AAH #807 - Unboxed Assembly Will Revolutionize The Industry....Or Maybe Not

0:00Auto Line After Hours is brought to you by Bridgestone Tires, solutions for your journey. And by BorgWarner. The automotive industry continues to evolve and so do the opportunities to define it. BorgWarner, one of the world's most admired companies, gets partners where they need to go. Let's do something big together.

0:22Gary Vasilash: Hey everybody, thanks for joining us on Auto Line After Hours and good afternoon, Mr. Gary Vasilash. How are you? I'm doing okay. So I think we've got to point out to the people last week who are watching the show or listening to the show when my phone went off with the klaxon sound and we got the tornado warning during the show. And then the show went off. It went black. So we actually did lose power, but we did not have a tornado. So it was just a power outage. For anybody who was watching last week, all of a sudden the show ended. That was why. This whole area lost power. And Nora Eckert, who was with us last week when that was happening, She lost power until Saturday night.

1:02So, big power outage. I think it landed to the east, right? The tornado hit further east of here.

1:07Gary Vasilash: I think you're right. And that voice you just heard was from Dan Hirsch. He's the global co-leader for automotive and industrial practices at Alex Partners. Great to have you on the show, Dan. Thanks, John. Your first time here. It is. I'm excited. I know. You and I have talked a number of times, but never in front of cameras. That's right. And we got Tuli from Sino Auto Insights. Always great to have you back on the show. Thanks for having me, John. I know. It's good to have you here. So, Dan, let's get into it. You guys have published a disruption index where you look at a bunch of different industries all over the world.

1:42Gary Vasilash: You interview all kinds of executives. And guess what? They all said, you know what? Automotive is the most disruptive industry that there is going. And not just the most disruptive, but two years running champions, right? It's great. Yeah, so we've been doing this disruption index, which is, as you say, it's a fairly holistic view of all the industries throughout the country, really globally. And we do, it's a bit of a survey followed up by some interviews, but it's a pulse, right? And so for the second year, automotive, this year I think tied with retail, general retail, but automotive is the most disrupted.

2:22Again, to this audience, of course, no surprise, right? The number of things that have continued to pile on each other since COVID. And it just feels unabating.

2:33Gary Vasilash: We in the industry know that, or those of us who follow the industry know that. But this really confirms it. Other industries are saying automotive is the most disruptive. Isn't it like you're in auto and you score it? And you're in consumer products and you score it? That's right. So auto executives answer, they are the most disruptive. that they feel the most at risk to lose their jobs or go through insolvency or all of the things that are piling up on them. So the sentiment within the industry is worse on this scale than any other part of the economy. Okay, but the thing that I don't get, so this is the official Alex Partners definition of what this disruption is.

3:16Because, I mean, I think this is something we need to put our arms around. And I read this, and I want you to explain to me what it means because I have no idea. Yeah. Disruption is the accelerated and fundamental reshaping of businesses, markets and value networks by technological, societal, environmental and political regulatory forces. Is that not self-explanatory? I'm sorry. Yeah. Yeah, I mean, just put simply, the rate of change, the frequency of things just being knocked on their heels in automotive, retail, as I mentioned, because of similar things, right? We spent years, decades with fairly smooth, stable supply chains, right?

4:04And then COVID, when COVID hit, I mean, it just absolutely upended everything. So there were some general trends and these things would happen over years and decades, right? So that's what we're seeing now is just one of the charts that we show in our global automotive outlook displays kind of the rate of disruption as a bit of a sine wave over time. And what's happened is these things have bunched up. It's, you know, it's like a Doppler effect. Like the train's coming at you and they're just compressed on you like this. And it's one thing after another, after another, after another, after another, multiple times within a year.

4:43That's not what we're used to. That's not what anybody's used to. I mean, that is a really significant difference. And just when you think, you know, that one is done, the next thing comes along. And sometimes, you know, recently it's been, you know, one tariff battle after another. And it's been, you know, military conflicts that create impacts that we don't put that are very hard to predict, not only where the military action happens, but what are those knock on effect? Right. So, you know, who knew that Ukraine was the the big wiring harness or manufacturer, Europe's version of Mexico before that happened?

5:23Who knew they'd make all of the xenon gas on Earth, right? And why that habit of why was it important, right? Now with Iran, we're finding out, you know, who knew how much helium comes out of refining oil and natural gas and what the impact to the rest of the world and economy is. And so that's what we mean by just the rate and speed of this. And in our case, it's holistic. It's the OEMs and suppliers and the aftermarket. Everybody's feeling the impact. And we talk about the things that are kind of macroeconomic that are outside of the industry's control. But, of course, within the industry, we've created technology shifts that have gone this way.

6:02And then we're swinging way back on electrification, autonomy. You know, it wasn't in certain regions. Yeah, in certain regions. Yeah. Well, yeah, exactly. But, yeah, certainly in Europe and the U.S., you have impacts of volumes eroding that are we're never coming back from. And China and China eroding. It wasn't that long ago Europe was$22 million in sales. Which is crazy when you think about it now. Yeah, and it's never going back to 22. Right. You know, a quickly validating factor to this ranking is Volkswagen Group laying off$50 ,000, now$110 ,000 or$120 ,000, closing four factories, reducing their product portfolio by half from $150 ,000 to$75 ,000.

6:46And likely, you know, closing some brands. It looks like Porsche sold Bugatti Remat for a billion dollars.

6:57Gary Vasilash: Seat may go away as a brand. Yes. So, yeah, look, they're going to be bailing out all kinds of businesses that made sense when they were the big behemoth that they were. But now as they start to shrink, my problem with Volkswagen is their 2030 plan, based on what I've read, still assumes they're going to be selling 9 million vehicles a year by 2030. And I just don't see that happening. Well, I don't want to bury the lead here, but okay, you guys found that nearly half of the CEOs in the auto industry think they may lose their jobs. Why? Yeah. So the rate of change, just the inability to plan and forecast and meet expectations, right?

7:39So a lot of these companies are publicly traded, right? So you have quarter by quarter pressure and pressure to perform and anticipate things that, I mean, how do you anticipate all of these? Not only can you not anticipate what maybe the administration is going to do, it's they announce something. Is it really going to happen? I mean, we're just talking about this with some of the tariffs. They come and they go. They're legal. They're not legal. They're threatened. They go away. like how you plan a capital intensive long-term business like ours under those conditions, but the markets kind of don't care, right?

8:17So they, the investors aren't always, uh, as, as informed about those aspects. They just see, all right, you know, cashflow and EBITDA and the important things to the, to the balance sheet. And so, um, you know, there's that piece. There's also the nature of these businesses where even 10 years ago, I think we would all still think of cars as primarily hardware devices, right? Software was there. It augmented things. It was sometimes great and sometimes a nuisance. It's now the central piece and it's awfully hard to see and feel quality problems. And so the number of warranties and recalls and service actions that have to be taken because of software glitches or poor performance or just interactions that are unanticipated and very difficult to test and find at those border cases, right?

9:13All of that is changing the nature of some of these companies, lighting companies where it would have all been about the physicals and the look, and now there's a heavy software piece of that. Plus, how you use AI and not waste tremendous amounts of money and energy and other things. One of the aspects of the study talks about within automotive, it's at least one of the most prominent industries that is no longer viewing AI or does not view AI as a revenue generation. It's a cost-cutting tool. I think nearly everybody saw AI as this thing that was going to help us sell whatever it is you sell.

9:56They're going to help you make new cool things. And I think we very quickly in this industry come to reality of it can help accelerate some things, but it's not that effective. It's hard to trust at this point when you're making things that people's lives are impacted when things don't go right. And so relying on them for safety testing, engineering, some of the basic things, really difficult. And so the use cases we're seeing are in finance or areas that are less sensitive to the consumer, the safety, to durability, that kind of thing. But back to the point of your question is, why do these CEOs all feel more risk?

10:45It's because just the very nature of the vehicle, from a very hardware thing to a software-defined vehicles, we call it, has been so rapid. And the leadership that's required when you've got your defending against change, but trying to figure out where things are going and anticipate, are the OEMs going to be more software, more hardware, more autonomy, more electrification? Where do you go? And every subsystem in the vehicle has different directions they have to go in that. So it's like, you know, you've got to be a super expert. And so if you're super expert in something, but then that thing changes drastically now, yeah, you're potentially out of a job.

11:25Well, speaking of being out of jobs, and this sort of goes to your point, too, when you're talking about massive layoffs at VW, you guys found 95 % of CEOs in the auto industry expect AI to lead to layoffs in the next five years. And of that group, 44 % expect at least 10 % layoffs. I mean, that's huge. Yeah. Yeah. Well, it speaks back to AI not as something that helps us make money or make revenue. It's something that helps us cut cost. You don't cut cost if you don't take headcount out. Right. It's about efficiency. And efficiency is either speed or fewer heads and usually both. Right. Now, the speed thing we're starting to find.

12:08I think we're starting to find the edge of the envelope on that. Everybody is chasing China speed, but even the Chinese are going, okay, within reason, you got to do all the steps. They can't just cut corners. And so I think we're finding the real borders of what's going to be viable there long term. But there are certain types of testing and validation and just making sure that things work together that can't be modeled, not with 100 % fidelity. You can't trust everything that AI tells you or gives you. You do have to go through some of the physical crash testing in some cases and durability testing and all the other interactions, as simple as going back to the one major recall where somebody didn't design the detent in the key ignition correctly.

12:56And so people with too many things on their key chain, much like my daughter, whose thing is like this long, it's turning off while you're driving, right? How do you anticipate that? And is AI more likely to help you find something like that or to also miss those important nuances that we just have built into the systems, right? It's somewhere in the middle.

13:18Gary Vasilash: I can see where AI would help in something like that, something mechanical, perhaps even in software. But my question would be, what about in management? What are you guys at Alex Partners advising, counseling, coaching, management? Like you said, these guys are afraid of losing their job. There's so much disruption. You can't plan for it. It's just going to happen. What advice do you give to top management? We have a very pragmatic view of everything. That's part of what we bring is solutions that work because we've worked in these companies. We've done the jobs. We're not just advisors. With AI, what we found is there are a lot of companies that get into trying to design something and thinking, well, it's going to create this value, but without thinking that, okay, that value either has to come through increased revenue, right?

14:07Or you have to cut costs, and that's the layoff piece, right? If you're cutting costs, if you're becoming more efficient and you need fewer people, that's from a baseline of what you have today. That means those jobs go away, right? What types of jobs? It's harder to take out headcount on the line, certainly robotics and automation, but that's not new. That's 20, 30-year-old things. And is AI really going to improve or accelerate that aspect? Not really. We don't see that. But redundant clerical tasks that you see in accounting and finance, in supply chain and procurement, some aspects of engineering.

14:47But what we find what we think is more on the design and ideation side than it is the nuts and bolts and validation piece. But there will undoubtedly be aspects of that that accelerate. great. Somebody figures out how to solve for those. And, and, you know, as executives, which are the ones that are really worried about losing their jobs, if they don't chase those, if they don't adopt and figure out how to make their companies more efficient, the other guy is, right. And they will be out of a job if they don't. So it's, you know, somebody is going to be finding a new job, right? This is, this is always the story of innovation is the people with a certain job are unhappy about it.

15:28But by and large, we all find new jobs and new things to do, right? Before you put the car together, now somebody has to maintain the robot that's going to put the car together. That's just a different type of job. Now we become service and IT industry people. Like that's a natural shift that's been happening since the industrial revolution. But let me ask you this question because cost cutting is not a strategy, right? So getting smaller, but not changing the way you, do business, run efficiently, whatever. Because we're talking about AI, we're talking about these functions or these features or these things, but we're not, it's been, it's more global now than ever.

16:11There will be 11 million cars shipped from China this year to the rest of the world. BYD's in 110 markets. Like, they should be afraid. CEOs should be afraid Because no one's creating value in the automotive space. They should have been afraid five years ago. So how are you explaining and separating, let's create a strategy and cost cut, a new strategy and cost cut? They're not mutually exclusive. They can't be, right? You have to, but responding to competition like that, figuring out how you're going to play in those markets at those costs in a competitive way is one thing. Part of that can and maybe has to be changing the way that you run the internals, the back office, if you will, right?

17:03So it's not making the cars, but how you run that back office certainly frees up cash for investment and innovation and some of these other things. Some of the automakers are drastically changing the way they put cars together, the way they design them that we've seen recently that that is that'll be the more meaningful thing. Right. But what what were the early adoption of AI is much more about becoming more efficient at what they do now. But they also have to completely rewrite. Right. And some some OEMs, you see them doing that. Some are probably doing it, but are either less public or further behind.

17:39It's not talking about it. But I mean, your point is exactly right. There's a tendency to think regionally. And in the US or North America in particular, I think there's an expectation there's going to be some protectionism for a while, and maybe there should be. But it's not forever. It's probably not more than five or 10 years. You know, Chinese competition in the US is an inevitability. It's just a question of when, right? There's just no logical reason that you, and it's not good for consumers in any case, right? I mean, their competition is good. It's just not always good for every individual, but overall it's necessary and it is a good thing, right?

18:16So whether they end up, whether Chinese OEMs end up selling and or making cars in the U.S. in the next five years, maybe, but in the next 10 years, almost surely, right? It would require a drastic change in the in the face of the geopolitical world for that not to happen. If, if, if they were kept out of the market and selling in Canada and Mexico, we would see them probably create protectionism in the Chinese market against foreign automakers. So, so, so, okay. One of the things that you guys do in that disruption study is, is you, you have breakout of different countries. And so there's discovered this comparison of China in the United States, in the auto industry.

18:58And these numbers surprise me quite a bit. So we look at the index score, the overall score. The U.S. disruption rate in auto is 72. In China, 77. So they're feeling more disrupted than we are here. Highest rates of disruption that overall, the U.S., 53%. China, 69%. Far more disrupted. And planning on making significant changes to the business models this year. In the U.S., 42%. In China, 51%. So everybody seems to look to China as being the model of this is what we need to do. Do these numbers indicate that they're more messed up or they're more proactive in dealing with disruption? I think it's just a more dynamic market, right?

19:56A, especially with the newer native Chinese companies, they don't have the century of legacy that, you know, the all the other Western or not all, but most of the other Western automakers have. And so the rate of change and the willing, you know, one of the things that we've noticed that characterizes some of these Chinese companies is their willingness to put out something that isn't 100 % perfect, or at least in their mind, that the customer is going to complain about, but know that they'll fix it. right? They know that they get something, something doesn't work in the software, something doesn't work in the radio, whatever it is, they'll still take a chance buying that brand because they expect that the brand is going to fix that issue for it, right?

20:45And so that's part of that China speed is being willing to do that, being closer to customers, you know, much more active leadership in those companies, much more active on WeChat and other, you know, with the consumers and really listening to what they want and then responding to it in real time. But what that comes to is you have those price wars that happen over there. You have just this constant. Some companies are completely EV. Some are completely ICE. Some are figuring out their way. The number of companies that exist over there versus what we've said, there would probably be 15 that are really viable.

21:23We don't think that hundreds of brands will go away. They will probably still also get support as you do in an economy like that. But all of that is going on just within China as the most competitive and what has been the most attractive market, the highest growth market in the world for 15, 20 years. Until today. Until recently. It's kind of gotten to that point. But now, yeah, we've created. Chinese are now selling. We think it's going to be 10, 11 million. We'll go to other markets.

21:55Gary Vasilash: And maybe going to 18 or 20 by the end of the decade. But I wonder if China's hitting an inflection point, too, because I was very interested to see sales of the Xiaomi SU-7 and YU-7. You know, a year ago, everybody was just gobsmacked by these things. You know, they captured the Nürburgring record for EVs. Their sales were going through the roof. Right now, sales of those two models, SU-7 and YU-7, are taking a nosedive. I can't remember the name of it offhand. There's some Chinese group that monitors product quality. They evaluated 29 new BEVs. This goes back a year ago. And they said, the SU-7 is the worst new EV that we've ever evaluated.

22:41Gary Vasilash: And so I think it gets back to what you were talking about before. Maybe too many corners were getting cut. You know, the Chinese government itself or different entities of the government have warned about involution. I had to run to the dictionary to find out what that means. Essentially, it means that they're just eating themselves. You know, they've created this hyper competition that's, you know, there's fear that it's going to just destroy it. Maybe destroy is not the right word, but it's not good. And so I'm just what do you think? Is China about to hit an inflection point? It's hard to predict that like an inflection point is something that is that large and dynamic.

23:20And it's hard to get accurate data there. The other aspect is fairly opaque compared to what I think we're used to in the U.S. and Europe, where you have big reporting agencies and both third party and government. There's always information to triangulate on and transparency for consumer safety has always been very important. That's not always been the reputation within China. So it starts with, it's hard to know exactly what's 100 % true. But by and large, certainly Xiaomi in particular has had some of the early black eyes in autonomous driving and crashes and issues there. But what you get into is, okay, are those because they're poor quality or is it because they don't have good guanxi or good relationships with their media people?

24:11like it's hard to say that they're necessarily worse, but the perception is certainly that they're worse. Therefore, yeah, they're, you're, you're starting to see consumers not want to buy them. Right. Because, you know, is, is it going to work? Is it going to be safe? You know, it's the Chinese consumers are interested in all the same things that, that other consumers are as far as, you know, getting home and getting home safely and having a reliable way to, to get around when, if you do own a car. I actually think,

24:48cyclicality that we know to be 12, 18, 24 months for a model year before sales really start dropping off a cliff. I think in China, that's like six to nine. So you have a honeymoon period. And then if you look at a Tesla or a Xiaomi, to have that resilience for a few years is pretty amazing. um and and you know to to hammer that point home john about the competitiveness there are over 700 products that are sold in china from an automotive standpoint less than or so 56 of them ship more than 5 000 units a month wow that was according to a government agency okay and so the the the in And the China market this year will be down about 18 % year over year.

25:35Maybe more. And so, yeah. It got worse last month. It did. It did.

25:39Gary Vasilash: And here's the other thing that I found interesting. So last month, there were 1.55 million new cars sold in China. Last month in the United States, it was 1.38. So almost 1.4 to 1.5. I think if things keep going like they're going, the U.S. market, maybe not for a full year or anything, is going to be bigger than the Chinese market. So the Chinese market historically races to the December timeframe, and you see the companies double their sales from the first six months. December to remember. Now, the involution part of it takes away some of the price cut opportunity or capabilities, right? But then you start seeing free charging.

26:28You start seeing 0 % financing. So there are other mechanism, non-price cut price cuts that happen. So, and, you know, Xiaomi is kind of on its heels a little bit. BYD is also hugely on its heels in the China market. Hence, exporting is such an important mechanism for them. And Wang Fanfu a couple months ago said, we're targeting Toyota. We're going to sell more than 10 million units by 2030. And so he said long-term, 50 % outside of China, 50 % inside of China. I don't think he meant because we're going to have shrinking market share in China. A goal is a good thing. Whether you're going to achieve it or not is something else entirely.

27:09One of the things that you guys found is that 95 % say that the company is being outpaced by technological change. Is this basically like if we look at automated vehicles as physical products, we look at AI as technical product, this stuff is just getting ahead of these companies? Yeah, and it's all of it, but I think we think of it in a few ways. One is, again, back to the vehicle becoming a software-defined vehicle, whether it's going toward autonomy, which I think people five years ago, maybe a little longer, were saying, oh, autonomy is going to be here much faster than you think. And that hasn't happened.

27:50Electrification is going to be here, yeah, right? Much faster than you think. Yeah, that hasn't happened. So there's the what is the type of vehicle thing. Then there's the content in the vehicle, right? So people, if you were in, I went to, we were in Munich for the auto show last year, and there were a number of companies that had set up showing how AI was going to be in the vehicle. And it was wildly underwhelming. The things they were talking about, you know, it's going to recognize your face and know what temperature to set. It's like, why? I still got fan, like, I don't need that. Like, that seems crazy.

28:26Can it recognize anybody on earth and know what temperature they want it set at? But even then you go, everybody on earth isn't going to drive my car. So there was a lot of that AI, but people are putting those into at least their cycle plans. And so whether you're in the OEM space or the tier suppliers, you're thinking about what are these things that I have to be developing, right? And then you get into the AI impact on systems and how do I build and how do I do my finance, all of the other aspects of technology. So it's what am I going to put my stuff into? What am I making to put into that car?

29:07And then how am I running my business? They're all moving and impacted by different things in different ways. And it really can be overwhelming. And, you know, there are a lot of people that just don't even really know how to think about agentic AI in terms of what should I do with this thing, right? I mean, you know, just scratching the surface of having it simplify reports and whatnot. And I think a lot of people early in their journeys find that, oh, boy, I have to double check this thing five times before I can, you know, we use it to create PowerPoint documents. and the things that we get, I'm like, I would fire somebody if they handed that to me the first time, right?

29:51That's not the job that we do. And so it will probably come along through training and experience and, you know, people like us will get better at using it. People, executives and people in business roles will get better at using it and it will get better to meet them in the middle. So there's not such a gap, but for now, there's just so many different things that you could constantly be thinking about that you become paralyzed. I think there's a lot of that is what you're seeing. It's just this paralysis of which thing, because there are some you can kind of ignore and just not, and you'll get left behind.

30:25And some, you just won't sell any, you won't have a product to sell. You're going to be making buggy whips and there's no more horses.

30:32Gary Vasilash: Hey, we've got to take a quick commercial break. Give a shout out to our sponsors. We'll be back to talk a lot more about the news in the automotive industry. Making a life full of memories. One road trip at a time. That's what really matters. Bridgestone Weather Peak Tires with a 70 ,000 mile limited warranty.

30:56Gary Vasilash: The automotive industry continues to evolve and so do the opportunities to define it. BorgWarner, one of the world's most admired companies, gets its partners where they need to go. Let's do something big together. All right, we're back talking all things automotive here. To me, the biggest news that came out this week, and I think this is a pivot point for the industry, is Tesla posted a video showing that it is using unboxed assembly to make the CyberCab. I think this is going to be, this is my opinion, it's going to be as revolutionary as the moving assembly line was when it first appeared in 1913.

31:38Gary Vasilash: But two, what do you think? I think it is, too. I think it's pretty revolutionary for the automotive industry. My challenge with Tesla is, you know, are they going to continue to be able to sell enough cars to really make CyberCap relevant? Because I think we believe that FSD to be the superior product globally for intelligent driving. Does that translate into robo taxis? Number one. Number two, if we take China off the board for Tesla or FSD, because it's still not fully approved for the China market, does that continue to make them this trillion and a half dollar company that creates the flexibility for them to do whatever they want?

32:21Gary, you're into manufacturing. What do you think? Unboxed assembly?

32:30I don't think it's a Model T moment. I'm sorry. I just don't see that because I think that this underestimates what other manufacturers have been and are doing in terms of different approaches to putting things together. And so all credit to them for – we're all fascinated by things like FSD and cyber cabs and cyber trucks and, you know, the product. But it's, you know, big credit to these guys for working on the process, which gets like zero attention, right? I mean, who cares about manufacturing? No one, unless you're in it. You do, I know. I care a lot about it. All of us sitting here. But you get my point about how, you know, they tend to have like the seat way over there at the table, right?

33:24Not among these guys. And so, yes, it's putting these things together because I might argue that when Smart developed its manufacturing system, it was far advanced compared to Unbox Assembly. They had everything and they were all coming in at different – it was brilliant in their plant in – I guess it was in France. But what's your sense of it? I agree with you in that. It's not a Model T moment. For me, it's because there are so many other things you have to do differently in the design of the car to make all this stuff work that not everybody's going to be able to follow. And are all of those advantages that the thing that everybody has to do?

34:16Or by the time you can make those changes, there's going to be a next new thing anyway. Right. So as opposed to being Apple chasing the zoom, they just leapfrog and go and launch the iPhone. It's the same thing like, OK, that. Yeah. Yeah. They've set up a great ecosystem and they can take advantage of that thing. Automakers ought to be thinking about how do I make the next iterative step? But it's yes, this is not the thing that everybody's going to start doing. It's a great improvement, but there are other systems to work in that are likely even more advanced, even have additional benefits. I actually have a Zune, by the way.

34:53Where I believe it's different is because we know that the automotive industry is a copycat league, and the Chinese will quickly try to incorporate this new way of manufacturing a vehicle, and it'll become ubiquitous across factories. That's the difference, right? Because if they think they can squeeze out efficiencies, and they're already the most efficient manufacturer in the world for multiple things. And that's where I think the influence is a little bit different because the car guys, they're not risk takers, right? But the Chinese have to take risk because after 12 months, the vehicle they just rolled out is now falling off a cliff from a sales standpoint.

35:36So they have to also continue to innovate. And they also look at, you know, the sales side, but the manufacturing side. Because if you've been to a Chinese factory, you know a good part of it, there's no people. And, you know, final assembly, there's still a lot of people going on and stuff like that. But they'll be quick to adopt it if they feel it gives them advantage. Okay, but does this mean that everything in this auto industry is predicated on what is done in China? I think that everything's happening at once. We're moving over to clean energy except for the United States. The rest of the world is.

36:13We're moving into front-end and rear-end gigacasting with cell-to-pack for the battery pack to kind of keep the vehicle together. So vehicle manufacturing to me in 15 years is going to be commoditized. We can debate about how it's going to be built, but the value add is not going to be in the manufacturing because the Chinese eat out all the costs. the major benefits to that. And we can take away the excess capacity by forcing them or creating policies that say you have to build a joint venture here, hire locals, but they're going to bring those manufacturing processes because the joint venture partner will also want those efficiencies in the US, in Canada, in Mexico.

36:55And so I don't look at it as China dictating. I They look at it as the largest market in the world by a factor of two, dictating to the rest of the world how they should manufacture things.

37:08Gary Vasilash: See, I do think this unboxed assembly, this modular, it's modular assembly really is going to be a game changer from a manufacturing standpoint. It slashes the footprint that you need for the plant. It allows you to take 40 % of the workstations and the workforce out of the plant And when labor costs are so disparate, especially in the United States versus just about anywhere except for Northern Europe, that takes care of a lot of the labor cost problem. But it's also your cycle time drops dramatically with this. Tesla's claiming a 10-second cycle time with the Cypress cam, and they're talking about going to a five-second cycle.

37:52Gary Vasilash: I don't necessarily believe those numbers. In fact, I don't believe them. But it shows the possibility of being able to build cars much more quickly with a lot less people and a lot less CapEx. I think that's a game changer. You guys remember that startup Arrival, who was also talking about smaller factories and regional. And so that kind of reminded me a little bit of that. Local Motors, too. They weren't doing the modular approach. They were going to 3D print everything. But yeah, I think, you know, Tesla's doing it. Ford's going to do it next year. Toyota had shown a bunch of, Toyota had a project going called the Bev Factory.

38:38Gary Vasilash: It sort of has been diluted. I think maybe it was too disruptive. Maybe because people aren't buying electric vehicles. Oh, well, I don't think you need electric vehicles to use this process. But electric vehicles are much simpler to manufacture in terms of components than internal combustion engine vehicles are. So we've got to keep that in mind. I'm glad he's agreeing with me. Well, you know, except for what? The gas tank, fuel lines, exhaust. But an entire power train division. If your battery pack becomes the structure of your vehicle and you have the front giga casting and the rear giga casting, voila.

39:19Okay. You've got most of your vehicle right there and everything else is gravy. Yeah. Decorative. Yeah. Yeah. I mean, not literally, but yeah, a lot of it just becomes the things that make it, you know, fun, drivable rather than just putting the structure together like that. But, you know, there was the promise of additive manufacturing that hasn't really come together. But how long might it be before you could 3D print a car as opposed to having a gig of casting? How long before you have something like that where you are? And it gives you completely different choices about the form and function and size and making changes rapidly.

39:56All of those things are that's the kind of thing that I'm talking about. Like somebody else is going to figure out the next new thing. And then, you know, doing this modular assembly is also going to seem old fashioned in some aspect. Like maybe that's the right answer. Maybe it's some other thing that comes along. But yeah, I absolutely think that not every company and not every vehicle can be done like that, which is why it's not. Yes, it's certainly going to benefit the companies that can take advantage. But the design choices you have to make now a couple years ahead of time drive whether you can do those things.

40:31And if you're not already. Is it still a couple of years, though? because Chinese can go from clean sheet to job one in 20 months. Yeah, but a couple years or a year and a half.

40:45Gary Vasilash: I'll bet there's a Chinese company working on modular. Probably right. Yeah, then nine months from now, they're going to – and you're probably right. Those companies that are just going, oh, well, let's just start making – let's do something different because they don't have a huge legacy cost and can pivot quickly. but uh the the large western oems are just that's a ship that is too big to turn that fast yeah i mean you saw what what ford had to do to do that they had to create that skunkworks that jim likes to talk about um and and kind of keep it far from the mothership right very intentionally so that they could uh try and make those those uh those choices that um the the typical oem development system would not allow you to do.

41:28So it's cultural as much as it is anything else. It's process. It's absolutely right.

41:34Gary Vasilash: So here's another big story that broke this week. John Duffy came out. He's the secretary of transportation in the U.S. Came out and really excoriated Ford. I got some beautiful quotes from Mr. Duffy about Ford. He's talked about, and this is broken in the Wall Street Journal, so we got to give credit to Ryan Felton for doing this, but here are among the things that Mr. Duffy said. The company's, quote, reliance on technologies of foreign adversaries, close quote, isn't sustainable for America. Quote, while the DOT recognizes the intense competitive pressures of the global market, the company's recent strategic decisions paint a troubling picture of a foundational American brand actively intertwining its future with Chinese state-backed enterprises, close quote.

42:20We've talked on the show about how Lincoln will be bringing back the Nautilus from manufacture in China by 2030. Okay. 2030. Okay. A multi-year window of reliance on Chinese manufacturing while depriving skilled American workers of vital manufacturing jobs. We talked last week about the Gili partnership in Spain that Ford has established. He called that, he said that, quote, help strategic adversaries secure a vital foothold in Western markets. And I'll leave you with this one. When a company intentionally chooses to deepen operational dependencies on strategic competitors, it fails to act as the reliable partner, the American public, and this DOT require.

43:07So this is Department of Transportation talking about one of the crown jewels of American manufacturing. The most American company, according to rankings.

43:16Gary Vasilash: And here's the craziest thing. Last week, the White House put out a press release with Donald J. Trump's name on it and Vance's name on it, praising the American auto industry for bringing all this work back and specifically cited Ford's manufacturing plant of batteries in Michigan and the 1 ,700 jobs that it created. $3 billion, 1 ,000 job. And that was launched hours after Duffy's. So within hours of each other. So what's going on, too? Well, I think I'm going to be a homer. It's a bit unfair for Ford to be called out because there are a lot of other companies. Stellantis owns 19 % of Leap Motor.

44:07They may not know that now, so you blew it, too. Well, Slate is using Goshen batteries from Indiana, right? LFP batteries. So I don't, you know, in talking to a few of the car guys that I talk to on a regular basis, it's this going back and forth, vacillating back and forth between what policy should be. one person in the administration saying X, the other person saying Y. And I think it has to be infuriating or very frustrating for automotive executives, especially the ones that feel like they're doing their part to be very American, very Michigan. So those two things, I think. And then Truby's response was...

44:52Mark Truby being the head of communications at Ford. So here's the opening paragraph of his response. Secretary Duffy's letter is a wrongheaded attempt to capture headlines at the expense of a company that has done more for American manufacturing than virtually any other in the nation's history. You don't hear car companies saying stuff like that against the administration. I mean, it just doesn't happen. Yeah.

45:14Gary Vasilash: Well, it's against Sean Duffy. I don't think it's against the administration per se. I mean, when you say this guy is just saying this to go out and grab headlines, I mean. And we should remember, what, six weeks ago, seven weeks ago, within two weeks of each other, Farley was on stage at a conference, said, we just need to build better cars that are competitive against the Chinese. And then a week or two later, Bill Ford was on stage, and he said virtually the same thing. We just need to just suck it up and design better cars that can be competitive. And I'm all on board for that. Yeah, my point earlier is that competition is good for the consumer.

45:49It's not always good for the people that are currently in the game, but the end customer, the economy, the global kind of competition is all good for that. You know, what do we think? It's political theater. I mean, it seems clear that it's political theater and, you know, what headlines they're trying to grab. But, yeah, I agree with you 100%. It's unfair to call out any one company. They're all doing it. And this industry has a long history of cooperation between competitors of all kinds, right? And to name one type of company as the enemy is also a little weird. I mean, yes, certainly there is some government support of Chinese manufacturers, but it's not ubiquitous.

46:31It's not always the Chinese stealing our secrets. They did a very effective job of getting Western automakers to have their JVs. They made that requirement. The Chinese have learned to be more than copycats. That is the reputation they had. They're no longer that. Turnabout's fair play. Why can't, why shouldn't Ford learn from what the Chinese are doing and bring that, bring that technology? It's, you might be concerned. I mean, he might have a valid point if Ford was giving away its technology to the Chinese. That's not what we're talking about here. I mean, this is about Ford also getting improvements because the Chinese have surpassed other parts of the world in a lot of ways, right?

47:15Not in every way. They're not better. But they're doing things differently, and there are things to learn there. Why wouldn't we want that to come back this way, right? We're not protecting anything. And the idea of having Chinese manufacturers build in the U.S. seems like a good thing. What are we trying to protect with tariffs and having an industry is what if we go to war? We've got to have those factories. Well, if those factories are here, then we have those factories, right? Knock on the door. Arsenal. Yeah. No, that's 100 % right. That's what you try to protect by having a robust industrial base, robust steel manufacturing, aluminum, all of these other things.

47:54That makes sense to me. I don't love the tariff situation. I think there are better ways to do it. But I can understand that. But to say, well, we can't have the Chinese manufacturer, that's political. That's not business. That's not economics. I would add that we have one opportunity, because they aren't here yet, to create a framework as restrictive as we need it to be. Data needs to be here on U.S. servers, not even North America, on U.S. Whatever the case is, if we're concerned about connected vehicles, blah, blah, blah, I have every confidence that most of the Chinese automakers would still sign up for it.

48:32You need to source from local tier ones or tier twos. I think they'd be okay with it. Now, they would have heartburn because they probably need to redesign some aspects of their vehicles for the local markets because, you know, in China, you might be using AliCloud, you might need to use Amazon Cloud, so user experience can be different, things like that. But, you know, they're already using NVIDIA Silicon for most of their vehicles, Qualcomm, Snapdragon for the front. And so this is not unusual for them. They're the most global automotive market in the China market, and there's tons of suppliers there.

49:03So they know how to do this. They're not going to give away the farm at the very initial negotiation, but we can create the right framework and have the OEMs here influence that policy because you had mentioned earlier, everybody's reacting. Everybody's kind of like, the OEMs used to be able to influence policy. And I think if we can get back to that and know that the consumer is the beneficiary. It's got to be bigger than the OEM.

49:37Gary Vasilash: I think the industry's got to talk with one voice. So it's the suppliers. It's the dealers. I would even argue labor's got to be part of that. And they disagree with a whole bunch of things, but there's certain core things of supporting a U.S. auto industry that they can agree on. Volkswagen Group was able to get their supervisory board, which is filled with labor. It's just stunning. It's filled with labor. Right. How did they pull that off? I guess my question is

50:13the productions that they've announced that they want to make over the next several years, is that still enough? The$9 million, as you had mentioned, is that deep enough? It's probably necessary, but not sufficient. There are other things they'll have to do now. In terms of job cuts, is that enough? Maybe. That's a hard question to answer without really studying it. But they're also going to have to do other things. They've been shedding brands. That's certainly one. They're going to have to get a lot more competitive in their own right. You'll probably see some more tie-ups and partnerships, different aspects of this.

50:48And we talk about Ford partnering with a Chinese company. When is VW or will VW do something like that? All of these are potentially on the table, but to just recognize that the markets you play in are not as big as they used to be and don't require as many people, yeah, that's a very tough thing to get done in Europe, as you all know. So one of the things I wonder about is, so Volkswagen announced today that it's going to cost them$18.6 billion for restructuring. Okay, so it's money out the window, right? And, you know, we look in this country, the amount of money that was charged against the EV thing that didn't work out, right?

51:30I mean, how do these companies deal with these billions and billions of dollars that go out the window, and yet the margins on the things that they make are so very small? uh so the write-offs are often accounting right and over multiple really they happen over multiple years they don't all hit at one time or they don't they certainly don't hit cash in all at one time many of these things are are just write-offs of accrued losses right things that they've they've just been kind of carrying um so writing off whether it's 20 billion for one company 18 billion for another. This is not like all of a sudden they have to shell out that cash, right?

52:09Gary Vasilash: But it was still money that was spent. It just went up in smoke. Yeah. Well, yeah, they recognize that it's money that they're not going to get a value from in the future. So they have to say, this is cost of goods that we were holding is whether they capitalized or whatever. But yeah, it is a way to clean up the books. You know, you often see this happen in in-court restructurings. You can also do it simply as a one-time restructuring cost. That's not uncommon. Some companies do that like every year, not to the tune of$18 million, but a billion or two almost every year if you're large enough.

52:49And, you know, the margins already kind of consider that, right? And, you know, there are some companies that will go multiple years in negative profitability, certainly negative net earnings. But that's why they have EBITDA. We all know what Charlie Munger used to refer to EBITDA as certain kind of earnings. Let me ask you, how does that different from an American car company that spent$5.6 billion, I think? I think Autoline had talked about$5.6 billion in warranty costs last year. From an accounting standpoint, how is that different than this 18.7? Yeah, warranty accounting is differential calculus.

53:29It's very, very complex because you're kind of projecting both future unknowns and current unknowns on sometimes imperfect data, right? And so these billions of dollars that companies recognize are often projections that go out five and ten years. That's it on the balance sheet. Yeah. I mean, they, they, it's a root from a gap accounting standpoint, they, they reasonably have to recognize that, oh, we, we had a problem on the set of cars that we don't know exactly what the boundary is. So we have to make it this big. And now, you know, you don't know how many people are actually going to bring that car in for that, that repair or recall or whatever it is.

54:11You don't know how many cars actually still exist because, you know, cars go out of the market or they crash, whatever. And so they make reasonable estimations. And then over time, one of the things that we've helped a couple of companies with is how do you minimize the actual cost? How do you make it less expensive to fix, both by lowering the cost of the parts that you're using, giving the dealers better instructions, holding dealers accountable to doing the repairs properly the first time? oftentimes what we find is when we talked we talked earlier about software and hardware which one is it you'll get repairs that come through where it's hard to know whether it was do I just need to reflash this thing or do I have to replace this module and you have lots of cases where modules get replaced the tune of multiple thousands of dollars versus what should have been a 20-minute job of just reflashing a thing making sure that you have the right rules the right support, all those things.

55:14Those are the ways that you can reduce them. And then, of course, the other one is recognizing and dealing with the problem quickly. You can minimize all that, but by doing all those things, it's just minimizing your future expected outlay of cost. And so it's almost the adverse of that, right? This is the case where they've spent all this money with the expectation that they're going to get a return on it, and they realize, no, we're not going to get a return on that. We just have to write it, treat it like an asset. We have to write that off. This is lowering the projected cost either by reducing the number of times you're going to have to repair it or the cost of repairing it and then being able to carry that forward.

55:56So either of these situations have an effect on what they spend on other things, like in terms of product development? Yeah. I mean, you know, if you had infinite money to do everything, you don't need strategy anymore. So yeah, I mean, you only, and you know, the, You can have a fortress balance sheet for the just-in-case, right? If you have another financial crisis like we had, what, 2008, 9 into 11, all of that type of thing. You can have something. That's what a lot of OEMs kind of have right now, and suppliers don't. We keep saying this. We keep expecting, and I think the shoe will start dropping pretty quickly as interest rates are staying high longer.

56:38Suppliers are really stretched. They do not have a lot of capital. They do not have reserves. The OEMs are funding more than they used to, the suppliers, to provide assistance to keep them out of bankruptcy. At least the OEMs have learned it's more expensive for a supplier to fail than to kind of make it their problem. But at the same time, they also can't afford to just have suppliers be drunk and disorderly with no repercussions. Right. And so there's a balance there. But yeah, it's it right now. It's really complex, really tight for these for the suppliers in particular. But the OEMs that everybody has to make choices about what you can do.

57:20And with the OEMs, oftentimes it's what can my supply base afford to invest in and hold, you know, until I'm paying them for two. How many billions of dollars can a company genuinely sit and wait until PPAP if it's two years down the road? Or if I'm helping develop a new electrical architecture that I then cancel? That's billions of dollars that some suppliers spend that then, okay, well, the supplier didn't go and say, I'm going to invest my money at risk. They said, I would help you develop this thing that you're going to sell in your cars. Now you're telling me you're not going to sell those cars.

57:58I need that money back. That's how those things go is everybody thinks they're investing in something that's going to sell. And then if the plan changes, well, you've all that money. That's how that happens. I think there's a couple of Asian battery companies that could relate to that over the last few years.

58:16Gary Vasilash: That's interesting what you're saying about suppliers. Was it all these EV programs that got canceled? Why are they in CapEx straits right now? So it's a lot of things. I mean, it's all over the industry. because one of them is the cost of material has just gone up so much. And so if you think of it, if you're making this, and okay, if I'm going to sell this to an automaker, I will generally have said, okay, it cost me this much to make this piece, and then this much to make this part, and this much to put the label on, this much to put the water in, and then I need to make money, so I have a margin that I make.

58:53And we sign a contract, okay, I'm going to start delivering this. And tomorrow, I double the cost of all the raw material. Automakers are not giving me higher profit. They might agree to increase the price of just reflecting the raw material. Now, my margin as a percentage has been cut significantly, right? If labor, transportation, raw material, if every aspect of my business gets more expensive, which it has over the past two years for most companies, my relative margin, my gross margin and net margin is a percentage, plummet. And that's where you get into your ability to borrow, your ability to use cash and how much gets taken up in working capital that I can run out of.

59:41And that's where bankruptcy happens is I run out of the ability to buy the next lot because I have payment terms and I have that, right? That that's the thing that we're expecting is, um, you have both that impact, you have volumes not hitting, right? So I have also bought equipment, tooling and facilities with the expectation. I'm going to sell you 2 million of those a year and you only buy 1 million, but we hadn't, but my, I've got to pay for all the things, all the investment I made at all of the fixed costs, right? So you have a variable cost problem and you have a fixed cost problem that's hitting this industry all at the same time and interest rates are high.

1:00:25And so if I'm going to service my debt on top of all of these things, there are a lot of companies that are just, they get to, there's an edge that you get to where nobody's going to lend to you anymore. And that's where somebody has to either declare bankruptcy or sell off, you know, hack off limbs and sell your kidneys. And, you know, that's what we're starting to see some of the German companies have. Yeah. As a former sourcing guy, normally the purchase orders say the supplier, if material costs shift plus or minus 10 or 15%, you got to eat it. Yeah. Right. So there's a ceiling on inflation and changes in material costs, but normally the supplier will eat up to 10, 15 % of that.

1:01:13So how imminent is this problem with suppliers?

1:01:20It's ongoing, right? I mean, some of it has started. Another year of declining volumes, like if China's down 20 % and Chinese cars start going someplace else, or start they're still producing but um you know these are suppliers that don't sell to the chinese and the erosion of volume is for the western automakers uh another year of that you'll have uh you'll have a lot more but it'll be a significant increase going into probably like q1 q2 um as as if interest rates remain high which no indication they're they're not going to remain high if volumes don't come back which there's no real indication that we're going to suddenly see a 10 percent increase in volumes in either Europe or the U.S.

1:02:08Like these are the. That's what we're looking at. There's a certain irony to this as well, because the Chinese are kicking tires on brownfields in Europe because a lot of factories in Europe are underutilized. Like the Ford is a prime example. I think Valentia was running at like 35 percent. OK, so Ford could not do that or in perpetuity. So this made a ton of sense. Spain is now like the new Detroit of Europe because there are so much foreign direct investment going into that. And if we allow the Chinese to enter, they might be the only ones that can bail out the tier ones if the legacies continue to shrink.

1:02:50Right. And so there's a certain, you know, because the Chinese are the ones growing and building factories overseas, not the legacy automakers. I mean, they're shifting chairs when they're hiring people because they're letting go X thousand and hiring people with the right skill set. And so this is where I'm torn, right? Because as a capitalist, let's build affordable things that people want so companies can be profitable. But yeah, I'm fearful of the companies in Michigan because we all know that the products are pretty good, right? They're competitive. Yeah, for sure. The reason you see it go to Europe first, partly because they haven't had as much of a blocking mentality about it, but they've long had that that region has long had much lower utilization of their plants because you can't close a plant.

1:03:42So you just figure they just figure out how to deal with it. And now they're getting to that point where if you're sitting at 35 percent long enough, you just have to you have to close it. Oh, here comes a company that wants to build here. That starts to sound pretty good. Right. We don't have as big of that. That problem is not nearly as big in the U.S. because it's just far easier for us to close down manufacturing. And then, you know, whether it's move jobs or not have the jobs, it's just an easier legal environment to do that.

1:04:12Gary Vasilash: Look, I hate to cut off the conversation. This is going really well, but we have come to the end of the show. Dan Hirsch, thanks so much for coming on. This has been fascinating. We're going to have to have you back and continue this discussion, too. We'll have you back as well. Yeah, awesome. And Gary, you and I will continue to do this. We're good. I want to thank all of you for having tuned in. AutoLine After Hours is brought to you by Bridgestone Tires, solutions for your journey. And by BorgWarner. The automotive industry continues to evolve, and so do the opportunities to define it. BorgWarner, one of the world's most admired companies, gets partners where they need to go.

1:04:51Let's do something big together.

1:04:56Thank you.