AAH #809 - China, Canada and Cars

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0:48Let's do something big together. Hey everybody, thanks for joining us today. I'm going to do something a little bit different. We talk a lot on this show about China and China speed. And so we're actually going to have someone on the show who can break it all down for us and give us a better understanding. So I want to bring back Edgar Feller, who has been on the show before. He's with the Center of Automotive Research. He's the principal mobility analyst. And then oddly, they have N strategy in your title. I don't understand how that works, but never mind that. And my favorite guest, Jerome Lovin, who is with Seeking Alpha, among many other things.

1:33The man is just a jack of all trades and master of all. Thank you, Gary. So thank you for being on the show. All right. So Edgar, you and your team out at Carr did research into why China is so successful in the auto industry. So give us some insights into this. Thank you, Gary. Thanks for the opportunity to talk today. So we're getting a lot of requests from industry for facts about China. And so we set about trying to look at China because there's so many different things happening and really trying to understand that success and trying to break it down. Because as we're doing the analysis, you quickly realize it's a very complex issue.

2:24And there's a number of sort of success factors that contribute to how they compete and their success of late. So we set about looking at all of them. We published a white paper which folks can find on our website. There's about 300 PowerPoint slides behind that. And we tried to do is break it down as succinctly as we could into some of those factors. So some of those we mentioned are setup. What's the history of the industry? Because when you look, maybe folks are surprised at the speed and how the success of late, but you can go back five decades to really look at how that ecosystem has evolved over time.

3:07It's just maybe perhaps of late that folks are a little surprised at how successful it's been of late and some of that. We looked at the supply chain. Where do they have deliberate strategies around a strong planning? And you can go online. You can find some of the strategic plans that the Chinese government has put forward and long-term view. So we were looking at where are some of those strategic choke points in the supply chain? What makes them so successful? Where do they have leverage? and that we looked at speed, which is often talked about a great deal in the industry. How fast really are they?

3:51And they're fast. And some folks talk about an 18 to 20-month development of product cycle. And yes, it can happen, but we were looking at what's your starting point? Is that truly 18 to 20 months? Is that a top hat, a refresh? Is that a full vehicle design? We looked at sort of the saturation. is our CEO, Elizabeth Krier, called saturation. It's no secret that they have a lot of excess capacity. And what role does that play globally? Subsidies. What do those look like? What's the state support? And then some of the sales success they've had. You can look just south of us to Mexico and look at how successful they've gone from nothing to capturing as much as 14 % of that market.

4:41in a very, very short amount of time. So we try to think about it because we think it's very complex. We think it's really driven by, at the provincial level, not necessarily just the national, folks like to talk about as the national government and that. So that was sort of the foundation of the research and that's how we've been looking at China. So if we take these and walk through them, okay, so in terms of the setup, I mean, you mentioned that there's a long history there. So in your report, which you can, as you mentioned, is cargroup.org. Yeah. So you guys write, between 1980 and 2000, foreign automakers entered the Chinese market through restrictive joint ventures that limited foreign partners' ownership to 50%.

5:31Technology transfer was an explicit requirement. Engineering expertise, manufacturing know-how, quality improvement systems, product development processes, and best practices were transferred to the Chinese domestic partners. So basically, the Western automakers went in and said, hey, this is how you do it. Exactly. I mean, it was sort of the price to entry for that market. Everybody looked at it. I was in equity research at the time, doing a lot of the analysis for investors. And we as an investment community looked and said, wow, look at this untapped market. It's unbridled market. You know, there's probably a lot of naivete at the time when you look back in retrospect because, you know, it was a lot of our technology on a lot of our vehicles, a lot of American, European vehicles that we were trying to perhaps impose on the Chinese population consumer.

6:31and you've seen as that, you know, just through demographics and, you know, this wealth transfer and as they've really come of age, a lot of that's changing. But, yes, so that was sort of the price of entry at the time. And I think folks in retrospect might look back and have a different, you know, oh, my gosh, what do we do perhaps? But, yeah, that was a significant amount. That's why I say this has been over five decades, and perhaps it has a bit of this curve. Perhaps it's gone kind of hyperbolic. I think where folks get really surprised was perhaps during the COVID period when we were all kind of inward focused and that, and where they really took off.

7:22But it did. That was the foundation in many respects. And a lot of those legacy, those businesses and that, there have been a lot of closures and plant consolidation in some of those original businesses. It's really, we have a whole plethora of upstarts and things that are both still privately, private companies and those that are, it's not one size fits all, which is, I think, you know, folks want to say it's all state owned, state controlled. It's far from the case. You know, I wonder how much of the ethnocentric assumption that they would be buying vehicles from us and we would maybe be tailoring our vehicles for them and they would buy them willingly from us.

8:06And we never really thought we, meaning the American automakers, because I visited China at the time. Did we ever really think as Americans that they would be able to make cars on their own, with their own designs, even if we gave them the technology? In retrospect, it seems like we should have thought about that maybe as a possible outcome of all of this. We knew that they were going to learn our technology, but I don't know that we ever really believed. We, again, the royal we of this auto industry, the Western auto industry, ever thought that they would take that technology and really make their own flavor of vehicles.

8:47Okay, but how much of that was predicated on, you know, as Edgar said, it's this huge market and the Western automakers just ignored everything else except for the opportunity to get into that market. Well, we're saying the same thing. I don't think that those negate one another. I think they go together. We were talking before about how we were going to the auto shows in the 2000s. Okay, they had already been there. They had already been developing this for 20 years, and there were plenty of plants. And we were looking at some of their early iterations of vehicles and thought, these poor folks, they don't really get it.

9:28And we don't really have anything to worry about. because if they ever try to sell that to us, forget about it. And probably their own people wouldn't buy it either. So why worry about it? Because we saw these early vehicles and they were pretty funny. A lot of them were pretty funny looking. Yes. Yes. So I think. Or they were imitative. If you remember, there was this whole trend where they would take some, you know, like a Porsche and they would try to make the Chinese version of a Porsche. That's right. But it was so transparently imitative that you would look at it and you would go, wait a second.

10:02That's ridiculous. Nobody's going to buy that. Now there's some outstanding vehicles. I mean, it doesn't mean just private companies. I mean, there's really, truly protective vehicles now. Who would have thought? Yeah. Back then, going to the hour show. Okay. So another thing, the size. Okay. You guys are right. By 2009, China became the world's largest domestic automotive market by volume, surpassing the United States and becoming the largest auto-producing country. Now, this is pretty quick. It's very quick. I mean, there was a long foundational perhaps building period, but yes. And now, if you flash forward today, there might be number one in every category.

10:47They were by global sales was the only one where they were just behind Japan and the expectation. I don't know what the domestic market, if things have softened a bit there. But I mean, they're on track to be number one global exporter, number one in domestic sales in every category. Number one in electric vehicles. uh uh it's it's i i would argue i mean the vision with the some of the vision statements and the strategy that the chinese had set out on they've achieved and they've they've achieved it already and you're still talking about a five-year plans and how that will evolve uh i mean maybe they haven't from a um produced the same global leaders within the if you rank the automakers but they're very quickly rising up the ranks.

11:39And they certainly have aspirations to be number one BYD in a global automaker in the world. Can I ask you a semi-automotive question? Yeah. You mentioned before that you were an equity analyst, okay? And I'm very interested in that stuff. Yeah. You look at the Chinese auto industry and you listen to critiques of China as a communist country. it makes you kind of wonder whether their version of capitalism actually isn't something that we could learn from, right? We have a lot of discussion about cost of capital, because this industry in the U.S. and Europe has struggled for a very long time to raise capital.

12:24And there have been periods of late, I mean, you have to flash back, more recent than the last two, three decades. I mean, there were opportunities around electric vehicles. I mean, clearly Elon Musk was able to do it. And there were a couple of the startups. There are investment bankers, I'm sure, at the time were counseling them. You need to raise more than you think and get out there. And those that did are their survivors in that. So capitalism, it's brutally efficient. I think it's Karl Marx, as an equity research analyst, voting. But it's the way it is. And you have to ask yourself, it's become this hyper-competitive where everybody's asking themselves, equity research analysts are like investors, how long can they go on like this when nobody, maybe two, are making money at the time?

13:22How are they getting the capital? because you go to places like when I was vacationing over the summer in South Africa, it's very expensive. Every billboard I saw in South Africa in a very small market relative to the U.S. market, it's everywhere. They're advertising. And this is not just that market. It's Mexico. It's very expensive. It's a very capital-intensive business. Where is it coming from? And at some point we get asked a lot, when does it end? And back to your... Well, we had this in Detroit back in the day, right? 125 years ago. Yes. There were scores and scores and scores of auto companies here in Detroit.

14:06Yes. And they merged, a bunch of went broke. Yeah. Why would anybody think that that's not going to happen in China? That you have 100 car companies there now, roughly, right? Yes. That's the right number. Yes. Okay, so let's say we have four or five or seven survive, and 90 of them either merge or go out of business. So what happens? So that will happen, won't it? Oh, yeah, at some point it does. But I look at the economy in the way that it's – somebody put it to me that it's a surplus economy with that persuasion, with that philosophy in which that managed and that approach that makes it different from our own.

14:47Sure. Back in the day, if these Detroit automakers were able to export at that point, that would have been a survival strategy for them. But export wasn't a thing back then. Right. Export's a thing right now. It's very much a thing. So some place that's out in the hinterlands that's maybe making 100 ,000 vehicles can export to South Africa and find a market for it. Right. Yes. Okay. So you guys have that. There were 47 domestic automakers in China in 2015. it peaked at 74 firms in 2019 and declined modestly to 68 firms in 2025. Yes, you can get into definitional because things get a little weird about, you know, who's connected to who and there's quite this ecosystem.

15:31But yes, I don't see that changing at any time. I know it has to. Logic says, as a capitalist, as a former reformed equity research, it has to. but I don't until, and at some point the survivors will be, you know, globally competitive. Or the state can keep feeding them as long as they want to. At some point it's really the state that says, hey, you're out of business. We're not giving you any more money. And it's at the provincial level. And that's, I think, what a lot of people don't quite fully understand. If they think about it as China and it's employment, it's industrial based, it's manufacturing.

16:09at the provincial level. It's their version of Lansing. Yes, that's right. So the number of automakers, that's helping shape and form who the survivors will be ultimately. It's not just one, two. It's the number. It should look more like where that provincial concentration of the automakers is. Okay, but we seem to have this built-in expectation that if we basically have a handful of auto companies here, then of course China will have a handful of companies. But maybe isn't that going back to what you were talking about earlier, that we have this notion of what reality is, whereas perhaps the number is 40 for that country.

17:05and or at least big much bigger than what we're used to you know maybe it's 20 but he but it could be you know it's 20 but it's they still they as far as we know they still have to they still have to buy presses they still have to buy uh assembly lines they still have to buy robots they still have to have the capital because this doesn't stop being in a capital intensive business it's a Long lead time business. Yes. Maybe shorter than we thought, but it's still a long lead time business, and it's a capital intensive business, and that doesn't change. I don't know what the ultimate number will be, but it's more than what the industry is used to.

17:42And from a hyper-competitive and a competitive dynamic, that will continue the ripple effects for a long, long time. I'm really fascinated to hear, and I know you're going to talk about this in a second, so I don't want to steal your thunder, but we talk about speed. and we know that they do everything faster in China. And what is it about doing things faster that we haven't figured out yet in this market? I think you've had Tuli here a number of times and deep respect for his analysis and his insights. Something that's driven by, I think he would tell you that hyper-competition that's happening in the China market itself, driven by the consumer and a different cycle there to remain competitive in that own hyper-competitive market itself.

18:36And so if anything, they're exporting that, perhaps, globally out of that. So I think some of that's inherently a market. How fast is necessary, I think, is still to be decided. I mean, we're still looking at a generational. There's still many of them had been first-time buyers, and it's only now switching over where you're beginning to see, you know, second-time buyers in some cases. And that's, so how fast is too fast? There's a cost to all that, a capital requirement to all that speed. You know, the other question is I see, I've seen a lot of analyses from different consulting firms calling out 18 to 20 months is a, you know, with a development cycle.

19:20Where's that starting from? And the information, one of the problems we have as analysts studying that market is that about data and getting good. Data is not, some of these are refreshed vehicles. They're not ground up replacement vehicles. Some of these had engineering support from some of the engineering services firms that they can, from elsewhere that are well known around globally, that can help you design a vehicle, help you build a vehicle, all those kinds of things. uh um so it's it's not clear the the point that is clear it is faster and i think that's the new reality and i think um you know there's also they have this thing called the 996 program yeah heard this yes why don't you tell everybody what the 996 program well i mean they're they're they're they're working their tails off and uh yeah i mean there's a uh i i quote it really well myself necessarily but other than to say that nine to nine meaning nine in the morning to nine in the evening, six days a week.

20:19So they've got a one day weekend and they're working 12 hours a day. So that makes things faster, right? That's right. You wouldn't get away with that very long in the United States. No, no. And in the rest of the world, right? So, I mean, you would hear that same thing in Europe, in particular, in Canada and here. So we're not used to that. There's also some things around with the supply chain too that can enable, you know, we've heard some things around where access to certain grade steels is, you don't have to work, wait in the U.S. 15 weeks for a tool necessarily. And you have, I've heard that hasn't changed in the last two decades necessarily, even with despite efficiency, we're talking about, we're doing a tool like study.

21:07You're saying you can get tools much quicker. Much faster. And some of that's excess capacity. That's right. Some of that is a function of surplus. Some of that's a function of closer together. There's not the scarcity. There's a number of reasons for that. So all these things sort of reinforce that speed. All right, all right. I'm going to quote you to you. Okay. During the concept stage, Chinese automakers often use existing electric vehicle architectures. We do that. Software stacks. We do that. And battery systems. We do that. In sourcing and design, Chinese automakers leverage strong automaker supplier relationships with suppliers brought in early for product development.

21:49If we look at the WRI, the Working Relation Index that happens every year, the OEM Supply Relations, we see that Toyota and Honda do a magnificent job of that. The other guys, not so much, but they understand that. Okay, so I'm not seeing anything magical there. Additionally, automakers utilize common components and standards and employ efficient, quote, to shelf schemes. No magic there. Well, by itself, yes. These things, that's right. I mean, to be competitive in this industry, that's the reality of, you know, you reuse as much as you can. But they've just taken it, in our experience, farther.

22:26And they're also starting with often, I would say, clean sheet, a newer clean sheet than we have a lot of legacy things that had worked their way inadvertently into electric vehicles. that why do we need some of the sound dampening and other kinds of things in an electric vehicle that's inherently quieter or quieter in different ways than an internal combustion engine with the noise. So some of the things we had, where they're starting at a different point, with some of the, it might be an existing design, but they don't have some of the other legacy, perhaps designed in systems that we had. So you're saying that we've got a bunch of NVH engineers here, and they don't have as many NVH engineers there because they realized, oh, if we're going to have an electric vehicle, it's quiet.

23:24But we have these NVH engineers who came up with ICE vehicles, and they're still on the payroll. We've got to give them something to do. And so we have this, no, I'm serious. I mean, and we have this new program. So, you know, let's put Bill on that because that's what Bill does. But maybe you don't need Bill because they're inherently quiet. They're structural things. I mean, you would have different, perhaps, and I don't like to overgeneralize around, you know, around the industry. We try to do some of it was data driven, but the as much as we can. But, yeah, it's a difficult thing because that development program might have gone through, you know, remember at one point, you know, when Ford was trying to do a bit more of the, there was some siloing around some electric vehicle program development versus ICE.

24:17but then the starting point was still some of the core structural components that were done that way because we've always done that. We've always done that with internal combustion engines and the way that vehicles crash and the way that, you know, and some of that creeps in. And they were just starting from a different place. And sometimes they're designing off the same. My point around the 18 to 20 months is we have to be very careful if we're talking about what that timeline is. Because in many cases, you know, it could be... You're not looking at apples compared to apples. Yeah, that's why that was the point.

24:58Thank you. Let me ask, can I ask you a sociological question about China and cars? We went through this period, we could look back in our own history when nobody had a car, then people started to have cars, and then the Model T came along and it started to be kind of the every man, every woman type thing. And then households got one car, two cars, three cars, four cars. Everybody had a car and suburbia was invented and people moved out of the cities. We have a society, China, that started actually now, the expansion of the population has stopped. It's actually starting to shrink a little bit and it's becoming more prosperous.

25:42Is the size of the automotive market going to get much bigger in China because people just are raised with the expectation that they'll have privately owned vehicles? So I think the social economic, the trends around the cohort in our age is a very, very important one from a end demand of, you know, vehicles and how we use them and how many we need. and we're experiencing in Japan and developed countries, I think there's some long-term implications about long-term demand, whereas trendline demand for industry. But interestingly enough there, and I'm not an expert when it comes to the Chinese market, Chinese consumer per se, but they're very much in a different curve around car ownership, right?

26:33We have a whole cohort of young people who don't want to drive at all. Yes. Or they want to take a robo-taxi. They want to live in Brooklyn and take a robo-taxi somewhere. They don't care about owning a vehicle. So we might be at a different stage. But I wonder, because they're not at that stage yet, whether they're more interested in owning more vehicles. Yeah, I think there still is a wealth effect. I still think there's some more growth, I suspect, there. But I do think that the long-term trend of an aging population and one that is in decline globally has global implications for all of us.

27:12And I mean, North America and Europe, in particular, Japan, I think they're because a different point in their cycle that I suspect they're still hyper competitive. They're still, you know, they're still turning over models. I mean, the behavior, the industrial behavior and the strategies seem to suggest that there still is a growth market, still a growth market in China. And they seem to be on top of the so-called new energy vehicles because of their technology and batteries, their technology and charging. I seem to get an email almost every other day about new supercharging initiatives. Is this really a thing where you can supercharge a vehicle using a great amount of electricity in a very short time?

28:03I mean, it is. There's a lot that has to be done. I mean, yes, they're leaders in much of the – I mean, when you start to talk about powertrain, you talk about electric vehicles and charging and batteries and anything connected to EVs. And from the supply chain, when we're looking at the supply chain and strategic implication choke points, they clearly have a significant amount of leverage. And they have not that, but a significant amount of know-how. I mean, sort of the leadership around fast charging is clearly coming from China. And, you know, we're always, you know, we're a little surprised.

28:41I mean, there's been this electric vehicle. We're at the lower end of the adoption curve globally. And we're, you know, we thought with policy, there were enough incentives to move that curve, shift that curve up perhaps faster. for them it's all there's been a it's a combination like so many things in why we're doing this analysis it's policy it's technology it's the supply i mean these things are all interrelated uh and now they're a point where they have technology leadership there so they can that vehicle there's less sacrifice you know for a lot of us i mean we'd be further along if if more Americans felt like I could take my vacation up north in the upper part of Michigan and drive my battery electric vehicle, fast charge it, have that ICE experience that we're all used to.

29:35Some of this stuff's very simple. I noticed, for instance, when I first started testing some of these cars and I would go to a fast charger, the cable was really bulky and difficult to use and heavy. And I recently saw a picture of one of these Chinese stations where the cable comes from the top. It comes down. It's literally weightless. You just plug it into your car. And I thought, OK, that's not high technology. It's not expensive. It's just some clever person said, why don't we run this thing up and let it come down in a way that makes it easy for everybody to use. Technology leadership and it's coming from China.

30:15That's a great example of, yeah, they're not following necessarily anymore. There's nobody to follow. Early, that's right. They're out. Yeah. Yeah. The wake-up call. All right. So we're going to follow that comment with a word from our sponsors. We want to hear from our friends at Bridgestone and BorgWarner who helped make this show possible. And then we'll be back.

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30:54The 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. And we are back. the conversation about China was going on during this whole thing. A lot of excitement from around here. All right, Edgar, I mean, we were talking earlier about, you know, the number of vehicles, the growth. Now, you guys found that there's 15 million unit overcapacity that exists in China, which then explains why the Chinese are so interested in exporting to different markets.

31:39Now, did you guys look at or did you find whether or not this capacity was deliberately built in order to have an export market? Or was it a nature of this hyper competition that's going on? Like, you build a factory, you build a factory, I build a factory, Sean builds a factory. This is part of the master plan, in other words. No, I mean, it's just part of it. Or was it just by action? Or just by people all wanting to have factories and maybe nobody buying their cars? Fortunately, the answer is probably all of the above. But if you want to be the... They clearly had a strategy of being global leadership in this industry.

32:21And to do that, you've got to build the capacity. It's difficult to say how much of it... It's certainly being directed elsewhere. and it's that hyper competition that is driving some of that. So, yeah, it's looking for a haul. I mean, it's remarkable to go and you can go market by market. As I said, I think it's close to us in Mexico going from up to 14 percent, you know, of market share in Mexican vehicles. So in Europe, as we experience it, it's difficult to say exactly. I mean, the strategy was clearly part of that in planning. But then, you know, with that, in that hyper-competitive, I mean, that's, I don't know if it should be a surprise.

33:20I mean, it's perhaps surprising there's that much capacity. But, you know, again, I'm beginning to think of China as more of a surplus economy in many, many ways as they're figuring out where is the right capacity utilization and economics and market. And but, yeah, exports are clearly part of it now in a very big way. And that's what policymakers and we all are going to have to deal with. You deal with this stuff every day. I mean, the big elephant in the room, obviously, is when do the Chinese get to America? Yeah. If ever, some senators would say, if ever. And I'm wondering, because you deal with this stuff every day, what's the imaginary scenario that you think is most likely for this market, given the reality of today's politics, given the reality of what's happening in Europe, given the reality of all this excess capacity?

34:26capacity and also the, frankly, pretty good reviews that Chinese vehicles have gotten and the desires of, you know, more progressive voters to want emission-free vehicles. What's going to happen here? Yeah, it's the billion-dollar question. I mean, they're already here. I mean, as you know, with Volvo in South Carolina, which is becoming its own issue, with some of the legislation that's been proposed that seems to be working its way through Congress. Clearly, there's been movement in Canada with the recently putting in caps, 49 ,000 going to 70 ,000 over five years. previously before tariffs were put in place in Canada Tesla was satisfying that demand in Canada for the first roughly around 49 ,000, just under 49 ,000 maybe 44 ,000 units or so from China.

35:36Those were Tesla's being imported. So the reality is they are here in different ways perhaps in some of the suppliers. Mexico also, right? Mexico as well. There's one of the plants for sale there that BYD is rumored to be in the running for. So they are here. They're here with Ford's here in Michigan, with the CATL, the licensed batteries. So it's difficult to see. It's difficult to know exactly, but the reality is they will. in at some time. And I think that's why everybody's worried about, you know, as far as, you know, speed. And, you know, we've got to adjust as domestic as this industry to be competitive.

36:30So it's very difficult to answer your question. So there was a piece in Automotive News by a gentleman named Dale Hall, Global Program Lead at the International Council on Clean Transportation. And he wrote that the Detroit 3 rank among the world's five least capital-invested automakers in EV research, development, and production. Chinese companies such as BYD, SAIC, and Gigli invest between$1 ,700 and$2 ,750 towards EVs per vehicle sold, while four General Motors, Atlantis, each invest less than$400. Now, there's a lot of discussion about the unfair playing field and the subsidies and so on. Now, this seems to indicate part of the problem is the OEMs themselves.

37:30But when you looked at the subsidies, and I mean, they had all kinds of subsidies in China, you know, get an electric car, get a license plate don't get an electric car yeah wait a while to get your license plate you know i mean and things like that but the government fundamentally had these five-year plans and as you said they said in these five-year plans we are going to be dominant in automotive we are going to be leaders in evs because they don't have a whole lot of oil right in in china right so you so the the chinese government put support behind these companies to do what they've done yes Do you see a clear path for whether it's the Detroit 3 or the Europeans or the Japanese or even possibly the Koreans without significant government support?

38:25We're going to have to figure out a way is the reality of it. But, I mean, to put some of the numbers in perspective, it's not our analysis, but as a percent of revenue, some of the subsidies we were seeing from China were about 3 % of revenue. That's what Toyota spends as a percent of revenue on R &D, period, roughly. I mean, it's in that range. So these are meaningful, significant dollars that are being with subsidies. But subsidies, we're finding, are coming in many different forms, not just from we'll give you the land if you want to build. I think it's always often what we find in the context of employment.

39:14We'll give you the land. We'll give you the building. We'll give you the tools in some cases. Or we'll finance the tools for 1.75%. Train your workers. We'll train your workers. Right. It's just that to achieve that goal and that strategy being of leadership and global leadership. So, you know, we're going to have to find ways as an industry. You know, I'm advocating some of the work that we're doing on tooling for a task force type approach to be able to kickstart and break down. And we're going to have to find ways to share things pre-competitively. you know they have there's certain standards and we talk about the speed and the supply chain and there's common parts that are you know that that is there's a fair amount of that happening in china uh kind of pre-competitively uh and we we're going to have to find ways to do that but again you know you know we did that remember the partnership for next generation vehicle pngv and U.S.

40:20car, which came out of that. I mean, what happened to these things? Well, sometimes we back into it accidentally. I mean, if you look at the case of Tesla, Tesla started out as a company that struggled and struggled and struggled, and it finally made it and made it into, because of a few curiosities. One was its stock became very, very valuable, and it could sell shares for a lot of money. Nobody planned that. It just kind of happened. But, Jerome, they got a lot of government. Don't forget one other thing, the clean air credits that they got from the legislation. And they got cheap government loans.

40:55They got a lot of loans that kept that place going. Yeah. Yeah. So we can argue about, because there have been, yes, instances of subsidies in this country and elsewhere. I think it's just the way that they're being deployed at the scale of which they're being deployed in China. We've long had, from policy perspectives under the prior administration, incentives in order to convert. It's usually over some policy objective to convert a technology to make sure nobody's left behind and to electrify. So we did have some subsidies in that, but they still don't add up anywhere near the 3 % and some of these other.

41:38It's significant. And again, some of it is happening in ways it's pervasive in ways. So that sort of involvement in those kinds of ways is new for us, I think, as an industry in ways that ours were usually around some kind of technology to meet certain emission standards, to meet policy objectives, to not always. I don't want to be very careful not to overgeneralize, but there's been very supportive of industry and its global ambition. And at the same time, I don't think there's an appetite, at least from where I'm sitting, I don't sense there's an appetite in this country for the same kind of central centralized planning you have in Beijing.

42:28And there is an advantage on the other side of the equation for people like Elon Musk, who are extremely innovative, extremely creative. And we can put him aside there. We have plenty of other examples of people who have created entire companies, entire industries based on their freedom, their creativity, their innovativeness, and the fact that they don't take orders from anybody. They just do it. We've got that. And the Chinese have a lot less of that. That's for sure. Yeah, I mean, you see other industries where examples were competitive and there's innovation around AI. And I mean, it's very much in the news today with the China-U.S.

43:11summit in that. And we're seeing AI applications of vehicles. So we know we can do this. I think we just need to it's forcing us to re-examine everything from the supply chain, our resiliency our efficiency design cycles what's necessary so in the end, I mean the consumer does win it's going to be, this could be a very competitive forces like I haven't seen in three decades of analysis but it will, it's necessity is the mother of invention. Have you driven Chinese vehicles? Yes, yes. Tell me a little bit about the stuff that you've driven and what you think about it. Yeah, I've driven the BYD, the going, the Seagull.

44:06What's it called, the SEAL? Seagull. Seagull. Yeah, yeah, the Seagull. I mean, it's, you know, that budget need. I mean, we have to step back that vehicle in parts of the world could do, you know, very, very well. And it sounds like, you know, it will and it should. Is it for the average American consumer? Probably not. But it's, you know, for the price, it was, you know, very competent and very – and then I've driven the SE7 as well. And that's – That's like a supercar. It's a supercar. And it very much – I mean, there's a reason when Jim Farley was, you know, didn't want to give it up. I mean, it's a very, very, very competent vehicle.

44:48You can argue if you're a Porsche owner, is it really a Porsche? But in China, it is. And that's who decides, the consumer. Talking about the Seagull. Yeah. What was it about the Seagull that you didn't think would be, that the American consumer would have an appetite for? I have friends that would be very much of appetite for them that looking for that kind of a car, maybe that meets their commuter kinds of, or they're driving around the city. Yeah, yeah. For me, I mean, it didn't feel cheap, maybe perhaps somewhat. It is cheap. Yeah, it is cheap. Well, that's the, that's it. Inexpensive, Daron, not cheap.

45:26So it's inexpensive, but it feels cheap. Yeah, but it's remarkable, you know, and everything on that vehicle says BYD. It's the vertical integration within that company. You look at the glass lenses and things. We haven't been in that business in a very long time. Anyone else. That's what's striking. There are certain striking things about the vehicle and the way it competes. It's a very competent vehicle. I would never dismiss that vehicle. We've got to move on to another thing that you guys have done. And that's looked at the Canadian-U.S. trade war that's going on. Okay, and you guys found Canada remains the largest U.S.

46:12export market for the automobile and light-duty vehicle, heavy-duty truck, and motor vehicle parts industries. During the first half of 2026, Canada accounted for 45 % of automobile and light-duty motor vehicle manufacturing exports, 79 % of heavy-duty truck manufacturing exports, and 39 % of U.S. motor vehicle parts manufacturing exports. Okay, so they're taking a ton of the U.S. things, and we put a big tariff on them. And we're getting even more of their, is percent of their exports to the U.S. And on top of that, what's being built in Canada has on average about 53 % the value of the parts are U.S.

46:58parts. So we wrote this, you know, just for mine folks, as things get a little bit more heated in negotiations. and there are a lot of things at play here, I think, beyond even automotive in the tariffs that we both lose. There's no winner in a trade conflict like this. And when we look at it, we step back. This isn't just a trading partnership. This is an integrated industrial production system. I didn't believe it at first. We've done some analysis about how many times a part goes back and forth across the border. I've heard it as many as seven or eight times. I'm like, I don't believe this.

47:40It just seems too high to me. You include tools. You can get to seven or eight times that a part can. That tool to make the parts to go into the vehicle can cross the border between Canada, Michigan, Ohio. I mean, the U.S. That's not inconceivable. You know, it seems like there's a disproportionate impact on Michigan. Yes. And I think that that's going to play into the politics of the next 60 days, because whoever makes a more convincing case that this is a bad idea for Michigan, I think, is going to help himself in the Senate race. That's 40 days, Duran. Pardon? Is it 40 days? 40 days. Yeah. The cliche is 40 days is a long time in politics, long time to make mistakes.

48:29But but I think it is really going to affect the state a lot. But the thing I wonder about, though, okay, so we've talked all about - Well, you didn't let him answer the question. No, that's fine. All right, all right, all right. He can wrap it in. He's a very clever man. All right, all right, all right. Okay, so, I mean, the thing is that, okay, so we talked about the vertical integration and the integration that's going on in China, okay? So what I wonder is, is from what you said that you're seeing, you know, Canada is part of a network, a structure that the U.S. auto industry has. North America, really.

49:02Yes. Yes, that's right. So, I mean, aren't we kicking ourselves in the butt by not working with them? Oh, 100%. So what our economist is doing some analysis, Tyler Harpy, he's a talented guy, very, very lucky to have him. So what we're looking at, it's already had some impact on the Canadian side, more than it has on our side. but it stands to reasons that it would because, you know, more of their exports they are heavily dependent on. We are their number one export market for all things vehicle,

49:44essentially, parts, heavy-duty trucks, and vice versa, essentially, one or two. So they've had the earlier impact, And the analysis from our economists just to that, this is before we get into potential retaliatory tariffs in January, if those were to come to pass, it puts about 8 ,000 jobs in the state of Michigan at risk, total jobs, based on a 24 % sort of decline in some of the dollar value, the trade value. this last year coming up to this point where now these tariffs are going into. And 8 ,000 jobs is like it's direct, indirect, induced. That's, we were talking, the average city, Michigan is 5 ,400, you know, the median population.

50:38City of Brighton, down where we're in Ann Arbor is 8 ,000, less than 8 ,000. So these are real, you know, implications and real jobs and real numbers. And it's because we are so deeply interconnected in trade, the parts, the automobiles, the heavy duty trucks. So, yeah, it makes no it makes very it's very difficult for those of us who are dealing in the data. And, you know, it's something that seems irrational in some of these in the way that this hyperbole and the things are escalating with these trade. So the attempt on our part was to try to remind folks, no winners. The original vision for North America was free trade zone, basically.

51:25Northern border, southern border, as many times you want to cross, you don't get charged each time. And that made us a region that was able to optimize lower parts costs, lower labor costs, better conditions for a Japanese producer that wanted to come over here. and produce as opposed to stay over in Japan and export. The original vision was very, very smart. This does seem kind of self-destructive. Yes, it provided stability. It provided, you know, yes, you knew from the time it was when we went from NAFTA to USMCA, Kurt did a lot of analysis on that at the time. Yeah, you knew with that there was a certain amount of planning that you could do around that.

52:10And now with you have Honda, everything's on, the investment's on hold. We track, there's about two. Honda just said, by the way, they're going to build this plant. Did they just say that? Yeah, I think in the last day or so. Okay. Nikkei yesterday ran it in Tokyo. They're going to build the plant down in Ohio, another EV plant. So, I mean, that was, well, the investment in Canada, there was some also that in play. So, I mean, that was our hope was that, you know, we've seen, because we track automotive investment very closely. a car. We call it our book of deals. And you can see$260 billion worth of investment over the last six years in North America.

52:48These are four auto plants. And you can see there's some, where spikes is typically, oddly enough, well, it shouldn't be oddly enough. It's around labor negotiations, one of those announcements. But you've seen a significant fall off. And you've also seen a lot of turmoil within that. It's paused with tariffs. There's certainly part of it. You've also seen a significant write-down. It's about$90 billion worth of asset write-downs for, you know, the numbers I'm quoting is from John Murphy. John is a terrific analyst. You should have him on sometime. A former baker of America now doing his own thing.

53:30I have to give him a plug. But, you know, approaching$90 billion of write-downs of that, you know,$260 billion in the last six years. So there's a lot to – and tariffs are just one more thing now that we're grappling with. And the$60 billion has to do with EV write-downs? About$80 billion of EV-related write-downs. Okay. And about$260 billion of announced investment into the future. So is this part of like you guys concluded rather than immediately shifting production from Canada to U.S., companies may pause or delay investment, scale back plans or redirect capital elsewhere until the rules governing North American trade become clearer?

54:15Yeah. So it's just like basically back burner. If this current administration has two years left and it takes you two years to build a plant. You know, maybe you're going to do it because you know that you're going to get a better outcome. Maybe wait to see what the midterms are going to do. Right. And then do that. I mean, Toyota just said they're bringing the Tacoma back and they're, they just announced they're expanding the plant in San Antonio big time. I think they're doubling the size of the San Antonio plant. Got a lot of land down there. Yeah, something's happening. So it's not all been, there's been some, some reshoring, not nearly as much, you know, we've talked about this before, I think, Gary, that we track well over 100 vehicle assembly plants in North America.

55:05We do a risk analysis of car. We competitively benchmark them. Only a handful could really accept that share a platform, the same model that could actually do anything in a reasonable amount of time without significant investment. There are instances, yes, Toyota, Hyundai, with some of their investments, there's some, and they take a very, very, very long time. And yeah, they take a very long time. But we're seeing pauses elsewhere as well. So it's a bit complicated. But the problem is, we talked about China. China is going full bore ahead, no stop. At the same product cycle, with the same ambitions elsewhere, and we're on pause in some respects.

55:57They seem to be moving quite fast in Europe. I mean, every month there's a new press release about a new market share figure that they've exceeded from last month. Yeah, so I think the Europeans are going to have to re-evaluate some of their trading positions. Is that for me to certainly, but I think they're not a client, right? They're not a client. No, no, we do. All right. So we have three minutes left. You mentioned you guys are starting to do a tooling study. So explain a little bit what tooling is and why it's important and why we're not in very good shape in that either. You know, Gary, with all your work around manufacturing, how important tools are.

56:44They need, I mean, they go every, all the 20 ,000 to 30 ,000 components in a vehicle need a tool to bend it, shape it, and that. And so we were looking at it in the context of China, looking at it in the context of reshoring. And so the reality is right now just too far ahead of ourselves. But we, as this industry, cannot launch a vehicle in North America without a Chinese tool. It's impossible right now. So this is like a big stamping die or a little stamping die or an injection molding tool. That's right. How about a humanoid robot? I mean, I don't think that's a joke anymore, is it? Or is it?

57:28I mean, I saw the humanoid robots. They won the marathon. They won the 100-yard dash. Can they work on a line? Well, I'm sure that there are folks working at it, very hard at it. the manufacturing, but the tools themselves, we were looking at the economic data and we were looking at a couple of things. We were looking at the, it's a big bucket of, you know, it's small by automotive terms, but we were looking at, we think it's a strategic sort of choke point that this North American industry has to kind of come to grips with. And we look at the tooling base itself, A lot of mom and pop shops not even very far away from your studio here, several of them.

58:16The employment's been in free fall for the last two to three decades. It's half of what it was in the last decade. It's down a number of establishments down by 15 % or so. CAR's done a lot of analysis for a very long time about this. We've pounded the table for a very long time saying this is an issue. This is an important issue. But people didn't listen because the competitive cost realities is that they needed low-cost country pricing. And we're hearing some of the prices from tools for China can be one-third of the cost today. And there's been a lot of productivity improvements. This industry has responded.

59:02but the study we're looking at the productivity improvements seem to have productivity stalled we have growing we have a defense industry that needs to rearm after the current war we have talk of reshoring some and we have demands from where we didn't have demand from before AI centers we didn't even think about that the power utilities so we have demand but we have this industry that needs a lot of attention because it's dependent. So when we look at the economic data, we look at the dollar values in pure economic trading terms don't look like a big deal. It doesn't look like a problem. It doesn't look like if we, we, we start at the highest snakes code, the three, three, three, five machine machinery includes all the tools.

59:58it's you know less than 40 % dollar value but when you start to look at unit volume and you start to look at and you also look at wait a minute after section 301 came into effect in China with tariffs in 2018 and 19 you see a spike in other countries in Vietnam and Thailand and Taiwan and the combined And there are certain part categories where it's 75 % of – over 80 % of cutting tools now come from that region. And they were 60 % in 2019. Is that this category that's most dominant, is cutting tools? It's from a unit volume, the consumables and things. They're not the large dyes and presses. There's still a significant, a small number that come from an important number, but very, very high dollar value that come from Japan, Germany, and South Korea and elsewhere.

1:01:00So we were just looking at, you know, this industry that we're dependent. We cannot produce, launch, you know, refurbish vehicles without a China tool. So basically it's not sexy stuff. It's not a big high dollar. We don't pay any attention to it. and commodity type stuff like cutting tools yeah and with that we've got to end the show yes i promised i'd get you out of here so don't point deron deron thank you my dad told me it's not polite to deron deron thank you for being here today it's always great to have you it's always nice edgar thank you it's good stuff cargroup.org yeah there's there's a lot of a lot of information there it's uh very good stuff so thanks for being super interesting thank you And thank all of you for watching, and we'll be back next week for another show.

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