A Closer Look at China’s Changing EV Landscape

The once-flourishing electric vehicle (EV) market in China has hit a speed bump. While government incentives fueled years of unprecedented growth, a faltering economy is now prompting consumers to rein in spending. The world’s largest EV market is now facing a demand slowdown.

As the sales surge ebbs, the nation’s homegrown EV makers like NIO Inc. NIO and Li Auto LI are downwardly revising their sales forecasts and focusing on expanding overseas. EV leader Tesla TSLA, which commands a significant share in China’s EV market, is curtailing its production plans in the country. Various foreign auto giants, including Nissan NSANY and Honda HMC, are also adjusting their production capacities in China.

From Subsidy-Driven Surge to Market Slowdown

Over the past decade, the Chinese government has been a driving force behind the EV industry, offering generous subsidies, tax incentives and favorable license-plate policies for buyers. This subsidy-driven initiative propelled China to the forefront of EV sales, surpassing both Europe and the United States combined and sparked a wave of investment in homegrown automakers. With other lucrative sectors facing government crackdowns, EV startups became a safe haven for Internet giants, smartphone makers, and even property developers venturing into the automotive market.

However, a slowdown in the Chinese market ensued as subsidies were reduced and consumers tightened their spending. Consequently, the growth rate of EV sales declined, along with the number of registered EV makers. While EV sales surged 36% in 2023, it was a significant drop from the 96% growth seen in 2022 as the government had ceased offering purchase subsidies at the end of 2022.

China’s electrified car market is forecast to experience a second consecutive year of slowdown, with a key industry body predicting sales growth of 25% in 2024. Also, from a peak of 486 registered EV makers in 2019, the number plummeted to approximately 100 in 2023.

Price War & Financial Woes Escalate

Amid a slowdown in China’s EV market, a fierce price war erupted, involving numerous startups and foreign players like Tesla. Carmakers are aggressively slashing prices to vie for market share. Since February, China’s top-selling brand EV company, BYD, has significantly reduced prices across its models, including the introduction of a hybrid plug-in at 79,800 yuan ($11,112), highlighting the cost advantage of batteries over engines. More than 10 other EV brands followed suit with price reductions. Tesla also offered fresh discounts. This intense price war is further squeezing the margins of EV companies.

Many Chinese EV startups are facing financial challenges and struggling to turn profits. Startups like HiPhi, WM Motor and Aiways have depleted funds. Some like Levdeo and Singulato Motors, have filed for bankruptcy. Consulting firm AlixPartners predicts only 25-30 out of more than 160 Chinese EV brands to remain financially viable by 2030. Last December, William Li — the founder of NIO —predicted that carmakers in China would face “the most intense competition” in the next two years.

Frequent price cuts have left many EV owners frustrated due to fast depreciation. Some owners are witnessing the value of their vehicles decline within weeks or months of purchase. With several EV companies facing financial crises and on the brink of collapse, many buyers don’t even have access to after-sales and software maintenance services.

How Are Automakers Responding?

Amid sluggish sales, EV behemoth Tesla has cut production of its Model Y SUV and Model 3 sedan at its China plant. Starting this month, employees have been asked to work five days a week instead of 6 1/2, with no clear indication of when production will return to normal.

Last week, Li Auto revised its outlook for first-quarter 2024 deliveries due to lower-than-expected order intake. It now estimates deliveries in the range of 76,000-78,000 units, down from the previous guidance of 100,000-103,000 units.

LI currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Li Auto’s peer NIO followed suit yesterday amid slowing demand. The company now expects to deliver around 30,000 units, down from 31,000-33,000 guided earlier. NIO had delivered 31,041 units in the first quarter of 2023.

Japanese automakers Nissan and Honda are scaling back their EV plans in China due to intense competition and pricing pressures from local rivals. Nissan intends to reduce its vehicle production capacity by up to 30%, equivalent to 500,000 cars annually, from its current capacity of 1.6 million cars per year across eight factories. In 2023, Nissan’s output in China plummeted by 24% year on year to 793,000 vehicles, marking the first time in 14 years that it fell below the 1 million mark.

Similarly, Honda aims to decrease its capacity by 20% to around 1.2 million vehicles annually, engaging in talks with local partners and informing major suppliers of impending production cuts. With a total capacity of 1.49 million cars per year through joint ventures with GAC Group and Dongfeng Motor Group, Honda’s move underscores the challenges Japanese automakers face in the fiercely competitive Chinese EV market.

The EV price war initiated by Tesla last year in response to declining regional demand has significantly impacted the profit margins of domestic EV companies in China. As such, companies like NIO, LI, XPeng and BYD are exploring opportunities in overseas markets, where they can command higher prices compared to the saturated domestic market. Recognizing the overcapacity and underutilization of factories, the Chinese government is encouraging automakers to expand globally and enter into partnerships with foreign entities.

BYD has ambitious plans to boost overseas sales, including establishing factories in Uzbekistan, Thailand, Brazil, Hungary, and potentially Mexico for exports to the United States. XPeng has already established dealer partnerships in several countries like the UAE, Egypt, Azerbaijan, Jordan and Lebanon and plans to expand to European markets like Germany, the UK, Italy and France this year. Li Auto aims to enter the Middle Eastern market in 2024, while Nio is considering establishing a dealer network in Europe. However, Chinese automakers face scrutiny from European investigators regarding the fairness of state subsidies for their cheaper EVs.

Parting Thoughts

The evolving landscape of China’s EV market, marked by a slowdown and competitive pressure, underscores a pivotal moment for the industry. As the initial surge fueled by generous subsidies and robust economic growth tapers off, both domestic and international automakers are forced to adapt.The industry is witnessing a price war, which is straining profit margins and pushing some startups toward financial instability. This challenging phase could shape the future of the global EV industry, emphasizing the need for a balance between innovation, market dynamics and government support.

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