Chinese market shake-out is separating the EV wheat from the EV chaff
China’s EV market is heavily oversupplied, a sign for major players like Tesla that a steep, competitive road lies ahead.
China is way ahead of the US in electric vehicle adoption. For Chinese EV producers that’s a double-edged sword – the market is far larger than it is for American EV producers but competition is much hotter.
Now after years of growth, the Chinese EV market is oversupplied. The current state of the Chinese EV market offers US investors a look into what might happen down the road – and how market developments in the US will impact Tesla.
Roughly 4.7 million all-electric vehicles were produced in China in 2022, up from about 2.6 million produced in 2021.
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Battery-electric vehicles account for roughly 17 per cent of total car production in the country, up from about 10 per cent a year earlier.
The US battery-electric vehicle market is a fraction of China’s size. About 810,000 all-battery electric vehicles were sold in the US in 2022, up from about 488,000 sold in 2021. Battery-EV sales accounted for about 6 per cent of total light-vehicle sales in the US this past year.
A smaller US market hasn’t hurt Tesla at home though. Elon Musk’s EV company captured roughly 65 per cent of the market in 2022.
China is a different story. There are hundreds of EV models available at a wide range of prices. This past year, Tesla sold about 440,000 EVs in China, capturing roughly 10 per cent of the market. Today, China’s EV market is still growing, but more slowly. Battery-EV sales are up about 6 per cent in the first two months of the year. That’s a problem for EV makers. They have too much capacity and slowing sales has prompted price cuts from a host of companies. It also has Chinese auto analysts sounding more like traditional car analysts, who follow pricing, inventory and production levels when evaluating automakers such as General Motors.
“We reckon simultaneous ICE and NEV inventory destocking of mid- and low-end priced products could pose a potential margin shock for all auto brands,” wrote Citi analyst Jeff Chung in a recent research report. He believes automakers have to cut production, and prices, to clear out an inventory glut. (ICE is short for internal combustion engine. NEV is short for new energy vehicles).
That sounds like bad news for Tesla. It certainly has its impacts. Tesla cut Chinese prices in January. And Wall Street’s 2023 earnings estimates for Tesla have fallen from roughly $US5.50 a share to $US4 a share over the past three months.
There has been a silver lining though. The discounting and market turmoil seem to be benefiting lower cost producers. Market share for Tesla and BYD is trending up, averaging almost 45 per cent of the battery-EV market in recent months, up from about 30 per cent during the same span a year ago.
The combined share for NIO, XPeng and Li Auto in 2023 is now below 10 per cent, down from roughly 11 per cent a year ago. NIO, XPeng and Li aren’t consistently profitable yet. BYD and Tesla are.
The Chinese market shake-out is separating the EV wheat from the EV chaff. The Chinese dynamic is what US auto investors will have to deal with as EV capacity grows and EV models proliferate in America.
There were fewer than 20 all-electric car models on sale in the US in 2019. There were more than 40 in 2022. More are arriving in 2023 including Tesla’s Cybertruck.
Tesla’s market share will fall in the US, but if the Chinese experience is a guide, Tesla will be a winner as long as it’s a low-cost producer of EVs.
For now, Tesla is a cost leader. It’s operating profit margin in 2022 was almost 17 per cent, where margins at GM and Ford Motor came in at about 9 per cent and 7 per cent, respectively.
Cars get cheaper as key costs fall Cheaper cars as costs fall
The cost to buy an electric vehicle is beginning to come down, making EVs more accessible than ever, but what does this mean automotive brands?
Can battery metals be sourced sustainably?
What are the environmental costs behind sourcing the metals for the batteries that power our electric vehicles?