Experience in the automotive industry

I’ve been in China for 17 years. My business while in China and before was always serving the automotive sector. I’m currently chairing the automotive committee at the American Chamber of Commerce here in Shanghai, which is a great opportunity to kind of sit right at the crossroads of the global and China intersection of how the world sees the future and how China sees the future. And China has a very different way, as we all know, of thinking about how to commercialize technology. So I get to kind of help clients understand China better, and how it goes about commercializing new ideas. Before coming here. I was Head of Strategy at Chrysler, a multinational car company. And early in my career, I actually worked at IBM. IBM is obviously a computer company that also went through disruption. That industry was technology-based, but it had to go through a transformation when the personal computer came along. The devices that we carry democratize Information Technology. Once upon a time when you were very young[1], when I was just starting my career, even before you were born probably, Information Technology was not in our pocket. It was in a data center. And people had to know how to program a computer to get useful utility from the computer. It wasn’t opening a device with your face, clicking a few buttons, and have all the information you need presented to you on a convenient little screen that you carry in your pocket. No, you had to know how to get the information out of the computer, you had to be an Information Systems professional. So that industry with the power of technology was transformed from a privileged few to everybody having access. I think that’s what’s happening to the automotive industry. It’s going through that similar transformation with a lot of the same technology and tools. So our business is helping clients understand how this industry is being transformed.

Helping clients ride the waves of disruption

We see it through the electrification of the powertrain system. That’s probably the most deeply rooted thing that this industry or any industry has had. Think about this: the backbone technology, the intellectual property that powers mobility, was invented in the 19th century. 1885 was when the internal combustion engine was first installed in a vehicle. 136 years later, where 95% of the cars even today, maybe not in China, but 88% of the cars in China still are sold with a technology that was originally invented in 1885. It’s time we change that. That’s just the first wave and one of the waves of disruption that’s changing the mobility landscape. The other wave is the self-driving vehicle. And that’s also going to be commercialized here very rapidly.

Question 2

Lewis

What are the current challenges to achieving large-scale sustainable mobility? What are some feasible solutions?

Mr. Russo

Incumbent legacy and economics

The biggest challenges are in legacy and economics. Technology barriers can be overcome if there’s favorable economics, it was always possible to power the wheels with something other than the combustion engine. But nothing was as economically advantaged as that. The reason why it dominated for so long is because you could scale it, the resources needed to refuel it were plentiful and relatively inexpensive. Henry Ford’s innovation of the 20th century wasn’t the internal combustion engine, it was the mass production business model applied to producing the automobile at scale. So the average person, middle-class person, not everyone, but the average person can afford it because it was built in a mass-production way. The ability to aggregate the supply chain, and you can drive down the unit cost of producing the product and make it affordable by somebody who has an average wage-earning job. That was the innovation of the 20th century. The innovation of the 19th century was originally the steam engine, followed by the internal combustion engine, which powered transportation for the 135 years of history of the automobile. But now we’re in a new era. We’re in an era where we have a legacy to overcome. We have economics at scale, which is the incumbent advantage. You have an industry that knows how to profit from the existing status-quo technology. What’s the incentive for that industry to change to a less than fully scaled technology that they do not have the supply chain in place to build and profit from. That’s why I say my theme is building and profiting from the future of mobility. Right now, the automotive industry builds in profits from the legacy of mobility, not the future. How do you build in profit from the future? Part of that shouldn’t be the burden purely on the industry. Henry Ford didn’t invent the mass-production model. He did a lot of things vertically integrated. He made tires and he did a lot of supply chain aggregation. But he wasn’t an oil explorer, he didn’t build the national highway road system. All of that is infrastructure. There were other companies to go explore and get access to the gasoline and build refineries. Standard Oil did that. The US has been very supportive of the carbon-based economy, and the supply chain of resources needed to power its industries. That’s the old 20th century way of thinking. If in today’s 21st-century world, you’re trying to pivot to something more sustainable than fossil fuel carbon-based transportation, then you need a heavy amount of infrastructure backing for the new supply chain, for the resources needed to build the batteries, to build the components, to get access to the resource like the lithium and other ingredients that go into making the anode and the cathode. You need the infrastructure for charging in place, all of which doesn’t come pure. It shouldn’t come purely from the company that’s inventing the device.

Revolutions are not led by the king, but the ones that are not in power

The automotive industry being a profit-making enterprise prioritizes things that they can profit from, and if the electric vehicle is less profitable, they do not put it as a priority for development. Unless you’re only making electric vehicles. If you are an electric-vehicle-only company, you have no legacy to protect. You are a predator in the competitive landscape. It took a company like Tesla to reimagine the business model of how you build a profitable electric vehicle company. Very rarely does a revolution get led by the kings, the royal family, or the Emperor. Revolutions have to come from the ones who are not in power. And that’s what’s happening in the world of the automotive industry today. It’s the startup companies that are the EV disruptors. In China, you could argue that it’s Tesla, as well as NIO as well as XPENG as well as pure-play EV companies. But there’s another revolution happening. And that’s the digital revolution. And the digital revolution is played by a completely different set of rules. And they are not pure-play EV companies. These are companies that are born in the internet era with the idea of monetizing mobility and monetizing the movement. So they’re not just thinking EV, they’re gonna go EV because it makes sense for them to make to go EV. Why would you start a company in the 21st century, powered by a technology invented in the 19th century, it would be kind of crazy to do that. So any company invented or born in this era is going to be born with electric vehicle technology embedded in its blueprint for the future.

But the other revolution is the digital revolution. And the digital revolution is not just about monetizing the sale of the vehicle. It’s about monetizing the mobility and the data associated with the usage of the device itself. We are users of smart devices. When a car becomes a smart device, what can you do with the users in it, especially if they’re not driving it? That user becomes a consumer of services, the services that you can present to them in the vehicle, the services that they can consume when they step out of the vehicle, or the services that the vehicle is enabling them to experience. So this is the world of the future. The world of the future is going to be a digital future. It’s going to require electrification and self-driving technology. So that’s where you see the new companies prioritizing. When you hear NIO, when you hear XPENG when you hear LI Autos talk, they’re talking like digital companies. When you hear Tesla talk, you’re talking like a tech company. Their business is to create the revolution. They are not in business to protect the legacy.

Public-private partnership is the solution to infrastructure

Public-private partnership is the formula that works. And it works everywhere in the world, I’d say it’s worked in the US and it’s worked in Europe. The transportation infrastructure, which was once upon a time, gasoline refueling stations and physical roads infrastructure. Car companies don’t have to build that. They shouldn’t build that. So why should they build the charging infrastructure? Tesla did, and they built the supercharger network. Now you can participate in that if there’s an economic benefit for you to do that. And I think in their case, they don’t just see themselves as an EV company, they see themselves as an energy company. And having access to the charging system actually gives them a more frequent B2C[2] customer engagement than just selling them a car. If I sell you a car. I see you when you buy the car, maybe if it breaks down, you come back to me, and the customer’s usually unhappy when that happens. But the everyday utility, where maybe two or three times a week you need to get your car charged, that’s also a customer touchpoint. It’s also a place where you can profit from the interaction. BP[3] knows this, I mean, what a convenience store next to the gasoline pump. You can sell people coffee, snacks, or whatever else you can do in a convenience store. Since cars used to break down more when they were mechanical in the 20th century, most of the places you stop to refuel are actually repair shops because you needed something else like checking your oil. I remember when I was young, you pull into a gas station, not only did you not have to pump it yourself somebody would pump the gas for you, they would check your oil, because they knew they could profit from selling you an oil change.

So the B2C engagement point, the connectivity to the customer is also a reason why you might want to be in the business of servicing or charging the vehicles when they’re moving around more frequently.

Fewer cars, more movement

We live in a densely populated place, people don’t like to be in the car and they don’t like to be in traffic. They know they need to get around town but the experience of mobility can be painful if you’re the person driving the vehicle. I think what we’re evolving to is a world where we’re not going to be actuating the machines ourselves, the machines will be moving all the time, probably without a driver. That’s a not too distant future. And there won’t be as many of them out there. Why? Because in a population as large as this, if everybody’s driving their own machine, there are too many out there. There are just too many and we don’t move around frequently enough to justify ourselves. If our average mobility pattern is say, one hour out of our 24 hour day, that we’re physically moving, then if we’re moving around on our own equipment, that’s 95% of the assets that move us that are sitting not moving. That’s not the way the future of transportation is going to work. They have to be moving constantly, either moving us or moving packages around, and only doing the productive work when it’s moving. Anything that’s unproductive and sitting part is just occupying space in the city. So if we’re going to live in densely populated urban city centers, we shouldn’t all be owning our own equipment.

So the auto industry has to learn how to profit from the movement, not from the sale of the asset.

If you’re a mobility company, then you are trying to optimize the productivity of movement, not the productivity of your factory. That’s what they optimize today. I know that their business is based on volume planning and product planning. How many can I build? At what price? And how much money do I make per unit? Which means I have to sell a lot of them. And you’re not concerned about whether or not people use them frequently, because you don’t profit from that. It’s not your business. The downstream business is not your business. That’s the part that I like about these new mobility companies: the Teslas, the NIOs, the XPENGS. They’re not just thinking about how many can I sell. They think about how can I profit from what people do with them after they’re sold. You have to think that that business is yours as well.

Why would you design a city to prioritize space for storing underutilized assets? Unless your city is based on making those assets which could be an exceptional case. I know in the case of Liuzhou, where Wuling is based. I think 30% of the cars in the city are that model. It’s very cheap. Look at the price, it’s 37,600 Kuai. It’s an EV base model, the more expensive one is 43,000 Kuai. Virtually anybody can afford that. 30% of the cars being sold are those. So the city now has the problem. Where do we store them all? It’s like the shared bikes, where do you put them? Now they have a problem: where are we gonna put them because people don’t use them that much. So it’s a solution to the personal mobility problem. It’s democratized so everyone can afford it. But is that a sustainable model for city development?

Prof. Luyao Zhang

Exactly, especially in city centers like New York, it’s very expensive to park.

Mr. Russo

Yeah, because they don’t want you to take your car to the city. The way they prevent you from doing that is making it really expensive to park and making it really expensive to go over the bridge. Have you ever gone round trip over a bridge in New York City? It takes $20 to do that. Do that every day for a month, and you’re basically working for the Bridge Authority. [chuckles] They’re encouraging you to use other ways. Either live closer to where you work, which is also expensive, or give up taking the car that sits parked and take public transportation, or shared rides that pool the assets and make sure that they’re moving all the time. So if cars moved all the time, we wouldn’t need as many of them. But you also then need to solve the problem of how do I keep them moving, which means you have to charge them if they’re EVs. And EVs have the problem that it takes four hours to charge them. That’s downtime, you have to charge them fast. One of the reasons why NIO prioritizes battery swapping is it eliminates the problem of four hours of recharge. And that’s I think that’d be very popular here in China. It wouldn’t have happened outside of China. It wanted to happen before, and there was even an Israeli startup that became a unicorn that tried to be a battery swapping company. But the automotive industry then 10 years ago wasn’t ready for that technology. But in China where we have a completely different context of how people move, it is very much a benefit to have the ability to fast charge your car.

The logistics industry is the driver for autonomous vehicles

The other issue is self-driving technology. And I think that’s where I think China really stands out to be the lead market for self-driving vehicles. First of all, I don’t think the motivation to get behind the wheel and drive is as high here. Some people want to own a car for sure. But they don’t want to drive it every day. They want to have it when they need it for occasional use. But manually actuating a vehicle is not the ambition. It’s the ownership and the pride of ownership, not necessarily get me out in the traffic jam so that I can experience gridlock. I grew up in New York, I never really was motivated to go to Manhattan with my car. But if I needed to go out to the countryside, no problem, I’ll take the car for that. So I think in China the use cases for mobility are going to determine what the type of solution is, but self driving is commercialized in a completely different way. And it’s going to be mainly driven by the logistics economy, it’s going to be mainly driven by e-commerce, by the food delivery, the robo delivery. Use case will be the commercial driver for the self-driving vehicle because I think when you talk about people movement, the hurdles are higher, you’ve got occupant safety risk, the issue of responsibility for the safety of the occupant, there are going to be more regulations there. But I think for delivery applications, and for goods movement applications, they absolutely will be commercialized faster in China.

Question 3

Lewis

How do you envision the future of smart (tech-enabled) mobility with the democratization of advanced technology?

Mr. Russo

Technology abhors inefficiency

First of all, technology doesn’t discriminate. What technology does is it disrupts and finds ways to make things more efficient. Internet abhors inefficiency, and internet companies seek to disrupt inefficient business models, whether that’s publishing, or music, or just pick a thing that required a physical product to be manufactured and sold in a retail way. The internet took out the inefficiency. If I had to physically print a book, sell it through a distributor to a book retailer, and then have you go to the bookstore, which we like to do. I certainly like to browse through physical books and I still do. But all of that inefficiency of the physical print, the factory to do that, the handling and intermediaries in between who each took a little bit more profit, at the end of the day, something that should cost a few dollars ends up costing $30 to buy a hardcover book from a bookstore. Amazon threw that business model away and said I’m going to sell books online. I could do that with no physical factory to build the book, no distribution channel, just put the information online and you just download it and consume it through Amazon Kindle. But the bookstore still exists and there’s still people still want to go have coffee. The bookstores became coffee shops, we like to hang out to see people and sometimes you want to touch it physically the leaf pages. I still liked reading the flaps. Some people even young people might still do it that way. But it’s gonna get challenged by the new. That’s where we are with the automotive industry.

What we are pointing out is the inefficiency. The inefficiency was there all along. It was the 5% utilized car. If the way we become personally mobile, not public transport, but personally mobile, to get in our own personalized mobility experience, we had to physically buy a device, a bicycle, a car, we had to free ourselves up from the bus and the train, by physically buying hardware. The internet said no, I can give you that. Even if you’re a taxi hailing person, you don’t have to stand in the border and get elbowed out by somebody else who jumps in front of you and grabs that taxi. You just tell the app and that’s your ride. There’s no more competition on the street. When I lived in Beijing on Changanjie, and I had to position myself in a way where I was able to not get on the taxi line, because you’re going to have 15 people waiting at the taxi stand in front of you. So you end up standing maybe 20–30 meters in front of the taxi line and try to grab the taxi before everybody else. This is China, we’re all competing for space and there’s no such thing as Pai Dui (waiting in line); wherever there’s Pai Dui, there’s a Jia San (cutting in line) and there’s somebody who will come in and say “okay, I’m gonna grab that spot”, whether it’s waiting for a taxi or Uber, or applying for college or anything else that you might do, there’s always five other people that want to do it in front of you. [chuckles] The Internet sees the inefficiency and says I can serve and give you a more personalized experience, and you don’t have to stand in line anymore. You might have to outbid someone online but that’s the profit of the internet company. So it sees that and recognizes mobility as a service.

Tech companies think differently

I had the experience of meeting Cheng Wei[4]. And I brought a car company to meet him in 2015. It was the CEO of Ford China that went to Beijing with me. After they shook hands, he (Cheng Wei) said, it’s great to meet a famous company like Ford, we are in the same business. And the Ford CEO said: “really? We’re a manufacturing company and you’re an app. How are we in the same business?” Cheng Wei said:

“Well, Henry Ford democratized mobility with mass production, and we’re democratizing mobility with an app. ”

And I thought, wow, that defines what the internet’s doing. This is the automotive industry, I’m not in the business of the utility, I’m in the business of the product. I’m making a mobility device but I’m not profiting from its movement. So the internet economy sees the inefficiency and says, I’m going to blow that away. I don’t need a factory. You can be the factory for me. Like Ford, you can build a car, and I tell you what a person who I put in the car might want to do when they’re in it and build me that car. Or maybe we can help the cars that are in service use your dealership network or some type of service network. So you have to come at the problem thinking differently. And that’s what the internet companies are doing. When you look at NIO, when you look at at Apple, when you look at Waymo, they’re solving a different problem. First question you have to ask is why are these companies experimenting mobility? What did they want? And the answer most people give, which is the wrong answer, is maybe they want to become car companies. No, I don’t think so. Who wants to be a manufacturing company? They want they see what human beings do every day. And they say, how can I make that better?

From problems to tech-enabled solution

What Didi did is they see what human beings do everyday, they move around every day, they don’t necessarily like to go on the train, they don’t necessarily want to go on a bus, they don’t like standing in a taxi queue, and I have a technology solution for that. So if you’re Apple, or if you’re Waymo and you say, I’m in the business of monetizing online services. If you are Google, what do people do every day? They move around. How do I capture that user as part of my Android operating system? I’m Apple. What do people do every day? They listen to music, they make phone calls, they they take pictures, and they move around. So mobility is always on the list of what we do every day: we order food, there’s Alibaba; we cook, there’s Hema[5]. The internect company sees what we do every day, and it monetizes us with a service that makes it easier for us to do that. And if there’s an inefficiency in the business of delivering that service to us, they attack it. What’s the inefficiency in transportation today? Fuel cost, maintenance cost and driver cost. How do you mitigate that? Electric and autonomous vehicles. So you get quickly to the answer if you think in the in the digital context.

Self-driving technology, connectivity, and operating systems

The first wave of disruption of the automotive industry was mobility as a service; the second wave of disruption is electric and connected vehicle technology. We’re in that era right now. We’re in the advent of electrification and early stages of self-driving technology. It’s called ADAS — Advanced Driver Assistance System. China likes to call it ICV — Intelligent Connected Vehicle. Same thing but different names. But it brings the idea of connectivity into the equation. And when you bring connectivity into the equation, you bring the operating systems into play. IOS, Android, Harmony OS, that’s why Huawei is in the game; Duer OS, that’s why Baidu is in the game; Ali OS, that’s why Alibaba is in the game; MIUI, that’s why Lei Jun[6] is in the game. Pick a device, and then say is the automobile a device? What operating system should power it? Mine, if you’re an internet company. So it’s only a matter of time until all of the tech companies are in some level in the future of mobility. The car is the most sophisticated computer that we will interact with on a day to day basis.

Who wants to be the operating system that powers the apps that are presenting the applications to the users in the everyday computer that they’re being transported in? The answer is every single tech company. [chuckles]

Prof. Luyao Zhang

This sounds interesting, because we were doing research about the decentralized finance application on the blockchain. But you help me see another user case: a car is also like a platform.

Mr. Russo

Not only is it a smart device, it’s probably one of the most personalized and immersive spaces outside of our living room. It’s probably going to be the most personalizable space. Even our workplaces is less personalized, because we share it with with others. But when we’re in that vehicle, that’s our box, that’s our cave. And it doesn’t have to be ours for the time that we’re in it. The technology is sophisticated enough to know who we are with facial recognition, you just have to sit in it for the device to know who you are. What’s the difference between shared mobility and personal mobility? The difference is there’s somebody driving a car where I have never met before. The other thing is, I’m never going to remember this car 10 minutes after I get out of it because they didn’t personalize. But you will remember it when it’s personalized. That’s what the internet knows how to do. They know how to make the services sticky. The successful internet companies are the ones that you miss when you don’t have it. The reason why people buy a device is because of the operating system and because they know their cloud storage, their photos and music, whatever they prefer, whether it’s harmony OS or IOS. You will be making a decision of what car to get on the basis of what operating system it has. I posted something online on LinkedIn about BYD. Somebody said I would want a BYD, but it doesn’t have Harmony OS. I’ve been saying this a long time, people will make a decision of what car to either own or use based on what experience they’re going to have in it, and the operating system is what defines the personalized experience of mobility.

Transportation device as an experience

Prof. Luyao Zhang

I feel like it’s similar to the thing you mentioned about parking lot. Because right now we are taking Didi for the convenience of doing something else, but the process is actually redundant.

What if the process of transportation is also itself a valuable experience?

Mr. Russo

Think about your hospitality industry. If we’re in business traveling, you book a hotel because it’s in the city that you’re going to. It just happens to be convenient for you to be going to that particular place. But there were destination hotels, you go there because of what it is. It is something very popular here in China, people go on weekend trips in their home city. It’s become very popular even now during COVID because of the travel restrictions. I don’t want to be in my home all the time. I’ll go book a weekend in Chongming[7].

I went out to Thousand Island with my daughter and we never really left. There’s this beautiful lake there. We went outside once and we spent the rest of time in the hotel, because there’s a children’s play area and there’s a lady making syrupy angels. [chuckles] There was so much to do she never left. And till this day my daughter was three years old and she was two years old when we went. She still calls it daddy’s hotel. The funny thing is we may think of mobility that way, not too far in the future, where you can create an experience and make that the reason you got in it. You just need another space.

Community / Brand culture is the game-changer

I think there’s a seed of that in the NIO’s business design. A lot of people buying NIO are not buying just because of the car. It’s an EV, but it’s also a community. William Li[8] did something with NIO day. I went to one of them, the one that they had here in Shanghai with Bruno Mars. It was a cult. It was like we were all NIO enthusiasts. And then he builds this NIO house, which is basically a club. So when you’re thinking do I buy a Tesla or a NIO, and you’re Chinese, and you’re thinking, “that one’s got a more famous multinational brand, but this one has people I can meet, I can socialize with, I get invited to go see Bruno Mars or whomever”. So you’ve created a community. You’ve created a culture. We did that a little bit at Chrysler with Jeep, the Camp Jeep where if you own a Jeep, you can go and take it out in the off road experience. Thousands of people every year would go to Camp Jeep. I think there’s a bit of that in the DNA of the internet company, because it’s social communities and it’s online attachment. If I can build that feature around my mobility experience, then I have a reason to stay with the brand. It’s no longer just having a physical device but there are things that the physical device enables in my lifestyle that I can let go of. That’s the part that I think the digital economy will invent a way for people to remember the mobility experience more than they remember the hardware itself.

They need to attach it somehow to the hardware, and they need to make the experience so unique, where I can’t not have that.

Apple enthusiasts sometimes are called Apple fanboys, that they’re so devoted to the brand where they have to have all the latest and greatest stuff, and they are constantly looking for upgrades. Or you’ll even go to the store not intending to buy anything, but rather just enjoy going to the store. You’re sucked into this community of people that like to brag about all the cool technology. And I think that’s where you’re going to see this industry evolve is these smart device companies, who, by the way, have stores. For traditional cars, you’d never go to the dealership. The most horrible experience about ownership is buying the car and getting it serviced. So the dealership is not a fun place to go. It’s like going to the dentist. [chuckles] You are like: do I really have to do this? I got to get my teeth cleaned every now and then but do I really get excited about the idea of going there? No. That’s the car dealership to the car owner. However, that’s not the Tesla store. That’s not the NIO store. It’s like people just want to go in there because it looks like: hey, people are having some fun and cool stuff in there. If you go over here on Corporate Avenue five, go to the HiFi store. I put my little girl in there and it’s got this wacky vehicle design. It’s got these goldwing kind of doors that fly up. But when you get in the car, it’s got this, and this is what the Chinese brands I think are very different than the foreign companies is they got these gigantic screens in front of you. And I put my three-year-old daughter in the passenger seat and she knew how to tap, swipe, and find what she wanted. She found Paw Patrol and it was just lots of watching. I can’t get her out of the car. It’s like she knows how to do this. I put her in a Tesla. She got behind the wheel. And within two seconds she’s tapping and she’s learning how to turn the radio on. I didn’t tell her to do any of this stuff. I put her in the NIO car. If you want to see how the future is going to be like, take a little child and put them in a car and look at what they do. They go right for the screen. The other thing NIO did is they put a little robot sitting there called Nomi, which you can talk to. And when you ask it to play music, not only does it blink and smile at you, a little guitar comes out. It’s got a little animation of the guitar playing while the music is playing. I got her out of the car and I went to another shopping mall and it was a Ford. I’m not downplaying Ford but I put her in the Ford. She didn’t want to stay in the car. There was no screen. And she asked me where’s Nomi? Where’s the little face? Where’s my little robot that I can talk to? And I’m thinking the traditional car companies are not in sync with where this world is going.

Customer segmentation leads to multi-brand strategy

I was invited to Ningbo by Geely to experience their new car, Zeeker. They put me into the new Zeeker car. Also, mind-blowing performance and giant screen. You can have a comfortable ride, you can have a performance ride, you can change the driving experience. That’s a neat idea. It also had a giant screen. So I asked him first of all, why do you have so many brands. He said in China, there’s so many different segments in the market so you need to be able to speak to the customers in a more granular level. Having one brand to cover everything is not appropriate. That’s counterintuitive logic to the way the multinational car companies have thought. They approached multi-brand strategy in a different way. They saw it as a way of standardizing on the manufacturing line with a common set of technologies and then creating prices and life stage brands with different levels of content for different lifestyles. So if you’re GM, you start with a Chevrolet and then maybe you graduate to a Pontiac, a Buick, Oldsmobile, and a Cadillac. Basically, it’s the same car. It just had different top hat and different interior. You might have leather, you might have something else. You had something that differentiated it, but everything under the covers was the same. The chassis was the same. Even today you see a Toyota has Lexus, but the Lexus cars are basically the same as Toyota cars but just with more leather in it. In China, these brands are targeting totally different customers. The GreatWall brand has TANK, they even have a pickup truck brand. Now they have HAVAL, they have WEY and they have ORA[9]. And the ORA brand is totally targeted at young, 20 to 35 years old buyers. EV in China is going to be sold to the younger technology savvy population. The way it’s being done elsewhere is through price premium. You can get a Volkswagen, or you can get a Volkswagen electric. The latter is going to cost more. You got the world upside down here. If you price it higher, you’re not going to appeal to the younger buyer. You’re trying to sell it to the older buyer because they have more money. You don’t want to be that cheap (referring to the previous Wuling EV that’s priced at RMB 30k). That’s too democratized. You want to make money at it. But take the Geely approach. Let’s create a brand. Let’s call it something that you’ll notice. What is a Zeeker? So I asked them what Zeeker is. “Z” for Generation Z, “eek” is geek, what’s the Generation Z geek? It’s a Zeeker. So they’re basically saying to you, “I’m selling EVs to the younger population”, which is exactly the way you should be doing it. Because the younger people are going to be more tech savvy. They’re going to not want to have what their mom and pop had, if their mom and pop even owned a car. If they didn’t own a car, they’re definitely going to want to have an EV. Anybody who’s probably born in this century is probably far less likely to buy a combustion engine powered vehicle than an EV. So let’s name a brand after them.

Question 4

Lewis

With the rapidly changing and diversifying landscape of the automobile industry, how do you think talents and scholars should prepare to make an impact in the industry?

Mr. Russo

The connectivity between industry and academic institutions

I was talking to somebody recently, whose son is about to go to university. And he was having a debate with his son over what to major in. His son wants to be in the automotive industry. And he couldn’t convince the son to not major in mechanical engineering. He is saying the higher priced graduates are the ones who have the skills needed for the electronics, the software, and the self driving technology. He is an investor so he kind of knows where the money’s going. It’s not in mechanical engineering. It is a dilemma for the automotive industry, because the automotive industry tends to be served by the universities that surround it. In the automotive centers of the world, the technical universities in Germany, even in the US, University of Michigan, Michigan State University, Ohio State University, those universities have a strong mechanical engineering, deeply rooted academic bias. There’s a reason why Stanford and MIT, which are long standing academic institutions, but they’re not in the backyard of an industry that is deeply rooted in a particular discipline. And you’ve got the other added benefit of new tech. The venture capital world surrounds the academic institutions that breed the kinds of technologies that are needed in the future, because the venture world is about the future. It’s not about preserving the past. So this is the dilemma that the automotive industry faces. The institutions that support it, which include academia are geared to the old legacy, not to the next generation. And it lacks in many of those locations, the vibrancy of a deep pocketed venture capital, risk hungry venture capital world. The automotive industry’s business model is rooted in a risk-averse financial system. Taking on risk is the purpose of venture capital, it’s to absorb the risk. It’s to say, “I accept the fact that 9 out of 10 are going to fail”, because it’s the 10th one that’s going to make back all the money. And that’s what Stanford represents, that’s what MIT represents as a breeding ground for the next generation of tech. I would argue that Carnegie Mellon. There’s a bastion of hope in the upper Midwest, and that the AV (autonomous vehicles) tech, the Pittsburgh Cleveland corridor did find some backing with the autonomous vehicle development coming out of their academic institutions.

But the academic institutions have to see beyond the incumbent companies to the next generation of technology startups, and gravitate to orbiting these very small dust clouds, which eventually will be the the burning stars of the future of mobility.

That’s why Tesla is in California, and that’s why California is such a hotbed for talent. That’s why even the Chinese EV companies need to go to California. It’s because you’ve got the AV talent coming from there. You’ve got the Googles of the world, the Apples of the world that are the next generation of mobility disruption companies. You’ve got all the AV tech companies that test their vehicles in that area. You need to spot the trend and reform the academics. I don’t want to say all academia is this way, but they tend to gravitate to where they get funded. And sometimes they get funded by old institutions that are not trying to reform the industries that they serve.

Prof. Luyao Zhang

Yeah, I really feel this. I gave up a lot of fundings because the project is not interesting. But a lot of professors cannot see this.

Mr. Russo

But there’s always going to be fundings, because even the oldest institutions have big R&D centers. They do. Volkswagen has labs here and they have huge R&D investments. But the question is,

Will the king create the revolution?

All you gotta do is look at the sales performance of Volkswagens EVs in China and compare it to NIO. Volkswagen sold fewer with far more dealers. How is that possible? If I’m in Wolfsburg[10] I’m really panicking right now, because this is their biggest market. I’m sure Tongji university with Volkswagens backing is doing a lot of cool R&D. But how much of that is finally going to find its way to commercial scale if they can’t figure out how to climb the hill in China. They’ll be able to do that in Europe, because buyers of Volkswagen products in Europe are not going to think anything different about Volkswagen as an EV company. They’ll say, “okay I’m fine with that”. But this is China. I think Chinese, you’re gonna have a different buyer of EV than traditional cars. And the people buying EVs are shopping TESLA, they’re shopping the new stuff. Then if they’re not happy with that they might go back and look at Volkswagen and look at their EV. But I don’t think so. I think they’re totally different buyers. Volkswagen might sell that EV to somebody in their 50s who can afford it, who might be a little bit more tech savvy than somebody else in his age demographic. But the 35 year old, 30 year old or the 25 year old, they’re looking to NIO, they’re looking at XPENG, they’re looking at the Chinese brands,

Entrepreneurship in Israel

I look at Israel, which is a small market that has to be global in the way they think. And they do a very good job at the academic institution level of incubating new startups. And then they create support structures for the startups in their early stage like incubators. But they are also backed by local venture investments that can bring these young plants to a level where they can be, at some point, competitive in the forest. You need that kind of system, and the university shouldn be the incubators.

It’s not because they’re demographically young. You’ll find 50, 60 years old entrepreneurs, they’ve just done this their whole life. They’ve started several different companies. And that makes them even more valuable, because they know how to get funded, how to work through the system, they know how to sell the company to a company that can help them scale. So they’re really good at it. And I think it’s that startup and venture backed ecosystem, with the universities as a breeding ground. There has to be some form to do that.

Prof. Luyao Zhang

All my advisors are Jewish, so I’m familiar with the community. And one thing that really impressed me is that they are all entrepreneurs their whole lives.

Mr. Russo

There’ll be some brilliant CTO who’s 25 years old, came out of the military. But then the CEO or the advisors are all 50-year-old, 60-year-old people, but they still have that youthful enthusiasm for technology, right? Because they’ve been doing it their whole life, ce, but not anybody older than me would have brought up in the Cultural Revolution. In Israel, they’re born to be entrepreneurs, and they live their whole life with that mindset, that entrepreneurial mindset. What’s refreshing about China is that the young generation of entrepreneurs are not bound by legacy. They’re not. They’re not stuck in serving the traditional industries. That’s the problem, not as much in the US but definitely in Europe. The academic institutions are geared to the traditional industries. Even today, the world has moved to digital, the movie world has moved to software defined. Europe is so far behind that. Even I’d say Japan is behind that. East Asian countries that grew up in the late 20th century, mimicked the West. And I would say, watch out for Vietnam, and Vietnam is going to be the Asian tiger that rises after China, and will probably embed the best of both worlds. They’re not coming here, they’re going to go to Europe, and they’re going to go to us. They might have even more success doing that than Chinese companies will because of geopolitics. Forget the fact that America might have fought a war in Vietnam, it doesn’t matter for American car buyers that a car was built in Vietnam, but it will matter more if it was built in China, just because of the geopolitics. But Americans totally don’t discriminate when it comes to what they buy. They can be a Trump supporter and still drive a Toyota. When they buy stuff, what they buy has nothing to do with their politics. It really doesn’t. They’ll go to Walmart, they’ll buy everything that’s made in China.

Notes

[1] The interviewers are millennials.

[2] Business to Customer: a business paradigm where customers have direct exposure to the products/services.

[3] An oil company. Its gas stations have convenience stores.

[4] The founder, chairman, and CEO of Didi Chuxing, a Chinese mobile transportation platform in China

[5] A supermarket delivery service, a subsidiary of Alibaba/

[6] CEO of Xiao Mi

[7] An island district of Shanghai

[8] Founder and CEO of NIO

[9] All these are brands of GreatWall Motor (GWM).

[10] Wolfsburg is the location of Volkswagen’s global HQ.

Acknowledgment

Interviewee: Bill Russo

Interviewer: Lewis Tian

Executive Editors: Lunji Zhu, Xinyu Tian, Lewis Tian

Advisor and Chief Editor: Prof. Luyao Zhang