The Scapegoat
(Writing this post was a strangely pleasurable experience — a way to momentarily step away from the current economic climate and the broader transformation of the economic fabric as we know it, and instead focus on longer-term business fundamentals and learnings. I hope reading it offers a similar kind of escape.)
At Rumo, we have a clear focus on mobility and energy transition. But like anyone deeply focused on a sector, we often need to resist getting carried away by purely an idea’s value and potential. Time and again, life shows us that execution can become more crucial than the idea itself. Whether success is due to the right people, enough time, a solid business model, right market timing, or just pure luck, we must carefully consider all aspects of execution and make a business thrive. At the limit, if luck is what is needed, then we should plan execution with that in mind (it might require additional capital, it might require cost cutting, it might require making an expensive hiring decision, or pure & simple creativity…).
Recently, while studying the performance of large automotive companies and the impact of recently announced US tariffs and other more fundamental offer/demand dynamics, we’ve realized that beyond the noise of the press and carefully crafted investor relations, there’s more to the story than what's being discussed.
We’ll spare you the financial details of the latest financial reports from automakers – sales fluctuations, margins, new hires, layoffs, cost-cutting, factory closures, profit guidance, and so on. Instead, we want to focus on the one word that dominates the narrative: China.
China has become the scapegoat for the woes of major automakers. Whether it’s the supposedly deteriorating market conditions (despite China’s automotive market still growing, it just so happened that German automakers' share has dropped from c.25% to c.15% over the last 4 years, a loss of over 300,000 cars annually), supply chain disruptions, new players in the market, changing consumer behaviour, a row of poorly developed products… somehow it is all due to China.
But we don’t see China as the disease that legacy automakers claim it to be. Rather, it’s a symptom of a broader problem. This isn’t about the ICE vs. EV debate – though Chinese manufacturers do offer superior product at lower prices. The real issue seems to be the high rate of progress and innovation that legacy automakers were unprepared for and the relentless execution. Raising the question: could the disease be the resistance to change and poor execution (some might call it focus on short term gains)?
4-5 years ago, the situation might had not been clear. But now, after foreign automakers’ unprecedented market share losses in China and the looming fear of a similar fate in their home markets, the picture is much clearer. We would go as far as saying that there are clear lessons about management, strategy and governance (i.e. execution) that can already be formulated from the past decade. Here’s a light selection of elements that point to the existence of early signs that should had pre-empted some contingency plans for legacy automakers:
Brand & Image: How many older legacy brands have been acquired by Chinese companies? Volvo, Lotus, MG, Pininfarina, Polestar, Saab, to name a few. Some acquisitions were made to overcome a lack of trust in Chinese brands, others to gain market knowledge, distribution networks, and talent.
Product Development: New automotive players (notably the Chinese companies) now take just 2-3 years from sketch to customer delivery – a timeline unheard of for legacy automakers, who take twice as long, if not more. This difference isn’t just in processes but in decision-making. Surely different processes allow a new product to be ready quicker and with the same level of quality, but surely more decision-making power at the different corporate levels has a material if not larger impact.
Supply Chain (of goods and ideas/IP): China has commoditized and vertically integrated the production of many elements, including engineering their own batteries and engines. All while working with the government to create favourable conditions to foster this new mobility era. The battery industry is a national priority (becoming both the major world manufacturer & the main innovator) and EV infrastructure is part of the Chinese national framework of infrastructure priorities (not a simple innovation project). Consumer support is another key pilar of China’s EV mobility strategy, with the government subsidizing consumers through different EV adoption schemes and positively discriminating users with EVs by supplying them with a green license plate and lower taxes.
(Automotive supply deserves a post all on its own, much to be said about it)
Industry Transformation: over a 100 years ago the switch from horse carriages to mechanical cars was a monumental shift. Many carriage builders who resisted change disappeared, while a few, like Peugeot, Mercedes-Benz, Skoda, adapted their carriage building or bicycle building know-how into the new product. History is repeating itself as EVs disrupt the auto industry, and those who resist, or fail to understand the new execution requirements, will likely face the same fate of all the failing horse carriages builders. How much effort was even put by legacy automakers to potentially lead the effort?
This shift is not just about a new product – it’s a fundamental change in market dynamics. Chinese companies and thir Government are not only “all-in” but are also evolving what it means to build a car. Jeremy Clarkson did an emotional goodbye of the show Grand Tourer and his professional life with James May and Richard Hammond, where he stated: “EVs are just white goods, washing machines, microwave ovens. You can’t review those, you can’t enjoy them, they are just s***t”. Let’s try to go beyond the emotional side of his reasoning and focus on the fact raised – EVs are indeed consumer electronics, the technology behind them is closer to an iPhone than to an ICE, and the emotional connection to cars as a product will for sure change/evolve. This shift requires a completely new approach to product development, supply chain management, brand management and a coordinated effort with public authorities. The question is: are legacy auto manufacturers (including the new non-Chinese EV automakers), other auto industry stakeholders and public agents ready to evolve?
The real disease doesn’t seem to be about building EVs instead of ICE cars. After all, China is still producing PHEV and ICE, and they too are significantly cheaper than their legacy counterparts’ products and with similar quality (if not better I have to say). The real disease seems to be the resistance to change (or focus on short term gains). An inability to recognize that they’re not just no longer building “carriages” and need to justify past “carriages”/ICE investments… the whole business model needs to change and evolve! The combination of electric engines, battery technology, climate challenges, and evolving consumer behaviour has created demand for a new product, and legacy automakers may not be meeting that demand.
A recent UK survey by Fully Charged Show revealed telling statistics from EV owners (original publication here):
99% would recommend a BEV.
93% wouldn’t switch back to ICE.
95% believe mainstream media doesn’t fairly portray their experience.
92% think the government isn’t doing enough to accelerate the switch.
80% wouldn’t mind buying a car made in China.
These numbers reflect the disconnect between legacy automakers, governments, and consumers. Who would’ve thought that 80% of BEV owners wouldn’t mind owning a Chinese-made car? Ten years ago, that number was likely close to zero (if someone has stats on a similar question from ten years ago, please send it our way, we would love to post about it).
As we focus on growth in western markets, numerous opportunities arise. The industry is changing, with new products and services emerging. Investors, governments, and entrepreneurs should position themselves for these trends. However, we may witness the demise of some century-old employers in the auto industry. But if we replace these losses with even bigger wins, we’ll be better off in the end and setting more solid long-term economic foundations.
Likely, many of these opportunities/new companies/restructured companies, will not be financeable by venture capital or the traditional capital means we have seen fuelling the growth engines of the past 20+ years (in domains like the internet, social media, software, AI etc). Instead, we will be looking at SMEs, that venture capitalists may call “lifestyle” businesses or capital markets and traditional private equity call “too small”. Smaller single product/service companies, profitable very early on, which eventually play a consolidation game down the road (forming new conglomerates or being acquired by existing/legacy conglomerates), which will present a very attractive risk-profile when there is a good match between the right pool of capital and businesses that have a clear understanding of the potential & limitations in these new markets. Just a few days ago we saw a good example of this reality: CYVN Holdings consolidation of McLaren Automotive, Foreseven, McLaren Licensing alongside a minority position in McLaren Racing. The new entity will be led by Foreseven’s CEO – Nick Collins – and will benefit from CYVN Holdings’ know how and other investments in the automotive space such as NIO and Gordon Murray Technologies (original announcement here).
Finally, here’s a light-hearted note to end on: We took some time to investigate how carriage builders and animal breeders lobbied against mechanical cars in the early days. Two efforts stand out – one obvious and one amusing:
They lobbied against spending public resources on roads for cars (obvious, easy gain, and remarkable parallel with the current lack of EV charging infrastructure in some countries);
They pushed for regulations requiring cars in cities (such as London and New York) to have a person walk in front of the car waving a red flag for safety. Can you even picture this amusing reality? Like if horse-drawn carriages couldn’t run someone over…
If you would like to meet some companies thriving on the back of these new trends and solving some of these challenges, visit the website of one of our “Alliances” - Everrati, a technology leader in high-end and complex vehicle electrification solutions. Or feel free to reach out directly to us or the team down at Everrati (Justin Lunny, Rhodri Darch) to learn more about the project.
Thank you for reading until the end. Please share and feel free to DM us to comment or share your views. Rumo is actively looking for investment opportunities in these domains and is keen to engage with likeminded stakeholders.