Dear Reader,
Today I want to talk about the potential merger between Honda and Nissan, which is utterly fascinating to me. Here’s why:
This is really a story about three things:
The Chinese auto market…
Electric vehicles…
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I’ll take these one at a time, and I thought this would be a good way to help folks understand competitive strategy.
So, over the past 20 years basically, Honda, Nissan, Volkswagen, General Motors, and American and Western car companies have invested heavily in building up their auto operations in China.
And China’s own companies have started to rise and outcompete these companies on price.
The Chinese government is also incentivizing its consumers to buy local cars from local suppliers. So they’ve been moving away from Honda and Nissan and toward Chinese automakers like BYD.
That has put so much pressure on these companies to cut costs, close factories, and merge to get economies of scale…
So they can compete better, lower costs and push back competitively against Chinese companies.
So you have Honda and Nissan trying to get efficient to compete.
Another difficulty for these companies is that more than half of new cars sold in China are electric.
China is way ahead on the EV front.
See, China got to start from scratch building cars into the EV era, sidestepping the infrastructure needed to build combustion engines and going right to EVs.
But because Honda and Nissan are geared towards Western markets where EVs haven’t taken off the same way they have in China, their entire manufacturing facilities are designed for gas-powered cars.
Which has been a massive disadvantage.
The other point of interest is how China’s increasing EV dominance and demand internally is affecting the rest of the world.
General Motors wrote down $5 billion…
Volkswagen is planning to close factories and cut tens of thousands of employees.
That’s what caused all these protests in Germany and the fall of their government, which is creating political upheaval that harkens back to when China entered the World Trade Organization in 2001.
Remember something – when China came into the World Trade Organization, Western countries heard a giant sucking sound – manufacturing jobs leaving and going straight to China.
This made China rich and hollowed out our middle class…
Which led to the rise of the populism we’ve seen in Europe and here in the U.S.
It’s interesting how the rise of one giant country with over a billion people could send such a shock around the world over the past 24 years.
First by taking jobs to support their growth and once they hit a certain level of growth, their car companies are now able to compete.
Now they’re sucking out a bunch more jobs as Chinese consumers buy Chinese cars.
The geniuses of this country and the West who brought China into the World Trade Organization – Bill Clinton, George W. Bush, basically the entire government elite establishment, cost America by some estimates 8 million jobs.
No wonder people are so friggin’ angry!
So we could see a mini version of that shock happening right now. Which is why Honda and Nissan are merging.
They’re trying to respond to Chinese competition by bulking up, firing people, cutting costs.
Volkswagen is going to cut tens of thousands of employees.
General Motors will likely face the same kind of challenges in the coming weeks and months. They’ve just been a bit late to admit that.
But this is what’s coming.
Fascinating stuff about the merger talks of Honda and Nissan.
We, of course, wish them the very best as they try to find a way to compete in this new China market.
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