Despite its role as the world’s factory, Chinese car makers have historically never really established themselves internationally. However, the transition from ICE (internal combustion engine) vehicles to EVs (electric vehicles) is changing that.
Global EV sales and predicted sales
Source: Statista
Last year EV sales accounted for 25% of all new car sales in China and that total is forecast to reach 35% this year. Globally, EVs made up 14% of passenger car sales but that figure is expected to more than double by 2027. By 2030 and beyond, almost all new light vehicles sold internationally are likely to be EVs.
Barriers to entry that proved insurmountable for Chinese manufacturers of traditional ICEs included a lack of brand power, hugely complex manufacturing processes and supply line management. However, these obstacles don’t apply to making and selling EVs to anywhere near the same extent.
Traditional marques that have established and refined their brands, manufacturing processes and sales networks over decades are, with the transition to EVs, are losing their competitive advantage and IP moats.
Chinese EV marques, many of them heavily backed and awash with cash, are doing extremely well and not only in China. Brand weight, a huge factor in the ICE market, is proving less important to EV buyers, who are showing themselves more willing to give new, Chinese, marques a chance.
Over the first quarter of 2023 the EV sales numbers of BYD, China’s largest car maker, grew 2.5 times faster than Tesla’s. A year ago, Tesla delivered 310,048 electric cars in the first three months of 2022. That was 2.2 times more vehicles than BYD. By the first quarter of this year, the gap had been cut to Tesla selling 1.6x more units and many analysts expect the Chinese EV maker to surpass its U.S. rival on unit sales, if not revenues and profits, at some point over the next few years.
BYD sells most of its cars in China, where it has roughly twice the market share of Tesla. The two companies are not yet, however, competing in the same market segment. Teslas are considered a luxury EV marque and can cost twice as much as BYD models.
However, the two companies will come into direct competition when Tesla launches its planned new budget model. That’s expected to happen either late next year or in early 2025.
The transition from ICE to EV cars has offered a huge market opportunity to Chinese companies and they are showing a determination to grab it. That means it won’t be a surprise if, ten years from now, there are several Chinese marques among the most sold cars globally.
For investors, that could represent an opportunity to gain early exposure to the most prospective publicly listed Chinese makers of EVs on their way up. What looks like a changing of the guard is especially worth noting for investors in traditional auto manufacturers. They are likely to lose market share to new Chinese competitors who weren’t a major threat to ICE sales numbers.
Why are Chinese EV marques a real competitive threat to established car makers when ICE marques were not?
Chinese ICE car makers like Great Wall have mainly targeted the low-cost end of the market, attracting buyers for whom even lower-end models sold by the established international marques are out of reach.
Largest automobile markets worldwide in 2022, based on new car registrations(in million units)
Source: Statista
China is, however, the world’s largest car market with 23.24 new vehicles registered in 2022 compared to just 13.73 million in the USA, the next biggest market.
China is also the world’s largest manufacturer, which perhaps makes its failure to produce internationally competitive ICE marques somewhat surprising. But the mass manufacture of high or even mid-level ICE vehicles is a hugely complex process and China’s late arrival to the party meant it was never able to catch up.
By contrast, Chinese companies have been among the early pacesetters in the new market for EVs and there are said to be as many as 300 EV makers in the country already. Several have reached significant scale in their domestic market and are now pushing out internationally.
Data company Schmidt Automotive says Chinese EV marques such as those sold by startups Nio and Xpeng, Li Auto and Volvo-owner Geely’s Polestar accounted for 6.2% of EV sales in Western Europe last year. That share is expected to grow quickly with the consultancy company Gartner predicting Chinese marques will make up over 50% of global EV sales by 2026. BYD has announced plans to construct an EV factory in Europe, signalling its international ambitions.
Does China have a competitive advantage when it comes to EV cost efficiency?
If the established position of the biggest ICE carmakers put would-be Chinese competitors at a distinct disadvantage, can the opposite be said to be true for EVs? Some Chinese EV marques have already achieved significant manufacturing scale and its been built for EVs from the ground up.
Traditional car manufacturers, with supply and production lines set up for ICE vehicles, are struggling to make a profit on EVs. Analysts at wealth manager Bernstein calculate that swapping drive trains increases car manufacture costs by up to 50% for legacy marques, mostly because of the battery.
Even with government subsidies designed to encourage the sale of EVs, they are still much less profitable than equivalent ICE models. Chinese models, note Bernstein, are now “on par with global brands on range and efficiency, and yet less expensive”.
BYD sells its Atto 3 for €38,000 in Germany, which is 10% to 20% cheaper than Volkswagen’s ID.4 EV, despite the fact the former is imported and VW’s model is manufactured locally.
Carlos Tavares, CEO of Stellantis, which owns a range of marques including Peugeot, Alpha Romeo, Jeep, Chrysler and Maserati, is blunt about the challenge facing traditional car manufactures, stating directly “to fight the Chinese, we will have to have comparable cost structures.”
His answer is greater protectionism in the form of tariffs but his company doesn’t sell many cars in China. Many of Stellantis’s competitors like Germany’s BMW and Mercedes-Benz rely on the Chinese market for their profitability and any tariffs imposed on the sale of Chinese EVs in Europe or the USA are likely to be reciprocated. That would be devastating for many European and American marques.
The biggest EV makers have seen valuations plunge
One major plus for investors eyeing exposure to the quickly growing EV market is that the valuations of pure-play EV companies have crashed in recent months, making them look much better value.
Many were grossly overvalued during the market melt-up in 2021 with U.S. EV company Rivian valued at nearly $130 billion when it went public through a SPAC (special purpose acquisition company) merger two years ago. It’s now worth $12.3 billion.
Nio, the Chinese EV maker which has a primary listing on the NYSE as well as secondary listings in Hong Kong and Singapore was valued at a peak of $97 billion and is now worth $13.35 billion. Xpeng, which also has dual listings on the NYSE and Hong Kong exchanges is worth around a seventh of its 2020 peak and has lost 60% of its market capitalisation in the last year.
Chinese EV stocks to monitor
There’s a growing argument that while the market meltup hugely overvalued many EV makers based on intangible and risky future potential, they have now been oversold and represent a bargain. Chinese EV companies look especially good value with BYD’s forward-looking p/e coming in at x12.5 compared to Tesla’s near x29.
BYD
Of the Chinese EV marques, BYD has the biggest scale advantage with the $103 billion-valued company delivering 1.87 million vehicles last year. The Shenzhen and Hong Kong-listed company’s valuation hasn’t dropped like Chinese peers with U.S. listings but it also wasn’t overvalued in the same way.
BYD may well overtake Tesla on unit sales in the not-too-distant future and like its U.S. rival it is focused on integration driving efficiencies, manufacturing its own batteries and many of the electronic parts used in its vehicles.
Warren Buffet’s Berkshire Hathaway saw BYD’s potential early and is a major investor.
Geely
Geely is a slightly different Chinese EV maker in that it also has significant exposure to the legacy ICE market, both domestically and through its ownership of established international marques Volvo Car and Polestar and stakes in Aston Martin, Proton and Lotus.
However, it sells a lot of EVs in China and can be expected to be revalued as an EV company as more and more of its revenues are generated by them. That represents a potentially significant opportunity with a current p/e of around just 9 based on 2025 sales forecasts. Geely is listed on the Hong Kong Stock Exchange at a current valuation of $12.16 billion.
Li Auto
Despite the fact it is a fresh-faced start-up, the fact Li Auto is a pure EV play reflects in its much higher valuation, $305 billion, than the more established Geely. Established in 2015, Li has arguably the highest risk profile of the three companies but also potentially the most significant upside.
The company has been compared to a young Tesla and is focused on the electric SUV niche, selling larger family-style vehicles. The startup’s strategy is to pursue the development of e-SUVs that offer higher value at a lower price point than rivals and many analysts believe it is well-placed to dominate its chosen niche.
The company currently trades at a valuation of x25 2025 sales forecasts. While that’s not cheap, there will be considerable upside if the startup’s niche focus pays off.