JD Insights: After the launch of Xiaomi’s first EV, where will the automotive industry ecosystem “roll” to?
2024-04-02
Abstract: Solid in technology, products, and customer relationship base, companies in automotive industry chain with matching strategies and capabilities may win in the long term.
As reported by medias, after enduring the complexities of the car manufacturing, including its high investment, long cycles, and intense competition, Xiaomi’s founder Lei Jun finally reached the moment to present his work after over 1,000 days.
On the evening of March 28th, Xiaomi's first EV SU7 was officially launched for sale, with prices ranging from RMB 215,900 to RMB 299,000 for three different configurations.
Lei Jun, who has claimed himself the man unafraid of competition, achieved a remarkable feat of 88,898 pre-orders within 24 hours after the launch of Xiaomi car. At noon on April 1st, the Xiaomi SU7 Founder's Edition went on sale again, and it sold out within 2 minutes.
The catfish effect emerged. On the same day that Xiaomi Auto went on sale, other new energy vehicle companies made a move.
The Huawei Aito’s New M7 Plus five-seat rear-wheel drive version reduced its price by RMB 20,000 to RMB 229,800, and the new M7 Max five-seat rear-wheel drive smart driving version was lowered by RMB 10,000 to RMB 279,800. Zeeker 007 rear-wheel-drive enhanced version was launched with a price of RMB 209,900. Besides, NIO introduced a subsidy plan of up to RMB 1 billion for fuel vehicle replacement.
With competitive pricing, configurations, and subsidies, where will the entire automotive industry ecosystem "roll" to after the launch of Xiaomi's car?
For a long time, the automotive industry chain has been one of the major investment directions for JD Capital. In today’s session, the Managing Director of Advanced Manufacturing Department of JD Capital, Mr. Jianli Li, will share his thoughts and observations on this matter.
Ⅰ. Supply chain and Brand, the core elements of competition in the automotive industry.
Q: With the launch of Xiaomi's car, what kind of impact do you think it will have on the industry?
Mr. Jianli Li: Although it is not a milestone in the automotive industry, it has intensified market heat and competition.
Especially with Xiaomi SU7 priced between RMB 215,900 to RMB 299,000, this falls within the most fiercely competitive price range in the automotive market, competing against traditional fuel brands such as Camry, Passat, Accord, as well as pure electric/hybrid cars like Zeeker 001, Zeeker 007, Aito M7, XPeng P7, and Tesla Model 3.
Q：The all-encompassing ecosystem of “people, cars, and homes” is Xiaomi's strategy. Do you think this ecosystem will be the core element of future competition for automotive companies?
Mr. Jianli Li: It's definitely a bonus point. The "people, cars, and homes" ecosystem is closely related to the brand strength of the Xiaomi. If it's something like what's happening in Huaqiangbei Electronics Market in Shenzhen, then no one would recognize it. Why can Xiaomi build an ecosystem? Why is Huawei also working on underlying system HarmonyOS? It's based on their strong brand power. If a complete set of products is relatively easy to use, it will form an ecosystem. Conversely, if the product is not user-friendly or has obvious shortcomings, it won't form a complete ecosystem.
Q: Lei Jun said, achieving high gross profit in the automotive industry is very difficult. Regarding gross profit in the automotive industry, Li Xiang, Chairman of Li Auto, once stated, "After reaching a revenue scale of tens of billions RMB, a gross profit margin of 15% to 25% is a benchmark requirement for a healthy automotive enterprise." From your understanding, for the new generation of intelligent car companies or those newly entering the market, what gross profit margin is considered healthy for survival?
Mr. Jianli Li: Based on industry experience, a gross profit margin of over 15% is relatively reasonable for new generation intelligent car companies.
Compared to the huge R&D investment in the early stage, the gross profit margin of the first car of an auto company is not important. What's more important is market feedback - whether people recognize it or not. If the first car doesn't tarnish its brand, it's already successful in marketing. And if the overall experience and after-sales service after the product enters the market can also do well, there will be no problem.
Q: How can car companies pursue gross profit margins while also considering the healthy development of the entire industry ecosystem? What suggestions do you have?
Mr. Jianli Li: The gross profit margin of cars is related to factors such as product configuration, after-sales service, and production volume.
Car companies should plan very clearly when they do product positioning at the earliest stage. What kind of product positioning corresponds to what kind of vehicle configuration and after-sales service? When the production volume goes up, are there any suppliers willing to cooperate with you to lower prices to ensure that the gross profit margin of the product is not affected?
Talking about the healthy development of the industry ecosystem is a big project, not just a simple issue of gross profit margin. For newly-entered automotive companies, the most important thing in the early stage is to validate their established goals. For companies like NIO, XPeng and Li Auto, who have been in the automotive industry for many years, they need to consider how to strike a balance.
Q: Li Bin, Chairman of NIO, previously predicted that the automotive industry will enter the final round in 2025. What is your judgment and thinking on the final round of the automotive industry?
Mr. Jianli Li: At the 2023 World New Energy Vehicle Conference, The Automotive Industry Green Low-carbon Development Roadmap Version 1.0, guided by the Ministry of Industry and Information Technology, and jointly researched and compiled by the Chinese Society of Automotive Engineering and the China Automotive Technology and Research Center, made it clear that the new energy vehicle market penetration rate in 2025 would be targeted at 45%.
So, what Li Bin said about the final round makes sense. The growth of the automotive industry is gradually slowing down, the market structure is becoming stable, and leading companies will establish their own capabilities and advantages in brand, sales, after-sales network, and supply chain.
For car companies, if they want to enter the finals round, strong capabilities in supply chain and brand are the core.
Ⅱ. With the slower growth rate and the higher threshold, the automobile industry may be reshuffled.
Q: Lei Jun also mentioned that Apple might be the most suitable company to develop the "people, cars, and homes" ecosystem, but it gave up on making cars. What's your opinion on this?
Mr. Jianli Li: Apple definitely has its unique strategy and thinking, enabling it to become one of the world's highest-valued and high-tech companies.
Regarding making cars, Apple announced the "iOS in the Car" program as early as 2013 and started to enter the automotive field. However, building a car is not easy, and Apple has also realized this.
In 2022, Apple adjusted its target to launch L4 level autonomous driving cars by 2026, and gave up the L5 autonomous driving route. In January 2023, Apple once again adjusted its car-making direction, lowering the vehicle's autonomous driving level from L4 to L2+, and postponed the launch to 2028, two years later.
The plan Apple made seemed fine at the time, but the R&D progress was slow due to various reasons. However, the automotive market is changing too fast. When it really comes to 2028, L2+ level autonomous driving may no longer be competitive in the market. For Apple, it's meaningless if it cannot make something distinctive or even exceeds industry expectations.
Q: With the automotive industry entering the final round in 2025, does it mean that after Xiaomi's car, there won't be any opportunities for new players (OEMs) in the automotive industry?
Mr. Jianli Li: It's hard to say whether there are any opportunities. But what's certain is that fewer and fewer companies are willing to enter the game because the industry threshold will become higher. And with the industry growth rate slowing down, it means there are very few market opportunities. The trend in the development of the automotive industry to the next stage should be increased concentration, rather than more people coming in.
Q: Looking ahead to the next 5 years, what changes do you think will happen in the entire automotive industry, and what trends will emerge?
Mr. Jianli Li: First, the overall growth rate of the entire automotive industry will gradually slow down. Second, the trend of intelligent driving will further strengthen. Third, the automotive industry will undergo a reshuffle. When young people in the future go to buy a car, non-new energy vehicles may no longer be their first choice, even for some automotive brands that have established a century-old brand image. If they cannot meet the new development trend, they may become "miscellaneous brands" in the eyes of young people, or even exit the market.
Q: What opportunities and challenges will the upstream of the automotive industry chain face?
Mr. Jianli Li: For automotive suppliers, they need to closely follow customers that are in line with the development trend of the industry. Resources or support should be tilted towards customers with huge potentials. Then, automotive suppliers' own product and technology must also adapt to the industry's development trends.
Especially during the transformation, some new technologies or components have never been seen before, requiring both OEMs and suppliers to collaborate on R&D and improvement. For example, the technological difficulty of integrated die-casting is extremely high, and the cost is very large. It has to redesign multiple independent parts that need to be assembled in the original design and uses large-scale die-casting machines to mold them at once, which can reduce the weight of the car body and also reduce the cost of the automotive R&D.
Q: Given that automotive companies are currently in a crucial development period, what advice would you offer to both OEMs and supplier companies?
Mr. Jianli Li: There's not much advice for OEMs. But for suppliers, competition still depends on technology and cost, which come from a company's R&D and management. The market changes quickly, but what remains unchanged is improving one's internal capabilities. The window of opportunity is only about 2-3 years left, so it’s important to seize the opportunity to become the core supplier of mainstream OEMs.
Ⅲ. If there is unlikely to be a "Foxconn" in the automotive industry, what traits can supply chain companies possess to win in the long term?
Q: The smart phone industry has given birth to contract manufacturing giants like Foxconn. However, in the automotive industry, many production lines are operated by the car companies themselves rather than outsourced to contract manufacturers. Furthermore, although the automotive industry chain also includes large auto parts suppliers such as Magna, their scale and industry position are not at the same level as Foxconn. Can the automotive industry still give birth to its own "Foxconn"?
Mr. Jianli Li: In terms of production lines, automobiles and smartphones are quite different. The investment required for automotive production lines is enormous, far exceeding that of smartphone production lines in terms of initial capital outlay, and the production cycle is also much longer.
Additionally, the automotive landscape has been constantly evolving. Initially, the contract manufacturing model was almost non-existent during the traditional era of combustion engines. However, as we enter the era of electric vehicles, manufacturers need to possess qualifications for producing electric vehicles. If there is no qualification, you can only find a contract manufacturer. Just like NIO, after nine years of car manufacturing, it finally obtained the qualifications for electric vehicle production at the end of 2023. Previously, NIO could only collaborate with its contract manufacturers (such as Jianghuai Automobile) to produce certain models. Now, there are signs of separation between car companies and contract manufacturers, but whether this will become a major trend is difficult to determine. However, creating a " Foxconn" equivalent in the automotive industry is not easy.
Q: Based on the evolution of the current market landscape, what are your priorities for investing in the automotive industry this year?
Mr. Jianli Li: We primarily focus on the upstream supply chain of new energy vehicles, especially within the supporting systems of mainstream automotive manufacturers. Because there is still room for improvement in the penetration rate of new energy vehicles, the industry still has a high-growth period of 2-3 years. Automotive electronics is very hot, but competition in both the industry and capital markets is intense. The rise of domestic brand vehicles will also reshape the industry chain and bring corresponding investment opportunities.
Q: What kind of characteristics of the automotive industry chain enterprises will attract you more to make investment decisions?
Mr. Jianli Li: Companies that have a solid foundation in technology, products and customer relationships, and have their own strategic planning and capabilities matching these aspects, are the ones that can win in the long-term competition. The company will be difficult in the future if it only participates in the hot track without core competencies.
When it comes to actual investment decisions, we prefer two types of companies: either those that are technology leaders, or those that are mature enterprises with a certain scale.