Tariffs, EVs and China: A CEO Insider’s View of the Car Business

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0:46And I certainly didn't understand they were as big as they are. They have basically as many employees as General Motors. Magna International is a big name in Canada. It is a big name in the automotive industry, the largest North American automotive supplier out there. Huge business in the U.S., huge business in North America, huge business globally. And we have the CEO. That's next.

1:17Magna International is a powerhouse in the automotive industry, manufacturing the parts that go into cars all around the world. Its clients are the car companies, or OEMs. To serve them, Magna has 342 manufacturing operations in 28 countries. All of that means that CEO Swami Kodagiri has his fingers on the pulse of global trade and what the trade war means for a major industry. I would say there is definitely stress in the system, right? I think when we were dealing with the 2007-2008 financial crisis or COVID and then the whole inflation because of the Russia-Ukraine war and the semiconductor, the one thing we all have come to understand better is the visibility of the supply chain.

2:11And I think people have taken a calmer approach now. I think nobody is reacting right away. The automotive industry is trying to navigate the latest trade war, while at the same time trying to pivot their businesses to a more digital world and facing new rivals from China that are offering up compelling electric vehicles. As supplier to those Chinese companies, Magna is also seeing how they work up close. How do they design? What is their design cycle? How are they thinking about it? And we are able to bring some of those learnings to other parts of the world. What it adds up to is a very complicated time to be in the car business.

2:52Because of all these changes, there is a possibility for new entrants to be coming in with completely new mode of thinking. So you add all of that, what used to be always a complex industry has now become a four-dimensional chessboard. From the Wall Street Journal, I'm Tim Higgins. And I'm Christopher Mims. This is Bold Names, where you'll hear from the leaders of the bold-named companies featured in the pages of the Wall Street Journal. Today we ask, how does one run a complicated global parts business when you're stuck between a changing industry and a trade war? Swami, welcome. So much to talk to you about today.

3:37But I think a lot of people thought we were going to see a huge spike in new car prices because of all the tariffs announced by the Trump administration this past spring. Why hasn't that occurred yet? Yeah, I think the best thing is not to have a knee-jerk reaction to anything. And this was one of that instance where things have obviously moved a lot from where the conversation first started in January to where we are, right? It still remains to be seen, but if you kind of summarize where we stand with the slight change in the USMCA, and there is a progression of the change happening in the next two years, if it stays as it is explained today, all said and done.

4:26Let me just interrupt here because this is my role on this podcast. When you say USMCA compliance, for those of us who aren't as well-voiced in this industry as you are, you mean getting stuff from Canada and Mexico, right? Yeah. The trade agreement, this is what replaced NAFTA. Yeah, thank you for that clarification. In the automotive world, like anything else, we have so many acronyms, but very simply stated, you are right. Absolutely. And this is super, super confusing, right? Because earlier this year, it looked like just about every trade partner possible was going to have, see incredible increases in tariffs.

5:09This spring, you had a speech in the Detroit area where you compared this thread of the trade war, the automotive industry as kind of a mix of disruption that we saw during the Great Recession, that 2007 -2010 period, and then the pandemic. What did you mean by that? And do you still feel that? Yes, I do. I mean, if you look at our normal industry variables, we are a long-term cyclical nature business. Over the last few years, what we have added to that complexity is the technology landscape changing, which is electrification, autonomy, and connectivity. And with all of these things coming into play, consumer preferences have changed, right?

5:57They have much more optionality, and they're also figuring out what it is they really want. It's not just about horsepower anymore. Absolutely not, right? And I always give the story in the past where we used to look at horsepower and the fit and finish and the style and what is the projection of your personality, which car speaks of me, really. And now you go talk to them, they say, like, where is the Wi-Fi and what is the connectivity and can I stream my apps? And, you know, there's very few people who sit and talk about the color of the car and so on. Kids today. Cars, it's like they're the ultimate phone accessory these days.

6:36Yeah, absolutely. Where's my Android Auto? Ouch, ouch. Yes, exactly, right? It's a place to scroll at stoplights, of course, until we get the self-driving ones. Yeah, it's well put, right? And add on top of that is the changing industry landscape, right? Because of all these changes, there is a possibility for new entrants to be coming in with completely new mode of thinking. So you add all of that, what used to be always a complex industry has now become a four-dimensional chessboard. We're going to talk about new entrants later on. Tim and I, of course, are obsessed with new entrants in the auto industry.

7:18but I want to get high level with you for a minute because I think in a way that a lot of people don't appreciate, you know, you're like the real estate industry. Your supply chains are a primary indicator of what's going on with the economy. And then you as a supplier to all these other automakers, you know, you're the, you're Oz behind the curtain here. Um, and, And you have a unique visibility into all of that. And so when you're looking at the impact on your supply chains, what is the state of the U.S. economy right now through the lens of people making their second biggest purchase after what they spend on rent?

8:03It's a very interesting analogy, right? And, you know, what I always like to talk about when we talk internally, what we are doing today is a decision that has been made two years ago, and the results will be seen two years from now. Right? As we're putting capital in, it's for producing vehicles or parts component systems for vehicles that are going into production in 27 or 28, really. Right? And all the sourcing decisions were made maybe in 22, maybe in 23, right? So that kind of gives you the cycle of decision-making in this industry. So if you're thinking about what happens today and read headlines and the expectation of the people is, so what are you doing because we heard this in the newspaper today?

9:00Not really a whole lot, right? Right. And that's why I think you have to be constantly thinking of your strategy in terms of how do you adapt, how do you accommodate and how do you innovate? And most of the variables that you consider is how much can you be flexible in your strategy? So you're building adaptability into your. That makes sense to me because, of course, auto analysts have said recently the next four years are going to be kind of the most uncertain it's been in the auto industry in the past 50, maybe, because of the head fake on EVs. People not transitioning to EVs as quickly as they thought.

9:45So are you, in a sense, trying to make yourself more adaptable for this uncertain time that's coming? Absolutely. From our perspective, yes, but I don't think this can be done by any one individual party. For example, an OEM comes with a platform. OEM being a car company. There you go, another acronym. Original equipment manufacturer, as they call it, the car company. They come and tell us, let's say, I'm going to make 100 ,000 vehicles. They're looking at their crystal ball, looking at their customer, consumer data. so they come and they give us that means we have to be able to plan the volume expectations based on the customer right so you put in the capital you put in the capacity you plan your labor everything according to that so what it means is if you don't make hundred thousand vehicles at that point of time per year then you have capacity that's sitting that's empty right Money on fire, essentially.

10:49Exactly. And there are certain parts of the capital which you can flex. For example, if I have a stamping press and I'm making parts, I take the die out and I can put a different die and make parts for something else. But if I have an assembly line that makes a EV or assembling things for a system, doesn't matter whether it's a mirror or a seat or something, you're supposed to make$100 ,000. It's not that I can just take that and make something else with it. So it's just sitting. It's dedicated capital. I think that's where the flexibility needs to be thought through. And so the OEM or the car company and the material supply, everything, it's not easy to flex at the switch, right?

11:32You know, you come today and say, I just want to make a change. It takes time. But if you think collectively and say, maybe let's plan for$60 ,000, and if the demand is there, how quickly can we get there? And let's plan through that. Great. Let's share the benefit. If it goes down, how do we change and manage the risk? We just heard Kotagiri talk about the challenges of the trade war. Next, how does he navigate the uncertainty? How precarious are things right now? It's difficult, I can tell you that. Pit in the stomach sometimes, right? But that's what's gotten us through, and I think that's what, you know, is very important for the industry right now.

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12:59it makes me think when i was in business school back there in the detroit area uh all those years ago and we were using uh pen and paper and we didn't have computers and all these fans i gotta say i'm really surprised tim i thought you went to art school i don't know if i'm excited or disappointed i just remember being in class uh and my classmates uh you know who were all working at the suppliers. I mean, these were people who had some horror stories dealing with the large car companies. I mean, talk about having very little leverage, right? And back then, there were winners and losers on these car programs, right?

13:33You were kind of making a bet years in advance. The volumes might fluctuate, but the fluctuation maybe was 10 or 20%, right? What's the fluctuation rate now? When the car company gives us, Tim, a volume expectations, we have our own viewpoint, right? And this viewpoint has been built on data from the past years. So the challenge now becomes when you have a platform that's new, right? It's a new EV vehicle. An electric vehicle, right? So there, I think we're all kind of playing a little bit of a guessing game here. We have seen some platforms where the current projections or the current production volumes are running at 30 % of the original planning volume.

14:2430%. Yeah. And obviously, you can't name names here, but we could all guess. There's good and bad, right? There are some which have done well. The things have been there all along, and it's just become a lot more difficult when the volume fluctuations are that high. I think the industry knows how to deal with 10%, 15%, 20%, right? So I think that's where this whole friction of commercial recoveries come into play. Market share is more fragmented than, as you know, automotive industry is all about scale and efficiency, right? So I think that is the magnitude and the crux of the problem that we're all trying to deal with.

15:05I mean, it's pretty bleak out there, which is, you know, in that environment, you know, we're seeing auto parts giant Morelli recently filed for bankruptcy. their CEO said in some court filings that they had been really struggling since the COVID-19 pandemic, but that the weight of the Trump administration tariffs really kind of pushed them over the edge. You have a visibility into the supply chain, A, because you've got a bunch of smaller companies providing you materials and parts and whatnot that you then package and put together and build and put into sell to car companies. So you can see where there's tension out there.

15:44Are you worried about more suppliers going out of business? I mean, how precarious are things right now? Tim, I would say there is definitely a stress in the system, right? I think when we were dealing with the 2007-2008 financial crisis or COVID and then the whole inflation because of the Russia-Ukraine war and the semiconductor, the one thing we all have come to understand better is the visibility of the supply chain, right? And I think people have taken a calmer approach now. I think nobody is reacting right away. And, you know, the ones that have survived have learned to evolve, and I'll give our Magna example, a good one.

16:33About 20 years is the timeframe that I look at, right? In 2004, 2005, Magna was a$20 billion company, right? and North America was making 15 million units. Interestingly, today we still are about 15 million units and Magnus is a$40 billion company. Goes back to what I was saying, right? You have to think through the product in terms of being disciplined to say, I'm not going to do everything for everyone. Here is what I'm good at. I'm just going to stick to that. So if you have that disciplined approach, we can continue to. So you need to have a strategy and not be reacting to headlines every day.

17:11is difficult, I can tell you that. Pit in the stomach sometimes, right? But that's what's gotten us through, and I think that's what is very important for the industry right now. Well, when you talk about that growth, you've seen some in the US, right? But the industry really has grown dramatically in the last generation from China, and you've seen some of that. And when you talk about new strategies, that's a place where we're also seeing new strategies. And I have to think, the last time I was in Detroit, which was just a few months ago, the sense of trepidation about the rise of Chinese electric car makers was just palatable.

17:51I mean, what is it that the Chinese automakers are doing so well that the Western automakers haven't yet adopted or haven't yet figured out? A few things come to mind, Tim. Like, if you didn't have the legacy, right, You didn't have an assembly shop or a body shop or a certain way of doing things, and you have install capacity and you have a process in place. You have a fresh sheet of paper so you can think through how you would process the manufacturing side of things. That's one. The second thing I see, when your new organizations are coming, even the organizational architecture is a little bit different.

18:34What I mean by that is you don't have a structural engineering department and a thermal department and a fluids department and a power department. And when they all come together, you have so many interfaces because you have to, at the end, have a holistic system. I give a good example, right, is five, ten years ago, you used to have mirrors and you used to have cameras and you used to have, you know, visibility of the inside of the cabin. Mirrors were sourced by the purchasing department. Cameras were sourced by a different department. Each one had an ECU of its own, right? ECU being kind of the central computer for that function.

19:17Thanks for holding me accountable there. So I think if you think through, right, really, you can sit back and say, okay, I get the image from the camera anyway. I have a you know this electric compute unit that analyzes the data and puts it together and my mirror is already there do I need to have two of this or should I just have one compute right and you know with the change in the compute with the change in the powertrains going to EVs with the new electrical architectures come in place connectivity playing a big role So, you know, how you're designing a car is different, but more importantly, how you're going to make the car is also becoming very different, right?

20:01And if you didn't have the legacy of an existing assembly plant or so on, you're able to do it very differently. And Chinese have taken advantage of that and are moving really fast. And it's fascinating to see a company like Xiaomi, right? Not only a Chinese smartphone manufacturer, but they partner with many other companies to make all kinds of home consumer electronics, suddenly coming out with a car that apparently people love. Looks like a Porsche. I mean, it looks pretty neat. Yeah. And the factory itself, the machine to make the machine, as Moss said, is apparently really well designed. As cars become more and more like consumer electronics, it begs the question, what is different or the same as manufacturing consumer electronics in terms of reshoring that manufacturing?

20:54Yeah, there is two aspects of it, right? Automation where it's needed and where it's useful is fantastic and it can do a great job. So that's one piece. The second part of there are some which are very difficult to automate, at least at this point of time. Never say never. For example, you cut and sew seats, right? The dexterity that's required to go make that process automated, you know, some ways to go. So that's labor intensive. I thought that Figure, which of course is partnering with BMW, already had a robot that can put away groceries. are you telling me these things can't sew seats yeah you know when you're talking of the one question you asked about consumer electronics and uh and cars i am i will agree humbly that i'm a dated automotive guy but you have to still keep in mind that when you buy i think you mentioned it right it's one of the largest purchase you'll make in your lifetime I don't think you will take very kindly if it doesn't start or if it breaks down after eight months and you need to go buy a different one.

22:07So the robustness and the reliability and the safety that goes with, you know, this product, I think is still pretty damn complex. There is one thing that people tend to underestimate. But with that said, we have to learn from the other industries. And there's been phenomenal progress. like you give the example of Xiaomi, right? You talk about EVs. It's really a confluence of three important things which will solve the problem. A high voltage electrical architecture, like 800 volts or 1000 volts. So that means just the voltage of the power system in the car. That's right. Where the electricity is flowing and the battery and this high voltage means you can charge the car faster and all that stuff.

22:52There you go. You got it. I think if you have a megawatt charging station and if you have the electrical architecture that can take that and the right battery technology, then you can charge 300-400 kilometers range in five minutes. And you've heard BYD and a few others talk about it, which means the ecosystem for the high charge has to be there. you need to have new vehicles with the new electrical architecture and the battery technology and it's making progress as you've seen over the last 10 years if that comes now the paradigm has shifted right do you really have a range anxiety if you can charge your car to three four hundred kilometers in five minutes you're okay so do i need as big a battery as i have today not really so i'm not going to spend eight thousand dollars for a battery if i'm the car manufacturer so that will shift or pivot the thinking completely of ev penetration right that's why we at magna have always been saying the penetration might be slow and it's not coming at the rate that everybody expected and surprisingly if you go back look at magna five six seven years ago tim i don't know if I told you this, but we said by 2030, there will be 30 % EV penetration globally.

24:12This was dramatically lower than everybody else's predictions. Yes. And we were called names, which I will not repeat here, but it was like too conservative. EV hater. Did you get, I mean, you were proven maybe even ambitious now in hindsight, right? Did you get a bunch of apology letters, emails from people? No, I wish, but they're now saying, it's like, really, you think it's going to be 30? I don't think so. It's going to be 25. Okay, fine. The whole idea being here is that, you know, the EV is a sustainable trend, right? It's going to happen. And because of some of the reasons I gave you, it just, you have to really invest where you can differentiate.

24:57And that's what the industry is going through, is like, how do you consolidate? where do you really put money where you need to, or what do you have to invest in until you differentiate, you just don't, you know, go invest in everything. We reached out to Morelli, a spokesperson said the main issues constraining the company's working capital were the market pressures impacting the entire automotive industry, along with lower production volumes during the past year. As Kotagiri tries to navigate uncertain forecasts, he also is keeping an eye on the rising Chinese automotive industry. We do believe in the long run, Chinese are going to be taking a share, right?

25:41To what extent, who knows, but they will play a role. So what can U.S. automakers learn from China? That's next.

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26:30The old way of the automotive industry, and we kind of alluded to this earlier, is to grow sales, to grow share. The idea was you had to have new sheet metal, new cars on the lot. And really, maybe what we're seeing now is there's new ways to make money in the industry, whether it's through the digitalization of the experience or the ride or whatnot. And you are in the North America industry, which, because of trade protection, has not seen the influx of Chinese competitors into the U.S. yet. But you are seeing kind of the rise of these electric car companies in China really displacing the Western giants' concerns about Europe.

27:10Where do you see yourself playing here in the next few years as we talk about where you make your investments and how you kind of straddle that? I think it's a combination, Tim. Going back to my example of how we doubled our company in the last 20 years, while the volumes were flattish in North America, one of the ways we did it by staying focused on the products that we can differentiate and increase the content. That's one. and we had our footprint in Europe and over these 20 years, you saw the influx of the European OEMs into the North American market. So we had our content and share there.

27:47And if you look at China, we started off primarily going to China to support our existing customers, which were the German and the Detroit Three. But as of last year, we are about$5.5 billion in sales in China and about 65 % of that is with Chinese OEMs, right? And we continue to grow. Last year, I think we grew at 15%, you know, in China. Which, by the way, this is my favorite trade war fact right now. I just want to put a fine point on this for our listeners. People think, oh, China is becoming entirely self-reliant. You're seeing huge increases in your sales to China. Yeah, no. The interesting thing for us is we make in China, for China.

28:37Build where you sell? Build where we sell. And that applies not just to China. It's pretty much everywhere, whether it's North America or Europe. It's the old axiom of the automotive industry. I mean, it goes back to the Ford days. That's kind of the idea, right? And if you sit back and think about it, just like we were with the Europeans, and when they came to North America, we came with them, And we are participating with the Chinese in China right now, the Cherry, the Geely, the BYDs, the Shopangs, and all of these people. And, you know, as they come to the different parts of the world, we are already in their ecosystem.

29:12We are partners, right? And that's one way to continue to grow. But we are learning from that, too. How do they design? What is their design cycle? How are they thinking about it? And we are able to bring some of those learnings to other parts of the world. And, you know, we do believe in the long run, Chinese are going to be taking a share, right? To what extent? Who knows? But they will play a role. I want to talk to you about what we have to look forward to, because even though there's this deceleration in the growth of EVs, it feels like cars are changing faster now than at any point since the Model T.