From the perspective of products and investment - A brief discussion on the underlying logic of smart car wire control-EEWORLD

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There are many popular science and research articles about the concept of wire control braking. This article aims to briefly discuss the reasons for the primary market investment boom that has been triggered by wire control braking and the rise of new energy vehicles in the past five years from the perspective of a primary market practitioner.

This article will not explain too much about terms and technical principles, but will only analyze the driving force behind the development of wire control braking and possible investments and product logic.

A detailed account of the past investment boom in new energy vehicles

Before starting to introduce wire control braking, it is necessary to mention two data.

Let's first turn the clock back to before 2015. From 2005 to 2015, it took China's new energy vehicle penetration rate a full 10 years to break through 1%; from 2015 to 2020, it took 5 years for the penetration rate to quickly break through to 5%; so when we discuss the investment logic of new energy vehicles in the primary market, 2015 and 2020 are two key time points.

The investment boom in the primary market started in 2016. According to investors' usual investment thinking for an emerging industry, the first wave of investment opportunities appeared in the place closest to the downstream application scenarios, namely new energy vehicles.

That era was an era of fierce competition in the new energy vehicle industry. New energy vehicle companies of all sizes emerged in large numbers. Many times, we had just recognized the logo of a new force, and soon we couldn't hear any news about it... In that era, the first wave of new energy vehicle companies were some domestic dollar institutions.

However, at that time, they viewed new energy vehicles not as hard technology investment logic, but more like durable consumer goods with greater value. Having just transformed from the Internet and mobile Internet, they were familiar with investing in new energy vehicles and were very happy. At the same time, some old RMB institutions were also eager to try, which was a stark difference compared to the current primary market.

After investing in the whole vehicle, investors will spontaneously look for investment opportunities in upstream parts and components. If we divide new energy vehicles into five domains according to the architecture: intelligent driving domain, cockpit domain, power domain, body domain, and chassis domain, corresponding to the three trends in the development of new energy vehicles: the power domain and chassis domain are investment opportunities in electrification, the intelligent driving domain and cockpit domain are investment opportunities in intelligence, and the Internet of Vehicles is an investment opportunity in networking;

The intelligent driving domain and cockpit domain emerged after 2016. In addition to the support of the penetration rate of new energy vehicles, there is also the support of AI.

In 2016, AI entered its second climax. Based on the previous wave of technological advances, a large amount of means of production required for AI has accumulated. Horizon Robotics, which was recently listed on the Hong Kong Stock Exchange, also started in those two years. At that time, everyone was promoting "AI+", that is, AI can empower and connect everything. Naturally, cars are an AI carrier worthy of exploration and research.

Driven by the electrification of new energy vehicles and supported by AI algorithms, startups related to intelligent driving emerged in large numbers in those years. A number of Silicon Valley algorithm giants such as Google, Amazon, and Apple returned to China to start their own businesses. The doors of senior algorithm professors and academicians at many domestic universities were trampled down, and they were all being "deceived" by investors outside the door. Many professors were persuaded by the "sea of stars" outside the door and embarked on the "road of no return" to entrepreneurship.

At the same time, compared with traditional fuel vehicles, the few changes in new energy vehicles appear in the power domain and chassis domain. The power domain is something that everyone can intuitively feel, representing the difference in power sources between the two eras. Directly related to the power domain are investment opportunities such as lithium batteries, battery materials, solid-state batteries, sodium batteries, and large and small three-electric products.

In contrast, the chassis domain is not so easy to be noticed, so it was a little late for investors to pay attention to it. Although some startups started to start EHB businesses in 2016 and 2018, the real investment boom was not until after the epidemic in 2020...

The investment boom of wire control brakes kicks off

Speaking of brake-by-wire control, I think investors who have looked at the autonomous driving and robotics tracks are not unfamiliar with it. This term was first known to investors not on the chassis of new energy vehicles, but on robots (mainly service robots and special robots) and closed L4 autonomous driving (mines, ports, logistics, airports, parks, etc.) car chassis.

When discussing the products of these two scenarios, entrepreneurs will tell investors that our chassis has purely electronically controlled (i.e., wire-controlled) braking and steering. However, the wire-controlled braking we are discussing at this time is quite different from the wire-controlled braking of passenger cars that we will discuss below. There are huge differences in operating speed conditions, safety and reliability, and passenger and cargo carrying properties alone. These different levels of requirements result in engineering implementation difficulties that are several orders of magnitude higher.

From traditional fuel vehicles to new energy vehicles, the biggest change for the passenger car chassis is that the vacuum booster required for braking has been replaced with an electronic booster. Apart from that, there is no change in other parts of the chassis, which still uses the traditional hydraulic drive method. The chassis structure is particularly bloated.

Depending on the form of separating or merging the electronic booster and brake controller, the wire control brake EHB (Electrohydraulic Brake System) can be divided into two-box and one-box. But in any case, this is a replacement of a certain component in the entire chassis, and the other parts of the chassis remain unchanged.

Therefore, the first companies that started out in the field of wire control braking in China started with EHB's two-box. Compared with one-box, two-box has an extra layer of redundancy. At that time, everyone thought that autonomous driving would be implemented quickly, so in the two or three years after 2016, people talked more about how to implement two-box.

The good times did not last long. New energy vehicle OEMs generally did not do well, especially during the period of 2016-2020. The OEMs experienced a brutal reshuffle, and those who can survive now are the best of the year. The electrification of OEMs has thus entered a state of fierce competition, with price cuts one after another. Everyone began to pay attention to costs. In addition, the craze for autonomous driving gradually dissipated around 2021, and everyone began to be generally pessimistic about autonomous driving. They felt that a low-cost solution such as one-box might be more in line with the current needs of OEMs. If L3 or above autonomous driving is really to be achieved, it is not impossible to add a redundant solution of RBU (Redundancy Braking Module).

At this point, the day when the offline controlled EHB new forces entrepreneurial boom will be heated up in the primary market is getting closer and closer.

After the epidemic in 2020, Bosch, a foreign brand that once dominated the braking field, also experienced varying degrees of production suspension in its factories at home and abroad. Domestic new energy vehicle manufacturers are facing the dilemma of chip and one-box/two-box shortages.

It is precisely because of this historical opportunity that domestic wire-controlled brake-EHB players have the opportunity to break through, and OEMs have to start trying to use domestic wire-controlled brake-supply suppliers.

Investors in the primary market are always sharp. From 2021 to the first half of 2023, the brake-by-wire EHB entered a short period of investment frenzy. During this period, there were more than a dozen water projects that received financing. The logic of investors is also very simple: domestic substitution. Bosch is not doing well, and the production capacity supply is insufficient. China's new energy vehicles are exported overseas, beating a number of foreign brands. Tier 1, which represents the new entrepreneurial force of domestic brake-by-wire EHB, also has the possibility of overtaking... The above words may be the most talked about logic by primary market investors.

But is this really the case? Is Bosch really in trouble? During the climax, investors often find various logics and evidence to prove that their views are correct in order to achieve logical consistency. It is often only when the tide recedes that we know who is swimming naked. Looking back from this point, this matter may not be that easy.

I am not saying this now in hindsight, but I want to sort out the ins and outs of the situation and explore the rationality of the investment logic from the perspective of the underlying driving force.

Analysis of the underlying logic of EHB investment

Most of the investors who come to see EHB have experienced the investment opportunities in autonomous driving and ADAS. The core ability of the entrepreneurial team in this track is the algorithm and how much data the algorithm model has been fed and what percentage of algorithm accuracy has been achieved. As for the extremely demanding engineering implementation capabilities required for automobiles, the product of hundreds of years of industrial accumulation, there does not seem to be such a strong correlation. It is not wrong to think so. After all, ADAS suppliers only need to provide solutions to the OEMs, and the OEMs will still provide the final guarantee for implementation, so the risks are relatively controllable.

However, this is not the case with chassis braking. Braking commands often come from chassis domain control or central domain control, and EHB is responsible for execution. Tier 1 can only cover itself, or leave this layer of redundancy to the driver. The reliability requirements of wire control braking for Tier 1 are much higher than those of the ADAS systems that everyone has seen before.

Of course, the two also have something in common, which is the algorithm. EHB Tier1 provides a "black box" in which the core is the ESC algorithm, which easily reminds investors of the investment logic of autonomous driving, that is, the algorithm is everything and the algorithm is the core.