Star Magnolia Capital
Monthly Global Views - Tesla: China’s Next Catfish (November 2020)
Updated: Nov 9, 2020
By Star Magnolia's Analyst (Jiawei He)
It is said that long ago, sailors carried sardines in a water tank to the port of Norway. Some of these fish would die in the tank before reaching the shore. One sailor devised a unique strategy— he kept a catfish in the same tank. The sardines stayed active during the entire journey for fear of being eaten by the catfish. Their constant activity kept them alive, till the sailor reached the port. In this case, the sailor got a better price for his catch. Therefore, the catfish effect is referred as the effect that a strong competitor has in causing the weak to be better themselves.
China’s EV industry went through a very interesting month in August, with Li and XPEV’s IPO in US stock market, the heat of EV market was boosted to another height in China. Meanwhile, Evergrande, one of the largest property developers in China, unveiled six different models as it vows to become the world's largest EV producer within five years. The company ventured into the EV business two years ago and has spent tens of billions of dollars on acquisitions, research and building factories, as well as a series of investments in battery maker, motor maker and auto sales network.
As a result of Tesla’s stock rally this year, excited investors turned their attention to the newly-listed Chinese manufacturers and tried to find the next industry star, but unfortunately many EVs have ran out of their juice in August.
There is no doubt that Tesla is the “King” in the EV market currently. Tesla’s design, technology, features, and reliability all represent the highest standards in the EV industry. There has also been a lot of debate on EV, mainly between the combustion engine lovers and new-energy supporters. As much as I love a V8 engine, EV is an inevitable trend in the future, given its simplicity, stability and sustainability.
The situation of China’s EV market somehow reminds me of the mobile phone market in China 10 years ago. Before 2010, there was no Chinese mobile phone brand existed, except for the cheap ones with ugly design that people used to call Shan Zhai Ji (山寨机). Walking into the smart phone era, the rise of Xiaomi started the wildfire in China’s mobile phone market. It was clearly a replication of Apple’s model, just with different concepts and a different target group. Many new brands came out and tried to get a bite from the big pie. Chinese consumers still preferred Apple, Sumsung or HTC in the very beginning, primarily because of the lower quality of the domestic products’ craft and design as well as the terrible user experience on operating system.
The mobile phone industry has continued to evolve, however, Apple also helped Chinese suppliers raise the quality of their products. As a result, many domestic brands actually benefitted from Apple because they either did not have the power or knowledge to improve the hardware on their own. With the standards improving, we are seeing more progress in China’s domestic mobile phone products. They eventually realized that they can actually compete with Apple and sell their products in oversea markets, which is why we see a huge change on China’s mobile phone market on below chart. Almost all 2010 brands are replaced by new players in 2019, except for Apple and Samsung.
So, I think the history might repeat itself in the EV industry. Personally, I don’t think people or investors should see EV as a different business compared with traditional mobile manufacturers. The largest differences are the power source and engineering on electric motors and combustion engines, while traditional mobile manufacturers actually have more advantages on the manufacturing of car parts because of the accumulation of technology, such as components like chassis and transmission gear, which is why we still see many consumers going for the EV or hybrid EV from traditional car manufacturers like BMW, Toyota and BYD.
Traditionally, Chinese people crave for foreign brands. A lot of us believe that whatever comes from Europe, US or Japan is the best, or at least better than “made in China.” The long queue in front of those designer brands is a perfect evidence for this. Yet, the innovation in China’s consumer space led by internet companies has begun to reshape people’s view of Chinese brands. Chinese companies have also begun to realize that the quality of their products is not necessarily lower compared with foreign brands and they instead need to simply focus more on marketing and consumers’ behaviour and psychology. For example, Many Japanese companies do a great job on marketing. The food in restaurant is well-presented, and the snacks are well packaged. Those small things make you feel like there is a difference and become the key to winning consumers’ heart. In China today, Huawei’s done that, Bytedance’s done that, as well as DJI and Hikvision, etc.
Tesla delivered 11,811 China-manufactured Model 3 to Chinese consumers in August, which puts the company in the first place in China’s new-energy vehicle market. Since the beginning of 2020, Tesla has sold 68,579 Model 3 vehicles to Chinese consumers, while the second-place player, BYD’s Qin, has only managed to sell 26,425 vehicles. In September, a dark horse called Wuling Mini dragged Tesla down from the first place of sales ranking. This actually tells us, you can still “beat” Tesla when you have a good product and proper marketing.
Returning to our argument on China’s mobile phone again, I think Tesla is a brilliant company. It is similar to Apple in the old days to some degree. Having Tesla building a factory in China will help Chinese EV manufacturers better understand how they should improve their competency. Therefore, the reason behind all the favourable policies is that Chinese government wants Tesla to play the “Catfish” role like Apple did for the mobile phone industry so that the innovative company can shake down the posers in the industry and leave out the true winners in the market.
China’s automobile industry, including EV, is still not competitive compared with foreign brands from Europe, US or Japan. Yet, we have seen huge improvements over the last few years in the design and interior. That said, as we know, the true core parts of a traditional vehicle are engine, gearbox and chassis. And the same logic also applies to EV, besides the hardware, they also need high-performance batteries, a smarter system and more efficient autonomous driving technology. And those features require a large amount of capital and time devoted on R&D, so there is a long way ahead of China’s automobile industry. A bold guess: I think Evergrande might stand a chance to become Tesla’s powerful rival in China, judging from their actions on building factories and buying battery makers, etc. These initiatives showed us the determination of the property developer, while other EV makers are still using the OEM model. They basically do not have their own innovation except for design, because their job is to put all components from different suppliers together and try to make them work better, which is like Xiaomi or Vivo’s role in mobile phone industry. In order to be the top player, I believe the EV makers need to have their own innovations and features, just like Huawei is designing their own chips and building up their own ecosystem. I hope that is what Evergrande is trying to do. Let’s wait and see.