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Some car companies will disappear

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New brands like Tesla, Nio, Li Auto and Xpeng threaten legacy auto

On March 15th, Bloomberg uploaded a video discussing how the shift from ICE to EV might be a bridge too far for some of the current car companies. Of course we all remember the Nokia’s and the Blackberry’s from this world after they didn’t adapt quick enough to meet the shifting demand from the market. Either because they did not see it, of because they were just too stubborn to pivot their business.

For some people this must be hard to believe, but I do think this is about to happen again, but now in the market for luxury vehicles. High debt, low margins, inefficient production, outdated technology and just not able to pivot quickly enough to fulfil the changing demand from the market.

Let’s have a listen to what former Aston Martin CEO Andy Palmer says about the possibility of this  happening in the future.

Software and autonomous driving

Often EV’s are referred to as computers on wheels. And with good reason. Eventually, all manufacturers will have cars that accelerate quickly and offer a long range, so I think software will be one of the biggest aspects of choosing a car. Part of this of course is autonomous driving. The first company to get this right will be the absolute winner for a very long time.

However, for legacy car manufacturers to transform into a software company is extremely hard. They have lots of knowledge and experience about mechanical engineering and the actual production of a car. And until now, software only was a tiny part of their business.

This means they need to invest heavily in building an advanced software department to compete with Tesla’s full autonomy, that’s expected to reach level 5 later this year. Level 5 autonomy stands for zero driver intervention after providing the car with a destination.

Car manufactures need to change their business from something with a strong focus on mechanics, to more of a tech company that’s focused on software and AI. Future cars will also be made in a much more automated way, and consisting of far less parts than we are seeing today, meaning they are in need of people with a different skillset.

The best legacy car manufacturers can do, is work together with tech companies like Google, Amazon or Microsoft, but of course this isn’t optimal, as ideally you want everything to be done in house.

For the last 10 years Tesla has been quietly working on vertically integrating all aspects of their business, while competition was clearly asleep. They now seem to have to pay the price for their negligence, as for a legacy car manufacturers, it’s almost impossible to compete against a software and AI driven company like Tesla.

But they’ll have no choice, and like Andy Palmer says, they gonna have to make a decision of life and death. Emission standards in 2025 will be so strict that production of combustion engines is no longer economically viable. Next to that, why would one invest in technology that’s soon becoming irrelevant anyway?

Production of batteries

Still today many OEM’s still don’t see that they’re slowly becoming obsolete. The biggest challenge, as Tesla shows, is producing enough batteries to meet demand for their cars. If Tesla faces these problems, how on earth are companies not even looking into the problem going to solve this when they actually need to?! Yet still BMW says they don’t need their own battery plant, as they will just keep buying their batteries from suppliers.

Two things here:
First: there is an additional man in the middle who needs to make money on the sale batteries.

And second, this puts the production of batteries quite far from the place, of where they integrated in the vehicle which could lead to problems over time, as batteries are becoming more and more integrated in the vehicle.

It’s of vital importance to have the battery production facility as close as possible to the vehicle assembly lines. In the early days Tesla offered Panasonic to produce their batteries inside the Tesla factory in Fremont, all in an effort of having them as close as possible to the assembly line.

Currently Tesla is working on multiple new factories, all with battery production under the same roof, integrating the process in the vehicle assembly line. This effectively eliminates the need for transport of those big bulky batteries across the country.

For any legacy manufacturer to successfully migrate to the production of EV’s, in house battery production is a lifeline. Advantages are numerous. Without a Tesla in this market, they could have gotten away with this. Tesla is truly disrupting the market for luxury vehicles!

To survive in this era of new energy and transportation, vertically integrating as much of the supply chain as possible will be the winning strategy.

Chinese bet on EV’s

Where do the Chinese fit in the spectrum between big OEM’s and Tesla? Somewhere trailing Tesla I think, at considerable distance though. But far from legacy auto because they don’t have to maintain a legacy car fleet and old production lines.

I agree with Andy Palmer here. Based on what we see, or based on the numbers we see, the Chinese are way further than we might think. They have a major advantage, and that is their somewhat monoparty leadership. When they decide something needs to happen, they just make sure it happens.

Contrary to that, here in the West we have many political parties, lots of regulations, and endless processes to worry about, before things actually get going. A good example of this is what we see happening in Germany, where Tesla has publicly stated to be frustrated by the painfully slow process of permits for their new Giga Factory in Berlin. Below quote is from an article at Electrek.co

Tesla has “learned firsthand that obstacles in Germany’s approval processes are slowing down the necessary industrial transformation,” the company said in the letter addressed to a regional court in Berlin. “This discourages necessary investments in clean-energy projects and infrastructure and makes it practically impossible for Germany to achieve its climate goals.”

The automaker reportedly aims to start production in July, but it needs its final approval and Tesla appears to be getting a little nervous about the process.

The Chinese have another major advantage, and that’s the fact that they have all the resources available to be fully self-sufficient. Contrary to that, the European Union now imports most of its lithium from foreign countries, like China, but in regards to raw battery materials wants to be fully self-sufficient by the year 2025.

China is positioned much better to become the world biggest producer of EV’s, giving them a head start as they can scale production much faster. If China’s EV production really gets going, nothing is going to stop them from becoming the World’s biggest EV producer. They will export their cars to the rest of the world, and sell them for a bargain, as they control the whole ecosystem of raw materials to final product.

Conclusion

So to sum this up for you; Just like Andy Palmer says, I also expect some big names in the auto industry to become the next Nokia. And much sooner than many of us had ever anticipated for. The companies vertically integrating their supply chain as much as they can, will be the ones that can produce their cars in the most cost effective and efficient way. Resulting in them being able to reach a far bigger audience with competitive pricing of the final product.

In a time where gaining market share is incredibly important, this absolutely is a key element of the company’s long term success. Compare it to Android and iOS that can be found on nearly every mobile device these days. To take back market share from these two players with a comparable operating system is just not possible. We’ve seen Windows Mobile make some decent efforts though.

The only way to gain market share is with something that has insane advantages (basically what Tesla is doing now). So, gaining market share in the early days of new disruptive technology is of vital importance for the future of the company.

Remember that losing a piece of the pie goes by itself, but regaining a piece of the pie needs twice the effort if not more. Big OEM’s are warned with the rise of Tesla, Li Auto, NIO and Xpeng. Talking about Li Auto, I’ve recently done a video about Li Auto, that makes huge margins on their cars compared to NIO and XPeng.

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