Battering their way ahead

August was another seismic month for retail sales of electric vehicles (EVs) in China, which jumped to 529,446 cars, up 112% year-on-year, as reported in the latest edition of HSBC’s China EV Tracker.

The large majority of sales were of vehicles powered solely by an electric battery, with a lesser contribution from hybrid cars with electric motors but also a back-up petrol engine.

Have we passed the inflection point in the wider market at which electric vehicles start to become a default choice for consumers? Many commentators think so, adding forecasts that more EVs will be sold to Chinese drivers this year than the rest of the world combined. Well over a quarter of the cars sold in China in August were classified as electric vehicles, reaching a new record of 28.3% of the market, adds Yuqian Ding, head of China autos research at HSBC Qianhai Securities.

What’s more, demand is set to deepen as we head into the October-to-December peak for purchases, with supply chains restocking in preparation for a bumper season.

For comparison: the US crossed a threshold in which EVs accounted for 5% of new car sales at the turn of this year – a milestone that China reached in 2018.

What’s clearer is that buyers are choosing domestic brands over international ones – with one major exception in Tesla.

In fact local drivers have been opting for Chinese brands in about eight of every 10 purchases so far this year, according to data from the China Passenger Car Association, with international giants like Volkswagen and BMW only featuring a long way down the rankings.

“Legacy automakers have barely any competitiveness in their electrified products,” Yale Zhang, managing director at Shanghai-based consultancy Autoforesight, explained to Bloomberg this month. “Their cars lack range, have outdated designs, lag behind in intelligent services such as autonomous driving, and are overpriced.”

The sales leader is BYD, with five of the top 10 bestsellers in August. It continues to deliver strong monthly volumes across a wider range of models. A decision to stop the production of gas-fuelled only vehicles since March is paying dividends in allowing it to focus on EVs. With sales of hundreds of thousands of cars every month, there’s also the prospect of economies of scale, bringing improved margins.

BYD’s share price – which soared last year – hasn’t reflected as much of this success as its bosses would have hoped, however, because a sell down by key investor Berkshire Hathaway has been spooking investors.

In second place in sales terms is Tesla, the only foreign automaker to feature near the summit of the tally. Its market share has actually been falling substantially on previous quarters but its absolute sales numbers are increasing, especially as it recovers from a difficult April and May in which commercial activity was heavily constrained by Covid restrictions in Shanghai, its production hub in China.

Since June the situation has improved markedly and Tesla has invested in a ramp-up of output at its Gigafactory in the city, which also makes cars for the European market, to production levels approaching 3,000 cars a day.

The upswing is contributing to reduced waiting times for deliveries of new orders in China, a situation that Elon Musk described as “annoying” for customers during the company’s second-quarter earnings call.

“It’d be like going to a restaurant and you order a burger and you have to wait three hours …” he complained at the time. “You want to get your burger right away. Same with the car. So we want that lead times to reduce.”

Wait times have now dropped significantly to a maximum of 10 weeks in China, and much less for some models, from peaks of double that a month ago, Reuters has reported. Tesla is also rethinking some of its sales strategy, the news agency added, including a plan for more showrooms in city suburbs, away from its flagship locations in the major cities.

The company responded to the reports, saying that it is growing its sales channels at a normal pace in China, without a major change of direction. However, insiders have speculated that Elon Musk’s firm might open more stores in suburban locations that double up as service centres for existing customers, following complaints that Tesla isn’t doing enough in after-sales support.

Tesla has often been a target of customer frustration including one of the more publicised cases last year, when an unhappy driver jumped onto the roof of her car to protest against Tesla’s handling of her complaints about malfunctioning brakes.

The company subsequently apologised for not addressing consumer concerns quickly enough and pledged to review its service operations.

In choosing to bolster its network of service centres Tesla would also be responding to challenges from local brands like NIO, which has tried to make a name for itself for its own service and support levels. Like Tesla, NIO has a network of high-profile outlets in Chinese cities but it has also invested heavily in door-to-door handling of servicing, with staff that pick up cars for repairs and return them to customers when work is complete.

Efforts like these are a bid to stand out from competitors, albeit in a marketplace where sales are surging. Companies that profit will position themselves clearly in a crowded field, with an offering that targets specific groups of customers.

Hozon has had success in selling cheaper sedans to price-sensitive customers in smaller cities and rural areas, for instance, while premium-positioned XPENG is giving more focus to advanced features in autonomous driving that help customers to change lanes or exit highways.

NIO has also been building out a network of battery-swapping stations to help buyers who lack access to chargers in their residential complexes. Instead, drivers arrive at one of the swap stations and exchange their depleted batteries for fully charged ones in a matter of minutes.

Its share price has faltered this year, with the company reporting net losses of Rmb2.7 billion in the second quarter, more than triple the deficit over the same period last year, largely because of Covid-related disruption in supply chains and rising battery costs.

But Yuqian Ding at HSBC thinks better times are ahead as the company taps into its premium positioning with the launch of the ET5, a medium-sized sedan with mid-market pricing, and the ES7, a mid-to-large sized SUV and the first model of its kind to be equipped with the company’s new intelligent driving technology.

“We reckon ET5 will be NIO’s new volume driver given its lower price range, and ES7 will further enhance NIO’s intelligent driving features with higher margin opportunities given the dedicated platform has generally better cost-control capabilities,” she adds.

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