AAH #814 - Hybrids or Die!

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0:44Alex Partners, when it really matters. And by Bridgestone Tires, solutions for your journey. Hey, everybody.

0:54Gary Vasilash: Thanks for joining us on Auto Line After Hours. We love having you on board as we get into everything that's been going on in the auto industry in the last week. Or maybe not everything, but a lot of it. And we may even go back in time. Oh, there's a hint of what's to come, I think. Yes, indeed. We also should let everybody know we got Adam Bernard with us back on the set again. Nice to be here. Great to have you here. And your company? Auto Perspectives. Auto Perspectives. There you go. We've also got Paul Waddy. And great to have you back here, Paul. And your company? Auto Pacific. Auto Pacific.

1:28Gary Vasilash: There you go. So we've got two great product analysts with us here today. And I would say industry as well. And industry, right. These guys look broadly, and we just make it up. But we do a really good job of it. We do. So, Paul, you've been looking carefully at what's going on in terms of the powertrain transitions. Tell us what you can tell us about. Yeah. I mean, you look at the market right now and hybrids are surging. And for a long time, we thought the industry at large was thinking that hybrids were just kind of a transition powertrain, something that was useful and had some good qualities too, but they're not very sexy.

2:15And, you know, it was something that we were going to go from gas to EV rather quickly. And I think the market is proving that that transition is going to be much longer and much wider than we expected. In the U.S. In the U.S. specifically. That's what I covered in my white paper. and you know one of the big things that you know we're seeing play out in real time right now is you know consumers are getting squeezed at every corner of society and in in terms of you know they need some some relief and so you know they're looking for affordability they're looking for, you know, better fuel efficiency.

3:01And, you know, they're not quite ready to make the leap to an EV. And hybrids are fitting that profile pretty well right now. Well, what do you think? Does the public, I mean, obviously, you're right.

3:14Gary Vasilash: Hybrid sales are surging. But I remember 20 years ago, there was as much animosity against hybrids as there was today against EVs. And we still run into people that really don't understand what a hybrid is. Do you think we've crossed that Rubicon? No, I don't think fully. And like I said, I don't. So we are seeing demand for hybrids more so than we did. Our research is showing right around 40 % and EVs is more like 20 % and gas is still in the high 80s. So, you know, it's, they're asking for it, but it's not necessarily a requirement, but companies like Toyota that are delivering RAV4 and like 400 ,000 units a year, and it's just proving to be, you know, the default, they're finding that, hey, I can have lower operating expenses.

4:10It just makes sense. There's no conventional hybrid, a full hybrid without a plug, it takes no change in consumer. They just drive it to a gas station and fill it up. Plug-in hybrid is a little harder to explain. And I think for the right customer, that's a solid choice. But again, they have to think about plugging in. They have to think about filling up the gas tank. And consumers we're seeing don't really like much change. And so So a hybrid without a plug is a pretty good option right now. So on last week's show, I made an error. I will announce this. When I said the GM wasn't going into hybrids, they did announce they're going to hybrids.

4:54They heard you, Gary.

4:55Gary Vasilash: And I went, gosh, dang it. They read the white belt. That must have been it. So, like, Adam, you know two or three things about General Motors. How do you perceive this, what some are calling a strategic pivot on behalf of General Motors? going to hybrids from EVs? Well, I mean, for the longest time, GM said, and this is not technically inaccurate, that a hybrid is you have to engineer two powertrains, electric and gasoline. So more complicated. And they said EV was the ultimate goal. But in 2024, Mary Barr said that they're working on plug-in hybrids and that we should see them in two to three years, which would be next year.

5:36And then this year she said, well, we're looking at hybrids that have plugs or maybe We don't have plugs. And to me, that was a sign that they hadn't quite decided what it was they were doing. And then, you know, plenty of articles out there about the fact that GM doesn't have any hybrids aside from the Corvette in the portfolio here in the U.S.

5:52Gary Vasilash: Which we really shouldn't count. I know. Yes. The Corvette is a power play, not a fool of economy. But I thought it was interesting at the GM Forward event, which was the big investor show off to the media, all our cool tech, a lot of discussion about EVs and batteries and AI. No discussion of hybrid technology at all. Even on the sidelines, they didn't want to talk about it. Right. And then afterwards, it sounded like maybe there was a leak that came out about the plant here that they were going to be putting some money into it. And people put two and two together and said, that'll be the three-row hybrid.

6:21So I think it's good that they're getting into it. And I think it is kind of late because it's probably going to be another two years, maybe, until we see them on the road. We don't know a lot about the technology. We don't even know if it's a plug-in hybrid or regular hybrid or mild hybrid. I'm guessing it's probably going to be a standard hybrid like a Toyota Grand Highlander. When they were talking about plug-in hybrids, they were specifically talking trucks and large SUVs. Now we're hearing that it's the unibody large SUVs. So the Acadia Traverse and the Enclave. So they're putting$750 million into the Lansing plant to do this.

6:56Yes. But it now leaves them without any, you know, Ram is working on their extended range EV for their pickup. Toyota's got a hybrid pickup. Which keeps getting pushed back. Yes, that's true. And Ford's got a hybrid pickup. So now GM has no electrified internal combustion in the full-size truck market.

7:13Gary Vasilash: So Adam, take me through your thinking or observations in product planning. I'll pick on GM. They're not the only one. No. How do you get to the point where you go, we don't need any hybrids in the market whatsoever? And they're now missing out on, as Paul just pointed out, the hottest segment in the market. Yeah. You know, I think it's a combination of, you know, you do some market research and ask people their perceptions. I think every automaker has had a challenge trying to predict what customers want in terms of EVs or whether they want EVs. Everyone misjudged the demand for that. And, you know, it's a business issue.

7:50Where do you want to invest the money? Do you want to invest in internal combustion or do you want to invest in electric? And obviously, if you're becoming all three, you've got to split a pot of money over multiple solutions. And some automakers decided to do that, and some automakers like GM decided not to.

8:07Gary Vasilash: Yeah, you know, I'm reminded of, if you go back a couple of decades, when Chrysler came out with the sliding left-hand door on the minivan. And Ford looked at the exact same research and said, people don't want that. And, you know, I'm just trying to resolve in my own mind how two different companies can look at, I'm guessing, the same kind of market data and come to polar opposite conclusions. Yeah, it is baffling. I mean, you see a lot of product decisions made, like physical controls versus screens. You know, some companies have said we're going to bring physical controls back, and some companies are doubling down on we're going to stick to virtual controls.

8:50and they're all talking to the same customers and yet somehow they are interpreting the data differently and choosing to make decisions that may seem counterintuitive.

9:00Gary Vasilash: I wonder if biases within the company start to play a role in this because I believe, this is me talking now, that when I'm going back to the sliding door thing, Ford looked at it and was like, oh my God, if we want to put in one of those doors, that's going to be, I'm making up a number, $200 million in tooling up a body-side aperture for that. And I'm the program manager of the mini. I don't want to have that charged to my program because now all my KPIs are going to look bad and I'm not going to get my bonus. Yeah. You need to have the long-term view as what's the long-term value of this investment.

9:36You go back to minivans, Ford and GM were both working on minivans, but they were worried about apparently cannibalizing their station wagon sales. And for Chrysler, that was not a problem. They said in the long-term view is the market shifts, we're going to be there out front. And so they came out with their minivan and took the market by store. But Paul, this goes back to the point of hybrids. Okay. So, you know, Toyota's, you know, RAV4, all hybrid, Camry, you know, which is over three. Their Q3 sales were almost 60 % electrified, which is, you know, EVs plus hybrids. But I mean, it's 56 % of their sales in Q3.

10:13That's enormous. Because they have a whole portfolio full of electrified or hybrid vehicles. Let's just call it what it is. Now, the thing I have to ask you, though, is that, so yeah, Ford has the Maverick and Ford has the F-150, but that's that for them. You know, we mentioned General Motors with the Corvettes, which are a lot of fun to drive, by the way um what does Stellantis have the Cherokee is that it the Cherokee is a regular the new Cherokee new Cherokee is regular hybrid but they pull their their plug-in hybrids right Stellantis has a lot of hardware on the shelf um technically Ford you know Ford had the escape hybrid and it seems like a Bronco Sport hybrid would make a lot of sense but we still haven't yeah well they discontinued the whole yeah escape so yeah so so so why did these these companies you You know, I mean, Hyundai is another company that has a portfolio approach, Kia portfolio approach, Honda.

11:10Those are the three that I always come back to that are they have such a breadth of choice across their portfolio. Yeah, Ford has proven that there's demand for for hybrids in even American segments. Just they're not expanding it as much. And I think it's because, you know, one company says goes to an extreme and says, hey, we're just going to invest in ICE. EV and GM did a great job. They kept their portfolio on both sides really fresh and they did the groundwork with then Altium platform, but they skipped the middle. And just like you talked about with physical controls versus digital controls, it seems like what we've been seeing is when you do an extreme approach one way or another, you're asking too much of the consumer.

12:00It's too much change. It's too fast. And it's just not what they're used to.

12:04Gary Vasilash: Definitely, it's a big risk. Yeah. Because if you bet wrong, you're toast. You're missing the gray. But didn't at one point, didn't Farley promise, like, everything in Ford would be a hybrid by the end of the decade? And I do think that's still coming. So at least Ford is sort of committed to it. Right. But GM, aside from these three vehicles, hasn't said anything about a hybrid strategy in the long term. So you think Ford will have multiple vehicles? I mean, I do. Before, closer to the end of the decade, you know, we'll start to see more. They've talked about E-Rev. They talked about, you know, regular hybrids coming into play.

12:36You know, like I said, plug-in hybrids are one of those where it's kind of, you know, it doesn't seem like the American consumer is going to latch onto that. But E-Rev, when you have something with substantial EV mileage and the driving experience is EV-like the whole time, I think an American consumer could latch onto that. But again, it's dealers need to be talking about it. GMs and Fords and Stellantis need to be, you know, instructing their dealers on that and teaching consumers about the real benefits. Right now, it's still confusing. So I know John loves E-Refs. And I'll let him comment on this after I make this point.

13:18So I was looking into E-Refs. And, you know, you talk about confusion. I mean, that's going to be ultimate confusion. And Adam, you were mentioning before the old line about like, oh, hybrids are too complicated. You have to have the two powertrains. Oh, my head hurts. You know, I'm not going to do this. So for an E-rev, you need an electric traction motor, a large high voltage battery pack, an ICE engine, a fuel tank, and two separate cooling systems. Seems pretty damn confusing to me. And expensive. Yep. So how is this going to play? one thing that i think is is you know i don't think any hybrid can cover the entire market and and do its job well i think an e-rev makes a lot of sense in a in a large suv or a pickup truck where you know consumers still want to tow and they don't want to have you know they they want that backup of of a generator um you know i think that makes a lot of sense uh so i don't think there's a one, one shot for, for the whole market.

14:24So I think that's why I'm saying in the, I'm arguing in the paper that it's more, it's a wide multifaceted approach that, you know, you choose the powertrain for a specific segment or a specific product. You know, you can have the performance, you can have the fuel efficiency and you can keep your towing, you know, that, that makes sense for a truck buyer. Right. And you do get, you know, uh, the, you know, You're not paying diesel fuel prices, and you're still maintaining the capability. The one thing we don't know is what Jeep and Ram are going to price their vehicles at compared to a Hemi-powered Ram or a Hurricane-powered Grand Wagoneer.

15:01And then people in their heads start doing the payback calculations about whether that makes sense.

15:06Gary Vasilash: Yeah, I think that's going to be key, what they charge for these E-REVs. Because it could be a pretty niche market if they're expensive. Yeah. I think one of the early, we're going to see what Scout's going to do with theirs, right? With their full EV and the EREV version, how they price those. I mean, we don't see the full gas side, but that'll be a good indicator of maybe what the rest of the industry is going to follow. I think Scout said something like 80 plus percent of the reservations are for the EREV variant. So there's definitely a lot more interest in the EREV than there is in the EV.

15:42Okay, but doesn't this concern you guys that if you look at all of the models on planet Earth, the availability of E-REVs, you could count on your hands, okay? There's like very, very few of them in existence. And as you pointed out, Adam, they keep... Well, in China, in China, there's a lot of E-REVs. There's a lot of E-REVs. I mean, the number of models is very low. There's at least a couple of dozen E-REVs. And there's how many Chinese auto companies? I know. So proportionally... But everyone is, almost every Chinese automaker now, even the ones that started just in EVs, they said, you know what, we kind of need to cover our bases.

16:16And they're adding EREV capability into their portfolios. So it is starting to creep up there. But I mean, isn't it concerning that, you know, they keep here in the West, keep pushing the timeframe back? I mean, like there's something going on there that they don't feel comfortable with?

16:32Gary Vasilash: Well, that's in the case of Stellantis. And Stellantis has got a whole boatload of issues as well. and uh they're on fire they're making money yeah their hair is on fire yeah and uh and they're not making money as per their third quarter uh results but uh there's some really interesting stuff that you can do with an e-rev because if an engine is only going to run a generator you can run it in a much limited rev range you can make it far more thermodynamically efficient than than a regular ICE engine. You know, the Chinese are quoting 46%, 47%, 48 % thermodynamic efficiency. Remember, a Formula One engine is about 50, 51%, and they throw everything in the book cost-wise at that.

17:20Gary Vasilash: In fact, there is some talk that in another year or two, we may see 50 % thermodynamic efficient E-rev engines coming out of China. So that is intriguing. And I think there could be a niche market in the U.S. for full-size pickup and SUV buyers who are into technology. And I'm not talking the broad base. And that's what's going to be very interesting because pickup buyers are some of the most conservative that there are in the market. And they're extraordinarily brand loyal. So to me, the question is, what size will the E-Rev market be? How are they going to price it? Because that'll determine the size and how much beyond the tech savvy or the the people who are into tech could that market spread beyond uh you know that cohort so you're basically saying these are basically like the guys who are buying the corvette hybrids like um no i don't know it's so one thing that ford has talked about for example is people who own bass boats they'll spend a boatload of money on their truck.

18:32Gary Vasilash: They don't care. And they want the latest technology. They're into technology. You know, they use all kinds of tracking stuff and sonar and everything when they go fishing and they're into that sort of thing. They tow boats. They tow big boats in some cases too. And it's identified that cohort as one that they think is going to be very interested in E-Revs. Yeah. And they've already got, they've got, I think, penetration for the hybrid for the F-150 is something like 15%. So they've got a decent number of F-150 hybrid buyers out there. So those are people that are probably going to be very receptive to an F-150 E-Rev, which is what's planned for the next Lightning, because they've already been exposed to this more complicated powertrain, which is apparently doing its job.

19:12Gary Vasilash: The other thing, too, is Ford's already announced with the Fathom All-EV that you're going to be able to plug into your house just with the truck. You're not going to have to put in some very expensive transformer, hire an electric, you know, the truck will handle all of that for you. If they do the same thing with the E-REVs, that could be a real sales thing. Because to your point, Adam, the people who have bought those hybrid Ford F-150s, they love the fact that they can bring power to the job site or plug it into their house or what have you. And that's what starts to make an electrified, you know, with a battery kind of vehicle, whether it's an E-REV or a BEV, a lot more appealing to a bigger audience.

19:58Well, then think about even like a fleet or a construction company or something that's working off-site. There could be a lot of benefits on that side as well, where maybe they like to drive an EV truck. I know Gary's rolling his eyes over here. I was going to say, that was supposedly the market for EVs. Right. And it's very deterministic. They know where they're going, blah, blah, blah, blah, blah, blah. How'd that work out? Yeah, but now you have an onboard generator.

20:27Gary Vasilash: So, you know, Paul, what do you think of horse, you know, shopping its engine? It's got a specific E-rev application. They took a Ford Lightning through their E-rev engine into it. And I was talking to them about it and I was like, man, isn't this really expensive? And they said, well, you know what? When you put a nice engine in, you can take out so much of the battery. And that's, you know, so they're saying it's a lot cost wise, at least with a full bev light. Yeah, exactly. Right. And that's even what Tim Kaniscus was saying when they were first started talking about the E-Rev is that, you know, we cut down our biggest cost by making our batteries so much smaller.

21:13And then, you know, you can put a smaller engine in there. It doesn't need to be a big engine to power the battery. so I don't know that I mean you'd have to be inside to know what the the price differences actually are but it might not be as much as we think yeah and especially if you get into scale you know right so speaking of that okay so in in your study when you're looking at things that you know you're seeing this growing demand for hybrid vehicles you see the situation with companies like Toyota having this scale. I mean, do you think that companies that don't have much in the way of hybrids would be more inclined to say, you know what, let's just go to the hybrid rather than E-Rev because we need to build some scale because we need to start making some money?

22:04Right. And actually, Toyota has just been saying that they wouldn't mind selling their hybrid technology. Oh, they're saying that they're planning on selling their powertrain technology to others, which seem to be like companies like Mazda, which they have. Well, yeah. But they're projecting that by 2032, they'll have annual revenue of$1.7 billion from selling powertrain stuff. Really? I'll think about a company like, you know, Subaru and Mazda and, you know, their current partners that they could already sell it to. You know, those are easy targets right there. Right. So there might be more just regular hybrids.

22:43Yeah. So, you know, one of the things I wonder about, and maybe you found out something about this, but, you know, it occurs to me that, you know, when John Early, you know, we've had the Prius for a generation now, 25 years of hybrids, but, you know, early on people didn't get what they were. And you remember early hybrids all had that little screen that showed where the power was going. And it always seemed to me that that had to go away because it was just confusing people. So do you guys think that hybrids just ought to be called something else and that people go shopping for a vehicle? And they're not presented with, do you want an ICE or do you want a hybrid or do you want an EV?

23:28It's just like you've got the ICE thing over here. So do you want one that's going to give you 30 miles per gallon, or do you want one that's going to give you 40 miles per gallon? I don't see a problem with the brand calling them hybrids. I think, like I said, they've become so mainstream these days. When you ask people what a hybrid is, you ask people what an e-rev is, most people won't be able to explain that. But if you ask most people what a hybrid is, they'll be able to figure out, yeah, there's gas and there's electricity somehow.

23:52Gary Vasilash: But if you go back a decade, that wasn't the case. There was a lot of confusion on the public's part, and they didn't get it. But I agree, Gary. I think that they should just say we've got a 30-mile-per-gallon one that costs this, and we've got a 40-mile-per-gallon one that costs that, and you choose. But when you throw the word hybrid in, there's still some people out there that it's confusing. Or electrified. Yeah, electrified is even worse. I mean, to your point, it used to be marketed as just some green fantasy, and that's kind of what has latched on to a lot of people's memories. But some of the newer generation, they're not really concerned about the term.

24:35They're just concerned that, hey, this is going to be cheaper for me to operate. I get more out of my tank of gas. So to your point, you might not need to even include the hybrid name in there, but I don't think that it necessarily hurts. And I think the real change happens when it just becomes the default and consumers don't even have to choose, which is what Toyota is doing. And, you know, that's when you're going to start to see, you know, we're predicting somewhere around 35 % of the market in 2031 for hybrids. That's pretty substantial. It sure is. Whereas EVs, we're still thinking we'll be like 9%, 9.5 % around that time.

25:17So, Adam, you mentioned in passing diesel. And, you know, yes, diesel prices are just completely insane. I mean, they're just off the charts. But do you think there's a possibility that for certain applications that they may come back as a more than a very, very small niche? I have not heard any. I've not heard about any potential revival of diesel. I mean, there are some people out there who don't want anything electrified in their trucks, to your point. You know, they're very conservative. just keep it simple and you know a diesel vehicle is certainly simpler than an e-rev or a hybrid or plug-in hybrid so for some of those folks but i haven't heard you know ford used to have a light duty diesel ram used to have a light duty diesel lots of luxury brands used to have them and now they're all gone and nobody's talked about wanting to bring them back i think the only place where

26:10Gary Vasilash: there still might be demand for diesels is in the farmlands where a farmer's uh agricultural equipment also runs on diesel. They'll have a big diesel tank on the farm, but that's it. Well, the thing I'm wondering about is that, you know, I've been reading more and more about European companies like BMW doing research on alternative fuels. And, you know, they're talking about diesel applications running that are, you know, truly are clean diesel. Oh, running the cleaner fuels. Yeah. And it's on the fuel side more than it's on the combustion side. So, I mean, it's the fuel itself. And I know that it's very expensive to do, but again, scale.

26:50You get scaled and it will be less expensive. And the other thing is all the sunk costs that exist in powertrain plants, it's like, well, we don't need to write those off our books. We can use them.

27:04Gary Vasilash: Yeah, it could happen. But to your point, there's no infrastructure. It's going to take enormous amount of scaling to get it to where it's, you know, at least the equivalent of what diesel used to cost. And who's going to put that money up? You know, it's a chicken and the egg thing. Are the oil companies going to build this infrastructure and hope that a market develops? I think it's got to be driven by regulation that says thou shalt not sell fuels with X amount of carbon in them or any carbon in them that would then drive it. But without that kind of regulation, I don't see it happening anywhere.

27:41I mean, just look at the investment made in electric vehicles and in batteries, right?

27:46Gary Vasilash: But that was regulation driven. And we're still not where we need to be from an infrastructure standpoint. And look at hydrogen. I mean, hydrogen ostensibly would be the best fuel to go to. And guess what? You can run hydrogen in diesel engines. And in fact, I saw But this summer in Germany, Mali has developed a diesel engine that runs on hydrogen. And in Europe, amongst the environmental crowd, there's a lot of interest in that. You know, are fleets into their interest? No, unless it's heavily subsidized. They don't want to buy that stuff. Well, even Toyota. Toyota is backing out of passenger car fuel cells.

28:21They see an application of commercial vehicles, but that's it. And I think it's all infrastructure related.

28:25Gary Vasilash: The other thing that's interesting when you look at what's going on in China and heavy trucks where diesels still matter a lot, there's a very fast conversion to electric semis with battery swapping. So, you know, you do, you know, X amount of miles or kilometers, and then you just swap out batteries and keep on going and you build the swap stations on the known truck routes. And that may happen a whole lot faster than alternative fuels. Sounds like what Trevor Milton was telling us. That's right. That's right. Before he went to jail. So, Adam, you were recently in Europe. Why have EVs caught on in Europe so much more than they have here?

29:13So I think it's a combination. And I did do a little research because I was primed ahead of time. I think part of it is distance. You know, here in America, we got long highways. We take long vacations. We need to drive far. And that's not as much the case in Europe because you've got a great train system if you're going to go on a long trip. So there's not as much of a need, I think, for a long distance range on your EV. I think part of it is infrastructure. You know, here in the U.S., we have Iona, which is the collaboration with all the automakers, which is, I don't know, what, two, three years old.

29:44The Ionity, which is the comparable organization in Europe, has been around since 2019. So if you look at the numbers, there's almost twice as many EVs per charger in the U.S. than there is in Europe. So they have a better developed infrastructure, which we know is kind of a barrier to adoption. And I think the other thing might be just climate extremes. You know, 120 degrees and zero degrees, you can find those in the U.S. all over the place. You don't find those extremes. We know that climate extremes are not conducive to battery vehicle performance. And gas being much, much more expensive over in Europe than it is here too.

30:18I know energy is also more expensive, but I suspect that the payback numbers look pretty good for getting an EV over there. And then there's the regulation side, too. Yep.

30:27Gary Vasilash: There's incentives, too, right? Yes. And when you say higher gasoline prices, when I was in Germany, it was$8 a gallon. And I think it's probably even higher now than when I was there this summer. The other thing is cheap Chinese EVs are cheaper than what most others are offering. And, you know, we especially see that in the UK where there's no tariffs on Chinese cars. And, you know, they're off to the races sales-wise. Yeah, I think the best-selling vehicle in the UK was a Jay Koo recently. So I don't know if it was an EV or a plug-in hybrid. But, yeah, they're definitely making inroads there.

31:01I just saw that Jay Koo is offering people in the UK who buy a Jay Koo whatever free charger in their house or 1 ,000 pounds in charging off of an outside system. I think automakers used to do that in the U.S. Honda still does.

31:20Gary Vasilash: I believe it still offers free chargers. Honda gave you a choice of charging credits or a charger, a home charger. You'd have to get it installed, but it was something like that. Right. We've got to take a quick break. We've got to give a shout-out to our great sponsors, Alex Partners and Bridgestone. We act. We grow. We transform, we protect, we rescue. In moments that define the future, we are the partner you can trust. Alex Partners, when it really matters.

31:58Knowing that a little rain won't slow down your day, that's what really matters. Bridgestone Tarantza Quiet Track Tires. Confident control in wet conditions.

32:11Gary Vasilash: Thank you, Alex. Thank you, Bridgestone. I should hasten to add that Bridgestone has now been named the official tire of the Sports Car Club of America. So good for them. So speaking of Jay Koo, which is owned by Cherry. So apparently Cherry thinks that the market in Canada would be large enough for it to do manufacturing in Canada. What do you guys think? I think they must be looking at a different Canada because, I mean, you know, a typical plant builds, what, 200 ,000 vehicles a year? And I don't know what percentage of the market that is in Canada, but I don't think a brand new brand like Cherry could get in there and justify that unless they somehow think that they could use that plant to export to other places that aren't the U.S.

32:59But even then, the math doesn't quite seem to pencil. And then that market has a cap, at least for right now on how many. That's imported though. Oh, so if they got Brampton or they got the Cami plant. Right.

33:14Gary Vasilash: To Adam's point, they'd have to export, I would think. And they would have to be KD kits, knockdown kits, I think. You know, bring in, it's a screwdriver plant, as Marianne Keller used to call them. You bring in all the parts from China and you screw them together and you got a car. make them happy. Well, they'd get, they'd get around the tariff or the limit. Yeah. Yeah. The import. Yeah. So, yeah, because the Brampton plant, nobody's decided what's happening with that. Right. There were some rumors of some sales and then I haven't heard anything more about the, the old Bright Drop plant. So, there's opportunities there to get something for a song like Rivian did.

33:55Mm-hmm. Yeah. So, so one other thing, you know, speaking of Canada, and going back to Ford, so, so they're going to be building super duties in the Oakville plant, right? Um, come January 1st, there'll be 50 % tariffs on those.

34:10Gary Vasilash: If that happens. If that happens. You know, look, next Tuesday, we're very likely, in my opinion, to see a political change in this country. And I think one of the first things that we're going to see is a move to stop this, in my opinion, nonsense of a trade policy that we've got with Canada right now. And I can tell you from talking off the record with senior level executives at both the automakers, but especially the suppliers, they want to go back to the way it was. This is, you know, these tariffs have just driven up their costs dramatically and they don't like it. And they're letting their congressional representatives know they don't like it.

34:58Gary Vasilash: So let's see what happens. My prediction is the 50 % tariffs will not happen. Bet your Ford wishes that they will not happen. Yeah, you bet you. I mean, I just can't imagine. How would you be able to absorb that? It would be crazy. So speaking of factories, you know, Audi made its, in politics, Audi made its announcement about building a plant in Georgia.

35:25Why? BMW does it. well how long has BMW been in Spartanburg I mean it's been like well the weird thing about the Audi plan is they talked about building the Q7 the Q8 and the Q9 it's not enough volume globally for those vehicles to fill a plant so unless they start putting in like Q5s and Q3s which is what BMW does that's how they justify their plant because they build almost all their SUVs there and then send them all over the world so it's kind of weird that Audi didn't talk about a long-term plan. And I know there was questions about the Scout plant. And here's my hypothesis. A couple of months ago, Volkswagen talked about getting into trucks in the U.S.

36:04market, and specifically body-on-frame. And we know the Scout, the body-on-frame architecture. So if you're looking to fill the Scout plant, my hunch is that Volkswagen might wind up filling the rest of the Scout capacity with VW-branded trucks and SUVs for the U.S. And that's why Audi had to go their own way.

36:21Gary Vasilash: I'll add to that then, and we can discuss this whole point, Because as you know, Volkswagen dealers are up in arms about Scout because it wants to use direct sales and bypass them. And Volkswagen is arguing, oh, no, no, no, Scout's a separate company. And the dealers are like, wait a minute. It's all Volkswagen money that built the whole thing up. Let's get real. And if you started building Volkswagens in that plant, it would destroy, I think, in the court of law, not my opinion, the stance that Scout's taking that it's a separate entity and can do what it wants. So I think what drove Audi's thinking is I've read that the tariffs are costing it$1.2 billion a year in the US.

37:06Gary Vasilash: This is a$4 billion plant. So they would pay for it in less than four years. And that's what they're looking at. But I love what you're saying here, Adam. This is intriguing. You're saying those three models do not have enough volume globally to fill that plant. No, because I think they built in Bratislava, which is where they built the Q7 and the Q8, they built 93 ,000 of those last year. And obviously, the Q9 is the flagship. It's not going to be anywhere near that volume. So assuming that this is going to be a 200 ,000 unit plant, there's going to be some space. Yeah. Here's my whole take though too is that the U.S.

37:44Gary Vasilash: market essentially stopped growing somewhere around 2017. We are selling fewer cars today than we did back then. And guess what? This is true in all the major markets of the world. Car sales are lower today than they were a decade ago. I think there's a confluence of events that are happening here. It goes beyond affordability because car sales have drop like a rock in China and affordability is not an issue there. So we have now eight new assembly plants in the course of getting built and or going to get built in the U.S. Are we going to stop all imports to this country? I mean, just a question I'm posing, but I think Like Audi and probably everybody else that's building these new plants in about a decade is going to go, oh my gosh, we don't need any of this capacity.

38:40One of the things I wonder about is Audi sales. I was looking at their sales numbers. So the four companies that are in this tranche would be BMW, Lexus, Mercedes, and Audi. Okay, so year to date, BMW has sold 287 ,000 vehicles to the United States. Audi has sold 107 ,000 vehicles. So half a plant. I mean, but think about it. BMW is outselling them by 180 ,000 units, and they're going to put a factory in? Yeah. Wow.

39:15Gary Vasilash: Right. and now imagine that you know you're the head of the Ige Metall union in Germany and you're going what you're talking about closing plants here and throwing our people out of work and you're going to build a four billion dollar plant in the United they're going to go ape over this insane yeah and then there was a story today that that someone talked about building 25 ,000 Audis in the Scout plant off of the new Scout architecture because Audi's supposed to be looking at some more aggressive off-road type SUV. And that would be in addition to the 200 ,000 Audis coming out of this new plant.

39:47Gary Vasilash: Isn't there open capacity in Chattanooga, the VW plant? I'll bet there is. Probably, yeah. And it would seem to me that you'd figure out between Scout and Chattanooga, figure out some way of, because to your point, Gary, 100 ,000, and we're almost at the end of the year, so I don't know make up a number 120 130 000 will be their sales for the year so you know and and remember they got a plant in mexico oh that's what i'm gonna do with that u5 is coming out of mexico yeah do you guys guys look at like what perception of various brands are i mean in in my completely unscientific thing it seems like audi has pretty much disappeared i mean i used to be in the conversation and I rarely talk to anyone that they bring up Audi.

40:39You know, it's almost like Mercedes has become the challenger brand that, I mean, it's like a lot of people are talking them up now. And, you know, Lexus is just sort of there and BMW is like, everybody's like, wow, how can they do what they're doing? They're amazing. The attention has turned to Genesis now.

40:58Gary Vasilash: right right no i i think you're spot on gary you know we all if you go back some years ago we talked about audi's interiors and they were on point and they were the benchmark and everybody had to look at what they were doing lighting and the light oh yeah right even to the headlamps yeah right they're still doing to the credit yeah but they should have patented that they would have been making so much money off of the led headlights but yeah now everybody's caught up to them and And I personally don't see anything really innovative coming out of Audi. Yeah. Paul, you're driving on BMW iX3, and you look at that as kind of a sea change within the BMW portfolio, both in terms of design and technology.

41:39And Audi really hasn't done anything like that yet. I mean, they were kind of early on with EVs, but everything seems to be very incremental while other folks are dialing it up to 11. And then you look at Mercedes on the other side with the CLA. You know, they did the same thing as BMW. um and yeah getting back to the plants though i think you know are we going to start to see more jvs you know like uh land rover wants to use stelanus to build build here in the states you know why couldn't audi be looking at something like that i i think they're going to come to

42:12Gary Vasilash: regret this this investment number one i'm not sure i believe the four billion dollar number but even so it's probably at least three billion and i i think they're gonna in in time look back and say this was a strategic mistake to your point yeah well i mean look at stillanus they have so much capacity and that was one of the things that uh feloso really wants to address is you know getting that capacity back up because they were under utilizing every single plant that they have and that cost money you know to to have a plant sitting there idle and not working to its capacity so we hit you know you just mentioned eight new plants and that's that's a lot of that's a lot of capacity that we're going to have in the u.s and you know like To your point, I mean, we still have a lot of imports coming in.

42:57Gary Vasilash: Right. And the main point is the market's not growing. Right. You know, we're selling a million fewer vehicles than we did a decade ago. A million. 16.3 this year or something should end up being. Right. And then what if we see Chinese plants by 2030? The net's more plants in a market that's not growing on top of everything else. So, but, but I mean, aren't new plants sort of like new Kroger supermarkets? It's, you know, you go to the old Kroger, you go to the new one, it's like, yeah, that's the place I'm going to. So you have this old plant, you say, you know what, we got this new one, we'll just, goodbye guys.

43:33Gary Vasilash: Yeah, but, you know, what's the plan? It's four walls and a roof. It's what's inside the plant that really matters, not whether the four walls and the roof are new. So you move what you can that's worthwhile and the rest of the stuff, you just sell on the scrap market. If you do that, if you close the plants and take that capacity out, then sure. Yes, although UAW might have a bit of an issue with that. Oh, yes, absolutely. Which Kroger doesn't have to worry about. You know, I think one company that made a really smart strategic decision and it was justified by their volumes and their growing market share was Hyundai.

44:06You know, and what they're going to, they want to add on to the plant that they have rather than trying to make another plant. But I mean, eventually, I do think they could be at full capacity there and importing and selling all of their key models, making them here in the States and selling them in the States. Because their new body on frame truck will go into their existing capacity. So they're not going to need a new plant for that.

44:31Gary Vasilash: Although they are going to build a new plant. I was down in Georgia earlier this summer. They said they're going to build a whole new plant there. That's one of the eight that I'm counting. Okay. So earlier, Adam, you mentioned the GM event, and they were talking about software and services and things like that. And so I noticed that KPMG International did their 26th global automotive executive survey, and this survey was among 775 executives worldwide. 51 % of the respondents expect software and digital technology to become their company's primary source of competitive differentiation by 2035.

45:17What's your assessment of that? Competitive? I thought you were going to say their main source of revenue by 2035, which I know a lot of folks have talked about. So I think it's, I mean, people have such high expectations now for the software in their vehicles in terms of what it should be able to do and how it should be able to function. I think it might be difficult to really differentiate. I mean, you know, you're either an iPhone guy or an Android guy, and they both work differently. But I don't know if anyone can necessarily explain how they work differently or how they're differentiated.

45:48They all have their own ecosystems and hardware. So I'm not sure how you're going to be able to, in nine years, from a software standpoint, tell people that your software is so much more different than everyone else's on the market. Well, you guys study very carefully what people want in their vehicles. Yeah. And, and, you know, right now you look at a lot of the stuff, like GM will say that, you know, their, their new on star AI stuff is, is theirs and proprietary, but it's built on Google Gemini basis. And, you know, everything is built on Android OS as a starting point to be able to differentiate it that far.

46:29I mean, you're still working on same core platform, you know, it's just a re skinning it basically. And then you obviously have proprietary data coming from your vehicles and stuff like that. But I don't know unless they're going to do all clean sheet like they're doing in China. You know, there's a lot of that going on in China. And it's, you know, a big market out there. Right now, it seems like we need to figure out our products before we can start thinking about the software side of it. because that's a deep rabbit hole and it's a lot of money behind that.

47:06Gary Vasilash: And the real focus has got to be on the consumer. What does the car buyer want? Because, you know, I guess you could have argued in the past that our engine controller software is better than their engine controller software. And maybe it was, but it was invisible to the customer. And so how many tech stacks do we need? And how differentiated are these tech stacks going to be? And we know that they're horrifically expensive to develop. And by the way, there's companies like NVIDIA that will sell you an entire tech stack right now today so that you don't have to devote all those resources and whatnot.

47:40Gary Vasilash: And, yeah, you're going to have to pay NVIDIA for a license or whatever. But I think we're fast approaching these what's going to have to be very serious make or buy decisions on the part of the OEMs. Because I think for so much of this stuff, to the consumer, it's going to be invisible. You know, you might be incrementally better, but is it going to make a change in their buying experience, in their driving experience, in their ownership experience? I think the only differentiator will be the automakers that can't get it done, that launch with buggy software or launch a vehicle that's missing features.

48:15And then you will be differentiated in a very negative way. Right. Well, and how can you justify, you know, the cost of development if there's only, you know, everybody's going to have the same revenue opportunities on the back end? And, you know, you'd really have to, you know, to me, it seems like it's you're you're trying to fight a battle that is unwinnable.

48:38Gary Vasilash: Yeah, I would agree with that. You know, I saw Monroe and Associates just did a great video down at the Tesla plant on the cyber cab. And Lars Moravy, who's the head of engineering for Tesla, was saying, look, it's all going to robo taxis. We can debate whether it's all going that way or not. But what he said is the digital experience is going to be what drives, brings you to a brand. So that you'll be able to get into any cyber cab and the experience will be exactly the same. You'll hail one on your phone. It'll come up. It'll look like any other one. But seats will be set at the position you want.

49:23Gary Vasilash: The cabin temperature will be what you want. Your music list, your video list, everything that you want is going to be, it's going to be just seamless that way. And I thought that was incredibly insightful as to where we're going. And then it comes back to, how good is your digital experience going to be for your customer, and how different is it going to be from everybody else's? i don't want to put a tinfoil hat on here but in order for all that to happen you're gonna have to have tesla own a hell of a lot of your information and that's yeah that's what g is asking guess what apple and whatever android you already had already has all that stuff i mean your your smartphone has everything that your car is going to have i i know people get all upset i don't want my car tracking me where i go it's like It already is.

50:21Gary Vasilash: Your phone's doing all, you know, the horse is out of the barn. How can you complain about this? Yeah, easily. It's a big concern. Yeah, you know, you can easily complain. All right, so here's another finding that I want you guys' reaction to from the KPMG International 26 Global Automotive Executive Survey. 48 % expect six of the world's top 10 OEMs to be headquartered in China by 2035. Sure, absolutely. That could happen. We're seeing more acquisitions and partnerships. So this leaves four for Japan, Korea, Europe, and the United States. Yeah. Four. All right, who will they be, Adam? Who will they be?

51:11I guess probably the big thing to discuss is what's going to happen to everyone here in the U.S. And if the U.S. becomes more walled off as an auto industry and just, you know, resorts to just build in full-size trucks and SUVs, do they get acquired by somebody in China? The premise is six of the top ten. Six of the top ten.

51:30Gary Vasilash: That doesn't mean American, like GM and Ford, are going to go away. They're just not going to be in the top ten, potentially. Actually, that's a good point. I mean, GM right now is pretty much just North America, South America, and they've just pulled Chevrolet out of China. So their global footprint has gotten even smaller. They're right. It could be less of a who gets acquired and who shrinks more. All right, but come on. If you're not in the top 10, you're basically a very niche player. Well, not necessarily niche. I mean, but yeah, you're not as important as you used to be. But, you know, when I was growing up as a kid, General Motors was the largest industrial corporation in the world.

52:08Gary Vasilash: And I don't know where they rank now, but they're nowhere near that. And I could easily see, we can argue whether it's six Chinese companies, but, you know, BYD is a player, Cherry's a player, G's a player, Great Wall. But, you know, there's at least four that I think are going to survive the coming shakeout in China. And once China gets rid of all these other players, the ones that survive are going to be even more powerful than they are today. Yeah, that's one of the things I talked about in that paper is, you know, it's kind of like this vicious feedback loop where, you know, Ford and GM particularly, they're continuing to cater to the U.S.

52:49market more than anything. And so they're investing in the full-size SUVs and trucks and, you know, they're still having highly profitable, you know, not highly, but they're delivering decent returns. But if you look, their market share is shrinking. So like in compact cars and compact SUVs and compact or midsize SUVs, they're starting to lose that market share. And they're still highly profitable for the U.S. products. But that investment is becoming a feedback loop where they're more America first and almost only now. Right. Although at least Ford's got a – they've got a decent footprint in Europe.

53:31They're now hooked up with Renault. But that's mostly commercial. But they're hooked up with Renault on the passenger side and also Volkswagen, although that may not last. But at least they've got a little more diversified geographic footprint than Geo. One of the bigger ones that I worry about is Volkswagen.

53:44Gary Vasilash: We should worry a lot about Volkswagen. But getting back to your point there, the reason that Detroit 3 abandoned those markets and those market segments is they couldn't make any money there. So it's incumbent upon them to figure out how do we get competitive and get back into passenger sedans and maybe export cars to other markets that find our products appealing. And that's why I love this skunk works that Ford's doing with the Fathom. And it was very intriguing what GM presented in its tech forward day or whatever they call it, of how they're rapidly getting into heavy, heavy digitalization and slashing product development time and cost that goes along with it.

54:24Gary Vasilash: If they can keep that going, that that can actually open up the market for them, beginning in the U.S. and maybe to some degree elsewhere in the world. But it was it's been driven by the fact that they can't make money in those segments right now. Yeah. Is part of it the economy of scale question? You know, if a Honda or Toyota or Hyundai is selling an Elantra, for example, around the world, and then they can bring it to the U.S. because they make so many of them, the fact that Ford and GM have smaller footprints, is that one of the barriers? No question. No question. But, you know, then throw UAW labor on top of it.

55:01Gary Vasilash: And I'm not going to blame everything on the union by any stretch of the imagination, but it's a factor. And so the real key right now, in my opinion, is study what the Chinese are doing, because you can't explain everything about government subsidies as to why. I mean, government subsidies don't let you slash product development time in half. Right, right. That's different practices. So what we need to do is what we did back in the 1980s. We studied the Chinese or the Japanese. You know, you had the Harbor Report. You had the machine that changed the world. Detroit adopted Chinese practices. and really became quite competitive in the 1990s.

55:40Gary Vasilash: Now we got to do the same thing with the Chinese, study what they're doing and adopt it. But speed isn't the only thing, and Adam, you probably know this more than anybody in this room right now, and that is appealing product that people want to buy. Yes, yes. Okay, just getting stuff out on the market faster. Right, right. You know, the thing with the subsidies from the Chinese government is money will help lower your cost, but we know that money doesn't buy your taste, and it also doesn't buy your brains. So the Chinese vehicles come to market fast, but they're also very good. You know, BYD can charge an electric battery in five minutes.

56:13Nobody in the US has a battery that can do that. That was not money. That was smart engineering. So yeah, the Chinese products are not just coming to market quickly, but they're also now much more competitive than they used to be and more appealing. So, I mean, what is your sense of, you know, a big organization like General Motors doing stuff more quickly? I mean, to your point of taste and brains, I mean, is there sufficient amount of both such that products that they will develop quickly could be appealing? Yeah. I mean, GM makes some very appealing products now. And so if they can bring those kind of products like a Cadillac CT5 or Chevy Trax, if they can do those faster and be more responsive to changes in the market, that's going to be a bonus for them.

56:59That's the big thing right there. If you can be more responsive. So GM may have identified a year or two ago that, hey, we probably should be getting on hybrids, but our development cycles are four to five to six years long. Well, you know, you can't do much about it because now you've missed the beginning part of that. You lost some market share that you might not be able to get back that easily. And it's much easier to retain a customer than it is to win them back, especially if they go to a, you know, rival buyer that, you know, they like what they're in now. But if you have a two-year development cycle, you could change much quicker and get back in the market.

57:36And so if something doesn't work, you can also adapt quicker that way as well.

57:40Gary Vasilash: Quicker product development means you can introduce new technology into your products faster. It also means if you come out with an appealing product, and I agree with you, appealing product is number one. I'd rather be late with an appealing product than fast to market with something that nobody wants. But when you put the two together, fast to market with appealing products, now as a corporation, you start earning a return on the investment you put into that product far faster. You're more profitable, and it's the flywheel. You make more money, you invest it back in, it just keeps on going. To your point about appealing products, this is one of the things that came out of the Paris Motor Show, is there were 20 Chinese brands.

58:19But as you walk from stand to stand, you could easily interchange the badges, and no one would know the difference. And that's one of the advantages the legacy automakers have from a design and a history standpoint is being able to make unique looking and appealing vehicles that aren't generic. And so the Chinese still have a little catch up to do in that area. And they probably will catch up at some point. But it's an advantage that a lot of the legacy brands have right now. One of the things that occurs to me about legacy brands, though, in speed is the fact that there seems to be a tremendous reticence to get rid of products.

58:51Okay. Okay. And, you know, and we could look at like a good example of a company that does get rid of products would be Honda. Okay. Who remembers the Del Sol, the S2000? I mean, it's just like they realize it didn't work. They went away. I don't know.

59:07Gary Vasilash: GM's got and Ford have got a long history of cars that have just gone away eventually. Yeah. Oh, yeah. There's a big graveyard of GM products that, you know, you got it right and then it's gone. like the Fiero and the Elante and the Bolt. And the Bolt, yeah. Now the Bolt. And the Bolt, yeah, the Bolt's about to disappear. Again, wise decision. I mean, they're talking, they're not selling. They're Gen 4 EV platform and, you know, they're, you know, this is what's so interesting to me. The Bolt, I think, is a pretty good car, pretty good electric car. I think the Nissan Leaf, the current generation, is a pretty good car.

59:48Gary Vasilash: They don't sell. And it's like, no, Americans don't want cheap little electric cars. They want big, nice, fancy, cheap cars. Yes, yes. And so it's like, you know, to me, it's kind of surprising to see that the new Bolt, Chevy Bolt, has kind of fallen flat in the marketplace. because, you know, if you talk to the buyer base, what GM has said is the buyer base for the Bolt is as equally passionate and committed to the product as Corvette buyers are. And so, but it's a small group. It's probably not a whole lot bigger than the Corvette group. It looks like the compliance car that nobody, you know, wanted.

1:00:31I think you used to be able to say that about the Aztec. You had a really core group of passion about the Aztec. And then Breaking Bad came and then, oh yeah. Then it knocked it out of the park. All right, all right. We're going to have to wrap it up. You got one more? Quick quiz, quick quiz. Okay. Okay. So I had a difficult time of trying to figure out how to work this, and it didn't work. But on October 29th, 1929 was Black Tuesday. That's when the stock market crashed. But that's not the question. Okay, so here it is. This, I figured, okay, we'll go to Halloween. Since besides Black Tuesday, there's really nothing important.

1:01:08But so Halloween, it's going to be in a couple of days. So on October 31st, 1957, October 31st, 2010, two different companies, two, I would, one, hugely significant, one, very significant to some people. What happened on either of those days? The first was, what year? 1957. October 31st. I'm thinking it might tie into Packard Studebaker. No.

1:01:43Gary Vasilash: My guess, or maybe I'm a little too early on that. Edsel? No. No. Okay. I have no idea. And then the other one was 2010? Correct. Is this company still around, the 2010 one? No.

1:02:04All right. So you guys are going to kick yourselves in the rear ends for this. On October 31st, 1957, Toyota Motor Sales USA was established. Oh, wow. Okay. And because we're at the end of the show, I'll give you the 2010 one. It's when Saturn was shut down. Oh, yeah.

1:02:30Gary Vasilash: Yeah, that's interesting bringing up Toyota because, you know, the first cars that they brought to the U S were so bad, so bad. They literally put them on the ships and sent them back to Japan. Wow. Little piece of, of, of history. And, uh, they were licking their wounds and, uh, that's when they developed, I believe they came back in 64 with the Corolla and never looked back. Look at them today. Yeah, exactly. Number one in the world. It's what good product does for you. Yeah, that's right. And hybrids. Excellent. And on that point, we will wrap it up. Paul Waddy, thanks so much for coming back on the show.

1:03:14Gary Vasilash: Adam Bernard, great to have you. My pleasure. Gary, always a pleasure to be with you. And always great to have all of you watching in. AutoLine After Hours is brought to you by Alex Partners. For more than 40 years, we have helped companies and their stakeholders around the world harness opportunity, overcome challenges, and achieve outsized outcomes. Alex Partners, when it really matters. And by Bridgestone Tires, solutions for your journey.

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