China is under pressure from... well, the entire world. While Chinese vehicles are a hit in their domestic market thanks to low prices and lots of included tech, other governments fear that China's "unfair subsidization" of its automakers will cause too much stress on the global auto industry. Now all of that, plus intense competition for buyers within the country, is sorting out the winners and losers.
Welcome back to Critical Materials, your daily roundup for all things EV and automotive tech. Today, we're chatting about China's EV makers feeling the squeeze, a proposed ranking of "levels" for software-defined vehicles, and Tesla asking Canada to cut it a break on tariffs. Let's jump in.
30%: China's Electric Car Companies Are Still Not Invincible
We've said it before, and we'll say it again: China's electric car companies are not invincible.
These EV makers might be heavily subsidized—which is one of the reasons that the rest of the world is putting the squeeze on them in the form of tariffs—but they eventually need to rest on their own laurels to succeed. It seems that's a bit of an issue right now, though, as nearly all electric automakers in China other than BYD are posting some rather disappointing earnings.
On Wednesday, the brand announced that it had a 33% jump in its second-quarter profit, signaling that the automaker is growing at a rather unprecedented rate. In fact, it's growing so quickly that other automakers in the Chinese market are feeling the pressure with sales slipping across the board. Whether that's a brand problem or a market problem is still to be seen.
BYD isn't taking any chances, though. Despite heavy import tariffs in Europe and North America, the brand is planning for nearly 50% of its sales to be overseas to minimize the chance of the domestic EV market being oversaturated with a large number of newer brands hitting the market. And that's exactly the fear that many global governments have which prompted the tariffs in the first place.
Prior to tariffs being enacted in the U.S. and Europe, China's EV makers were accused of producing vehicles over a capacity that would support its market. Parker Shi, who leads international operations for China's Great Wall Motors, said that overcapacity was a "fake concept".
"I don’t like that kind of judgment from the third party—they don’t know what is happening in my house," Shi said.
Meanwhile, other automakers in China now need to work out their own problems. Aside from BYD, the only other profitable EV maker in mainland China is Li Auto. Unfortunately, Li Auto also reported a 52% drop in earnings for Q2 which sent its stock prices tumbling, as did the shares of competitors XPeng and Nio.
Surprisingly, BYD's stock also fell. As it turns out, the almost industry-wide fall in earnings sent investors into a sell-off spree in fear that the next two quarters, including the historically great fourth quarter, could disappoint investors.
The Wall Street Journal explains:
Some investors likely sold the sector because of uncertainty amid ructions in the industry this year. The first quarter saw aggressive price cuts as automakers tried to win market share; the second quarter saw sales recovery thanks to government’s trade-in subsidies and the Beijing Auto Show. That said, weak overall consumption has weighed on car demand in the country. Retail car sales in July fell 2.8% compared with the same period a year earlier to 1.72 million units, according to the China Passenger Car Association.
China’s fourth-quarter EV sales could also disappoint the market given the high base of comparison, analysts say. Retail cars sales in the last quarter of 2023 was 6.46 million units, according to CPCA data, and analysts say that is a strong number for automakers to match this year.
China has moved very quickly as the auto industry began pivoting towards electrification. Many automakers and investors began chasing Tesla money, throwing dollars at the possibility that their investment in the industry could—metaphorically, of course—strike oil. It actually may have caused over-saturation instead.
Now, with global powers pushing back against China's automakers exporting vehicles to other countries, China has to find a way to continue to earn. Whether the solution is penetrating other markets or expanding the reach in its domestic market is still to be seen, but one thing is certain: it's going to be a bloodbath for the brands that can't keep up.
60%: Expert Calls for "Levels" Of Software-Defined Vehicles
If you haven't been living under a rock, you've probably heard the term "Software Defined Vehicle" lately. It's the auto industry's latest buzzword, and the Average Joe doesn't really know what an SDV is. Hell, the industry really doesn't know what an SDV is—and that's because there's no industry standard on what it currently means.
That's where Dr. Moritz Neukirchner steps in. Neukirchner is the Senior Strategic Director of Software-Defined Vehicle Project Management at Elektrobit, an automotive software development company in Germany. Neukirchner is pretty passionate about SDVs, and in a new LinkedIn post by the good doctor, Neukirchner calls for the industry to standardize on what they actually mean when referencing a software-defined vehicle.
So what exactly is a SDV, then? Well, as Neukirchner likes to say: "it depends."
In the post, Neukirchner calls for the industry to develop a standard similar to SAE International's J3016 standard, which formalized the industry-accepted taxonomy and definitions for automated driving system levels.
Here is a brief run-down of the proposed "Moritz' SDV levels":
- Level 0: Software Enabled - Not "Software-Defined," an OEM purchases a static piece of whitebox hardware from an automotive supplier to run adaptive cruise control or parking distance control. Functions are run through individual micro-controllers or through the car's Controller Area Network (CAN) Bus.
- Level 1: Connected Vehicle - The vehicle uses whitebox hardware from an automotive supplier but can be networked through dynamic infrastructure. Example: a car that is connected to the internet to receive traffic updates or that allows you to tether your phone via screen mirroring.
- Level 2: Updateable Vehicle - The vehicle can be updated over the air thanks to dynamic operating systems and programmable ECUs, but its overall functionality remains static. This is for vehicles that can address recalls or bug fixes with an OTA update, but do not receive functionality upgrades.
- Level 3: Upgradeable Vehicle - A true SDV, vehicle functionality can be upgraded OTA after a vehicle has been sold. Example: Tesla added its boombox function to its infotainment system. The vehicle may support a zonal architecture to allow for individual controllers and ECUs to be updated within a specific hardware generation.
- Level 4: Software Platform - The vehicle's software and hardware can undergo separate lifecycles but still retain upgradable functionality. For example: Tesla shifted from HW3 to HW4 while keeping its FSD software running on both hardware stacks.
- Level 5: Innovation Platform - The OEM opens the vehicle platform up to third-party developers to build on top of the in-car platform, similar to a smartphone. ECUs must be hardened with strong isolation technologies to prevent unwanted intrusion and data access. Automotive security is a must for Level 5.
Now, it's important to note that this is just one industry expert's call for this type of standardization to be brought into the industry. But to Neukirchner's point—with the industry rapidly developing SDVs, a standard will be needed sooner rather than later.
Automotive News calls out just how fractured the industry is on SDVs:
The global consulting firm SBD Automotive has been refining its software-defined vehicle levels since 2021, describing them partly in terms of their architecture evolutions. As they advance, vehicles can increasingly shift computing workloads between onboard hardware and offboard infrastructure such as the cloud.
Boston Consulting Group, as part of an initiative with the World Economic Forum, describes four stages for the software-defined vehicle, from "connected" vehicles, which have low-bandwidth services and isolated software features, to "immersive" vehicles, which rely on an ecosystem of companies that enable scaled software updates and a most custom experience.
The European Commission, enabled by the European Chips Act, is working off a schema from the consulting firm McKinsey & Co. that outlines five stages in the centralizing of vehicle architecture.
As with the automated driving levels, there will still be gray areas and confusion. That is the nature of these advanced vehicle technologies.
By proposing a standard, it's the hope of Neukirchner (and likely many others in the industry) that this type of confusion can be cleared up once and for all. A formal standard is likely far out, but this is at least a step in the right direction.
90%: Tesla Asks Canada For Lower Tariffs On Its Chinese-Built Cars
Earlier this week, Canada announced that it would follow in the footsteps of the United States and impose a 100% tariff on Chinese-built EVs imported into the country on top of its existing 6.1% fees. That's not great news for Tesla.
As it turns out Tesla already imports some made-in-China models to The Great White North. This would mean that it too would be required to pay 106.1% in duty fees on any qualifying vehicles—and it doesn't want that. According to a source who spoke with Reuters, Tesla has reportedly done something it's become quite familiar with lately and approached the Canadian government about getting a break from these new tariffs.
Here's what went down according to Reuters:
The source, who requested anonymity given the sensitivity of the situation, said Tesla approached Canada before the official announcement. The automaker asked for a rate similar to what it received in the European Union, the source said.
Tesla does not disclose its Chinese exports to Canada. However, vehicle-identification codes showed that the Model 3 compact sedan and Model Y crossover models were being exported from Shanghai to Canada.
[...]
While the EU only considered direct subsidy costs when calculating its tariff for Tesla, the United States and Canada looked at subsidies, industrial over-capacity, non-market policies as well as environmental and labor standards, the source said.
Earlier this month, the European Union recalculated Tesla's duty fees for its made-in-China imports. The automaker was originally slapped with a 20.8% tariff, however, after Tesla approached the EU, the tax was subsequently reduced to just 9% after the recalculation. Other automakers importing Chinese-built EVs will pay as high as 36.3% in import duty fees.
Reuters' source says that Tesla has not attempted to contact the Canadian government again since the announcement of the 100% tariff introduction on Monday. Canada's Finance Minister declined to address the talks with Tesla with Reuters.
Canada's efforts to reduce the number of inexpensive made-in-China EVs aren't without merit. Imports of Chinese EVs have reportedly skyrocketed in the past year to 44,356 in 2023—that's up 460% year-over-year—and is largely credited to Tesla importing Shanghai-built cars into the country. Similarly, Chinese automaker BYD is also reportedly preparing to enter the Canadian market.
It's not clear if Canada is willing to work with some automakers on reduced tariffs, or if the duty fees will be strongarmed into existence as a means to protect one of the country's largest manufacturing sectors.
100%: How Much Software Is Too Much?
Being a car enthusiast, I still like my share of analog in a car. I daily drive a Tesla Model 3, but there's still something exciting to me about getting behind the wheel of a BMW without iDrive and a row-your-own gearbox. It's like disconnecting.
Being on an EV site, I'm pretty sure we all know that analog is a thing of the past when it comes to cars. But now there are mounting micro-transactions, in-car software upgrades that can be purchased from an app, and problems become difficult to diagnose without special tools...eventually there's a limit for everyone.
So, what's your limit? Where does the fun stop and the nuisances begin? Let me know in the comments.
