Why China's electric car boom is losing money | DW Business

Key Concepts:

• EV Market Dynamics in China: Intense price pressure, overcapacity, race to dominance.
• NEV (New Energy Vehicle): Electric vehicles and plug-in hybrids.
• Consolidation: Expected rationalization of the Chinese EV market due to oversupply.
• Economies of Scale: Critical for survival in the EV market, particularly in battery and electronics production.
• Supply Chain Dominance: China's control over the EV battery supply chain (70% of global production).
• Product Configuration: Evolution of cars into "smartphones on wheels" with intelligent, connected features.
• Export Strategy: China's focus on dominating production rather than solely relying on exports.
• Legacy Automakers: Need to collaborate with Chinese technology companies to remain competitive.

1. BYD's Profit Drop and the State of the Chinese EV Industry

• BYD reported a 30% drop in profit in the second quarter despite record deliveries.
• This reflects the reality of the Chinese EV market: massive scale and intense price pressure.
• The issue isn't weakness but industry dynamics: too much capacity chasing a finite pool of buyers.
• Companies are using price as a weapon to eliminate competition in the race to dominate the next generation of EV product configuration.

2. Frenzy of Production and NEV Penetration

• China's NEV penetration is above 40% of new car sales; over 50% for passenger vehicles.
• Growth in NEVs is primarily at the expense of combustion engine vehicles.
• NEVs are affordable, leading to a price war to eliminate combustion engines.
• This has negatively impacted legacy auto players.
• Overcapacity is driven by companies wanting a seat at the NEV table.

3. Consolidation and Survival Factors

• Consolidation is expected as economics will eventually trump the chase for volume.
• Survival depends on scaling key technologies around electric vehicles, especially batteries.
• BYD, as the second-largest battery company globally, has an advantage.
• China makes 70% of the world's EV batteries and controls the supply chain.
• Survival will be based on creating favorable economics and economies of scale for a new product configuration: an electronic device or "smartphone on wheels."
• Companies like Xiaomi and Huawei, with expertise in electronics and intelligent connected vehicle technology, are well-positioned.

4. Political Dimension and Government Tolerance

• The auto industry is crucial for China, especially with the property industry's challenges.
• China must navigate a tightrope walk, balancing economic growth with industry consolidation.
• In 2017, China made 28.9 million vehicles, with foreign brands holding two-thirds of the market share.
• By last year, production increased to 31.4 million units, with Chinese companies holding over two-thirds of the domestic passenger vehicle volume.
• Over 80% of the growth in that period was in the NEV category, representing about 43% of all automobiles produced.
• China produces four of every five NEVs sold globally.
• China is winning the race to the electric vehicle and will not damage its advantage in the next generation of technology.

5. Export Strategy and Market Expansion

• China's goal is to dominate the ability to produce transportation equipment at scale, not just to be an export nation.
• Historically, automotive powerhouses like Germany, Japan, and Korea built factories close to demand.
• China is following this pattern, with exports not being the endgame.
• Exports are projected to peak in the 6 to 7 million unit range, with capacity eventually distributed to overseas markets.
• Key export destinations include Mexico, the Middle East, Southeast Asia, and Europe.
• The US market is less of a priority due to tariffs.

6. Investor Sentiment and Market Rationalization

• Investors are bullish on the Chinese EV industry but are looking for consolidation.
• Fragmentation and regional funding prop up companies that haven't earned the right to survive.
• Consolidation will rationalize oversupply and balance supply and demand.
• The current period is a transition, with companies racing to dominate the market.
• This race comes at the expense of short-term profitability.
• Companies like BYD, Xiaomi, Huawei, Cherry, and Jile are expected to survive consolidation and become global companies.

7. Legacy Automakers and Collaboration

• Legacy automakers need to take the high road, be bolder with innovation, and learn from Chinese companies.
• Some are attempting collaborations, such as Stellantis partnering with Leap Motor and Volkswagen collaborating with Xpeng.
• Accessing Chinese technology and scaling critical technologies is key.
• Foreign companies need to come to China to work with Chinese technology companies and access economies of scale.
• Policies should guide Chinese entry in a way that benefits domestic industries.
• Legacy automakers that don't pivot and collaborate risk becoming less competitive.
• Currently, only Tesla is a top 10 selling brand in the Chinese EV market among foreign companies.

8. Notable Quotes

• "It's a race to the dominance of the 21st century product configuration. And right now, China has the inside track." - Bill Russo
• "Only the strong will survive." - Bill Russo
• "China is not going to damage its advantage when it comes to the next generation of technology." - Bill Russo

9. Technical Terms and Concepts

• NEV (New Energy Vehicle): Refers to electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs).
• Economies of Scale: Cost advantages that enterprises obtain due to their scale of operation (typically measured by the amount of output produced), with cost per unit of output decreasing with increasing scale.
• Supply Chain: A network between a company and its suppliers to produce and distribute a specific product to the final buyer. This network includes different activities, people, entities, information, and resources.
• Product Configuration: The specific arrangement or combination of features, components, and attributes that define a particular product.
• Software-Defined Vehicle: A vehicle where core functions and features are primarily enabled through software, allowing for greater flexibility, customization, and over-the-air updates.

10. Synthesis/Conclusion

The Chinese EV market is characterized by intense competition, overcapacity, and a race to dominate the next generation of automotive technology. While companies like BYD face short-term profitability challenges, China's dominance in battery production and supply chain control gives it a significant advantage. Consolidation is expected, and survival will depend on scaling key technologies and creating affordable, intelligent vehicles. Legacy automakers must collaborate with Chinese technology companies to remain competitive, and global policies should guide Chinese entry in a way that benefits domestic industries. China's focus is on dominating production and establishing a global footprint, rather than solely relying on exports.