: Today it's I wouldn't actually say it's number one.
Speaker 5: A yeah, that's my question. I sort believe that it's
a short term thing, that it's you know, saber rattling and squabbling with Trump and other governments. Then eventually we'll
get into some sort of livable level of terroriffs.
Speaker 3: I think we'll get into a situation where at least it's a level playing field and so if the wind is at the face, it'll be an equal wind. And
that there's some short term things to go through. Again,
the direction you kind of know, okay, I need to put more things in the United States versus other countries.
The amplitude of that don't quite know. But there is
still this massive amounts of money you've put in the ground for electrication. There is still the business model, loperty
model challenges. So those concerns that we're there in November
are still there and are somewhat heightened by the distraction of tariffs and the concept of the some cost now of having launched a vehicle in Mexico or Canada or somewhere else or Korea and having to perhaps now have to change that midstream, adding to the bill of all of these other things going on.
Speaker 2: So what's your analysis of what do you think is going to happen with these tariffs? Let's just talk Canada
and Mexico for right now.
Speaker 3: That's a challenging one. I would say that, you know,
I think there's a coming realized that you saw the realization with oh, you know, we'd be hurting people making cars and making more things. Are USMCA compliant and benefiting
cars coming in from Korea, coming in from Japan to do it? You know, the way it was done, and
the eventually you would likely see something phased in of saying okay, in two years, this is what's going to happen, and it's going to escalate from here to here in five years, and that orients more construction of plants and of launching of vehicles in the United States, and there's labor constraints of that, but that's also then pushes the automation piece. The QUAW deal already pushed a lot of
automation and pushed some to Mexico. But the boogeyman of
UAW or labor in the United States and automotive has not been Mexico. It's been robots and so an automation
and productivity, and so this would also exacerbate that and sort of accelerate that. So to get more production in
the US, it's going to have to be a more long term play that people believe will stick around and stay around for people to make adjustments, and in the near term there's maybe some softening up for USMC. There
may be some other reasons for doing these things, but the long term needs to be a long term play.
Speaker 2: My guess is the two and a half percent import tariff currently as it sits and has been that way, I don't know for decades, those days are probably over.
I mean, Trump's talking about reciprocity. I would imagine at
the very least cars coming in from Europe are going to face a ten percent tariff. Although he's also talking
about value added tax as being an inhibitor to US exports and that an officiary for US imports.
Speaker 3: The vats in Japan or elsewhere. Are they apply to
a domestically made car versus an imported car. There's a
lot of soft tariffs for like a Japanese market, for example, But the Korean free trade agreements, you know, we're basically changed how it was with Korea. There's not any import
tax to put a car into Korea from the US, but there's still the VAT, but that VAT applies to a domestically produced or an imported vehicle.
Speaker 5: The two and a half percent is an easy one because of Trump plants production from Mexico back to the US.
Speaker 3: There are a large number of.
Speaker 5: Vehicles imported into the US from Mexico that are not compliant because you know, it's it's.
Speaker 2: Only two and a half percent.
Speaker 3: Yeah, it's cheaper to.
Speaker 5: Pay the two and a half than pay a bunch of UAW guys even at the parts plans to do that.
So I think that's the easy one where that goes up to some significant degree and it it you know, if you can if you keep USMCA in place and GM forward plants still ASIS plants are pretty highly compliant with USMCA, they're going to be better off than Volkswagen, Nissan BMW who have plants in Mexico and less likely they have compliant vehicles, and so they may be they may be paying much higher tariff on their car is
coming in.
Speaker 3: We'll see how that shakes out.
Speaker 5: And to my knowledge, they haven't really been very loud, if at all at the table in these discussions so far leading up to the thirty day stay on this thing that we had, so that how that shakes out will be interesting.
Speaker 4: So Mark, you know, he mentioned that the thirty days stay, I mean, so now they keep putting these stays on.
So from the point of view of you know, advising companies of what they ought to do, I mean, is there is there confusion or is there just a feeling of, well, let's cross our fingers and hope this works out for the best.
Speaker 3: That's not as you guys know, that's not the DNA of the automois. There's people get into work to try
to figure out what to do. We're helping a lot
of clients try to figure out their supply chains, their options, both suppliers and automakers. Where stuff comes from, how what's
the ways you could go around it in an easy way?
Is it raw material, you know, is it things that could be dual sourced, is it shifting production. It's kind
of on the margins of the real cost of it.
But still you're looking at those things because even in the seat cushions, this could be billions of dollars. But
then there's duty engineering, and there's the locations of where things are made. There's lots of different ways to skin
the cat to try to minimize the impact, including the longer term plans of what can be built and done in the United States. If you take the view of okay,
this may happen, and there's various flavors of that that say, Okay, we want a dual source to be ready, or no, I'm just going to move over and ready, but I'm going to add an awful lot of automation and do other elements to make it more economic. But mostly those
are plans, paper plans. At the moment, some tooling that
has been kicked off, but not a lot. It's mostly
first of all, making sure plans stay running and people keep shipping, and who's really going to be responsible for these tariffs. There's a fair bit of negotiation going on
about some of those things. But then trying to understand
what the impacts are, how to then mitigate those in the near term, and what are the plans for the long term and how much do those things cost. It's
been a very busy time last two months.
Speaker 2: I'd say, what do you think is going to be the end result of this? Are we going the US imports?
Speaker 1: What is it?
Speaker 2: Five six million cars a year? The great book of
those coming from in Canada and Mexico. But do you
think that we're going to see a huge drop off in imports and all that production, most of that production moved to the US.
Speaker 3: I think it's a long term thing. It's you know,
it will take five to ten years to see a real big shift in that kind of stuff. In the meantime,
you've got, like if you've put a billion into a plant, a billion into the tooling and validation, these sorts of things you can if you're looking at them, okay'm and to replicate that United States. If I can find the
labor to do it and all these things, Okay, I do that. Two years later, I've got that done. Now
I've spent another two billion to do that. I've got
costs that I've got to deal with. The plant that's
in Canada or Mexico, and what do we do with that?
It becomes expensive to do it off cycle, and so you end up doing the Okay, what do I eat versus not eat? And before you make that decision, you
kind of want to know how USNCA is going to land because there's a good chance that seventy five percent becomes eighty or eighty five percent. Right, the local content,
the amount of content that has to be within the region that a US component of that becomes a new part of that thing. That labor content probably goes up too. Labor. Yeah,
and that was not much teeth to that one at the beginning, because you can put you put a bunch of engineers in Mexico and now I average so this is.
Speaker 4: About that they had to be making at least sixteen snars per hour. It was forty to forty five percent
of the people that worked on the vehicle. So it
wasn't going to increase that that number.
Speaker 3: Yeah, So until you sort of see where this lands you, you would only be wanting to do the kind of no regret moves where you've got a warm plant or you've got capacity, and this isn't a big build, a new plant affair.
Speaker 4: What are the possible consequences though that I mean, if all of these things happen, if somebody has spend two billion dollars extra, they can eat so much of that, but more of that they're gonna have to pass on to the consumer. Consumer says, you know what, these things
are getting too expensive?
Speaker 2: You know what I mean.
Speaker 4: Exactly, and so so demand diminishes, people hang out of their cars even longer, and you know there are all kinds of knock on effects of that that are economically not very good.
Speaker 3: Yeah, there prices would rise. That's I mean, you at
tax something, you get less of it, and then prices rises.
There is a game theory going on, though of course it's surprise I haven't seen more dealer advertisements of get your pre terraced price to pick up truck today. But
there's a consumer psyche. There's a dealer behavior on pricing,
and then there's automaker's behavior looking across the aisle in a you know, airline esque way of what are you doing because you also do have vehicles that are made here in the United States that are not going to be subject to it, and how much do those things go up in price because they can. You know, because
you saw that with aluminum. It wasn't that aluminum got
more expensive overnight. It was that the cost of the
import aluminum is going to go up, so we can raise this.
Speaker 2: Everyone's going to raise prices. I mean, if let's just
say there's a twenty five percent tax on a Toyota raft four coming in from Canada, you think Ford's going to leave the price of the escape where it is today. No,
They're going to raise their price.
Speaker 3: That's the logical thing to do.
Speaker 4: Well, there's a study that they did when there was a terrorist put on washing machines, and they determined that everybody raised their prices on washing machines.
Speaker 5: So it happens in the metalist markets all the time. Right,
even the domestic pression production gets more expensive. Surely after
those tariffs are put in place. It's you know, when
the Trump administration says that it'll just be short term pain because these are things we need to accomplish, it's usually not. If companies and industries can get consumers to
pay it, it sticks.
Speaker 3: Yeah, And then you have that expectations thing coming in for wages, where then people demand wages and it becomes this sort of second snowballed effect of yes, the stuff got expensive, and then that drove an expectation of inflation that drove people to ask for more money, and that drove wages going up, and then it reinforces a second wave of sort of non transient inflation.
Speaker 2: I see real problems for the industry no matter what I mean. We're in an era of peak auto. I mean,
US sales peaked circa twenty sixteen twenty seventeen. You've got
changing demographics and aging population that doesn't buy as many cars.
And if you drive up the prices of vehicles with terriffs or even just introducing inefficiencies into the supply chain, I think the star is going to be even worse than it is now.
Speaker 3: SAR is one thing we are Forecasts are for less vehicles to be produced in the USMCA region this year than last, despite the consumer's balance sheet looking decent, despite what otherwise you would think would be a somewhat supportive environment.
But yeah, with the care that's even.
Speaker 2: Before the tariffs, or are you calculating the tariffs? That's hard, Okay,
So getting back to.
Speaker 4: Your study, I thought, you know, talking about competitiveness, And I thought an interesting finding was that fifty one point one percent see that the auto industry is losing the war for talent, that they're not getting the people that they need to you know, competitively develop things. And I
thought it was also either the lowest was consumer products twenty two point eight percent. So is it like working
at Procter and Gamble is better than working at General Motors.
Speaker 3: Or the degree of disruption in consumer products is considerably less than say, in tech, the tech endustry, or in our industry. But the degree of shift of software defined vehicles,
of the competencies around software is dramatic in the auto industry.
And it's very, very difficult to take an electrical engineer and make them a software engineer, or take a mechanical engineer and make them electrical engineer. That doesn't really happen.
So you've got a big, big challenge in the auto industry that doesn't really exist to the same degree in consumer products. They're not making your toothpaste, you know, software
defined not yet.
Speaker 2: Mark. The last time you were here, you were talking
about the need to get competitive with China, and you're talking the need for fundamental change in these car companies and suppliers go into that a little bit. You know,
what's your elevator pitches in terms of the things that need to be changed.
Speaker 3: Yeah, I mean, I think we went through the last time.
But the competitiveness comes in in just an entrepreneurial paranoia and a aggressive activity on cost, on consumers and what they'll actually pay for, and on the idea that hitting a two year development instead of a four year development, hitting the cost parody of an EV with an ice vehicle, and hitting what consumers care about and not putting a scent into what they don't care about, and doing that
with a very rigorous approach that doesn't have local optimums and has a global optimum as, and it doesn't have you know, the purchasing team optimizing their thing and engineer optimizing their thing, and the manufacturing guy optimizing their thing.
But true entrepreneurial decision making around the right outcome fast with an idea that if you don't hit your marks on timing, if you don't hit your marks on cost, then there is no tomorrow. Because that's what it feels
like to compete in China today, and that's what those companies are bringing to Europe predominantly, but eventually to the United States.
Speaker 2: How do you make that happen in the sense that when the industry typically talks about the need to cut costs, it's just grind the suppliers even more. You're talking about
organizational structure changes in these companies, how.
Speaker 3: Much more internals what I'm talking about. Yeah, there's a
knock on effect in the supply base of should you vertically integrate like a BYD or do you have good should cost and understanding and partnerships into the supply base.
But it's tertiary compared to the amount of internal change.
Speaker 2: How do you get that to happen? Where you know, design, engineering, manufacturing, purchasing, sales, legal,
the whole thing is working on, as you say, not optimizing their silos, but optimizing it. Let's just take a car.
Optimizing a car from a total system standpoint, it's a lot more.
Speaker 3: Difficult in a traditional company where there is all the trains that have to keep running on time, versus a startup or a newer entrance that has to only focus on a few things, or a Chinese automaker that has a way of working, and it's just basically trying to figure out how to do that now with you know, Polish labor, and that's a big challenge and Mexican labor's a big challenge. Is very different, but it's one dimension
of a challenge versus all but trying to blend this in like a new electrical architecture that's truly architected to be software defined instead of it's you know, a puzzle piece thrown together, is a challenge because the motivation is to okay, how do I I'm not going to take a big break point and change, and I have to have all these pieces together. So it's organizationally very difficult
to do, but it is also it has to be done.
It's an imperative because otherwise you're you know, melting ice cube, boiling frog, whichever you're in a look, but.
Speaker 4: Aren't we seeing a setup for conditions where that isn't going to happen? Because if we're basically going to say, okay,
we're going to do everything here, we're going to.
Speaker 2: Keep the others out.
Speaker 4: So why should someone radically change their business when you know we're doing very well, thank you on those big SUVs and pickup trucks, and you know, we really don't need to worry about that other stuff because you know.
Speaker 3: What, the other stuff's too expensive. Well, two things. One
is it's the second biggest concern. So it is a
concern even with you know, a protectionist world that was expected to be more protectionist. But let's say you have
ten players in a market and it's protected market, but there are lessons to be learned from those competitors that are growing faster and being more innovative and being you know, cheaper, faster, better.
And now, now let's say one of those competitors of the ten takes those lessons and does something with them, then they start to win that market. So it doesn't
have to be a bid coming into the United States.
It can be an automaker taking the lessons of all of the best of the best that are applicable that aren't you know, Okay, we're going to get some benefit from a Chinese provincial government. There's a lot of other
things that are replicable, that are true lessons to be learned, and you don't have to have the Chinese automaker come in and do it. If another automaker does those things
and moves faster.
Speaker 2: Hey, look we're going to have to take a quick commercial break, give a shout out to our good friends at Bridgetone. We'll be back talking about the automotive industry
in just a moment.
Speaker 3: Here making a life full of memories, one road trip at a time.
Speaker 2: That's what really matters, rich Don weather Peak Tires. But
the seventy thousand mile womened warranty, Thank you Bridgeting for that.
So Gary, good time of the show. To get into
the chumps.
Speaker 4: So I was going to ask you who drove the first vehicle on Woodward Avenue on March sixth, eighteen ninety six.
An entrepreneur whose company didn't. But that's not that that's
not gonna be the real question.
Speaker 3: But he's going to answer this anyway.
Speaker 2: At least this is a king. It was king, right,
Charles Kitning. Nice, Yeah, don't ask me what I had
for breakfast, but I can remember that at.
Speaker 5: Least it wasn't one of my fore bears. You know,
there was a Welch Motor company in Pontiac.
Speaker 3: I don't know that they made luxury cars. Inflation adjusted,
their car would cost one hundred and twenty thousand today.
It was bought by Cadillac.
Speaker 5: Cadillac went on a buying spree of luxury brands in the twenties. We'll sell all these other brands, and most
of them actually a salum they may have created, but they bought a bunch of luxury brands and most of them were just sort of subsumed into Cadillac and just went away. But yeah, I've got the logo and everything.
The building. The building's still there. What the plant was, No,
can it's just off of downtown. It's pretty wild.
Speaker 2: That's wild, you.
Speaker 5: No, I've always wanted to like open up a microbrewery and I'd put it in that building if I.
Speaker 3: Could do it.
Speaker 2: Carls King, wasn't it Charles King? So yeah, A lot
of people think that Henry Ford was the first to drive a car on the streets of Detroit, but Charles King beat him by a year or two.
Speaker 4: Things that seems very bizarre to me is why did he do it in March.
Speaker 2: It's cold out there. It's just because he got it
done then. I mean, same with Henry. You know, built
his quadricycle in a shed next to his house, and when he got it done, he realized it wouldn't go out the door. The door was too small, so he
took a sledgehammer and broke the door down and knocked out a bunch of bricks and went out. He was
too excited. He had just gotten the thing done. I'm
sure it was the same with King. He got the
car done, or got the car, and it was like, man, we're going for a ride.
Speaker 3: So okay.
Speaker 4: So here's the real question, since I.
Speaker 3: Obviously blew good trivia question though.
Speaker 4: All right, So this vehicle was introduced on March sixth, nineteen seventy three. Last year it was the tenth best
selling vehicle in the United States. They sold two hundred
and forty two thousand.
Speaker 3: And seventy five. What did they sell last year to
forty two? A sivin infant Bingo.
Speaker 2: Wow, very good, Dave.
Speaker 3: Was it the CVCC back in seventy three?
Speaker 2: It was no, No, the CVCC didn't come out until about nineteen seventy nine. You know, Honda brags all about
that that they were the only car company in the world that was able to have an engine that met EPA standards without a analytic converter. And I remember going
to Bob Stemple at the time, this is how far back that goes, who was then a chief engineer at Chevrolet, and I said to him, why did you guys let to get away with this? Why you can't do this?
And Honda, I mean, they advertised the hell out of it and everybody was like, oh my god, look how good they are at engineering. And Bob told me John,
it's a dead end technology. He said, by nineteen eighty one,
no one will be able to meet those standards without a catalytic converter, and that's where we're putting all our money.
And sure enough, by eighty one the CBCC was gone and Honda had its moment in the sun, and people still remember it fondly, but it was a dead end technology.
Speaker 4: So if we take that for an example, go back to what we're talking about before the break, about people doing things in a competitive way to advance what they're doing.
I mean, so obviously Honda probably spent a ton of dough on that, which perhaps didn't do as much as they'd hoped it would. So isn't there like a basic
reticence in the industry to make the sort of radical change that you're talking about.
Speaker 3: Well, I think Honda's motor technology and motor engineers still serve them well, even in a Yeah, they probably learned a few things from about combustion and so being excellent at something as long as you're not doing like they didn't do what Navistar did of just really betting the farm on I won't need the the SCR. I'm sure
Honda was actually working on catalytic converters at the time and being ready for when they will need it, So you can't just not plan for a head and then balancing of near and far like a lot of these central compute and software defined things. You've seen a lot
of these delays from many many automakers as they get Oh, this is actually more difficult than I thought. But you've
got You've still got to be able to have that in your your pipeline coming down, because if you just said no, that will never happen, you would you could wake up one day very uncompetitive. So balancing the near
and the far is a big challenge because where you put your resources is your strategy in the end of the day. Yeah.
Speaker 5: Look, there's a similar debate today with hybrids e revs, which I hate that there's eufs just be called plug in hybrids. I'm sorry, but he have some electric vehicles
right GM's still heavy on EV saying that they'll do some hybrids if they have to to meet regulations, and they're going to have some coming plug and hybrids, but really their big push is still EV. Pretty Much everybody
else but the Koreans have backed off on evs and they're looking at hybrids, plug and technologies and that sort of thing. That's sort of like do we do something
like a CVCC or do we invest in in catalytics.
That it was probably more clear back then than what you need to do with evs now because no one knows what the demand is. But you know, if you're
running a car company, where do you put your money.
Do you go headlong into EV with a few hybrids, or do you pull way back.
Speaker 3: I think you've seen some strategies that have said we're going to look at a mixed powertrain to be the winning ones. This idea of we're going to just skip
to EV's and we'll be by twenty thirty or twenty thirty five one, it hasn't been the greatest strategy, and to walk back from that. A lot of people walk
back from that, but you're not seeing them say and we'll never do EV right. So you have to have
this portfolio and you have to look through if you believe something short enough term, do I need to do it all myself or if I don't have the scale, how do I partner up for some of these things at A customer at the end of the day isn't going to care about but having the choice of an e REV is going to be more and more important, especially in the near term. You've got you know, the
BEV benefit used to be a three x on a PHV on a cafe. We'll see what happens to cafe,
but you know it was now going to go down to one and a half times of a benefit. So
these big boosts that you were getting from from a BEV from a cafe perspective as already was going to be us and now may even go away in its entirety.
So you kind of need to be able to meet the customers where they are. You need to also optimize
around an engine that can support any REV as a gen set versus as something that's really going to be attraction moder for the vehicle. And so yeah, you'd have
to have your horizons set and figure out where it doesn't make sense to do it alone and partner up on those ones and also really really understand what each customer actually needs.
Speaker 2: Mark, I wasn't aware of that that the advantage you're saying of a pea a rebev is not going to for Rebev is not You're not going to get as much fuel economy or Zebra credits, I should say for that. Boy,
where does that leave a company like Tesla that has made literally billions selling these credits? Now automakers are not
going to need as many credits don't need as many.
Speaker 3: I mean, Tesla's in a spot where they though have a bomb cost advantage to a lot of other ones in the market today, not China side US market. So
to a degree, it's sort of once you're up the ladder, kicking the ladder off from a Tesla perspective, but from other people's perspective, it's okay. BEVs really aren't as important
as compliance vehicles in the current cafe rules, and it may get even for it may go even further.
Speaker 2: Speaking to Tesla, I'm not asking you to comment if you don't want to, but man, it looks like their sales are creating. David, what do you make of this?
Speaker 5: So look for the longest time, I've sort of looked at this, Well, Elon's gone conservative. This is before the
current thing, right, this when you started tweeting conservative things.
It's like a lot of my liberal journalist's friends dream, right, the conservative has turned away the populace. I think it
is real now. One there's research from I forget that
there's a group of people in Washington pushing for evs.
It's basically a bunch of never Trump Republicans who are trying to keep EV credits in that sort of They have research that like eighty percent. I think you get
similar research from you gov and some others, like eighty percent of EV buyers are like center after liberal. So
if they don't like Elon, does everybody care what they're the CEO of their product, what their powet success? Probably
now there are plenty I know some left of center people who bought Teslas recently. But I think it is
having an impact. Some of these sales. Impact that they've seen,
like in Europe and in China is because the Model three redesign and there's production down.
Speaker 3: So it's not all yeah, it's not you know, you.
Speaker 5: See these headlines and you know I don't want to be a media guy complaining about the media, but these stories just don't capturing what is actually happening, which is they've had they've had some serial production downtime.
Speaker 2: Moreover, they always ramp up sales at the very end of each quarter too.
Speaker 5: Yeah, and so there, but but something is going on.
The other thing I think is just like we've seen this for a while now with Tesla. The product's pretty
stale and the Yeah, the cyber truck's new, but it's a niche product that hasn't taken off. And the other
vehicles are basically the same styling that we've had since the Model SU came out in twenty twelve. You know,
that vehicle is literally old enough to shave, and we don't.
Speaker 2: Well, the Y and three, the Wine most notably, has gone through a bit of a styling update.
Speaker 5: Oh bit, but it's it's not a huge styling change.
Speaker 3: You know.
Speaker 5: These are kind of you know, differment design standpoint are They're kind of like four different you know.
Speaker 3: Shapes they do.
Speaker 5: Tesla's a lot of the Tesla redesigner software upgrades, better range and so forth. I mean, the cars are just better,
but there's more competition out there in the market in all of the markets, particularly in China, but GM and Hyundai and Kia have a lot more models on the market in the US now. Europeans are pretty aggressive in
their market, so Tesla's they don't have this this monopoly slash oligopoly so much anymore. The products stale, I think,
and I think you know there there is this political thing going on that you know, this is why other CEOs don't stick their neck out there politically. They don't
want to offend anybody. They'll sell a card, or a
razor or a tub two face to anybody.
Speaker 2: In that area.
Speaker 4: I ask you that if we look at some of the startup EV companies that have been trying to do things differently, it's not working out so well for many of them, and even the ones that seem to be successful.
I mean, we talked last week about Lucid, I mean, you know, getting rid of their CEO, I mean Rivian, the you know, basically life preserver that they got from Volkswagen to you know, do software.
Speaker 2: Although one other thing that broke this week, uh they're head of software came out and said that they're going to be selling their tech to other automakers, not just Volkswagon.
So I don't know what kind of money that could bring into the company, but it could be a lot.
Speaker 5: That was their business plan all along. But yeah, all
the way back, that was Rivian's business plan. That's what
j wanted to do. The CEO was sell basically use
their platform as like this white label ev platform. And
one of the reasons the GM deal fell apart is GM wanted a seven year exclusivity on that and they were going to do it, and then before it got over the line, they said no. Ford offered them a
deal that basically did it on Rivian's terms, but you never saw the Ford Rivian vehicle come to market either.
Speaker 2: So, Mark, what do you think should as you as an OEM, should you buy centralized compute architecture or should you do it in house?
Speaker 3: I think you generally wanted to do it in a way that you have some control over it. There is
debates on the open source versus the internal, but you wouldn't want to do it in a way that is half baked. You'd want a full architecture where you've got
a plan for how it's all going to work, and then you're executing against that plan versus you have a vision and then you're hoping people cooperate as they go.
And the trouble is you've got stories of working not so well in both ways. Of adopting somebody else's architecture,
it has been very difficult. Doing your own also has
been very difficult, and part of that is the people and the development process that you've got. You have to
be able to have your architecture of your electronics set and then have cycles on the software running in a somewhat decoupled way to roll along with that. You can't
just be doing this the old way of a v that has very intrinsically connected software hardware all along. And
you can also then say, okay, well, I'm going to put the software definition of the function in, but I'm not going to be able to corehop when and I now end up adding to that and adding to that, and I don't have enough compute capacity in this thing, or the edge compute of my eight ass stuff now needs to operate on a zonal on a totally different system, because the progress of that doesn't match the progress of the rest of my body controllers. So it's a difficult
thing to say I'm going to use somebody else's electrical architecture if you don't have the full architecture and the full plan laid out and aren't ready to go sort of cold Turkey into that new world.
Speaker 2: It just broke yesterday. In fact, Volkswagen's coming out with
this low cost sub twenty thousand, twenty thousand euro electric car.
Looks like a polo that's going to be electric, sounds like it's going to be using Rivian's central compute system, but it's still several years away. It's amazing to me
how long it takes to integrate this technology.
Speaker 3: It is because these are fundamental things. These are not
you know, just a center stack of the entertainment that can be compartmentalized enough. This really is, you know, not
using a canvas the way it's been used, and using a much higher speed approach to data exchanges within the vehicle instead of trying to piece meal it along that a lot of automakers have done, or have a software team that's basically a converted controls team that's now trying to pretend like they're a software team.
Speaker 4: So we get back to the talent. I mean, does
the auto industry have the sufficient talent to do these things.
Speaker 3: Yeah, I mean that's a big deal, and that's a challenge that the auto industry is struggling with deeply. To
the timescale of how long it takes to put out a vehicle is also a challenge compared to consumer electronics or other things that run at a much lower safety concern and so much faster cycle. The amount of people
you need to do this sort of shift is huge, and getting them to dig in with the electronics engineers, then the hardware engineers, and the program teams and the safety groups, and you know, this is a challenge. Functional
safety isn't really a thing in an iPad. Functional safety
is a real big deal and it's not as fun to deal with if you're a coder to deal with functional safety, or it takes a specific type of coder to be to enjoy the restraints of functional safety through.
Speaker 5: A lot out of work software engineers in China, though, because so many of them graduate and we find a way, even in this current environment to import some of that talent, and.
Speaker 3: The difficulty bringing even people from California to Michigan is one level of difficulty. I think that's another level of
difficulty from China, that it's not as hard to get the validation, verification engineering talent to be done, getting the actual software architects to be done, and then the debugging and the what has to be done to get to a launch is difficult, and it's difficult to have that happen in China.
Speaker 5: So some of the companies, and you know who I'm talking about, they built big offices in California to hire and keep those people. That is that not a big
enough of a war?
Speaker 3: Is it?
Speaker 5: That they just want to be with the high flying tech companies with the it's get paid in high multiple stocks and so forth.
Speaker 3: It's difficult, it is. It's a it's difficult to be
competing because now you've got it's not just the Googles and Amazons, it's the AI startups that are popping up everywhere, throwing stock options that that programmers. And it's still the
you know, the culture of the ten Red Bulls and coding through the night and all. This is a very
different environment than one with functional safety requirement.
Speaker 2: It's not a law.
Speaker 4: So the car companies have spent, as you mentioned before, lots of money on trying to electrify their products. They're
spending or lots of money on eight ass and beyond, and now they're being faced with other challenges financial in terms of the potential tariffs coming on their business. I mean,
what do you think that is going to give? I mean,
you can't do everything. You can't keep spending money endlessly.
You've got to make some hard decisions.
Speaker 3: Yeah, pricing volume brands in some cases, so brands could go away. Yeah, absolutely, the sort of existential decision of
do I try to change from within and change the whole organization, or do I separate things off the But the nice thing is that the balance sheets of the automakers, not the suppliers, are in pretty good shape after the forced to cooperate, cooperate of the pandemic and the supply constraints and the pricing that happened and profitability that happened because of it. But that's a very short term thing
that is going to be very protectively chipped away at.
You have to have you know, another island across the bridge to get to before you say I'm going to spend an awful lot of this. But yeah, there's stranded
costs that now are being adjusted from the ev side.
We've gone through a smaller version of that, and the a V to aid ASS switch, and I think now going through the EV to multipower train switch, at least in North America, and the shift then of the operating model into a more modern one, Chinese looking one is yet another shift that's going to be multiple years, very expensive, but not optional. And the industry has a way of
getting to work on these things when they're not optional, not really bearing the head and sand.
Speaker 2: Earlier you were talking about the need to shorten product development times get to market faster. I don't know what
the engineering burn rate is these days. It used to
be quoted at a couple two hundred million dollars a year.
I'm sure it's much higher than that now. So the
longer you take to do a program, you're just burning engineering money. But there's an argument too that says, why
rush to market if it's not the right product, and so why not take your time, even if it's another year, hit the market with the right product, and then the extra year doesn't matter at all.
Speaker 3: Well, well I build it if it's not the right product.
Speaker 2: Well, this industry's got a history of building the wrong products.
Speaker 3: I mean, yeah, So if you're in China, and you feel that there's two hundred other competitors that are going to launch in between that year that you delay. You
can be right and dead by waiting for fixing something, or you can say we have to do it at this time. We're going to make as best as we
can and time will not be the variable. We can
spend a bit more here or there and try to do these things and we're going to make a shot at it and see what happens because we don't have an option, and that mindset drives a Okay, time isn't the variable. I have to architect upfront, do less, less prototypes,
less of this, do this because I have to fit in and that's not then looking at the current product development process and just by FIAT saying we're just going to chop a bunch, it's okay, I've got twenty two months and I got to have a vehicle. Therefore, what
do I walk back from that to do? And does
that mean less options and less variances? Are forcing that
into I'll do it later and I'll up to you know, I'll bring in half the features after I've launched the vehicle.
Maybe that is the case that is happening in China.
It's like twenty times more OTAs in the first six months of a Chinese ANV company than there is a traditional automaker in China. Twenty times more OTAs. So there's
clearly not fully baked vehicles.
Speaker 2: They've pushed their PD past job one as well.
Speaker 3: You're saying it's continuous and software development, and it's and it's possible to do that as long as you're not totally faking out the customer and and creating a revolt because the dog has to eat the dog food. But
the if they're if you're not ready, someone else is going to be feeding that dog.
Speaker 2: Yeah yeah, no, no, no, no good analogy.
Speaker 4: Okay, So so you're saying that, okay, let's let's let's bring it here. So a car company here decides that
they're going to put out a vehicle before everything is fully tweaked, and that they figure we have OTA capability and we'll we'll address that later. So it's a situation
like the you can't have the radio on and have the windshield wipers working. Don't worry about that, it's a
minor problem. Okay, What is the consequence on the consumer
who spent the money to buy the vehicle, who then has that limitation until the OTA comes. What's the likelihood
of that person buying another one, or that person telling someone else like, this car's crap, don't buy it, and it goes from there.
Speaker 3: So let me flip that on you and say, let's say you've architected it to do ot as very quickly, and you have the access to change stuff, and you're one of the first buyers of the Garymobile. And I
turned the lights on, and now the win show white person won't turn on. I'm pissed, and I have a
button depressed that says, you know, tell me if something's wrong, and you press up on your best thing will work.
And then when you wake up in the next morning, there's a voicemail or a little text saying we fixed it.
Try it now, and it's fixed, and try it now.
Have you turned a negative experience into now Holy crap, that's impressive. I like this stuff.
Speaker 4: Should have worked the first time.
Speaker 3: Oh come on, no, sure, no.
Speaker 2: People like surprises and delights, you know, but it's not a surprise and delight.
Speaker 4: It's not like when when Saturn had the problem, when the cars weren't working. People would take them back here
and then the guy would fix it.
Speaker 5: It's a fix that you don't have to go to the dealer making a play that's four days from now.
You don't have to sit there, you know in there.
Speaker 4: But if the lights and the windshield wipers don't work, those are that extreme example.
Speaker 2: I would all right, radio radio and windshow wipers. That's
a safe No.
Speaker 3: Are there's safety. Of course, there'll be safety things in
the safety requirements here different than than in Chida. So
you've got a whole bunch of challenges on that. You
try to work some things out, but you would have to take more risk, but you'd also have to cut off more. I believe it's the standard, and I'm going
to do it. Because of the specification of the standard,
you'd have to architect up front the capability to do that twenty four hour ota change, have the ability to go into it, to everything to do it, and so it's it's a different vehicle you're doing. And the benefit
of doing it is your your screen is two years pressure, your battery technology is two years pressure. Your speed to
connectivity is that much better. You're app it's that much better,
and they are better when they're on a newer technology and you're not. You don't have a USB you know,
USB C thing, and you know, do I even need this anymore? All of these things are fresher.
Speaker 5: Didn't Tesla have heaters for the rear seats in one of the cars and there was no indication whatsoever that they had them, And then one day customers came in in the morning, they turned the car on and there was a word on the screen saying, you, now, I have heated rear seats. Push this button and check them out.
And they'd go back to like, holy crap, I have heated rear seats now. And it was just a surprise
and delay thing that you have to have the hardware in the seat obviously, but you know, and I'm sure there are other things that you could do that don't require oh.
Speaker 1: Yeah something, you know.
Speaker 2: One of the famous ones was the one of the hurricanes hitting Florida and Tesla said, Okay, we're temporarily unlocking your battery capacity so you get more rank. There's things
like that, and I think most customers love that kind of stuff.
Speaker 3: No, I think that's absolutely true. They do, and it's
but you have to be able to architect it upfront to do that, so things like when I say defining the silicon and defining it and then doing the iterations of software. That silicon has to have extra bandwidth and
it's going to be more expensive. So you've got a
plan for this to be used more and more and more.
I still remember doing a teardown of an early Tesla and seeing the kind of compute power they had behind the center screen, and the traditional automaker going, oh my god, how could I possibly do that? They're not even using
two thirds of that power. Well fast forward four years
and they were using it on that screen and they were able to put more and more in. That's a
very different business model. Then I'm hitting a price point
at launch. It will be this cost, this bomb cost,
and I can't afford to put a thousand bucks more into the car because then it's a thousand bucks more than the Gary Mobile next to it, and it'll die.
It's a very different business model.
Speaker 2: But Ota is what has enabled that.
Speaker 3: Ohta, and not just Ota, but the architectures of no No.
Speaker 2: I understand that you have to have the architecture, but you have to have the ability to remotely say okay, we've got our engineering done on this. Yes, we put
in the hardware and the software, but now we've got the engineering done.
Speaker 3: Boom.
Speaker 2: Now you've got this to your customer.
Speaker 4: So that Gary Mobile works perfectly at start and just gets better with time.
Speaker 3: But then Garymobile takes two years to do it and then feel old the day it's launched, versus the one that's that's you know, the John Mobile that's now in the second generation two years later, and it's it's a better vehicle. Yeah, it might have some issues, but the
people are confident that when they hear their neighbor, you know, I'm saying, oh, yeah, they had that issue, but then it got fixed right away. I'm like, yeah, that's better.
And it's got longer going.
Speaker 4: To Costco and seeing a larger large screen TV than the one you just bought. Yeah, so, what what amount
of angst does one have, going, holy shit, I should have waited. I got a seventy eight inch and now
it's eighty.
Speaker 3: It's not that it's that you're saying because you don't wait.
You know, no one's gonna wait for the Gary Mobile.
They're gonna they're gonna buy the fact they John or David mobile.
Speaker 2: And you minal work, you will be in the side of the road.
Speaker 3: But that is a bit of the true dealership. Yet
it's all right when it's there, And that was a bit of the frustration of traditional automakers looking at Tesla before going God, they're taking a lot of risk we could never get away with that would be hauled in front of Congress and this isn't fair. But it doesn't
matter at the end of the day that you have those concerns and those risks, you have to find a way through it.
Speaker 2: Well, Look, Tesla has affected the industry. We're starting to
see automakers think more like that, we're going to put the hardware in now, even if we can't not unlock it for another year or two.
Speaker 3: Yeah, architecting it more and it's more than just an O TA because OTA just really means you can access in and update a few things. It's not being doing
an in sequence being able to core, hoop and move things around within the vehicle and being able to actually control you know, everything that needs to be controlled without having locked systems. That's that takes upfront design and architecting.
Speaker 5: Is that's what Apple's trying to do with like the car Play two point zero and the versions beyond that, right, like car Play two point zero, and it's still pretty early in the game for what they're doing, but it's starting to dig into the vehicle itself, which is why why Riving and Tessa, General Motors and Mercedes don't want it in their cars. Okay, with car Play one point
zero for now, I mean GM's gettingway from pretty quickly, and so is Mercedes. But two point zero starts to
control all the mirrors, it starts to control actual aspects of the mechanical aspects of the vehicles. It's starting to
dig in. It's not just a projection system for entertainment.
So you have to assume, like car Play three four, five point zero is going to control a lot more of the vehicle. But I think they're trying to do
what you're saying, which is have this like sort of use this and on a computer system to be able to as really a cannabis where they'll be adding more features as the.
Speaker 3: Battle is going on in entertainment in that space and expanding, but also an ad asas and in who has the data freight aas who has the data of the sensors coming in and what do I use that training sets for?
It's just being great at AI, isn't that useful? The
value is really seems dependent on who has actually the data to then do the AI on. And so having
the infotainment control or having the ads and sensor control, eventually having the battery algorithms and conditioning algorithms and vehicle controls will rely on who has control of those data pieces.
Speaker 4: So John's going to end the show, but before he does, I want to ask you if we bring you back one year from now and we ask you about the twenty twenty six alex Partner's Disruption survey.
Speaker 1: Where will AUTO be then.
Speaker 3: If we did you know now, if we did it right now, it'd be even higher. But it was high
coming into this and it looks like it's going to be even more.
Speaker 2: So you've got this report on your website or something.
If people are interested, how do they get it? Yes,
on our website there's Alexpartners dot Alix, Alix Partners Partners dot com.
Speaker 3: Okay, and yeah, we've been It's really across a number of industries to show what's what's there, and it also shows how we're helping clients address it. By getting ahead
and being able to pivot, being able to move forward even in the face of the destruction.
Speaker 2: Mark Wakefield, thanks so much for coming back on. We'll
have you back on again because I always learn things when you're here, so thanks, that's my pleasure.
Speaker 3: Thank you very much.
Speaker 2: David Welch, great having you here. John and Garry. You'll
be gone next week, but I'll be in this chair and we'll have another show and then you'll take over when I go on vitation, so really good. Thanks everybody
for having tuned in, and if you haven't done so already, please subscribe to the YouTube channel for Outline Network.
Speaker 1: Out Online After Hours is brought to you by Bridge Stone Tires Solutions for your journey
About this episode
Navigating the complexities of the automotive industry amidst the Trump tariffs is a hot topic in this episode. Mark Wakefield from Alex Partners and David Welch from Bloomberg share insights from the Alex Partners Disruption Index, highlighting that automotive is the most disrupted industry, driven by opportunities in AI and material science. The discussion delves into the challenges of supply chain management, the impact of tariffs on production costs, and the industry's struggle to attract talent. The episode also addresses the need for significant changes in business models to remain competitive in a rapidly evolving market.
Original notes
TOPIC: Tariff Impact PANEL: Mark Wakefield, AlixPartners; David Welch, Bloomberg; Gary Vasilash, shinymetalboxes.net; John McElroy, Autoline.tv
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