Analysts Get Cautious on Chinese EV Stocks Amid the Price War
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Wall Street analysts are getting cautious about Chinese EV stocks amid the intensifying price war and the feared slowdown in sales growth. Chinese EV stocks were mixed last year and while names like Li Auto and Xpeng Motors closed in the green last year, they fell sharply from their highs.
In its report earlier this month, Bernstein said, “We expect competition within the domestic market to remain intense and put pressure on pricing and profitability.”
It added, “Competitive landscape will be more challenging, and pricing pressure to ensue. Although EV demand is set to remain resilient, the industry will confront three major challenges on the supply side: overcapacity, new model launches and the rise of new tech entrants such as Huawei and Xiaomi, which point to growing competition.”
Notably, there has been an intense price war in the Chinese EV industry for over a year now. Last year, The China Association of Auto Manufacturers (CAAM) tried to bring about a truce in the price war.
China EV price war
A total of 16 automakers including Tesla signed the pledge at an industry conference in Shanghai which stated they “take on the heavy responsibility of maintaining steady growth, strengthening confidence and preventing risks.”
However, the truce failed and shortly CAAM said that the EV price war agreement violated China’s antitrust law and it would retract the pledge. To be sure, the fate of the deal looked in limbo as just a day after the pledge, Tesla announced a $500 referral bonus which is tantamount to discounts.
The EV war in China began in Q4 2022 when Tesla lowered car prices. The EV giant’s price cuts were followed by similar announcements from other carmakers including Xpeng Motors, Ford, Toyota, and Nissan.
Last year, even NIO lowered car prices. Previously the company had categorically said that it wouldn’t join the price war.
The price war has taken a toll on margins
The price war was taking a toll on the earnings of startup Chinese EV companies most of which are anyways posting losses. NIO’s gross margins fell to a mere 1% in Q2 and Xpeng Motors posted negative gross margins in Q2 as well as Q3. Tesla’s operating margins also fell to 8% in the third quarter of 2023 which are less than half of their peak. That said, the company’s margins are still among the highest in the industry.
Key takeaways from Chinese EV companies’ 2023 deliveries
Last year, Chinese EV giant BYD delivered 3.01 million vehicles as compared to Tesla’s nearly 1.8 million deliveries. While BYD took over the title of the biggest new energy vehicle (NEV) seller from Tesla in 2022 only, in Q4 it also became the biggest seller of battery electric vehicles. BYD delivered 525,409 electric cars in Q4 while Tesla delivered 484,507.
Looking at other Chinese EV companies, NIO delivered 18,012 vehicles in December which was 13.9% higher YoY. During Q4 2023, the company’s EV deliveries rose 25% to 50,045 vehicles. In the full year, the company’s deliveries rose 30.7% to 160,038.
Xpeng Motors delivered 20,115 cars in December which was 78% higher YoY and a new record for the Chinese EV company. While Xpeng Motors’ deliveries were below par in the first half of the year, they bounced back subsequently and in Q4 it delivered 60,158 vehicles which was 171% higher YoY.
Its full-year deliveries rose 17% YoY to 141,601 and its cumulative deliveries stand at 400,311 units at the end of 2023.
Li Auto’s deliveries rise to a record high in 2023
Li Auto delivered 50,353 vehicles in December which was 137% higher as compared to the corresponding month last year. Its deliveries rose 185% YoY to 131,805 in the fourth quarter. In the full year, the Chinese EV company delivered 376,030 vehicles which is 182% higher than 2022.
Li Auto’s cumulative deliveries at the end of 2023 are 633,364 and it became the first emerging Chinese EV company to hit a milestone of surpassing 600,000 cumulative deliveries.
Elon Musk on Chinese EV companies
On multiple occasions, Tesla’s CEO Elon Musk has praised China’s manufacturing ecosystem and EV companies.
In May last year, Musk termed China-based EV maker BYD “highly competitive.” In 2011, the billionaire had laughed at the possibility of BYD as a competitor to Tesla.
During Tesla’s Q4 2022 earnings call in January 2023, Musk said, “we have a lot of respect for the car companies in China. They are the most competitive in the world. That is our experience.”
He added, “They work the hardest and they work the smartest. And so, if I were to guess, probably some company out of China is the most likely to be second to Tesla.”
Previously also the billionaire praised Chinese workers for burning the 3 a.m. oil” while criticizing American workers for “trying to avoid going to work at all.”
Ford’s CEO Jim Farley also echoed similar views and said during the Q4 2022 earnings call and said: “I don’t think you can be globally successful in the EV business if you don’t compete with the Chinese.”
Fitch expects consolidation in the Chinese EV industry
Meanwhile, Morgan Stanley is cautious about Chinese EV stocks in 2024 and said in its note, “Investors remain cautious as China’s auto market has had a volatile start to the year as competition and macro uncertainties persist.”
In its report last November, Fitch Ratings said, “We expect the market to consolidate as a result, with smaller niche EV producers that require capital for development to merge with or be acquired by stronger market participants.”
