China’s EV industry braced for shakeout as prices plunge

Amy Liu is unsure whether she should trade in her five-year-old electric sport utility vehicle for a newer model with a longer range or wait a bit longer.

“If I place an order now, I’m afraid the price might drop next month,” said the property agent in Shenzhen.

Automakers in China’s highly competitive market for new energy vehicles (NEVs), which include all-electric and hybrid models, have been aggressively cutting prices since late last year as demand softened and the government cut back on subsidies.

Local players in the world’s largest EV market have sounded the alarm, projecting that the number of electric-car makers in China will shrink from about 200 to between five and 10 in the coming years. The shake-up is compounded by competition from foreign automakers. Volkswagen, BMW and Nissan all plan to introduce new electric models for China, where local EV makers account for nine out of the top 10 by sales.

Encouraged by government policies aimed at bolstering the emerging industry, about two-thirds of China’s existing EV makers were registered between 2018 and 2020. Nio, Xpeng and Li Auto are among the poster boys competing against Tesla of the US in the medium and premium segments. Others include domestic leader BYD, as well as subsidiaries of state-controlled automakers and independent brands.

Drivers in China have embraced electrics — more than a quarter of all cars sold last year were NEVs — but experts say only EV makers with economies of scale and enough financial firepower will remain standing in the years ahead.

“Those without a deep-pocketed parent company will be under the largest pressure, especially those that haven’t got access to the equity market,” Jing Yang, a Shanghai-based director at Fitch Ratings, told Nikkei Asia. “For independent EV makers, we still think their brand positioning and cost structure will make the key difference.”

Some are already feeling the heat.

Zhejiang Leapmotor Technology is one of the EV start-ups to go public recently. In the past four years, Leapmotor logged consecutive net losses that widened to Rmb5.1bn ($734mn) in 2022, largely due to higher selling expenses.

“We will try to achieve a balance between sales volume and gross profit,” chief executive Zhu Jiangming told local media in March. “We will prioritise winning market share.”

Hong Kong-listed Leapmotor sold 111,168 vehicles in 2022, a 154.1 per cent yearly growth. By comparison, Tesla delivered 711,000 vehicles in the same period. Leapmotor last month reduced the price of its flagship sedan C01 by a fifth to match rivals.

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The price war extends to the lower segment. Ballet Cat, an electric hatchback that resembles the Volkswagen Beetle, now sells for as little as Rmb149,800 after a discount of about Rmb50,000 to meet the “market reality”, a promoter said. The model is made under the Ora brand, one of several EV marques under state-owned Great Wall Motor, itself better known for making pick-up trucks.

Ora sold 103,996 vehicles in 2022, a 23 per cent dip.

China’s total new-car sales grew just 2 per cent last year, while NEV sales rose 93 per cent to 6.88mn units, or 27 per cent of all cars sold, as buyers rushed to capitalise on a deadline for EV subsidies that year.

Partly driven by a drop in the cost of raw materials for batteries, Tesla began slashing prices in October. Other EV players soon followed suit, and makers of traditional petrol-powered vehicles joined the fray as they tried to clear inventory ahead of new emission standards in China that will come into effect on July 1.

“These moves have led to a wait-and-see sentiment and have not helped in increasing vehicle sales,” said Phate Zhang, founder of the China auto news outlet CnEVPost. Total vehicle sales contracted 6.7 per cent in the first three months this year, while NEV sales grew 26 per cent, compared with 138 per cent in the same period last year.

Even established EV start-ups are alarmed by the intensifying competition.

“The elimination of players in the auto industry has just begun,” He Xiaopeng, chief executive of Xpeng, said on April 16. “Players with an annual sales of 3mn units will qualify . . . and only eight mainstream players will remain in the next 10 years.”

Xpeng, which is listed in New York and Hong Kong, delivered 120,757 vehicles in 2022.

A more consolidated EV industry would apparently suit Beijing just fine. The government warned in 2021 of the danger of having “too many players and [being] too scattered” and stressed the need to create “big and strong” EV players.

But there have been few mergers and acquisitions in the industry, though some start-ups have thrown in the towel, such as Byton, which suspended operations in China in 2020. Nio was kept afloat after securing a $1.4bn lifeline from the Anhui provincial government in 2020.

“It is the Chinese culture where entrepreneurs try to maintain the independence of their business rather than merging with other companies when they are in trouble,” said CnEVPost’s Zhang.

The price war is not going away anytime soon, analysts say, even as the Chinese economy rebounded from three years of zero-Covid policy with a 4.5 per cent yearly expansion in the first quarter. That growth was driven by consumption, markedly in the services sector, and infrastructure spending.

“We are still concerned because under such a fierce competitive environment, some leading players and emerging brands backed by large auto groups may opt to price their products more aggressively to gain market share,” said Fitch’s Yang.

Demand was strong for plug-in hybrid vehicles based on first-quarter data, Yang added, and that would benefit players with such line-ups, including state-owned auto groups.

For potential buyers such as Liu, however, the challenges facing the market could spell bigger savings.

“I will wait it out for the best deal,” said Liu, whose existing car has lost two-thirds of its value.

A version of this article was first published by Nikkei Asia on May 5 2023. It was subsequently amended to correct the sales growth of Leapmotor and the unit sales of Ora. ©2023 Nikkei Inc. All rights reserved.

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