People spend peacetime studying how the lastest war was fought. It’s a tempting pastime. In the global auto industry, executives continue to scramble to obtain enough semiconductors, which is currently the biggest bottleneck in production. The procurement of chipsets is dominating the discussion from the boardroom to the factory floor, and sorting out that supply chain issue is now seen as strategic as finding the next CEO. The danger, of course, is people are not preparing for the next battle.
A closer look at the market capitalization of automakers is telling. It shows what drives the future prospects of a carmaker.
But perhaps it is more telling to look at the price-to-sales ratio. You can calculate this by taking a company’s market capitalization and then dividing it by the company’s annual revenue.
What you see, of course, is how much the purely electric players have surged. But here is the obvious question: Who will become the next Tesla? Do NIO and BYD stand a chance?
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BYD is a classic case of low-end disruption. It never intended to be a car company from day one. It’s a contract manufacturer no one has heard of. Back in the mid 1990s, it was a battery manufacturer making nickel-cadmium batteries for Motorola, Nokia, and Sony Ericsson.
Then, like all things in China, BYD scaled up and moved up the value chain. It entered segments such as electric bikes, then it went into electric scooters and mopeds. Next, it got into electric buses. Every step along the way, the company reverse-engineered other brands’ vehicles. It copied, improved, and started to innovate on its own.
What BYD innovates is the engineering process. It’s a company that loves manufacturing; it invested in battery factories, assembly lines and the fabrication of semiconductors. BYD invested exactly in those areas that require heavy capital investment and also happen to be labor-intensive. They are also areas that BYD’s Western counterparts have shunned for a long time.
So when BYD began building its sedans, it was the only car company that possessed an integrated supply chain. It feeds itself with batteries and semiconductors, yet it’s smart enough to follow the playbook of TSMC – the world’s biggest semiconductor manufacturer. BYD doesn’t just compete against other carmakers; it’s also supplying critical components to FAW and Toyota. At the time of writing, BYD is spinning off its semiconductor operations to raise additional capital. It’s a crown jewel that it wants to scale. That’s when BYD said it “fared better than its peers when facing chip shortages this year.”
So if manufacturing in the past was about the mastery of internal combustion, then BYD is the powerhouse of tomorrow.
Then you have NIO, which is starting from the top end.
NIO’s strategy is unusual, especially among Chinese companies. Its obsession is not on manufacturing, but on business model innovation for the high-end segment. It’s going international. It’s selling a lifestyle. It’s a proposition that reminds us of Harley-Davidson, but for the 2020s.
A NIO car is not cheap, selling as high as US $70,000. Buying a NIO feels like joining a membership. There are NIO owner clubs located in posh malls across China. There is the NIO app, through which an owner can speak to human assistants. And, with all the data that NIO is gathering, owners get to browse its curated e-commerce store and see other members’ comments on the user forum. It’s GM’s OnStar, Harley-Davidson’s passion, and Muji’s lifestyle all rolled up into one.
Now NIO is bringing that triple package abroad to Norway, its international beachhead. Its where investors will pay attention. NIO has not signed a joint venture but is selling 100% direct to consumers. If it excels in Norway, NIO will replicate its model elsewhere.
Although NIO isn’t big on manufacturing like BYD, it goes big on software. What distinguishes Tesla’s software platform are its over-the-air updates, not only on software like infotainment and user interfaces, but also on safety-critical features that are often hardwired in a car’s firmware. No other automaker can update firmware like Tesla yet. This is also why only Tesla can switch its chipsets to whatever is available in the open market right now. It is rewriting its firmware on the fly. No one else could do that except for NIO. Somehow, both companies have cracked the code.
To be able to update firmware over the air, a carmaker needs to master a lot in cybersecurity, speedy connectivity, and massive computing power. But that’s exactly what investors see as crucial capabilities for the future.
NIO is not making money yet, just like Tesla in its earlier days, but it has an interesting sideshow selling batteries as a service. It is investing in battery-swapping stations across China and starting to build new ones in Norway. Unlike Tesla’s superchargers, NIO doesn’t want people to wait at the station at all.
Whether it’s a scheme of folly or a game changer, we don’t know. But to break into an old industry, you’ve got to play a new game. What’s clear is this: NIO and BYD are built on the capabilities of the future, not of the past. Whether there’s a semiconductor shortage or not, they are busy preparing for the next battleground. Traditional carmakers should be on high alert.
