Can you imagine the phones calls?
A few days ago President Trump lay out massive tariffs on Chinese goods. It’s not new news to you anymore.
But what we have found fascinating is his backflip on a particular area of Chinese goods. Specifically a relatively unknown but incredibly vital selection of minerals.
Trump very quickly realised that these minerals were crucial to the US ‘grand plans’. He wants to ‘Make American Great Again’. He wants to return manufacturing to the US.
But what he forgot is that the US simply can’t do any of that without the help of China.
There’s a particular set of minerals that the US car industry simply can’t live without. The problem is China provides 78% of the US’s total supply of these minerals.
So after he slugged the tariffs on the Middle Kingdom we can only imagine the calls that would have come in…
Tariffs affect on the auto industry…
We think James Hackett, CEO of Ford Motor Company [NYSE:F], might have been quick to pick up the blower. Something akin to…
‘Donald, what the heck do you think you’re doing? Tariffs like that are going to crush our ability to provide cleaner, greener, more affordable cars. Keep this up and we won’t have an auto industry in a few years. At the very least let China supply us with rare earths without tariffs.’
After that one, we’d have thought Marry Barra, CEO of General Motors Company [NYSE:GM], would have been waiting in the queue. He might have said something like…
‘D Man, what’s going on? You lost your marbles or something. You can’t whack tariffs on rare earths. We can’t make cars without them. And we certainly can’t beef up auto manufacturing if you keep this up. If you want to add tariffs, that’s your call, but please don’t add tariffs to rare earths. US auto manufacturing depends on it.’
And of course a few hours later as Europe got out of bed we think Michael Manley, CEO of Fiat Chrysler Automobiles [NYSE:FCAU], would have been straight on the line, suggesting something to the effect of…
‘Good day sir. You’ve lost the plot. If you want Chrysler, Dodge and our other brands to continue to make cars and employ Americans you must not add tariffs to rare earths. We cannot sustain these businesses in the US without cheap, easy access to these minerals. Good day to you sir.’
Of course we don’t know if Hackett, Barra and Manley spoke to Trump. But we reckon there would have been serious pressure from US car companies.
You see Trump has decided that he’s not going to add tariffs to rare earths.
Rare earths include minerals such at Yttrium, Neodymium, Europium, Lanthanum, Scandium and Dysprosium.
These materials go into everything from the chassis to electrical components, magnets, catalytic converters and play a very important role in battery and EV production.
And he also made sure that graphite flakes weren’t on the tariff list too. Graphite flakes are important as anodes in lithium ion batteries. If the likes of Ford or GM are to build thousands of EVs any time soon, they’ll need graphite as much as those rare earths.
The US car industry is actually in a relatively fragile state. These are all global companies. Overseas markets are important to them as much as the US. While Trump’s plan to make them strong again is noble, he can’t do it at the expense of the industry itself.
What makes the future for US carmakers even more uncertain is the rise of premium Chinese carmakers.
China has a notorious reputation from days gone by of making rubbish cars. For a country built on manufacturing you’d think they’d sort it out by now. Well they haven’t. But it looks like they might.
And a big part of the future of China’s auto industry is going to lie squarely with NIO. NIO is China’s newest premium carmaker. The company itself is only four years old and they recently listed their IPO on the NYSE.
The company (four years old remember) now carries a market cap of US$8.6 billion. That’s a lot for a company that’s only started making and delivering their first car in June this year.
Their first model is the ES8, a premium SUV. This is an all-electric car with in-car artificial intelligence, autonomous driving capability, and importantly…it looks good.
NIO is also developing a battery swap system and a 24-hour mobile charging service. As NIO’s website explains, ‘power is always 3km away.’
NIO’s first car, the ES8, is everything a premium SUV should be. And it’s affordable. Well it’s at least more affordable than Tesla’s Model X. But then again, everything’ more affordable than that…
NIO’s plans are to release the next model, the ES6, shortly. This is a smaller version of the ES8. This will give them two key models to launch from. They then plan to release a new model every year.
But it’s their hero car, the EP9, that’s really turning heads. The EP9 is their ‘supercar’. It too will have autonomous driving. In fact it set the record for the fastest production car lap around the Nurburgring last year.
Although it may be worth pointing out a $1.4 million car with only around seven in the wild may be pushing ‘production car’ status.
The point is that NIO is making quite a splash already for a four-year-old Chinese EV maker. While their initial focus is to ramp up and expand into China. We expect them to take a more global stance in the near future.
This expectation comes with their ongoing team in the FIA Formula E, an all-electric global racing series. With the likes of Porsche, BMW, Mercedes, Nissan, Jaguar, Renault all having a presence in Formula E, the fact that NIO sits alongside these major global carmakers is significant.
With the recent listing though, the question is, should you buy NIO stock? Well in our view it’s too early to say. They’re Chinese focused for now. They haven’t announced a global play. They’re building a strong, reputable, premium brand. They are what the future of car companies looks like in our view.
But they also burnt half a billion US dollars in the six months to June 30 this year. And that’s on delivery of just a couple thousand cars. That’s got to change for investors to really take them seriously. And they need to do the opposite of what Tesla does — NIO needs to meet production targets.
They show all the promise in the world. But at an US$8 billion valuation and burning cash at great speed, it’s merely one to keep an eye on for now.
Editor, Crisis & Opportunity
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