30th Annual Automotive Insights Symposium

KRISTIN DZICZEK: Welcome back from the break. We gave you healthy snacks and cookies, because I have to tell you. We have some events here and we tried to do just healthy snacks and we got rebellion. We need cookies. So we've learned that everybody wants cookies. So hopefully you're back. Yes? Do you want-- photographer. OK. For the Fed.

MARK WAKEFIELD: There you go.

KRISTIN DZICZEK: There we go. OK. So we as you know had a little bit of a change in our schedule. And the change in our schedule necessitated making these sessions a little longer. And thankfully we were able to add another panelist to this panel, Mark Wakefield. And I'm very thankful for you two, on short notice, to join us. Because we've added another panelist, I'm going to keep my remarks really, really short.

So this panel is called The Coming Cost Crunch, and what I was thinking about here is, the UAW contract is done. And although many of the labor gains are making up for past-- no raises for many years and trying to get them back to where they were, there are increases in labor costs. And so the automakers are going to be searching for ways to offset those costs. They tell us they're going to offset all of it.

But we also have all this investment in EVs, in software-defined vehicles, and everything else that is going on. Plus it's not cheap to borrow money these days. I'm sorry. That's not my fault. And again, with that I'm going to provide my disclaimer if you didn't hear it this morning. Everything I'm saying here today is my opinion and my opinion only, and not that of the Federal Reserve or anybody who works for me or that I work for or works with me.

So with that, we're going to get into our panel. I'm going to introduce the panelists. They will go up one by one and give a brief introductory presentation. This is the only panel in the two-day conference that has introductory presentations. They'll do that for a little bit, and then we will get into the moderated discussion with Pigeonhole. Again, submit your questions through Pigeonhole online and in person. You're all equal on Pigeonhole terms. Upvote the questions you want me to ask, and we will ask them. And we'll have a very vibrant conversation, I hope.

So with that, I'm going to start introductions. Mark Wakefield on my far right. He's a partner and managing director for the automotive practice at AlixPartners, and a well-known commentator on the industry and has been around a long time. And I'm really happy to have Mark join us.

Next we have Colin Langan. Colin Langan is the automotive and mobility analyst for Wells Fargo. Colin and I go back a long time from many positions for both of us. But Colin has a pretty good handle on what the UAW contract costs are, as well as he's funded a lot of EV teardowns to know where the costs are in building EVs.

And then finally but not least, Mathew Vachaparampil. How did I do?

MATHEW VACHAPARAMPIL: [INAUDIBLE]

KRISTIN DZICZEK: Cool. With a name like mine, I try to do it right. He's the partner and managing director for-- I'm sorry. He's the CEO. I'm reading Mark's title. I'm backwards. The CEO for Carahsoft Global. Carahsoft Global is a engineering consulting firm that has done a lot of work on what exactly are companies doing to get the cost out of making vehicles?

And I saw a presentation from Mathew in January. I have to say, it was impressive, but I was a little skeptical. And then throughout the year there was little bits of news here and there that-- there's some things he said that would come back that I wanted to talk about. And then of course, the news that I mentioned this morning of GM buying a gigacasting company and Toyota saying they're going to go to the Tesla manufacturing system.

I know Jeff Liker would probably have some issues with TPS-- meaning Tesla Production System. But with that, I'm going to shut up and turn it to Mark for your introductory comments and slides. The clicker is up at the--

MARK WAKEFIELD: OK. Thank you. Oh, here it is. OK. And the clicker works, too. Great. Well thank you, Kristin. And as she said, I'm Mark. I'm here to thank you on behalf of Stellantis-- oh, that's not the right teleprompter.

[LAUGHTER]

Just kidding. Mark Wakefield.

KRISTIN DZICZEK: You're not dressed to be him.

AUDIENCE: [INAUDIBLE]

[LAUGHTER]

MARK WAKEFIELD: Mark Wakefield. I lead our global automotive practice from AlixPartners. We were founded in the auto industry about 40-ish years ago, I'd say. And it's our largest industry practice. We help automakers, suppliers, dealers, other private equity involved in the auto industry with helping on all manner of different business situations. Mostly stuff that people haven't dealt before. Not the process mapping or cost mapping sort of things.

And what I was going to talk today is a bit about some of the lessons learned and the focus of the industry at large that I think needs to get pivoted. And we started talking about this a bit earlier in the year, and it's picked up some momentum. So I wanted to continue on with that. If I think through at least my career in automotive-- and I go back before my career in automotive, this starts in the '70s.

I was born in the early 70s, so obviously it wasn't in the industry then. But there was definitely the-- everyone look at what happened when Toyota and Honda came in and what they were doing differently. And it became the focus of the industry. GM famously got their tie-ups in NUMMI and other things in the '80s. And that was a lot of the focus. Quality. TPS. Quality circles. Price. Fuel efficiency.

Then the Korean wave one and wave two. And that became then the focus. And everyone's now fixated on, what are they doing differently? What are they doing differently? Charitably I put 2010 here, but it's really 2018 when people really started to pay attention to Tesla-- when they became profitable and it became obvious that they were scaling and becoming a powerhouse in terms of profitability. Doing some things differently, taking risks, and having more surprise and delight to offset the horrendous quality that they had and were able to make it through.

And then they started to really get momentum after that, and people started paying a lot of attention. You hear tons of stuff about what they were doing with sell to structure. Last year was the modular piece. But everyone's been talking about that for several years. And there's some great things that can be learned from them, but we think that some of the NEV companies in China are not getting the attention that they should.

And not necessarily from a, hey, there'll be a wave of vehicles just like there was from Tesla from the Koreans and from the Japanese, but from actual lessons learned. And there is a wave going into Europe. So it's relevant in a global sense. If you look at these domestic Chinese, they've really focused on China. The biggest market and the one that has by far the most NEV penetration. Triple what the US has.

And without even really focusing on it, putting the pedal to the metal, let's say, they've become the number one exporting country in the world last year for the first time ever, dethroning Japan and not close and not slowing down either. But when you look at the right-hand side of this chart, you see, OK, where is the growth potential for these companies? And the growth potential still exists more in China than outside of China.

So that's why I say that their opportunity remains the bigger opportunity at home, which is easier for that market. And so what's going on in China at home? Well, these NEV brands have become dominant. They were 36% a few years ago, up to over 50% in 2022, and headed towards 2/3 by the end of the decade.

And you see in this, where is the pie coming from? Well, predominantly it's coming from the foreign OEMs in their ICE vehicles Tesla's put up a bit of a fight, but not too much, frankly. And the growth has been in these new energy vehicles and Chinese domestic brands, even if part of-- we can consider Wuling a Chinese domestic brand.

And so, well, what's beneath that? Well, we've always talked about freshness of vehicles. The freshness of the vehicles is dramatically different. And if you look at the last several years, you've got 1.3 years on average of these NEV vehicles. And yes, a lot are getting launched. But that means they are fresh. They have new technology and they have what's the best thinking of each of those companies right away.

The Chinese legacy brands-- also fast. Basically around three years. The non-China brands-- so the GMs, the Volkswagens, the others, Tesla included-- I mean, these things were designed before TikTok came into existence. These things were launched when Baby Yoda was a thing. This won't attract the attention of Chinese consumers as much. And you can see in this chart just the dramatic separation on some of these vehicles.

The other thing that my team in China has been-- they've been laser focused on both domestic Chinese brands as well as foreign and how to compete in this voracious ocean. And this is why part of my talk is about the lesson of, hey, if there's sharks fighting in the ocean and one of them makes it into the lake, whatever's in that lake might be in a little bit of trouble, assuming it's saltwater.

And so it's worth looking at what's winning and what's succeeding in China. And if you look at this chart, so you've got the rank order of what matters to a customer, and then you've got the OEMs, higher or lower ranking-- highest to the left, lowest to the right-- of a forced ranking of these six brands. Three of them representing the non-Chinese brands and three of them representing new NEV-- new energy vehicle-- China domestic brands.

And it's pretty clear, right? The things that matter to Chinese customers-- these brands are doing better. They're not just doing it on price. They're not just throwing better infotainment out there. They're doing better. They have a higher ADAS content. They have higher electronics content. They're a more software-defined vehicle. And they're focused on exterior styling, interior styling, and the technology-- not on ride and handling. Not necessarily on quality to the same degree.

Kristin was talking about orange peel. I don't think it matters as much if it gets to a certain level. And that's been a hard thing for automakers to accept, and particularly for chief engineers to accept. In my career in automotive, I've never met a chief engineer that wants his vehicle to not handle as well as the prior version of that vehicle, to not have better, better, better, on each piece.

Yes, there's requirements that go out there. Some of them are a stretch. Some of them are narrow. But there are always more. And I think that's a challenge for how the industry looks at it. And if you look at the last-- before Tesla, the last wave into the US was the Kia Hyundai success. And if you looked in those rankings, it looks kind of like their success if you superimpose this on the US. Which then suggests, hey, there may be something to this. It's not just a China phenomenon and not just a China customer phenomenon, but is more of a global one and points to a different way of doing business, particularly as an automaker.

And so what we've been doing a lot more work on in the last three years is helping automakers reinvent themselves. Because it's been pretty clear to automakers they cannot simply be an evolution of what they used to be. They can't just do some different cost benchmarking. They have to fundamentally re-architect the way they're built, who makes decisions, and how their vehicle comes together.

What I mean by that is, not just the manufacturing plant. There's lots of innovations well beyond what Tesla is doing. But also the stepwise function. Instead of just setting hard points and then figuring out how everything can fit in, doing the battery, doing electronics, doing thermal first, and then putting stuff around it. And being a system orientation to think through it. But it takes getting beyond that engineer that is bound and determined to have better ride and handling than the last vehicle and being much more laser focused on what that customer wants, and being more entrepreneurial about it.

And so when you think of engineering-driven and finance-driven versus entrepreneurial-driven, entrepreneur-- I mean, thinking as an owner and taking an ownership stake in the customers have to love this vehicle and it has to be competitive in the market, it also means saying something is good enough and hitting your mark on launch times and hitting your mark on costs. Instead of saying, well, that's the standard. So if it's an extra $50 a vehicle, I guess we'll have to do it to hit the standard.

The ones on the right and the ones in China are doing much more of a negotiation around, OK, we wanted to do this sort of thing with this part, but it kind of is expensive. OK, what else can we do? And the standards are negotiable, but they're negotiable in the context of what really matters to a customer, what's the total value, and what's the timing? And you have to hit the timing. I mean, I think the average vehicle is probably delayed 1.3 years. If you think one-point years' freshness in that mode, a new vehicle is coming out and hitting you.

The defender mindset or observer mindset. When you're trying to defend and you have your people thinking, it's like an old chicken and pig thing with breakfast. The chicken's involved in the pig is committed. Well on the right-hand side, it's do or die in China for these NEVs. They have to do it. They have to launch on time. They have to sell. And it has to be profitable and it has to have momentum.

The EV and ICE conundrum of the Western companies has prevented them from being thoughtful about what to really get rid of and how to go as far into the usurper side. And then prudent risk-taking-- this is pretty obvious. The speed to market and the ability to take more risks and to not have to be right and dead.

And so there's a lot to this, but I tried to give a quick overview of a bit-- not just of what's the threat from China, because the threat from China in my mind for the US automakers in the US is less about Chinese vehicles coming in than it is someone picking up the right-hand side of this and winning. Thank you.

[APPLAUSE]

KRISTIN DZICZEK: Colin?

COLIN LANGAN: Sure. Great. Thank you. Good afternoon. Thank you for having me today. Thanks for the nice intro earlier. Today I will focus on the core topic today. I'll talk about the UAW contract. Recap the economics of what that means for the auto industry. And then as Kristin mentioned, we've done a series of six teardowns in the last year and a half. And so recap some of the real big challenges that I see for electric vehicles going forward. And you will find out I'm quite bearish on the auto industry right now. And so I'll finish it off with some even more bad news on the auto industry of what other challenges I see as we look forward.

So really starting on the first part, this slide actually encapsulates the major concessions in the most recent contract. I think most notably is the fixed-cost wage increase. Wages are up about 25% over the next 4 and 1/2 years. If you actually look at the prior contract, there were two 3% increases. So pretty massive difference.

Now some of the last contract-- those smaller increases were reflecting the shrinkage of the labor gap between end progression and legacy workers, and we've seen some of that again here in terms of at least the timeline. So it used to be an eight-year grow-in period. Now it's going to be three. So that obviously has financial implications for those younger workers who are now going to be ramping up the pay scale rather quickly.

And then on top of that, particularly for companies like Stellantis that heavily use temps, we're seeing a quicker timeline to bring temps in to the workforce. In addition to that--

[RINGTONE PLAYS]

I apologize. That's never happened. But, OK. Oops.

KRISTIN DZICZEK: Happens to me all the time.

COLIN LANGAN: Usually I put a-- sorry about that. The other things that people don't pay attention to but do add up-- 401(k)s are up. Pensions are up. So you do have other cost headwinds. I think the only thing that really wasn't higher than the last contract is the signing bonuses are about $5,000 lower.

I think two major changes that are really important to note is the reintroduction of cost of living adjustments. So the auto industry is now guaranteed to outpace inflation in terms of their labor costs because of these inflation adjustments. So if inflation is 10%, all my estimates on labor costs are too low. And in addition they've actually re-instituted, which surprised me, the pensions for retirees. So they'll actually give about $2,500 in pensions for lump sum payments to all those retirees, which is pretty important for companies like GM that still have a lot of retirees out there.

Other concessions that are noteworthy is the Belvidere plant was reopened. I'll talk about later some capacity issues in the industry. And then even the battery plants, which are in joint ventures for most of them, now actually will be using UAW labor, which is more expensive. And then we really don't what it's going to mean when they have these no-strike clauses. Could actually make it tougher to close capacity, which clearly could be an issue in the future.

This slide actually is our estimates building up based on some of the company comments and data that's out there of where labor costs are going. So we were going from somewhere-- I think if you look at the average on a production basis with overtime about $40 an hour going to $49, I think, an hour over the contract. That does underestimate it.

Remember, the UAW has probably the best health care in the world, so you have very high health care costs. So the all-in wages are actually probably going from $57 to I think $72 by the end of the contract. So it is quite a substantial wage increase over the period. We're also talking-- I know the UAW called it a poverty wage. They were making $82,000 on the old contract with all the bonuses they were getting. Average median income in the United States is $57,000, so it is substantially higher. And they will be making probably six digits with bonuses by the end of the contract at over $100,000.

So these are material burdens for the auto industry. When you add it up, Ford obviously has the largest UAW workforce and therefore will incur the most cost pain. So it'll be about $1.8 billion, is our estimate. GM actually even has a higher estimates. And we might be underestimating some factors here. Stellantis has the smallest and also the fewest retirees, so maybe $1.3 billion. Annual costs, by the way. These aren't just cumulative costs per year by the end of the contract.

And this is an industry with really thin margins. So you're talking about, Ford is guiding to about $10 billion in profits this year, and now we're almost $2 billion it might go away in the next few years. GM is around $12 billion, and so they're seeing similar headwinds. So this makes it challenging. And these aren't companies that have been sitting on a lot of extra cost. So they're comments that they're going to find offsets-- I'm a bit skeptical considering all the challenges that we have going forward.

So this was kind of known. Priced into the stocks in many ways, but is a huge challenge going forward. The other factor is electric vehicles. And this is another area where I'm very concerned about the auto industry. We did a series of six teardowns and a pretty diverse range of vehicles. So we did the Tesla Model Y, which is the standard benchmark. We did a Hyundai Ioniq, which I think is a great example of the kind of good work that traditional automakers can do on EVs.

We did two Chinese vehicles, the BYD HAN and the XPeng P7. And then more recently we did the Ford Lightning and the Rivian. So it gives us an idea of sedan, SUV, pickups, traditionals, Chinese. I think there are probably three highlights that I would point out from the many reports we've done on these teardowns. I think number one-- and this conclusion has changed over time-- is just the sheer volatility risk of raw materials.

So when we did our first teardown, there was a huge departure that no one actually at the time was talking about in battery costs. We were having this nice linear decline in battery costs, and then those costs shot up from like $110 to $150 as lithium went through the roof. Nickel, cobalt went through the roof. And that changed pretty dramatically. Adds about $3,000 to a car from those cost changes.

Now we've seen it come back down, but I am very skeptical they'll stay down. Matter of fact, I think to really put new lithium ions in place you probably need higher prices than where they are today to justify the economics of that investment. And when we look out 10 years-- and 10 years sounds like a long time, but it's not in the world of mining. It takes at least 10 years to bring most of this capacity online. We're going to be short. Probably of the seven critical minerals that we track, at least five are going to be short

[INAUDIBLE].

So you have big issues going forward in terms of making-- if we have all of these aggressive EV targets, probably not going to get there. Definitely think raw material prices at some point are going to go back up and just erode some of the already tough economics. But even if we've adjusted this chart for the decline in material economics-- so battery costs now probably bring it down for a 60-kilowatt battery, which is what you use for a small SUV. Probably $6,000 for that.

A lot of people just throw those numbers out. But never forget that you have a pack about $4,000. Could be smaller for an LFP chemistry. But also you have another $3,000 for powertrain. So you add it all up you're close to $14,000 with the current low raw material prices. And an engine probably doesn't even cost $7,000, but let's say it's 7. That's a $7,000 gap. There's an industry average profit per vehicle is $4,000.

So these aren't small numbers. These are big gaps. These are big problems. And we're seeing now, particularly with consumer demand seems to be peaking at 7% or 8% US market share, getting pricing premium for these costs is going to be extremely difficult. I think parity is going to take a lot longer than people think.

And then the other factor that's concerning is pickups. So we've seen all the Detroit Three announce all these pickup programs. This is extremely risky. The pickups probably historically account for 2/3 of the profitability for the automakers for the Detroit Three. This is where they have big share and make a ton of money. And if you look at the economics, size is the enemy of electric vehicles.

The bigger the car, the bigger the battery you need. The bigger the battery, the more weight you add. So the bigger battery you need again to make up for the weight that you're dragging around. So these pickups need really, really large batteries, which means they need a lot more cost. And the economics go from being the most profitable vehicle by far in your fleet to probably a money loser. Probably won't cover your fixed costs going forward.

And we're kind of seeing that as these vehicles roll out. So I think there's a huge risk that they're trying to protect their profit-driver long-term. But in the mid-term, to do that protection, they are going to be losing a lot of money per vehicle on the full-size pickups.

And a lot of my investors are a bit more optimistic. They say, hey, consumer demand is slowing, so they're just not going to make as many of these pickups. But that's just not true. There's regulation. And that was my predicate in my view when I downgraded GM and Ford a year and a half ago. That'd be easy if you could just walk away from these markets, but you have regulations.

Not the proposal of EPA for through 2032. That may go away. Who knows with the next election. But the current 2026 probably is going to be in effect. And you need probably 10% to 12% EV to get there. Stellantis doesn't have any EVs today. GM has 4% EV. So over the next few years, they're probably going to have to sell more EVs whether they're profitable or not. Which isn't too different from long ago where they were selling cars that they lost money on to justify selling pickups.

And now they're going to be selling money losing BEVs to justify their profitable internal combustion engine vehicles I think this puts the industry in quite a difficult situation over the next few years. I'll probably skip this for time. We'll talk about it in the panel. The challenges of a $25,000 car people want.

But to wrap it up, I do see five major challenges for the automakers going forward. We talked about the structural cost inflation, and really the lack of flexibility from the UAW contract. I think you have really tough economics of electric vehicles. And even I am a bit surprised how early we've seen the low demand for the US consumer in these vehicles.

And then on top of that, there's just been a huge tailwind on pricing. Pricing has grown at a 10% CAGR since COVID. I think a good chunk of that will go away. And that has been a huge profit-driver for these companies. And so there could be thousands of dollars in profit per vehicle that erodes as we see some level of normalization in pricing.

The other factor that I just don't think people are talking about enough is excess capacity, which really feeds that pricing concern. So it's been very subtle, but we've added 4 million units of capacity in North America. That means that you're going to have plants that are underutilized and that means there's going to be pressure to discount and drive share at those plants, which has historically been the major problem the industry is in.

Europe is maybe relatively flat as they've downsized some of the plants, but structurally problems there because US sales in Europe aren't recovering back to where they were. And we're seeing a lot of Chinese imports fill the market. So utilization there will also be struggling as well. So you have capacity issues, really in the major developed markets developing.

And then the other factor to keep an eye on is full-size pickups, because they are historically very correlated with housing starts. And there's been so much volatility with the strike and downtime and supply issues. But if you really take a step back, pickup sales have been fairly flat actually and inventory has pretty consistently climbed up. I mean, this is a story we talked about early last year about BEVs. And people disregarded it for a bit, but it could be a sign that we're building inventory because the demand isn't really there.

So I think you have a lot of challenges going forward. And with that, I'll wrap it up because I think I'm out of time. But we'll pass it over to Thomas.

[APPLAUSE]

KRISTIN DZICZEK: Thank you, Colin and Mathew. When you talk about move fast, I want to commend the Federal Reserve staff across many departments. I think last Thursday Mathew said, could we put a Model Y in the lobby? OK, you've gotten into this building. This is a very secure building. So getting this-- and there was a holiday. We take federal holidays here. Over a holiday weekend, we got legal, we got events, we got facilities, we got Mathew's team, and there is a body in white of a Tesla in the lobby of the Federal Reserve. So we moved fast.

MATHEW VACHAPARAMPIL: It is amazing. Thank you.

KRISTIN DZICZEK: And thanks to all the staff who did that.

[APPLAUSE]

MATHEW VACHAPARAMPIL: So thank you very much, Kristin, for the opportunity. I'm going to focus on material cost and what's happening. Yes, we talked a lot about BEVs. But there are two companies that are profitable making BEVs. One is Tesla one is BYD. I'm just going to give you a snapshot with data and pictures how they are profitable and how the rest of the Chinese work very closely with the rest of the Chinese, and how they are moving very fast. So next slide, please. Oh, it's right here. Sorry.

OK. So this year and last year after Tesla-- you'll see the body in white downstairs. It's a body with no floor. And many companies have announced modular architecture. It could be Tesla, it could be Toyota, and so on. But there are only three companies that have the gigacasting in their vehicles today. It's Tesla, it's Xiaopeng, and Zeekr 009. As a company, we do around 35 to 40 vehicles a year and we work with about 125 customers reducing their cost and so on.

So why is Tesla doing-- I'll tell you what Tesla is going to do with the modular architecture. This is the financial reason. I'm talking to a lot of financial people. I want to set the stage on why Tesla is going to a modular architecture. In 2023, Tesla did around 2 million units. They've announced that by 2030 they want to go to 20 million units, which means they need 18 million units more.

The volume per factory is around half a million. They need 36 factories. Each factory costs, if you look at the Austin report for the city, they've spent around a billion dollars to set up the factory. So you need around $36 billion. What I'm going to show you is how they're going to reduce their capital investment by 30%, which means they will save $11 billion over the next seven years. We talked a lot about the UAW wages and the amount of labor. We'll also show you how this build is going to take out 30% labor when you build a car.

So a lot of pictures from now on, I'll just focus on one or two messages in each picture in the interest of time. This is the Tesla body in white. And if you look at it-- please when you go out, look at it downstairs-- you'll see it has no floor. What is the floor in this vehicle? The floor in this vehicle is the battery. So when Tesla talks about first principles, they ask a simple question. Why do you have-- and I'll show you the next bit.

On the left is the Tesla-- is a Legacy OEM. You see the body in white is 458 kilos. On the right, Tesla is 333 kilos. One on the left is actually the world's second largest manufacturer of automobiles. They make around 9 million units. Look at this here. You have a body on the left with a floor. And you have a battery with a floor-- or sorry. With a top cover. Tesla asks the question, why do you have two pieces of metal with some air in between? They removed one. And that's why it's a challenging of first principles.

Second, look at the observation. If you look at all the other traditional vehicles-- I don't have [INAUDIBLE]-- they put all the inverters and all the electrical equipment in the front. They took the engine out and put it in there. Tesla integrated into the battery so that you reduce cost. It's very straightforward. They focus on two or three things. Cost, weight, which gives you increased range, and it drives down the price of the vehicle.

Next slide. Now look at this, what's happening. From left to right, 2020 Tesla launches gigacasting with-- two vehicle with two gigacastings in the back. 2021, they launch a single gigacasting. 2022, they launch a gigacasting in the back, gigacasting in the, front and no floor.

Traditional companies. Mark talked about speed. Very, very important. Entrepreneurial is a question of survival. Traditional companies will take two years in the boardroom to even decide whether to do it or not, OK? So it's no different to the Roman empire, the Greek empire, the Ottoman empire. People die because they don't move fast. It is not the big that eat the small. It's always the fast that eat the slow. That's what's happening here. And the Chinese are very good at following Tesla.

So look at this. Just key message here. From the Model 3 to the Model Y Austin, they have reduced the parts 63%. So, OK, it's all about cost, my friends. Look at this. On the left you have a legacy OEM with 458 parts to make a body in white. Tesla has 141 parts. And then the legacy OEM wonders why they lose money on EVs while Tesla makes money. It's all in the design, and it comes back to something that Mark said. The entrepreneurial nature.

Most of these new electric vehicle companies-- let's take examples of Tesla, Lucid, Rivian. Then you take a Xiaopeng and so on. Tesla is led by Elon, Lucid by Peter Rawlinson, Rivian by RJ, an MIT graduate. Then He Xiaopeng, Bin Li at NIO, BYD. Warren Buffett, sorry-- Charlie Munger said he's one of the smartest engineers he has met. All led by technologists.

They focus on the product, take cost out of the product, because today it's a technology game. It's not a scale game anymore of building 10 million vehicles and leveraging it. It's technology and how soon can you move? It's not scale and complexity and make a car for every market in the world.

Look at the modular build. Tesla integrates 10 parts. Sorry, for the formatting. Sorry. 10 parts into one. So instead of having 10 brackets to hold parts, Tesla has one. And I challenge you to look at any Detroit OEM-- how they integrate this. They have 10 parts instead of one, OK? So look at this on the left. Legacy OEM-- 15 kilos for the front bumper system. On the right, 11 kilos. 28 fasteners. Seven fasteners. Who do you think makes more money? Who has a lower cost? So it's the way they think from first principles. Go further.

OK. So now let me just come back and show you-- now that we've shown you the progression, let's go to the unboxed build. Tesla plans to split the body in white into two. We have a tech center here in Livonia close by. We have over 30 vehicles where customers come in and take a look. But if you look at the body in white, and if you want after this, I can show you-- the intent to split the body in white into two, OK?

Next slide. Now look at this here. I came from Fiat 14 years there. So now, just to put it this way, you have a body that's going through the paint shop, OK? That body-- 80% of what you're painting is air. Now what Tesla does by splitting this body into two is they can put two body side panels and two body side panels. Suddenly what happened? You have increased the productivity 200% or you have reduced the cost 50%. The days of incremental 5% 3% cost reductions are gone. This is 50%.

So now-- now just tell me. Do you need two factories or one for the same volume? And the next most important thing. You have reduced carbon footprint, emissions, all the other things that everybody is looking at. We had COP28 and so on. So all these things happen. And the biggest investment in a plant is paint shop, and paint shops dictates the through-- it's the bottleneck. It dictates the throughput of a factory.

So if you can take out-- I don't know whether you've read the [INAUDIBLE] the goal. If you take out the bottleneck and you can increase that, that means you can increase productivity 200%. So that's how you take cost out. So my focus is totally on cost. And this is how they assemble it. Build the front module. Build the rear module. OK?

And I'm just-- Kristin told me not to walk. But if I have a body in white, I have to walk eight steps to assemble this car. Now I just have the front module. I just walk two steps. Which is better? You want to play your labor to walk eight steps every day, 60 jobs per hour, or two steps? And most importantly, I will show you later, we bring in robots in.

Because now Tesla talks a lot about operator density. So walking eight steps. You have operator focused on this area. So it's taking out cost all through the system. Plant investment, labor, material, and so on. So here what happens. First step, you put the two modules together. You bring the sides next to it. Next one, you bring the seat from the bottom.

We already saw the modular build that they did in Tesla Y, and all they have to do is split the model. Whole term of unboxed came because you had horse-drawn carriages with a box with a horse in it. Took the horse out, put an engine in it, OK? That's how the box came. It's being challenged, OK? Next slide.

So it's moving from a serial assembly line to a parallel assembly line. And you can see parallel assembly of major systems. Just to tell you, with this we see around 40% to 50% reduction in the area for a new factory. That's how you save $11 billion in investment. It all starts with the product. With the technology that you bring in.

I'll just go very quickly. So at Carahsoft, we spent over 150 or 160,000 man hours analyzing this for the last two years. We built the product digital twin, the manufacturing digital twin, and the factory investment. I'll go through very quickly. Built a lot of concepts and designs, essentially like building a new car. And this is how you put it together. This vehicle has over the last week-- we have Terry, who is our president who is the head of all programs at GM. He's finally happy with it. We have a product that meets all US crash requirements, and so on.

And these are the results, everyone. To 15% reduction in material cost, 25% reduction in manufacturing process time, 30% reduction in floor space, and 30% reduction in plant investment. These are real numbers. We have laid out the full assembly sequence. We have laid out every part how it's assembled. Please notice station number one is a robot. Station number 5 is a robot. So by splitting the body in white and increasing operator density 30%, we talked about content earlier with Scheffler. We talked about content reducing. It's not really content reducing. It's about labor reducing, OK?

Next slide. This is the assembly line of the future of a plant like this. 60 jobs per hour. General Assembly is only 300,000 square feet, OK? That's how you reduce this. So finally I'm going to-- the close-out is, there are technology gaps and there are cultural gaps. Mark talked a lot about the cultural gaps. Moving fast. It's a competitive mindset. Newcomers are coming in who are coming in to challenge. So are we willing to move fast?

There's only one thing now if you're in the industry. You have to learn. You have to unlearn what you remember. Say, so if you built a car with a box all the time, you have to forget that. But most importantly, you got to move fast. This car, even though it's $11,500, they do make money. And we have calculated the cost. We work in China. The bomb cost is around $9,000. You add manufacturing, which is thousand. They sell it for $11,500. They still make some money, or worst case, break even. So they do it.

I'll close out with one final comment. I immigrated to this country 32 years ago. I love this country. If we don't change, because the competition is coming hard and heavy, it's going to be tough in 10 to 15 years. And I came here on a U of M Ford scholarship. So I feel very much that we need to change and be competitive for the survival of the industry. Thank you.

[APPLAUSE]

KRISTIN DZICZEK: Well, the slow get eaten. So this is, I think, a common thread here. When I put this together, I was really struck. I think it really-- I invited you guys way before this, but in November when I started seeing the news of Toyota looking at the Tesla production system. Now we know that when the Japanese came to the US, they looked at Ford and the Ford manufacturing system.

Then we had these joint ventures where we were learning from them about how to do lean manufacturing and all of that. And many, many, many-- I mean, there's lots of direct flights from Detroit to Tokyo where there will be a lot of automaker people on those flights. So there's a lot of learning back and forth. But I was really, really struck when the news came out that Toyota, not on a low-volume or low-cost car-- on the Lexus is going to look at moving to the Tesla production system.

The TPS that Jeff Liker taught at Michigan is a holistic system. It's not just production and the product design. It's about management, it's about quality, it's about a million other things. And to me, this combination of Tesla's design and speed with Toyota quality and efficiency could be an absolute juggernaut. And then you have these Chinese coming very fast on their heels, adopting everything, moving fast, changing all the time.

So I'm going to start my questions, actually, with Colin in the middle. Because I've been a Tesla skeptic for a while, too. Colin as well. What are your thoughts on the production system cost savings and the efficiencies that Tesla and their fast follower Chinese companies seem to have achieved or may be able to achieve with these really dramatically different approaches to vehicle and production system engineering? Is this going to be something that can revolutionize the industry? Or is this we're going to get costs out? What are you thinking?

COLIN LANGAN: Well first of all, I have an equal weight on Tesla. I think long-term, I guess I'm more skeptical than others. And I think it's a name-- for perspective, it's like 80 times my estimate for next year. So you're already paying for the success of what we're talking about, right? So do I think there's opportunity? Of course there's opportunity here.

I think you have to step back a little bit, though. And there is a structural sort of decision that maybe the legacy guys don't have to their advantage. They have stamping. They have welding machines that they spent millions, if not billions of dollars on. Some of these equipment have 20, 30 year lives. So to go out and decide to go scrap all of that and put in a megacast isn't necessarily the best decision.

Now if you're building a new plant-- and we're not building, if you're a legacy, too many new plants, then these are what people are thinking about. And look, GM is looking at this investment. Toyota is looking at this investment. So I think you have to distinguish-- I mean, these guys I don't think are burying their heads in the sand. I think the opportunity is, you already invested a lot.

So if you look at megacasting, the truth is it's not individually what they've done so far. It's probably hundreds of dollars per vehicle of savings. Not game-changing. A lot of it-- actually that savings-- you realize you're doing it with aluminum instead of steel. So that actually adds cost. But then you're taking out weight. In an EV, that's huge.

But you do have to think about the economics of what you already have and whether you want to fully utilize that. And you have to worry about serviceability over the life of the vehicle, which is still a wild card. Maybe it'll work out. Maybe it won't be a big difference. But you may have to scrap these cars more if they're made out of five megacasts. So I know we're being kind of critical about the traditional guys, but you know what? I don't know what flies in China's going to fly in the US. And so maybe the slow-- fast-- or a fast follower approach isn't necessarily wrong.

And so I think there's potential here. I think the traditional guys should be looking at it. But I don't think it's as a slam dunk-- as easy as people may think. It gets to be where I'm a little more skeptical.

KRISTIN DZICZEK: So, Mark, I'm going to let you jump in and give you a reaction to--

MARK WAKEFIELD: Well I think--

KRISTIN DZICZEK: Is this the potential for where there can be a lot of savings for legacy automakers?

MARK WAKEFIELD: There's a ton of savings for it, especially rethinking how a vehicle comes together both in the architecting and in the plant. As Matt was saying these, sort of 15-- I think it was on his low end of validating to 50% and 30%-- those are not numbers you normally talk about in a plant. You're normally talking about little, little things by just getting a little bit better.

But we've unfortunately then grown up in a world where chassis and powertrain and interior and electrical are complete islands unto themselves that these poor chief engineer vehicle teams try to put together. But in reality, they make this part and it bolts to this part, and it's a different part of the whole company that's making those two things.

So the idea of doing systems integration to the level that Tesla's done it is a very difficult thing, just organizationally, for these companies to overcome. They've seen in Tesla's success that they have to. They've seen in a hundred EV startup failures that there's also ways that it goes wrong. But the fundamental physics of when you prove-- Tesla proved you could open the CAN bus, do an OTA, and hell doesn't freeze over. There's not things that go terribly wrong all the time if you've got the right software controls put into it.

Prior to them doing that, nobody would have ever said, that's like the third rail to allow the CAN bus into an OTA and into every system talking to every system on a car. Just no way. And they were right, if you were going to do it that old way with domain controllers all having to talk to each other. That's not what a software-defined vehicle is. And so it's these unlocks that allow a different paradigm that Toyota and Tesla and everyone is following.

And frankly, Toyota's got some neat stuff, too. The hanging factory was a neat way of getting away from some automation. There's a lot of good that comes from rethinking and having good engineers that actually can solve problems doing it.

KRISTIN DZICZEK: Thank you.

COLIN LANGAN: I think you're convoluting two issues, right? You're talking about software and you're talking about the megacasting production design. So I think it's a wild card because it's still more theoretical in what we do with this production design. The software-- when I did our teardown, the cost of an Ioniq and a Tesla Model Y were very similar. So I don't think people fully appreciate-- is how does Tesla make money?

They're making it on autopilot. They're making it on the software. They're making it on not advertising. So I think that is actually critical and that is probably the true challenge. I think in terms of the actual changing the production process, there's definitely incremental opportunities. We'll see how these play out when we actually see it in the market.

MARK WAKEFIELD: I think if you think about what their fixed costs have been to develop these vehicles, and how they've kept a lid on fixed costs while they have grown, like the SGNA, the engineering teams-- while they have grown around the world. While they have developed new vehicles. It's somewhat enabled by this systems engineering approach that allows them to go after it in these ways.

So I think they have a cost advantage, and I think traditional automakers are looking at how to replicate some of these things that are now proven. When I was talking about the electrical, it was more in the CAN bus example of, it's breaking through a paradigm. The gigacasting with its three-dimensional mating is extremely difficult, right? You don't want to do that typically. You want a nice slip joint and overlaps and all sorts of easy stuff to put together.

But if it can be done reliably, it is a game-changer. Because you're getting past what the standards of, we need to make this easy to make. Well, if it's a little harder to make but it actually does come together every time and comes together faster with less parts, I mean, it's cheaper.

COLIN LANGAN: I mean, I'm not saying it's not cheaper. It's just, is it a game-changer in a couple hundred dollars or thousands of dollars? I guess would be the difference. I agree on the software side and I'm not disagreeing that there's not a advantage on Tesla. I just don't know if it's the-- the reason why they're profitable is not so much on the, in my opinion, the E-powertrain side. I think it's surprising how good the traditionals can be. They do have to catch up, but I think the gap is more on the software side.

KRISTIN DZICZEK: Well, so this is a question I'm going to ask all of you. And then, Mathew, I'm going to bring you into some of the cost discussion. But in this industry, I've been to many presentations where it's like, well, it took three years to engineer this vehicle and we cut it in half. It's 18 months now. And we go on these cycles of, there's a new model. The new model year comes out. We changed some stuff. And then there's major and minor refreshes for eight or so years, and they're kind of scheduled in.

What Mathew is showing is interior structural changes to this vehicle year over year or even faster, and some of that allowed-- in the software-defined vehicle part allowed Tesla to adapt to, say, the chip crisis faster. Like, can't get those chips? Get these chips. Change the software. They were able to move much faster.

But Mark, you had them way down on the end of the priorities of Chinese consumers on exterior styling. Like, the Model S still looks like the Model S. The Model Y, the Model 3. They have not changed in any kind of substantive way from the outside. So how do we think about automakers doing both? Being flexible, being adaptive, and having products that can move not just on these set timeframes, but also have new styling, fresh technology, the things that not only Chinese customers want but American customers as well?

MARK WAKEFIELD: I think you do have to think of freshening both the look and feel and the surprise and delight as well as the core cost elements in a much more rapid way that's ready when it's ready. And it's not just Tesla doing it. Hyundai-KIA does a great job of running changes. Most don't do running changes, and most don't do a change based on first principles. They do a change based on, did it make it through the whole gauntlet of things that a change has to go through to get approved?

Versus someone really owning it as a team, coming together and saying, is this a better way? Have we validated that we're comfortable at it? Rather than applying a standard that may or may not exist as much and running everything through the same gauntlet and then relying on the de-risking nature of single change events where you change a whole bunch of things at one time and do a big validation, and therefore you're convinced of it. And it's not Tesla being Tesla. It's Tesla having a bunch of people from the tech industry who are very used to validating things that don't exist physically and being OK putting it out there.

KRISTIN DZICZEK: Well, and the blue screen of death on my computer is not death like it would be in a car, right? So if I had a blue screen of death in my car, that's a problem. So Colin brought up, we don't yet know how gigacastings are going to perform in the vehicles. One person I mentioned this to, and I don't remember who-- I said, well, this is a big piece of cast metal. You get in an accident and you're not just taking the side of the car off and replacing this. This is going to be an insurance industry bonanza, I guess.

And they said, well, it's a $20,000 car. You throw it away. So Mathew, I want to bring you in here about that conversation that Colin started with the fixed cost of legacy automakers. Not just the US firms. You've validated all of this, and you've told me you've talked to many people at the highest levels of European, US, and Japanese and Korean and Chinese automakers. How is the reception, especially at those companies that have those sunk fixed costs? Are they really interested in trying this out? Are there small-scale ways for them to kind of get their toe in, or is this just a jump in with both feet and start swimming fast?

MATHEW VACHAPARAMPIL: OK. That's a very big question. So I think the first point is we've got to realize that it's a big race and there are a lot of people competing. And Tesla and BYD and all have come in and they've changed the rules of the game. The rules of the game today is, it's not about scale and building 5 or 10 million units. It's about technology and how fast.

And whether it's SDV-- software-defined vehicle, or whether it's gigacasting or CAN OTA, the important thing to take out of this between the Tesla and the Chinese is, they all have a mentality of failing fast and learning. Fail fast and learn. That is not a legacy OEM auto industry mindset. That's a tech industry mindset. And the reason I brought up Elon Musk or Peter Rawlinson who worked under him, or He Xiaopeng or Bin Li or even [INAUDIBLE]-- they all come from the tech industry. They're used to these phones getting an update every day. That's the mindset. So for them, changing that casting once a year is too slow, actually.

Now looking at the legacy OEMs, we work with 145 customers. We work very closely with a few of them at the CXO level. I'll tell you the common thread. If the leader of the company-- and if the company is not making much money or even they are losing money, especially two or three of our customers who are almost bankrupt during COVID, their interest to change is very high.

On the contrary, the [INAUDIBLE] folks who have been very, very successful for a hundred years. And if they are still making a lot of money, their incentive to change is very minimal. So broad brush-- when the house is on fire, they're willing to change.

KRISTIN DZICZEK: Deathbed conversions.

MATHEW VACHAPARAMPIL: Yes. So this is consistently [INAUDIBLE] how we pick customers for some of these major projects and where we help them with cost transformations. Product cost transformations, that's all we focus on-- is we look at the financial P&L statements and see who's the worst and go after them.

There are one or two notable exceptions and so on. There is the leader of one of the second or third most profitable company in the industry. I've never met a CEO who is so humble in the automotive industry. His willingness to learn. And he's paranoid even though he is the second most profitable company in the world, like a COEM. But he's paranoid. He's very humble, and he's always, hey, what can I learn from you? What can I learn? What's happening? And so on.

So it also depends on the mindset of the leader-- that they realize that there's a big army / the onslaught of-- and this is a European OEM. There's an onslaught of the Chinese coming. And leadership is about seeing something 10 years ahead that nobody else sees. That's what leadership is about. It's the same. A lot of the people who work at these companies are people who have come from Audi or Jaguar, Land Rover, or from Ford or GM. It's just that they are allowed to fail fast and learn. That's the difference.

KRISTIN DZICZEK: Well, and they've hired a lot of talent, too, from these companies. Designers especially to bring that to bear. And what you're talking about, though, about being number two and being really humble reminds me of, there was a car rental company. It was like, we're number two. We try harder. So everybody's behind right now, and some are trying hard and some are not.

So going to go to Pigeonhole now. So if you see the questions in Pigeonhole you want asked, those are what come to the top for me, and that's how I'm going to go. Like my former-- my fellow moderators, this is democracy. Help us out. And I'll try to get them in in the right order. But one comes in right after my question about the repairs.

So the question is, modular architecture means more expensive and complicated repair, and ultimately customers may pay more over the life of car. How do we assess the total cost of ownership? And I'm going to add on to that, and how does that come into price of the vehicle? If you're going to have to pay more to own this vehicle or your insurance is going to be higher, how are automakers and consumers going to negotiate that? It's not fixable.

MARK WAKEFIELD: And there's a long run and a short run at it. I mean, in the long run, those things can come in. In the short run, it doesn't matter. A consumer buys a payment. How much do I pay per month? 80% of the buyers think about a payment per month, and that's how they buy a car.

That payment per month is lower if it's leased. That payment per month is lower if the automaker can show a high residual. And the LG gives them a high residual so that they can then-- there's less amount that they have to spread over that 36 months or 72 months or whatever the long lease times are up to.

So it can take quite some time for these things to come back. And there's enough noise in it that if you haven't had a big accident, then your experience is binary, right? If you have had an accident where you think, jeez, that shouldn't have been scrapped. It was scrapped. Then it's binary the other way. It's still a one. And it's tough for a lot of these to boil up into something that works its way high enough upstream in any kind of a fast way that starts to really affect consumer buying behavior about how difficult something is to repair.

KRISTIN DZICZEK: Until there's enough underwriting to-- the initial insurance is very, very high.

COLIN LANGAN: So I think it's a valid question, particularly with what's going on at Tesla. I mean, the discounts that they have to the vehicles are going to destroy the residual values. They already have. And that is the biggest cost of ownership of a vehicle. And then there's questions. Look, Hertz is dumping these cars. If you want a discount, go to hertz.com and get yourself a $21,000 Tesla right now that's two years old.

I mean, it's not a good sign that the maintenance is so high. My understanding is it's a bit of a skewed effect. That there's a little bit more of a few duds that are very expensive repairs. But it does unravel what has been the big EV bull case-- is that the total cost is actually better today. And a lot of the data coming in is actually saying, not yet. Now maybe over time, the quality improves. But I do think some of the actions that Tesla took last year on the residual on the discounts will pay back. I'd be pretty pissed if I bought a car right before all these discounts myself.

KRISTIN DZICZEK: A lot of people were. Yes. We heard about that. I'm going to go right to our next most popular question. It kind of feeds in here. It's for Mathew. The person wants to know, did they understand you right that Tesla might be overestimating their cost savings from unboxed? And by the way, they don't have unboxed yet, right? This is a theoretical thing.

They were going to put it in their plant in Mexico. So you're going to combine unboxed savings with low labor costs in Mexico, and right on the shores of the US market. Mexico has very favorable trading relationships with the rest of the world as well. They can reach over half the market for new cars without a tariff. So this person wants to know, are they overestimating the cost savings? And if so, why? Why are they overestimating it?

MATHEW VACHAPARAMPIL: OK. So I'll just take a stab at it, though I'm not sure I fully comprehended the question. So what we showed--

KRISTIN DZICZEK: Because you're validating less than what they're claiming. So why are they claiming more?

MATHEW VACHAPARAMPIL: OK. So look. One of the things you're going to do-- we do a lot of benchmarking and analysis. So just imagine this [INAUDIBLE] laid out. You're driving from New York to Cleveland to Detroit to Chicago, OK? We are seeing-- Tesla has been doing this from the Model S to the X to the 3 to the Y, and so on.

Once you've reached Chicago, where do you think we're going to go? You may go to Iowa City, you may go to Minnesota, or you may go to Kansas City. But definitely you're not going to Miami and you're not going to Boston. Is that a fair assessment? So what we have done is, we don't know what Tesla is going to do. I want to be upfront with you. But we have a very, very good idea that the way they are heading and the tracks they are leaving in the forest is this is what they're doing.

This is the real metric, and this we feel is their biggest path to a $25,000 EV. What's the biggest reason for lack of adoption-- early-- lack of-- so for example, I have two kids, a 21-year-old and a 16-year-old. One drives a Ford Escape, which is $19,000. The other one drives another Ford car which is, I think, $22,000. If I had that BYD Seagull, guess what? I'd replace both those vehicles for half the cost, half the payment, for my kids.

So the path to EV adoption is to have cars that are at ICE parity and to take away range anxiety. These are the two major reasons for EV adoption. So until we solve that, it's-- so why did they estimate? We don't know exactly what-- coming back to the question, we don't know exactly what Tesla is going to do. But this is what we have estimated with our engineering data that we can stand by. I cannot make a claim where we don't have sound engineering CAD/CAE manufacturing plant data, everything. Every part has been measured, every investment is made, every robot has been analyzed to do this estimate. I will not make claim that I cannot substantiate.

KRISTIN DZICZEK: OK. I'm going to turn the same question sort of differently to Mark and Colin. Has Tesla ever overestimated anything before? And why might they have done that? And how did it turn out?

COLIN LANGAN: I mean, they're notorious for setting very aggressive targets and falling short. I think that is part of the more tech mentality-- is like, aim high and you'll still be better than everyone else. I mean, I'm still waiting for full self-driving. It's been promised every year for the last five, six years.

KRISTIN DZICZEK: Lots of people paid for it, too.

COLIN LANGAN: So, yeah. It wouldn't be surprising, right? I mean, I think the Investor Day targets, I think people fully get, are stretched. We talk about Model 2, but remember, the Model 3 was supposed to be $35,000. Just, no one ever got it. Or maybe one or two people were able to pay that. It started really in the mid 40s and they increased it from there.

So will we get-- yeah, I'm sure they'll fall short on some of these targets. But still aiming pretty high, so it'll still be good.

KRISTIN DZICZEK: Shoot for the moon and land in the stars kind of thing. Mark?

MARK WAKEFIELD: No, I think Colin's got it. I mean, there's things that they have come through on, but later than planned. But actually come through on. So you can't just dismiss all of it and say, oh, the volume will never get there. Well, maybe it won't get there the year they say. But they're actually pushing it to make sure it gets there eventually because they do care about scale per platform and scale per factory quite a bit.

And they've shown a willingness to drop price to make it happen as well. So I echo your thoughts about them putting stretch goals out there and pushing. But at the same time, discount that doesn't mean that it never happens.

KRISTIN DZICZEK: So going back to the audience-- and then I've got a question in my head to come back up. In terms of cost margin-- and this is going to be more broadly. Actually, I'm going to go somewhere. I'm going to tell you something about the internal stuff at the Fed.

We have a conversation among the people who care about the auto industry, and we talk frequently on a scheduled basis. And there's sort of an internal slap your hand whoever mentions Tesla first because we're talking about the auto industry, and whoever brought it up-- like, oh. Like, do we have to talk all about them all the time? They're doing a lot of things and there's a lot to react to.

So this kind of changes it back to the Chinese company. So in terms of cost margins, can you comment on whether Chinese companies have leads in technology other than cheaper labor and raw material costs? Mark, start.

MARK WAKEFIELD: Yeah, they do. I mean, they've got-- just look at lithium access and lithium prices that you can get as a Chinese company in China versus what any company buying processed lithium carbonate can buy here. I mean, it's dramatically different. Aluminum is different. There are differences there, but the bigger cost things are what Mathew and I have been talking about about-- how different the approach to designing the vehicle is.

The speed at which you're making changes, the speed at which you're making improvements into it, and the hunger and paranoia and drive to, oh my god, I have to versus I have my 333% that I will get a red mark on my sheet if I don't get this achieved. And maybe I'll figure out a way to horse trade and get it achieved.

That's sort of the bureaucratic thinking, versus a hyper-paranoia a hyper-fear of not going fast enough and not getting the cost down that drives an experimentation, a challenge of standards, a difference of systems engineering. And just the speed itself often saves money if you're doing it in a fairly smart, first principles way.

Obviously if you do it too fast and you end up throwing a whole lot of stuff out because it didn't work, that can cost an awful lot. And some startups have learned that. But if you take too long to develop a vehicle, you're paying for an awful lot of engineers to be developing and redeveloping and improving and improving for those three years versus the year and a half or the year it could have taken.

KRISTIN DZICZEK: So on the earlier panel-- or it wasn't panel. When I was answering questions, Rick asked me about the productivity number. So US motor vehicle productivity is-- labor productivity is down. And, like, why? And one of the answers I gave was, we're changing a lot. There's a faster cadence of new models. There's new plants invested. And we've got this up and down volume kind of thing.

So when everything is changing, labor productivity is worse. And if you look at the vehicles that were in production basically unchanged for 10 years, you get really darn good at doing something if you've been doing it for 10 years. So with this faster cadence of changeover, you lose a little bit of productivity. We're talking about moving fast and changing all the time. What are the implications for labor productivity?

So Mathew, you've talked about you need 30% fewer people. So you've got these robots integrated. Robots you can reprogram. Are there going to be labor productivity gains and savings with moving fast, or are we going to have to relate to a lower productivity environment because change and moving fast is more important? I don't know if that's clear, but--

MATHEW VACHAPARAMPIL: OK. So I think there are-- to your earlier question and to sum it up together, there are three things that we need to look at when we look at China and then labor productivity and so on and so forth. So one is-- your professor was Jeff Liker. My professor was Jeff Liker. So we talked about TPS, lean manufacturing. And so on.

KRISTIN DZICZEK: Go blue, by the way.

MATHEW VACHAPARAMPIL: Yeah, go blue. At the national championships, it's a great time. So when we looked at the Toyota production system, it was always taking the existing product that was given from engineering to manufacturing and doing it in a very, very efficient fashion with one piece flow, jidoka, making sure that the line is-- you get the best quality, reduce inventory just in time, and so on and so forth.

What is really happening right now is the product itself is changing, too, on the mechanical side to lesser parts, lesser weight, better integration, less labor. It's being done earlier on in the design stage. And Mark talked about system integration view and so on. That's huge there. The other piece that we're bringing in is all the technology. And like we talked about-- Mark showed the Chinese customer looks at technology.

Now the BYD vehicles-- I go to Europe every month. 60% to 70% of the time I rent a BYD, a Lincoln Co., a Polestar. Or it's usually a vehicle from China because they want to get those vehicles in and for us to experience it. So on the technology side, they're bringing all these technologies in which are appealing to the customer. To the customer. So that's on the product side.

Then there is the whole subsidy piece, and then there's the whole piece in terms of supplier specifications [INAUDIBLE]. Now coming back to your labor productivity, we have hundred people. Your labor productivity increases because you're like Toyota. You don't make changes. And it goes from hundred to 95. Flip it around. I go from hundred to 70. My productivity drops 5%, but I've saved 30%. I'd take the latter any day of the week.

So it's this exponential thinking. And the quantum of change is so huge that they're willing to challenge the established auto industry assumptions. So with all the things that they're doing, it's all about taking labor out, cost out, weight out, parts out, reduction. You saw those things. That's what the focus of the industry should be in.

And this integration is not only happening on the physical side. It's also happening on the electrical side. On the electronic side. Like, integration of multiple [INAUDIBLE]-- when we talk about electric or electronic architecture, a lot of companies are on domain-based architecture. We are now on the zonal and then central compute. How do you integrate all these systems? Huawei is coming out. The new latest vehicle from "Avatar" with the Huawei 2.0 system is an effort to catch up and integrate and reduce the number of controllers, reduce weight, and so on. So it's all over, Kristin. All over the vehicle.

KRISTIN DZICZEK: So I'm going to go way back, even before my time. In the US, we used to have a system of branch plants. So there was a plant out in California, and it made all the models for California. It was kind sort of CKD, basically. Like, we didn't have these dedicated plants to platforms. And then we moved to this-- there's a dedicated plant for this platform. And this platform maybe has three cars or vehicles you can make off this platform. And so the flexibility within a plant is three vehicles.

We saw some of the Japanese can come in and be much more nimble and flexible to changes in the market. So if gas prices go up, we can shift to a completely different car on the same platform and take advantage of that major change. If people start preferring something else, they're very, very nimble to change. How much nimbleness is built into this?

And that's a critical thing of TPS-- is being very quick to move and nimble. This is quick to move on this product, but can you make five different products on the same line? Can you adapt to consumers all of a sudden hate that and love this? Or there was bad news about this thing or this particular battery, and let's-- oh, we've got to change something so we can be much more responsive to the market. So how flexible is this system really?

MATHEW VACHAPARAMPIL: The unboxed system?

KRISTIN DZICZEK: Mhm.

MATHEW VACHAPARAMPIL: OK. There's tremendous flexibility. Because first of all, now you're building the pieces in modules, OK? So say for example, if you had the same model and you want to have longer and shorter batteries, more flexibility-- I don't know whether you had a chance to see the assembly line. There are no big monuments in there because you're building these different modules and bringing it.

You're going from a sequential assembly, which is an assembly line in the plant, which is 2.5 kilometers long, to building the front module to building the rear module to build the battery module. And bring the sides together and put together the-- all the monuments in the plant go away. And they don't go away. But you reduce them, and that gives you a tremendous flexibility to do changeovers to build a more flexibility. One of our experts, Raj, is here. I don't know. We can-- he feels that there's a lot of opportunity to build different product lines on the same-- sorry. Different products on the same line.

COLIN LANGAN: So I think a lot will come down to the megacasts, right? I mean, if you have five megacasts and they're going to-- might be the dictating pace of the plant. I don't know. I think that would be a big factor-- is how flexible the megacasts are in different models, I would assume.

MATHEW VACHAPARAMPIL: So you just have different-- so they use the same machine, but you'd have different tooling for to build different sizes. So the flexibility increases, and so on.

COLIN LANGAN: But I think the changeover of megacast machines could create downtime in the plant, from what I understand, so--

MATHEW VACHAPARAMPIL: Yeah. So it-- the bigger question is this. So one of the points that Mark said was-- what is the changeover time? Was 1.3 years?

MARK WAKEFIELD: 1.3 in China.

MATHEW VACHAPARAMPIL: 1.3. So one of the things is the freshness. So one of the things that customers will expect in the future is the traditional way where we design a car for three to four years. 36 to 48 months. And then we had a run for three years, then we did a refresh in three more years. The technology changes are so fast, those paradigms are being challenged.

So we need, I think-- this is an opinion. This is not based on data. But if I was working in manufacturing and having this sort of flexibility will make my life a lot easier. And if I'm a consumer, I'd like to see a new model every year. I'd like to see. If change could be constant, we'd like-- like the Apple phone updates every year, I'd like to see a new model every day. My daughter and son would love it.

COLIN LANGAN: There's a difference between software-- look. Tesla Model 3 and Y look the same. I there's been refreshes, and they've been around for a while. So does the exterior really need to change? I think the end of the goal here is, if I'm an automaker, I'm focusing a ton on software. I think the car is going to-- maybe it's modular or maybe there's other changes, but I actually think the focus should be more software. And that's what made Tesla different.

I'm not sure-- I mean, I got admit, the more you guys keep talking about the short development timeframe, I don't want to buy that car. I'll wait a couple more years for something that's been developed a little longer. It keeps scaring me.

KRISTIN DZICZEK: I don't buy them in the first year, either. This is making me nervous.

COLIN LANGAN: Well, one year. That's all you're going to get, because the next model will be out year two. So--

KRISTIN DZICZEK: That's exactly right. I want to come back to-- we're getting near the end and I want to wrap us up. Here I've got two big questions to ask. So, Colin, you did a good job on talking about how labor costs have gone up under the UAW contract. And automakers say we're going to offset those costs. We're going to talk about some of that tomorrow in our last panel.

You say $58 to $73 average hourly labor costs all-in. They were $78 in 2007, roughly. If you inflate that by the rate of inflation, that'd be $130 an hour now. So they're well below where they were in 2007, but we're going to see costs come up there. Suppliers are going to see their labor costs rise. And you talked about the excess capacity. And I think, Mark, you also have some views on that. What are the implications for manufacturing and North American supply chains if we're seeing costs going up, volatile material costs, heavier regulations? What are the implications for our footprint here?

COLIN LANGAN: I think the new UAW contract is creates structural problems long term. I mean, one, I'm going to automate as much as I possibly can, hopefully. I mean, I maybe can't get rid of workers. But as they retire, I'd rather automate them away. Because if they're going to cost a hundred grand, well that means I could pay how much for that machine that might replace them? And I'm going to Mexico and then maybe Canada and then I'll build in the US if I'm an automaker.

So as much as it's within IRA compliance, I'll push as much down there. Because now Canada is cheaper and Mexico is now even more cheaper, even with all the wage increases there. And look. Ford is probably not happy they have a lot of UAW right now, because they're paying a lot more than Stellantis is. So yeah, I think great near-term structurally. Long-term, it's a problem.

KRISTIN DZICZEK: Mark, do you want to weigh in?

MARK WAKEFIELD: On capacity?

KRISTIN DZICZEK: [INAUDIBLE]

MARK WAKEFIELD: Yeah, capacity. I mean, it's a problem, but not a problem today. It's a problem for when the market really taps out. There's a desire to build more from many, and there's a desire to build new advanced, lower cost. And so, yeah, I think in the second part of the decade we're going to see a wave of closures after that. And I think, yeah. Mexico will be the big winner of those.

KRISTIN DZICZEK: So if the other Mark had been here-- Mark Stewart-- I had a question for him that I'm going to ask to you guys. And that's how we're going to close out this panel. So several auto executives, including Carlos Tavares, the CEO of Stellantis, have this benchmark of a $25,000 affordable EV. There are very few ICE vehicles at $25,000 price point. And I was going to say Stellantis doesn't have virtually anything down at that end with their very truck-heavy lineup. And no EVs down there, really.

So what does a low cost or $25,000 EV look like in the US? What are the prospects for those sorts of vehicles? How long does it take us to get costs down here? Or does it have to be an import?

COLIN LANGAN: I could start. I mean, I actually am very skeptical that there's a demand for a $25,000 vehicle. I mean, I think a new car buyer usually buys for the status of it. And the size of an EV-- you'd have to-- I mean, the Seagull that was in the presentation earlier is smaller than a Fit, I think. Very, very small car. And that makes sense. To get the price point low, you need a really small battery and less weight. And I just don't know that the market's there.

Now that doesn't mean there's not a huge market in China, not a market in Europe. But I'm a bit skeptical in the US. But to get there, to do a $25,000 car, it needs to be right now very small. And I feel like possibly it could succeed if it's more of a replacement for a used car or something like that. But I don't think the typical new car buyer is going to be that interested.

KRISTIN DZICZEK: And does it have to be an import?

COLIN LANGAN: I think you'd do it in Mexico, right? [INAUDIBLE]--

KRISTIN DZICZEK: That's still an import, yes.

COLIN LANGAN: You also could get IRA. I mean, with IRA rules you could structure it. It's North America, and so you could get the EV discount.

KRISTIN DZICZEK: Mark?

MARK WAKEFIELD: You'd have to be convinced in the US that you had to build that. Because right now with the footprint cafe, there isn't the same motivation to build a small car. Small car gets hit. So building a small pickup can make some sense from a cafe footprint rules. But building a small car is really, from an OEMs perspective, a question that doesn't really need answering.

And I mean really, as Colin was saying, yes, there is a $25,000 car. It's called a used car. And because they're reliable enough and because now automakers are trying to prop up their residuals by giving warranties and lease rates on CPOVs and trying to make those as seamless as possible to help prop up their residuals to help them do a lease value that's cheaper, it's not as scary to buy a three-year-old car. You don't feel like, oh my god, will this get me to work or not as much anymore. And so that also allows people to buy a used car. But as you've seen in pricing, the new car is effectively a luxury good at this point.

KRISTIN DZICZEK: I have said that several times. So, Mathew, you get to bring us home on the questions. Can you make a $25,000 EV in the US profitably?

MATHEW VACHAPARAMPIL: OK. I'm going to take a different approach. I don't have an answer to the question, but I can give you some data points. How did Honda and the Japanese enter the US? They came in with this small Corolla and the small Civic. How did Hyundai come in? They came into the small car. Gave a 10-year, 100,000-mile warranty.

Mr. Tavares says-- I'll just give you data points and I'll let you make the conclusion. Because I don't want to make opinions without solid data. Mr. Tavares just invested in Leapmotor in China. And the rationale is to get this Chinese knowledge and know-how to build this. He just launched the Citron EC3, I believe, in Europe, which is less than $25,000. And we also see the BYD Seagull at $11,000.

So if, for example, Stellantis comes in and says, we are going to bring the Leapmotor technology or something and we build it here in the US, can they replicate what Honda and Toyota did and what Hyundai did and so on? So I'll give you these data points, and time will tell whether this will happen or not.

KRISTIN DZICZEK: I have a million more questions. You guys have a million more questions. The good thing is, we're going to break and go to a reception where you can ask those questions lubricated with beverages of your choice and some snacks. Mathew, you've got the Model Y in our lobby. You've got some staff down there that can point out some of the things that people might want to see. And especially if you aren't really familiar with what's there, they can really walk you through what's different about that vehicle and why that's something people should be looking at.

So I would like to thank you, Mathew, Colin, Mark, for pinch-hitting for the-- I got a Mark. Just a different one. Not quite as flashy of a dresser, but--

[LAUGHTER]

But let's go have a little bit of a social hour for a couple of hours here. And I hope you've enjoyed the first day of the conference. We come back tomorrow for another set of sessions.

MATHEW VACHAPARAMPIL: Thank you, Kristin.

[APPLAUSE]