Brand Image Improvement, Margin Maximization Confirmed
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Maintain BUY, target price of KRW220,000
From Nov 13 to 18, we participated in HMC’s U.S. marketing tour (Boston, Las Vegas, Los Angeles) to look into the progress of the company’s major businesses in the country.
Boston Dynamics: Quadruped robot Spot, logistics robot Stretch
We first visited Boston Dynamics, where we saw the operation of the company’s robots. After observing the excellent balancing abilities of quadruped robot Spot (already commercialized), we better understood the various applications that the product could facilitate. Also, we met the logistics robot Stretch (pilot testing conducted at logistics companies worldwide), which presents the potential to reduce heavy loading/unloading work, a major factor behind cost increases at parcel delivery companies, notably so during the pandemic.
Motional: Level 4 autonomous vehicle
At Las Vegas-based Motional, we rode in a Level 4 autonomous vehicle. The product’s software determined routes based on information on nearby vehicles/pedestrians collected in real time and automatically executed steering/speed/stop processes. We also confirmed how the vehicle responds to emergencies. Through our experience, we believe the mechanical limitations encountered last year have been resolved. We believe HMC requires a mobility service platform operator within the Hyundai Motor Group in addition to EV manufacturing capabilities and autonomous driving software.
Brand image improvement, margin maximization confirmed, but industry at inflection point
We also visited the LA Auto Show, local dealerships, Hyundai Motor America and Hyundai Capital America. We confirmed HMC’s improved brand image and maximization of vehicle sales margins. Earnings may decline/normalize on rising interest rates, rebounding competition and falling used car prices.
I. Dealerships, Hyundai Motor America & Hyundai Capital America
Brand image improvement of HMC, Genesis and Ioniq confirmed
We visited an HMC dealership in Los Angeles, followed by HMA and HCA. The meetings confirmed that U.S. vehicle sales margins are quite high and the brand images of HMC, Genesis and Ioniq have significantly improved. However, we also found that HMC is not immune to an industry-wide trend of margin contraction triggered by rising interest rates, rebounding competition and concerns over an economic recession.
High demand for high-margin Ioniq 5
HMA and dealerships in Cerritos, Los Angeles County, stated that the brand images of HMC and Genesis are improving but sales are constrained by supply shortages. For example, consumers view the Ioniq 5 as a very competitive SUV given that it can be charged from 10% to 80% in only 18 minutes at 800V, but there is a huge order backlog. Inventory is sold as soon as it comes in, and Ioniq 5 margins are said to be as high as Tucson margins. HMA anticipates that, although Hyundai may not catch up to Tesla in the U.S. EV market anytime soon, its strong dealer network will help provide better customer service. Furthermore, building on competitive capabilities such as reducing charging time should lead to continual progress.
Low-margin fleet sales expected to increase but profitability will be secured
HMA’s low share of fleet sales, which are usually less profitable, is an indicator that current vehicle margins are fair. At present, proportion of total U.S. fleet sales is unusually low, at 0.4%, yet HMA believes this will recover to a normal of 5% while targeting 9%; the company believes it will be able to secure profitability if fleet sales are planned in that range.
HMA expects U.S. market to grow 4-6% in 2023 (similar to KB Securities estimate)
HMA expects that changes in macroeconomic conditions, such as increases in interest rates, will affect auto demand in the U.S. It estimates the U.S. market will grow 4-6% in 2023 given deferred demand from consumers thus far unable to purchase automobiles because of semiconductor shortages. The growth estimate is similar to our previous growth forecast of 5%.
Competitiveness expected to remain intact after IRA implementation; localization, expansion of commercial vehicle sales could counter IRA impact
HMA did not seem concerned about the Inflation Reduction Act. Even at IRA-induced prices, consumers' desire to purchase the Ioniq 5 is expected to be quite strong. HMA plans to increase local production following IRA implementation but predicts a strong sales uptrend will not come until 2025 (excl. GV70e). The new Savannah, Georgia plant (originally targeted for mass production in 2025) is scheduled to begin production in October 2024, yet the JV battery plant to be built alongside it is set to start production in 1Q26. HMA seems to be considering expanding sales of commercial vehicles as another countermeasure against the IRA (commercial vehicles are not subject to regulations related to battery and mineral sourcing).
Increase hikes should not have major impact on profits; change is inevitable amid margin normalization
Regarding the recent incentive hikes, HMA believes that profits will remain nearly intact with an increase in volume, though an uptick in incentives is clear. Both dealerships and HMA agree that vehicle inventory has been on a slight upswing but still insufficient; they believe higher incentives or diminished price competitiveness following IRA implementation will not be major issues. Dealership profits may decline going forward, but not because of higher incentives. Rather, auto margins have been unusually high as of late, thus profit decline seems inevitable amid margin normalization. Dealership inventory has bottomed out, inching upward thanks to production normalization. We note that no incentives were used along the way, but financing deals were offered to customers in consideration of rising interest rates.
Significant improvement in consumer perception of Genesis
HMA and dealerships remarked that consumer perception of Genesis is significantly improving. As for the dealership space we visited, we note a Japanese luxury brand shop is scheduled to be transformed into a Genesis brand shop (the previous Genesis brand shop will be dedicated to Ioniq) to meet popular demand. HMA has announced plans to position itself as a leader in luxury electrification by limiting the no. of Genesis dealers, with a focus on competitive dealers, greater brand awareness and sales volume for more competitive models such as GV60 and G80EV.
Reduced need to engage in high-risk, low-margin contracts in auto financing
Business conditions confirmed by HCA were not very different from business conditions attested by HMA and dealerships. Responding to dealerships' comments that they are increasing financing incentives amid rising interest rates, HCA stated that there is a reduced need for low-margin contracts. In periods of rising interest rates, banks tend to have much better financing conditions than HCA. Still, HCA does not appear to have plans to defend against falling market share via aggressive sales engagement. In addition, while an increase in leasing deals at competitors is a sign of growing market competition, Hyundai Motor Group has stated that strengthening model competitiveness will hinder the pursuit of securing more high-risk, low-margin contracts.
More late car payments but seasonal factors should be considered
HCA stated that interest rate hikes and lower savings rates seem to be slowly leading to more missed car payments. Still, as some seasonal factors are at play, there should be fewer late payments starting early next year. In addition, HCA commented that, unlike in Korea, the U.S. fares much better in terms of financing.
Pre-owned vehicle profits expected to decline
We expect a decline in pre-owned sales margin. HCA deemed a decrease in used vehicle sales profit as inevitable following a drop in used car prices. Although it projected used car liquidation losses for some models in 2023, overall used vehicle sales are still expected to generate profit.
II. Boston Dynamics Hyundai
Motor Group’s wholly owned robotics company
Boston Dynamics is an engineering and robotics design company spun off from the Massachusetts Institute of Technology in 1992. It is well-known for its robots, particularly in videos showcasing them dancing to music, completing obstacle courses and doing backflips. In 2021, Hyundai Motor Group acquired Boston Dynamics (equity structure: HMC 30%, Hyundai Mobis 20%, Hyundai Glovis 10%, Hyundai Motor Group CEO Chung Eui-sun 20%) from Softbank, which previously bought the company from Alphabet. As of 2021, Boston Dynamics posted revenue of KRW66.8bn and comprehensive losses of KRW197.0bn. The company’s mass-produced robots are Spot and Stretch. The humanoid-type robot Atlas frequently appears in the media but is not yet mass produced.
Spot: A multi-purpose quadruped robot
Spot is a quadruped robot that can be used for various applications. It is designed for surveillance purposes, but depending on installed equipment, it can also facilitate noise measurement, recognition of gas/radiation leak and pharmaceutical deliveries. Its most frequently used equipment is a pan-tilt-zoom camera/sensor system that allows for data collection from specific locations/angles. Data collected from multiple Spots can be reported via PC-use software Scout.
Stretch: A robotic helping hand
Stretch is a specialized logistics robot used for handling heavy objects weighing ~20kg, mainly case-type objects. It can move 600-700 cases per hour (vs. 400-500 for humans) and can work for 20 straight hours on batteries. When it comes to case handling, rapid input is possible, as case parcels do not require separate machine learning. Stretch can also palletize, order build and de-palletize.
Atlas: The human side of robots
Currently, Boston Dynamics is not considering the mass production of its bipedal humanoid robot Atlas. However, Atlas plays a crucial role in publicizing the company’s technical prowess. Technologies used in Atlas can be applied in the development of other robots.
BigDog: A video sensation
In 2010, Boston Dynamics entered the spotlight with its YouTube video featuring BigDog. In the video, the dynamically stable quadruped robot traversed difficult terrain and maintained balance amid attempts to knock it over.
Spot is able to traverse dynamic terrain
In terms of Spot, we also confirmed the robot’s ability to walk on gravel. According to Boston Dynamics’ research team, gravel terrain changes for each step that a robot takes. With only a vision camera, precisely and quickly recognizing changing surfaces is quite difficult. For Spot, however, stability is achieved through rapidly processing data transmitted from is legs.
Atlas is able to regain balance much like humans
In terms of Atlas, we saw the robot instantly regain balance through a “floundering” motion, much like humans when losing balance.
Balancing prowess of robots are critical for platform versatility
The balancing prowess of Boston Dynamics’ robots demonstrates its critical competitiveness in platform versatility. With excellent balance comes easy handling, allowing the operator to provide general guidance on direction of path and things to do. For instance, Spot is controlled with a tablet PC-like controller that has a straightforward interface, so much so that even a novice could control the robot without much difficulty.
Stretch is a suitable substitute at parcel delivery companies
As for Stretch, Boston Dynamics stated that the robot presents excellent unloading abilities but still has limitations in terms of loading, which requires a higher level of intelligence. That said, Stretch can be a suitable substitute at parcel delivery companies given that unloading/loading work is a major factor behind cost increases, notably so during the pandemic.
Market for fixed-/mobile-type, collaborative robots to surge
The market for fixed-/moving-type and collaborative robots (e.g., Spot, Stretch) is estimated to reach USD17bn in 2023 and surge to USD90-170bn in 2030 (26.9-38.9% CAGR).
Spot priced at USD75,000; Stretch in pilot testing
Spot, which has been commercialized ahead of other Boston Dynamic robots, fetches USD75,000 per unit. Stretch is in pilot testing (to increase product capabilities and customization), with 200 pre-orders from major logistics companies.
III. Motional
Hyundai Motor Group’s JV with Aptiv
Motional is a developer of Level 4 autonomous-driving technology designed for ride-hailing and delivery services. Established in 2013 via nuTonomy (established via the Massachusetts Institute of Technology), the company was acquired by Aptiv in 2017 before a JV was formed between Aptiv and Hyundai Motor Group in 2020 (equity structure: HMC 26.0%, Kia 14.0%, Hyundai Mobis 10.0%).
Recent product issue seems to be resolved
In market intelligence firm Guidehouse Insights’ 2Q21 ranking of autonomous driving technology vendors (Guidehouse Insights Leaderboard), Motional was ranked seventh globally in terms of competiveness in strategies and execution abilities. According to the report, Motional products were not allowed to be used at hotel entrances, which are crowded with people. This limitation was cited as a technological weakness by Guidehouse. However, we witnessed Motional’s autonomous driving software-mounted vehicle used at the entrance of the Mandalay Bay hotel in Las Vegas, suggesting the issue has been resolved.
Thirty-two sensors mounted on autonomous-driving Ioniq 5
During our visit to Motional, we were presented with Ioniq 5s equipped with 32 sensors, including 13 vision cameras, four radars and five LiDARs (three rotation-types). We noticed that the vehicle self-updated movements of nearby pedestrians/vehicles in real time and tracked such movements outside the driver’s direct view.
Safety driver intervenes in danger zones
We also observed the intervention of a safety driver during vehicle operation. When the autonomous vehicle was stuck in a danger zone—in the middle of a narrow road and parked vehicles—the safety driver took control of the vehicle. In addition, Motional stated that in situations where autonomous driving AI is unable to determine optimal routes, remote vehicle assistance (RVS) determines alternate routes and AI takes charge. Much like how an airport’s control tower determines routes for planes approaching the runway, RVA determines routes when AI cannot determine them itself, and AI takes on driving responsibility.
Most mobility companies’ vehicles will be robo-taxis in 2040, according to Motional
According to Motional, mobility companies’ adoption of robo-taxis should accelerate until 2030. From 2040, robo-taxis should comprise the largest no. of vehicles at mobility companies. From 2030, we see privately owned vehicles beginning to adopt autonomous driving technologies.
From 2023, ride-hailing service to begin in partnership with Lyft
In its initial phase, Motional plans to focus on ride hailing in collaboration with Lyft and Uber. The company plans to begin in earnest from 2023 in a partnership with Lyft. Going forward, it sees itself directly selling Level 3/Level 4 autonomous-driving technologies and expanding into delivery services using trunk space and the ad business of autonomous-driving vehicles.
Move toward asset-light business model
Motional stated that it will initially directly own robo-taxis but transition toward an asset-light business model by offering only software/services as the market matures.
Autonomous-driving technologies are key to mobility business
We believe completely unmanned autonomous driving technologies (SAE Level 4 and above) are the most critical technologies in terms of economic feasibility and safety. Motional’s capabilities are being recognized as closely comparable to those of Waymo and Cruise. Having participated in a pilot testing ourselves, we confirm that Motional holds a considerably high level of technologies.
Mobility service platform operator needed within Hyundai Motor Group
However, we believe Hyundai Motor Group requires a mobility service platform operator in addition to its mobility hardware platform companies (i.e., HMC, Kia) and a mobility software company (i.e., Motional). Even if Motional becomes an industry leader, late starters should also accelerate its technological advancement. Nonetheless, late starters will find it difficult to compete against the strong customer engagement that leading mobility service companies with cost-efficient and safe autonomous services will likely have already secured. Thus, the true winners will be companies that change consumers’ lifestyle patterns with superb mobility services and utilize customer engagement in other fields of business.