Investment Team 2024 spring reading list
Feeling lucky? The Investment Team shares a virtual pot of gold for readers and listeners alike just in time for St. Patrick's Day.
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Zombie car factories on the rise in China as buyers opt for EVs
In 2017, Hyundai invested $1.15bn in a new factory in Chongqing, southwestern China, with the goal of reaching an annual output of 300,000 internal combustion engine cars.
But six years later, the rapid switch by Chinese consumers to electric vehicles has stalled sales, forcing the automaker to sell the factory in December for less than a quarter of the investment value.
That plant is one of the hundreds of zombie factories that analysts are predicting over the next decade in the Chinese auto market, the world’s biggest across sales, production and, since last year, exports. In 2023, China produced 17.7mn internal combustion engine cars, a 37 per cent fall from its prior peak in 2017, according to data from Automobility, a Shanghai consultancy.
Bill Russo, the former head of Chrysler in China and founder of advisory firm Automobility, said that the “precipitous decline” of internal combustion engine car sales means as much as half of the industry’s installed capacity — around 25mn units of 50mn units annual capacity — is not being used.
While some older factories will be repurposed for plug-in hybrids or pure battery electric vehicles, others will never produce another car, posing a problem for both foreign and Chinese companies. Many auto groups in China, Russo said, ultimately face two choices: “Leave the factory mothballed or crank out some volume and send it to Russia, send it to Mexico.”
Hyundai’s exit from Chongqing comes as combined car sales in China by Hyundai and its Kia affiliate fell to 310,000 last year from nearly 1.8mn in 2016, as a result of free-falling sales of internal combustion engine cars.
An intense price war across the Chinese auto sector is only heaping more pressure on legacy automakers, including top foreign players Toyota, Volkswagen and GM, which have been slower to release popular low-cost EV and hybrid models and are quickly losing market share to companies such as BYD and Tesla.
Until recently, foreign auto groups could only enter the Chinese market as a joint venture with a local partner. Of 16 joint ventures between Chinese and foreign carmakers, only five had a capacity utilisation rate higher than 50 per cent while eight were below 30 per cent, according to a report by Chinese media outlet Yicai Global.
In response to the worsening domestic market situation, Chinese companies have been ramping up exports of cheap petrol-powered cars to Russia, a market that many international carmakers have quit in the wake of that country’s full-scale invasion of Ukraine.
Yet analysts question whether those sales deliver meaningful profits to the Chinese groups, for how long they can continue, or if other developing markets can help soak up Chinese non-EV exports. Foreign brands, too, are increasingly trying to export more from their Chinese factories. But, experts say, in doing this companies risk undercutting their own factories in other markets.
Growth, VW believes, will mostly come from the hundreds of smaller Chinese cities that usually have a population of 3mn or below. That is in part because car ownership in the bigger, more developed cities is high and restrictions on buying new petrol-powered cars are already in place. But another key factor is the lack of charging infrastructure in poorer cities, which has frustrated EV industry growth.
“The number of cars in China is still very low. While the average here is just 185 vehicles per 1,000 inhabitants, there are almost 800 vehicles per 1,000 inhabitants in the USA and around 580 in Germany,” said VW.
VW last year announced €5bn worth of investments in China as it targets ramping up production of EVs. It has started converting some factory lines in China to produce EVs. And the group will also work to “gradually hybridise the internal combustion engine models and thereby convert them into an electrified new energy vehicle fleet,” the company added.
But VW is an outlier in deciding to double down on the Chinese market — spending by most other foreign automakers in China has ground to a halt.
Industry executives say that the biggest pressure on all legacy automakers in China stems from the rise of new EV factories, which take a radically different approach to car manufacturing.
In Hefei, west of Shanghai, a factory owned by Nio demonstrates this challenge. The factory, opened in late 2022, is designed around founder William Li’s bet that EV customers will increasingly want cars with customised features, rather than a mass market product from a dealer.
The factory offers different configurations — both physical design and software features — among its eight different Nio models. Cars can be delivered in China around three weeks after they are ordered, or 90 days to customers in Europe.
Nio’s Hefei factory will soon have the capacity to produce 300,000 vehicles annually — the target for Hyundai’s Chongqing factory less than 10 years ago.
John Jiang, the Nio factory manager who previously worked with GM in China, says all carmakers in China are in a fight for survival: “not every brand can succeed in the end”.
Delivery Drones Are Gaining a Clearer Commercial Flight Path
Cassidy Shorland, a council member in Logan, Australia, wanted a refreshing treat on a hot day recently, but didn’t want to get in his car and leave the office. So Shorland opened a DoorDash delivery app, clicked on a mango-flavored juice from a nearby smoothie chain, then walked outside as a big white-and-yellow drone came into view and lowered a tethered box holding his juice.
Shorland, 47, is one of the customers in the small municipality near Brisbane who routinely order things from rotisserie chickens to pain medicine delivered by drone.
It’s the kind of routine service that has mostly eluded drone operators in the U.S. as they’ve navigated regulatory obstacles, community unease and challenging economics over the past decade in a bid to bring new technology to the puzzle of last-mile delivery.
Industry executives say they have an improved landscape in 2024, however, after federal regulators recently granted several drone-delivery companies permission to fly more freely. That has led several retailers, restaurants and healthcare systems to expand their services across the U.S.
Still, logistics experts caution drones have a long way to go before they become entrenched in commercial parcel distribution in the U.S.
For the average e-commerce order, “it’s actually relatively hard to beat the delivery costs that you would get, for instance, out of a big brown, yellow or white delivery van out there,” said Matthias Winkenbach, director of research for the Massachusetts Institute of Technology’s Center for Transportation and Logistics.
Attention to drone delivery heated up for many companies during the Covid-19 pandemic, when a surge in online orders pushed more goods into trucks, cars and bikes, adding congestion and pollution on roads. Advocates say the technology is environmentally friendly since the devices typically are battery-powered, reducing emissions for filling orders.
The Federal Aviation Administration, overseer of the nation’s skies, in the past year has given companies including Wing, a unit of Alphabet, and autonomous drone operator Zipline permission to fly their drones beyond so-called visual line of sight. The requirement that drones remain in sight of a human operator has been a major hurdle for drone operations.
Robin Riedel, a partner at the McKinsey consulting firm, said the federal approvals pave the way for expansion of airborne delivery.
Retail giant Walmart, which has been among the companies most aggressively seeking to embed drones in its delivery operations, said it will begin offering drone delivery this year to about 75% of the population of the Dallas-Fort Worth region. Amazon.com, which has delivered goods by drone to customers in some U.S. cities since 2022, plans to launch its latest drone model later this year across three U.S. states, as well as in Italy and the U.K.
Fast-food restaurant Chick-fil-A recently began delivering orders by drone to customers within 1.2 miles of one of its restaurants in central Florida. And Zipline plans to start delivering prescriptions next year on behalf of healthcare provider Cleveland Clinic.
Drone delivery has expanded more rapidly outside the U.S. McKinsey estimated that more than one million commercial drone deliveries were completed around the world last year, of which about 157,500 were in North America.
Industry experts say regulatory restraints will be lowered as communities grow more accustomed to airborne parcels zipping by homes. Residents and regulators have raised concerns about safety, privacy and noise as the whirring devices fly over people’s homes and backyards.
Drone operators say they are testing and building quieter devices. They have also been working on what’s known as detect-and-avoid technology that teaches the devices to go around obstacles including other aircraft.
This week’s fun finds
The 50 best Irish films ever made, in order
Donald Clarke and Tara Brady's definitive list has more than a few surprises
No sane person will sincerely claim that the ranking of cultural entities is anything other than a sophisticated parlour game.
When it comes to Irish film, however, the debate will invariably focus less on relative placings – whether Garage is better than The Quiet Man – than on how we are defining our terms. Is The Quiet Man Irish at all? It was financed by an American studio and set in a fanciful version of the real nation.
Our rules are looser than some may prefer. Significant numbers of Irish personnel is a factor. Notable levels of Irish funding scores you a few more points on our jerry-rigged scale
This is not a ranking of Irishness. Once a film has qualified it competes equally with all others. Some may reasonably think our top film among the least Irish of the bunch. So be it
