Canada, China, EV Tariffs: What's Going On?

In this podcast, Motley Fool analyst Asit Sharma and host Dylan Lewis discuss:

• Canada's tariffs on electric vehicles from China, and what they say about global production and adoption of EVs.
• Tesla's diversified approach to manufacturing coming in handy as Canada, the U.S., Europe, and China all craft trade policies.
• Peloton's return to growth...kind of.

Motley Fool host Mary Long talks with David Foulkes, CEO of Brunswick Corporation, about the company's subscription boating service and the latest in marine technology.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our beginner's guide to investing in stocks. A full transcript follows the video.

This video was recorded on August 22, 2024.

Dylan Lewis: We're checking in on the market for four wheels and no wheels. Motley Fool Money starts now.

I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst, Asit Sharma. Asit, thanks for joining me.

Asit Sharma: Dylan, how are you doing? Happy Monday.

Dylan Lewis: Happy Monday. We are checking in on transportation on this Monday looking at the electric vehicle market and also the stationary vehicle market. We have some updates on Peloton, and also a look at the latest round of tariffs to hit the EV market. Why don't we start out there, Asit?

This week, Canada announcing it will be imposing an 100% tariff on EVs made in China. This follows a very similar approach to what the US and the European Commission have done. I want to dig into the Tesla pieces of this and talk about some of the other players in the EV industry. But can you lay out some of the history here, first?

Asit Sharma: Sure, Dylan. China today finds itself in a bit of a difficult economic position. The country has grown largely through emphasizing production in various industries in its history, and it's relied on a massive real estate market to fund production. Now, real estate is becoming a little bit less of a driver in China's economy. They're trying to become more of a consumption-based economy, and they are training their sites on future industries to make up for this shift in how their economy functions. One of the areas that the Chinese government really wants to emphasize is the production of electric vehicles, and you've obviously heard us talk about their emphasis on developing different technologies in the electronic sector and tech sector in general. Having the effect of in the United States, in Europe, and Canada is scaring the governments, because we've seen in the past when China has come and subsidized an industry.

I'll take the solar industry as a great example. That's tended to wipe out the competition because the government has so heavily favored both on the tax credit side and the credits for production, that it's killed competition before competition could even arise. Producing electric vehicles is extremely complex. The entire supply chain is so much different than conventional vehicles. I think governments around the world, especially in Europe and the US, North America feel that if they don't react now with these tariffs, that they'll get undercut in the near term. A 100% tariff. Let's just refresh here. That means that it's going to be twice as expensive [laughs] to buy a car from China and the US an electric vehicle. That's 100% tax imposed on the consumer. That's supposed to disincentivize people from buying those vehicles while the US industry, the European industry, and here we see today, the Canadian industry catches up.

Dylan Lewis: A big part of the reason why this story has really picked up so much steam in the last year or two years is because out of nowhere, China's BYD, one of their EV manufacturers, has absolutely skyrocketed onto the scene with production and sales. They've been jockeying with Tesla for the title of Top EV seller. You mentioned 100% markup there. They are operating for the large part in the teens when it comes to their pricing in US dollars. Even with it 100% markup, that becomes still very competitive with what we see from some of the higher priced EVs here in the United States.

Asit Sharma: Yes, and it's a race to catch up, Dylan, for major US manufacturers. There are some really nice vehicles coming out. We've seen Ford coming out with its electric version of the VF 150. That's an expensive vehicle. Tesla vehicles generally are very expensive. Now, Elon Musk had promised for years that Tesla would introduce a lower cost line of electric vehicles. That really hasn't materialized yet, although, this last conference call for the last earnings, he said, yes, that is now on the horizon. But if you have cars that sell in the mid to high teens, double that, as you mentioned, that's still cheaper than some EVs on the market. What is the US trying to do? The US is putting this barrier up between the consumer and these EVs coming in.

But at the same time, it's incentivizing the development of the battery supply chain here in the United States. The Inflation Reduction Act paved the way for, I think about 17 new manufacturing plants in the US for electric vehicles. There was a report earlier this year that the US is probably on track to supply 100% of its EV battery needs by 2030. This being one of the most expensive parts of a EV to produce, I think it's going to help the US industry play catch up a little bit. But let's talk about BYD for just a second here, Dylan. Those cars aren't all about low cost. One of the interesting aspects of BYD vehicles is from the start they had an idea to make them just as attractive on the inside with lots of nifty features as Tesla's automobiles. You don't feel that you're sitting inside some cheap automobile when you're inside a BYD vehicle, even though it costs tens of thousands dollars less. I think this is one competitive advantage that vehicle manufacturers around the world are just going to have to grapple with; just as Tesla, really laid down a gauntlet for so many other manufacturers. The bar is getting so high in this industry. The industry is only becoming more competitive as we move along.

Dylan Lewis: I'm glad you gave us some of the color there on BYD and their cars because most US consumers have never seen one. They are not on the roads here in the United States. It's a story that has taken place out of sight, I think of most of us here in the US. I do want to talk a little bit about the Tesla side of this. Because Tesla shares down around 3% today on this news on a day that the market is largely flat. That could be for almost anything. I think, in a complicated position when it comes to this story because they have global distribution of their cars. They also have global production of their cars. They have manufacturing in several different countries, the United States, Germany, and China. What's the impact of these tariffs and the current EV environment for Tesla?

Asit Sharma: I think it's generally positive, Dylan. The reason I say that is because Tesla from the beginning has excel at one thing above almost any other, and that is the ability to raise lots of capital. We can fault Elon Musk for a lot of missing of deadlines and throwing out grandiose plans and revising them. But I think what's under appreciated about Tesla under Musk's leadership is that they have consistently poured billions of dollars of their own free cash flow, their stock as the stock grows, converting that into dollars and building manufacturing facilities around the world, whether for the battery production or the vehicle production. Now you've got this very spread out manufacturing base, quite a lot in the US, but the US is a huge country. Now, Tesla is manufacturing outside of Berlin. Of course, in China as you mentioned, they're building production in Mexico, which is great for that supply chain which runs from Mexico all the way up through Canada. While this is going to hurt in terms of China production that could go to Europe, it really is not bad at all that they established a foothold there. The Chinese government really understands Tesla's objectives and they play well together.

I think another thing that maybe Musk doesn't get enough credit for is his ability to navigate the complicated geopolitics of production. They can participate in some credits that are available to manufacturers in China. What it stops them from doing, though, is really gaining share in Europe from China production. Now, in trade, they've got the local production. They can lean into about half of Tesla's production in China is sold within China. They also have Australia, they have Asia, which are markets that at this point in time, haven't erected these big barriers in forms of tariff. Really what they're losing out on is the production that can go to Europe. But look, they've got that expanding base in Europe, so maybe they can make up for it there. There are a lot of puts and takes here, but generally, I'd rather be in their position to have these choices around the world than to be stuck with, let's say a ton of manufacturing capacity in China and that being, let's say, I don't know, three-quarters of production, that would really hurt.

Dylan Lewis: Over to a different market, and a company that we haven't really checked in on too much up big. That's Pelton. Shares up 40% since the company reported earnings last week, and we missed them in the wider earning slate. There were a lot of companies to cover last week. I looked at the actual results here, Asit, and the company eked out top line growth, barely. First time they've done it since Q2 of 2022. I guess that's a reason to be excited, but that doesn't seem to me like 40% up excitement.

Asit Sharma: Yeah, Dylan. You and I were trying to piece together this partly the result of a short squeeze. People who had short positions trying to buy shares to cover their positions with a little bit of good news. I think there's some of that going on. I think also there's now a sense that the company's free cash flow picture is improving. The worst maybe over. They just refinanced quite a bit of debt. The maturities have gone out to 2029, which gives them a little bit of breathing space. Gross margin has improved. They closed their manufacturing plant a few quarters ago, pre core. Now that really heavy burden on the operating statement has just been lessened a bit. When you look at all this together, it seems like they're not going to go out of business tomorrow.

But I ask, is this still something that investors should jump into? This is a company that in every relevant metric is still trailing. I was just looking, they lost a little bit of their membership. This past quarter they've been bleeding out some members. So 6.4 million members total versus 6.6 in the just the previous sequential quarter, Dylan. Their average net monthly paid connect fitness subscription churn is still around 2%. There paid subscribers are still declining. While you've got an improving economic picture, what you've got here is still a company that's not grabbing its market, it's not growing. Last bit of this, which gives me pause is they still are working with two interim co-CEOs. They're on that CO search. I have been burned in the past by buying into turnaround stories before the new CEO comes on board and lays out his or her strategy. Sometimes it's the best. It's the stuff. Other times, I'm like, why did I increase my position size more than normal? Because I got attracted to this turnaround story. That's not going to fly.

Dylan Lewis: I can understand the attraction, though, Asit. It's so easy to look at a business, particularly one that has a subscription revenue approach that has A base of users. In their case, it's people with the hardware in their houses, but there is something there physically installed in the home. There is something very captivating about that. It reminds me a bit of that first round draft pick. That winds up not quite working out with their first team, but continues to find opportunities around the league because the promise was there, the potential was there. Somebody saw something in them. There's always that temptation for me when I look at a business like this. But I feel like until we start seeing the actual user numbers bottom out, and they are able to maintain A base and then build on top of that base, we have to look at this business with scepticism.

Asit Sharma: I think so, Dylan. There's also the draft pick whose, I don't know, something like seven, eighth, ninth in a year, who turns out to be the pick that everyone else. Years later is like, why did we look over this pick? They were so good. Just when you get in these turnaround situations, in some case, you almost want to buy Effitious. What if this [laughs] does really work out? They've got some interesting things going on under the hood. There's a secondary market for Pelton bikes now. Once the company sells a bike, Dylan, you hop on that bike and then you're all excited, and then you fizzle out after a couple of months. You put it on Craigslist or third party seller, I pick up the bike, I get it in my closet, and I start riding it every day. Guess what? They get an incremental subscription in many cases from me. I subscribe to the app.

They don't get any part of that sale from you to me, but they've picked up with no marketing costs at all, a new subscription. They point that out. They pointed out in recent calls. There are some fun things that are going on, but at the end of the day, these are tricky businesses to run where you've got the equipment part and the subscription part. I asked the same question. I asked when the last CEO came through. What are you going to be when you grow up? This is what the new CEO who comes in is going to have to decide, what is this company going to be? They almost always have to be stuck to the equipment model, because that's the brand to sell the subscriptions. How do you do that profitably? I still haven't figured out as an armchair quarterback how that's going to work, but maybe the incoming CEO will.

Dylan Lewis: Asit, it sounds like you're buying my hypothetical secondhand bike on Craigslist, but you are not buying the Pelton turnaround story quite yet.

Asit Sharma: Totally. I got to work off a little bit of this middle aged wait. I got some cash on the sidelines for maybe some more interesting ideas for myself right now. I'm able after all these years to separate the two, Dylan.

Dylan Lewis: [laughs] Asit, Sharma, thanks for joining me today.

Asit Sharma: Thanks for having me. This was so much fun.

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Dylan Lewis: Coming up. Self-driving Tech and EVs aren't just for cars. Dave Foulkes is the CEO of Brunswick, Marine recreation company and the owner of major boating brands, including Sea Ray. My colleague, Mary Long, cut up with folks for a conversation on Brunswick subscription service, the limits of Marine electrification and self-docking boats.

Mary Long: You all make boats, boat parts, and propulsion systems. You also, and I want to hit on this first because this is really how I got interested in you guys. You also own a subscription service. Tell us a bit about the Freedom Boat Club and how that came to be.

David Foulkes: Freedom Boat Club is a club a little bit like a golf club. It's a shared access participation model, if you like, which didn't exist to the extent that it does now in the marine industry. We actually acquired the business in 2019. It had been developed over a number of years, had about 170 locations at the time, mostly in the US. Over the last five years, we've developed it to about 410 locations worldwide. Now about 45 in Europe. We just opened the first ten clubs in Australia. But the bulker in North America, and it operates like a golf club. Essentially you have a joining fee, and then you pay monthly dues, and you join in a home location, which could be your city like Chicago or New York. You get access to a fleet of boats that you book on an app. But then you also have reciprocal access to any of the other locations worldwide. If you live in New York and you vacation in Florida or maybe you vacation in the Mediterranean, you can use the clubs in those local locations. It's proved extremely popular. We have more than 100,000 members now and it's very convenient. The boat is ready, clean, and ready to go when you arrive. When you finish, you just drop it off again. You don't need to put gas in it or clean it or anything like that. For people who are a bit more time-constrained, particularly people in metropolitan areas. It's proven to be a really exciting and convenient model for them to get into boating with.

Mary Long: The recurring revenue that comes from Freedom Boat Club is only a piece of the revenue of the whole company. But when we look at company sales across every segment over the past few years, they've declined between 2022 and 2023. A couple of weeks ago, you all reported earnings, and at that time, you lowered full year guidance to $5.2 billion. Boat sales around the US are also in a tough spot. So it's not just you guys. They peaked in 2021, around the pandemic, but have fallen to below 2018 levels since then. It makes sense that this is a cyclical industry that that sales would follow interest rates and more the macro environment. But still, how do you think about down cycles and how do you navigate the cyclical nature of a discretionary industry like this one?

David Foulkes: It certainly has a cyclical component to it, but we've very purposefully changed our portfolio of businesses. New boat sales directly only accounts for something like 20-25% of our revenues. The rest comes from propulsion, our system sales businesses, Freedom Boat Club, but notably our parts and accessories businesses. Essentially, that is aftermarket businesses, mainly generated by the use of our propulsion systems. Things like oils, fuel, lubricants, replacement parts, those things. We've grown that aftermarket portion of our business by about three times in the last 10 years. What that means is even though the new boat market can be cyclical, boating participation doesn't change that much. If you own a boat, you tend to use it. In the US, there are about 10 million registered recreational boats, and that number has stayed pretty constant for about the last 15 years. The more of our businesses that are exposed to people wanting to participate in boating, either using their own boat or using one of our Freedom boats, versus buying a new boat, which, as you mentioned, is more cyclical, the more resilient our business is to economic cycles. This year, in the second quarter, as you said, we did take down guidance for the year, but we also noted that about slightly more than 50% of our earnings is coming from those recurring revenue or annuity type businesses, like parts and accessories aftermarket, Freedom Boat club, those portions of our business. We're much more resilient through economic cycles than most other businesses in the leisure and recreation sector.

Mary Long: Listeners might not think of a company in the boating sector as being, I'll say a technological leader, but there's a lot of really cool tech projects that you guys are working on. We're at the Consumer Electronic Show at the start of the year, showcasing some of your newer technologies. Just one example of this is a Boston Whaler model with autonomous features. I think about autonomous driving boats don't often come to mind, but what does self-driving boating look like today?

David Foulkes: We have a strategy called ACES, which stands for autonomous, connected, electrified, and shared. I already talked about the shared portion, which is Freedom Boat Club, but we're active in autonomy and driver assistance, commonly called ADAS in the automotive world in making sure our products are connected and in electrifying a portion of our fleet as well. In terms of autonomous features, a lot of our new boats already come with station-keeping capability. In other words, they will hold a position if there's waves and wind and current, for example. They also come with autopilot-type features, and many are controlled with a joystick. Controlling a boat and having some assistance features is already very common. One of the difference is between autonomy in recreational marine and autonomy in automotive or Light-duty passenger vehicles is in Light-duty passenger vehicles, often, the idea is to detach the driver from the driving experience. You just want to get from A to B in your vehicle, and you'd like to do it as a driver with the least intervention possible, if you like. But in a recreational boat, part of the experience is operating the boat. We don't necessarily want to just detach the operator from the driving experience. What we do want to do is help them in some of the more stressful boating situations. Docking is often one of those. I don't know if you've ever experienced docking a large boat, but boats have a lot of momentum and there are waves and wind and there are often people watching. It's one of those experiences. When you get used to it, it's fine, but if you're a in the earlier stages of your boating journey, it can be a more stressful experience. We have demonstrated the ability to autonomously dock boats in a number of situations, in a number of different boat types and dock types, and we plan to introduce that as we complete development over the next year or so.

Mary Long: I'm glad you made this parallel and distinction between the self-driving technology in cars and self-driving technology in boats. One of the things that when it comes to cars, we've been promised these self driving cars for what feels like so many years, and that process keeps getting delayed. I'm sure that the process for developing this autonomous docking system was also one with many twists and turns. What did you at Brunswick learn throughout that process?

David Foulkes: We've learned a lot and we continue to learn. As you say, it's frequently what is referred to as the edge cases that catch you out if you like, those anomalous situations, unusual situations that you don't necessarily fully anticipate. You're right. The journey toward autonomy on road vehicles has been very long, and it's still far from complete, although a lot of progress has been made. But where they have made progress really is by limiting the number of situations in which you can activate or effectively use autonomy. For example, highway driving, those things. That is what we need to do and what we're doing as well is making sure that we only activate and operate autonomous features in a set of situations in which we're very confident in the outcomes. One of the ways that we can do that in boating is by not only using real environments to test the capability of our autonomous systems, but testing them in simulated environments. You don't necessarily want to put a real boat in every edge case of wind and rain and current and all those things in every variety of docking situations in real life. But you can put a digital version of the boat into a digital environment that has all of those edge cases in it and do a lot of testing to make sure that the system is robust to all of the reasonable environmental conditions that you can anticipate and also that you don't activate the system if it's outside of those boundaries.

Mary Long: I'm going to make another parallel between driving and boating. Let's talk about electric power. What's the state of marine electrification?

David Foulkes: Clearly, a lot of progress has been made with Light TT road vehicles with passenger vehicles and electrification. I think where the threshold was crossed was where the utility of the electric vehicle was in some way roughly equivalent to the classical internal combustion engine vehicle in terms of performance and range and overall features. Boats are a little bit more like aircraft than they are like road vehicles. They're very weight-sensitive. They require a lot of power to operate them, and they don't have brakes, for example, to regenerate energy. At the moment, electrification of recreational boats is limited to smaller boats, smaller power requirements, relatively smaller bodies of water, typically. We've introduced a range of five now electric outboard models, which can be used in a variety of boat applications, small fibreglass, small aluminium, or inflatable boats, that give you reasonable range and performance that you might need for a certain set of applications. The market for that at the moment is mainly in Europe, and it's mainly on restricted waterways.

There are a number of city centers in Europe and also smaller lakes that don't allow combustion engine craft on them anymore, and so people need to use electric power. That's a real market, and we're present in that market with really innovative, exciting new product. But when you get to more of the core of the boat market and certainly larger boats, the technology doesn't exist currently in terms of particularly the energy storage, the batteries, that are at the right power-to-weight ratio to allow you to have performance and range anything like equivalent to a conventionally powered vehicle. We certainly continue to work to increase the power of the electric product and reduce the cost. But currently, not with a current technology set. We don't see electrification advancing into the concern market.

Dylan Lewis: As always, people on the program may own stocks mentioned and the Motley Fool may have four more recommendations for or against. Don't buyer sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.