Auto Industry

Electrifying prospect

Investment pours into China’s EV sector at an accelerating pace

Tesla-w

From this month Tesla’s Model Y has been made locally in Shanghai

Companies in China have been urging their employees not to travel during the Chinese New Year for fear of spreading Covid-19 (see WiC524). One firm has a greater need than most to encourage its staff to stay put: Contemporary Amperex Technologies (CATL).

The world’s biggest battery cell manufacturer is having a hard time growing production quickly enough to meet new demand for electric vehicles (EVs). Under pressure to meet targets, CATL has been trying to keep employees in place over the holiday period, financial news portal JRJ.com reports. It has also announced a Rmb39 billion ($6 billion) plan to boost battery output by 130 GWh at three plants in Fujian, Jiangsu and Sichuan provinces. That comes on top of an even bigger slug of extra output planned through the construction of another six factories (five in China and one in Germany).

Demand for batteries is building in markets like the US, which lag behind the rest of the world on manufacturing capacity. Other parts of the supply chain are running into bottlenecks as well, with carmakers including Daimler, Honda, Renault and General Motors all warning that they are heading for production cuts because they don’t have enough of the semiconductor chips needed to power the new generation of cars.

Some of the shortages have been blamed on the former Trump administration’s action against Chinese chip factories, which has prompted other semiconductor firms to shift replacement sales to sectors where order volumes are higher, such as consumer electronics. The car sector was also overly conservative in its sales forecasts when plants closed down in the early stages of the pandemic. Business rebounded better than anticipated when economies started to reopen, with sales buoyed both by stimulus packages and new car buyers who want to avoid public transport.

While China’s overall car sales declined 1.9% last year to 25.3 million (compared to an 8.2% reduction in 2019), sales of electric vehicles surged 10.9% to 1.4 million units, according to the China Association of Automotive Manufacturers (CAAM). It is predicting that 2021 is likely to be better still, with an increase in total sales to 1.8 million electric cars by the end of the year.

So is the market closer to a tipping point in which EVs dramatically displace cars of the traditional ICE variety (internal combustion engines)? General Motors seems to be signalling so in its choice of Canadian author Malcolm Gladwell – the man who made ‘Tipping Point’ the title of a bestselling business book – as a spokesperson for its EV range. “Change: you can either resist it, be left behind, or embrace it – move forwards,” he urges in GM’s new ad campaign.

It’s the Chinese marketplace that is changing fastest, with its manufacturers accounting for almost half of global EV deliveries. Carmakers expect that trend to continue, based on government targets that a quarter of new cars sold in the country should be electric by 2025, up from about 5% at present.

The question then becomes who is going to grab the spoils as the sector transforms. In terms of the manufacturers, what’s notable is that two cars at opposite ends of the spectrum sped out ahead in last year’s rankings. Tesla topped the sales charts in China for the year overall after Elon Musk’s firm started to churn out domestically-produced Model 3s last January. However, the top spot in sales for the last five months of the year went to the Wuling HongGuang Mini EV, a micro ‘city car’ made by SAIC’s joint venture with GM, that retails for just Rmb28,800 ($4,400).

Aside from rock-bottom prices, micro EVs appeal to customers as city run-arounds. Shorter driving ranges are less of a concern to their owners and the cars can be charged from home, which is important when charging infrastructure is still in its infancy in many towns and cities. Millions of Chinese already own smaller two or three-wheeler means of transport – often electric-powered bikes and mopeds – making the micro EVs an easier sales proposition than in other markets. They account for about 40% of sales and some commentators think the proportion could grow in the short term as larger models lose their sales subsidies from local governments.

At the premium end of the market the race is still on to emulate Tesla, however. New York-listed Chinese carmakers NIO, XPENG and Li Auto all have aspirations to overtake Musk’s pioneering brand in China – by choosing to outsource production rather than invest billions in plants of their own.

Instead they have deployed more of their capital in the end-consumer experience in areas like car finance and insurance, maintenance, servicing and battery swaps.

NIO has been one of the busiest of the EV brands in the capital markets, raising $2.6 billion from a follow-on equity offering and $1.3 billion from a convertible bond in the past two months alone, taking advantage of investor excitement which has been surging. A year ago NIO was trading around $5 a share and struggling to survive. Today its shares are priced around $58 on an impressive forward EV/revenue ratio of 25 times, according to S&P Global Market Intelligence data.

Talk of bubbles abound yet intense investor interest has helped some of the players to plot a path to profitability. In NIO’s case, its forthcoming ET7 sedan is being flagged as the newest of the “Tesla killers”.

The new sedan isn’t due for commercial launch until early next year but NIO claims that its battery, with an extended reach of up to 1,000km, offers a greater range than Tesla’s Model Y (which as of this month began being produced at Musk’s Shanghai Gigafactory – alongside the Model X).

Geely, the Hangzhou-based carmaker, has been another of the busiest in the sector, pumping out announcements on almost a daily basis. EVs accounted for less than 2% of its sales last year but it has plans to scale up quickly. Last week it was promoting a new partnership with Tencent to develop smart-vehicle technologies, including autonomous driving software. The week before it announced something that sounded similar with Baidu (see WiC524), in a hedging of bets that’s reminiscent of the way that foreign car firms struck multiple joint ventures with local partners when they first came to China in the 1980s and 1990s.

At the heart of Geely’s strategy is its Sustainable Experience Architecture (SEA), an open-source platform that puts much of the meat into another joint venture just announced with Foxconn. Geely is trying to position its SEA offering across the wider EV manufacturing chain (while additionally also producing its own brands). The claim is that electric vehicles have simpler architecture than traditional cars, so modular assembly should also be more straightforward. Of course, contract assembly is its partner Foxconn’s speciality. It hopes to mirror its successes in putting together iPhones with a bold diversification into the EV sector.

Foxconn’s flirtation with Geely puts another of its tie-ups – with Byton, a start-up – into focus. At the beginning of January the two firms announced that Foxconn would bring its operational expertise to bear in delivering Byton’s first model, the M-Byte by early 2022. The deal was a lifeline for Byton, which was reported to be on the verge of bankruptcy last year (see WiC503). It could also provide Foxconn with more of the manufacturing experience it needs to hook much bigger customers, including its largest client Apple.

As we reported in WiC524, the US tech giant is accelerating its own plans to launch its first car.

The pace at which share prices for firms like NIO and Tesla have soared has put off some investors. Some are looking instead at companies trading on lesser multiples in other parts of the supply chain.

The choice is extensive: not just the EV brands and the auto manufacturers but the newer breed of contract assemblers, the battery firms; plus the software developers and the semiconductor makers.

In the short term, some investors will be hunting for bottlenecks in the supply of particular parts or services, sensing a chance to cash in on a run-up in prices. But over the longer term the winners will be those who set the terms on industry standards or react the fastest to sector-wide changes.

Higher-performance semiconductors will be much in demand for superfast charging, for instance, while the best of the battery makers will benefit from pushing out driving ranges and driving down unit costs on higher-volume production. Another game-changer is the arrival of fully autonomous driving, which will supercharge the software systems that perform best in supporting it.

In the meantime investor excitement in EVs shows no sign of subsiding. BYD raised nearly $3.5 billion a week ago by selling an 11% block of new stock in its Hong Kong-listed shares. The placement came after a 500% rally in its stock price since the start of 2020.

Shares in Evergrande’s Hong Kong-listed electric vehicle offshoot also surged more than 67% on Monday after it said it had raised $3.35 billion from six investors to fund its plan to become “the world’s largest EV maker”.

Evergrande is a property giant (and one that has been struggling financially; see WiC518) and it’s not immediately clear how it is going to emerge as a top-tier competitor against more established players in the EV sector. Caixin, a business magazine, sounded another word of caution last month in pointing out that Evergrande is yet to get any of its cars into large-scale production.

All the same, news of the fundraising saw shares in the Evergrande subsidiary race past Ford in market capitalisation (reaching $51 billion on Monday versus Ford’s $45.8 billion, according to the Financial Times). That meant its fledgling EV business was also bigger in market value terms than its parent firm, a real estate-focused unit valued at $28.8 billion.

Evergrande Auto also sounded confident about its prospects, with promises of six models ranging from sedans to crossovers by September.


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