By Guo Xixian
With diminishing traditional energy sources and increasing environmental pollution problems, electric vehicles (EVs) have become an unstoppable trend in the auto industry. EV development is already booming without any signs of slowing. Despite lacking any obvious advantages in the auto market, Chinese EV brands have deftly seized new opportunities for super high-speed development and managed to become global leaders in the EV industry.
China has the largest car inventory in the world. Development of EVs can help address air pollution and contribute to achieving the “carbon peak and carbon neutrality” goals. Various methods to supply electricity have emerged alongside other advantages such as centralized emission outlets, improved energy conversion efficiency, and easier testing and supervision.
Replacing fossil fuel-powered vehicles with electric vehicles is of great strategic significance for alleviating China’s oil shortage and reducing its dependence on external energy sources. At the 8th China EV100 Forum on March 26, Wang Chuanfu, chairman and president of Chinese automaker BYD, noted that China now imports 70 percent of its oil, 70 percent of the oil imports come through the Strait of Malacca, and 70 percent of China’s oil is used in the auto industry. It is urgent for China to reduce its dependence on oil.
Three forces are competing in China’s EV industry. The first are traditional car manufacturers, which have shifted focus to EV manufacturing, represented by BYD, which has been followed by Changan, Great Wall, and GAC in succession. The second force are EV startups including Nio, XPeng and Li Auto, which have injected new vitality into the market. The third force are companies that have risen through high technology and the internet such as Huawei, Baidu, and Xiaomi, which have accelerated their forays into the EV industry.
Traditional car manufacturers have successively launched relatively independent sub-brands. Making use of their advantages in production capacity, they have sought industrial coordination and cross-border cooperation. For example, BAIC BluePark launched the ARCFOX series. Based on its own battery, motor and electric control system, the new series incorporated Huawei’s Hongmeng OS (operating system) and MAGNA’s hardware platform. GAC Aion has cooperated with upstream Ganfeng Lithium (battery manufacturer) to develop the whole industrial chain from upstream to downstream.
The second force, new energy brands, started earlier, faster and more steadily. With cutting-edge philosophies and ideas, the companies have pooled top talents in the industry and constantly improved their product quality and customer service.
Huawei, a representative of the third force, released its AITO (added intelligence to auto) M5 with Hongmeng OS at the end of last year. Xiaomi has announced plans to mass produce its EVs by 2024.
At the 2022 China-ASEAN Energy Transition Roundtable, Shi Jianhua, deputy secretary-general of the China Association of Automobile Manufacturers, said that strong governmental support has helped China’s EV industry develop rapidly through application of R&D outcomes, technological innovation, and market-oriented business operation. China has become the world’s largest EV market.
Since 2015, China’s EV production and sales have remained first in the world for seven consecutive years. In 2021, more than 3.5 million electric vehicles were produced and sold, accounting for about half of the world’s total production and sales. And despite sporadic outbreaks of COVID-19 and a turbulent international situation, strong growth momentum was sustained. Statistics from the China Association of Automobile Manufacturers showed that from January to August of this year, 14.80 million new energy passenger vehicles were produced in China, 14.65 million of which were sold, up 14.7 percent and 11.7 percent respectively year on year. By the end of June 2022, the EV inventory had exceeded 10 million, and the EV penetration rate increased to 21.6 percent from 13.4 percent in 2021.
Chen Tao, deputy general manager of the China Automotive Engineering Research Institute Company, noted that China has the largest EV inventory in the world because of its consumer market with the largest potential and consistently increasing demand for electric vehicles. Effective responses to sporadic pandemic outbreaks made it possible to resume production of the automotive industry chain efficiently, which has ensured the steady growth of EV production capacity.
Gong Yue, a new energy vehicle industry analyst for the Western Digital Networking Equity Investment Fund, opined that China’s EV manufacturers have achieved autonomy from model design to spare parts production, with increasing technological maturity to meet the various needs from the low end to the high end.
At the initial stage of market development, the pricing for electric vehicles was polarized: Traditional manufacturers such as BYD and SAIC launched mini vehicles for less than 100,000 yuan (US$15,385) while the EV startups generally focused on the medium-high-end market with vehicles worth more than 200,000 yuan (US$30,770). However, as technology upgrading has gradually segmented the market, EV manufacturers now focus more on the blue ocean of pure electric vehicles priced from 100,000 yuan (US$15,385) to 200,000 yuan (US$30,770). Differentiated products have provided consumers with more diverse choices.
The monomer energy density of batteries powering Chinese EVs today is 1.3 times more than that of 2012, and the range of the mainstream models has increased from 150 kilometers to more than 500 kilometers. Six Chinese enterprises rank in global top 10 in terms of power battery installed capacity. With continuous progress in ultra-fast charging technology and construction of battery charging facilities, China has built the world’s largest network of EV charging facilities.
Although sales of electric vehicles have soared, EV manufacturers are still facing widespread losses. According to financial reports, in the first half of this year, BYD, Changan, and a few traditional manufacturers achieved positive profit growth, whereas other manufacturers achieved negative growth, including the EV startups.
In terms of delivery volume, in the second quarter of 2022, Nio delivered 25,100 vehicles, up 14.4 percent year on year. XPeng delivered 34,400 vehicles, up 98 percent year on year. Li Auto delivered 28,700 vehicles, up 63.2 percent year on year.
In terms of net profits, Nio posted a net loss of 2.56 billion yuan (US$393.84 million), up 369.6 percent year on year. XPeng posted a net loss of 2.71 billion yuan (US$416.92 million), up 126.1 percent year on year. Li Auto posted a net loss of 641 million yuan (US$98.62 million), up 172.2 percent year on year. This phenomenon has been ridiculed in the industry as “deliver more, lose more.”
Declining government subsidies, rising R&D and sales costs, and a steep rise in raw material costs are believed to be the main factors behind the consistent losses of EV manufacturers.
In 2009, to boost the development of the EV industry, the Chinese authorities launched a project to encourage 10 pilot cities to add 1,000 new energy vehicles each annually over three years. From that point, China’s EV industry entered a stage of rapid development. In 2014, electric vehicles were exempted from the vehicle purchase tax, which promoted expansion of the EV market significantly.
However, in 2016, the government started adjusting its policies to provide subsidies only to EV brands that had excelled through competition. Subsidies have been gradually reduced as the technical threshold has been gradually raised. In 2022, subsidies will further drop by 30 percent and eventually terminate by the end of the year. Gradually declining subsidies have pushed EV manufacturers to depend more and more on the market, where they are facing increasing cost pressure.
A BAIC BluePark manager said that the relevant policies issued by the government have lowered the industry entry threshold, with incentives earmarked for EV manufacturers focused more on technology innovation and quality improvement in a bid to promote the sustainable and high-quality development of China’s EV industry. Since China’s EV industry has evolved to a stage of stable development, the thinking is that industrial upgrades should be market-oriented and supported by relevant policies.
Chen Tao explained that over the last decade or so, China has gradually expanded coverage of its subsidy policies for electric vehicles. At the same time, the amount of subsidies has declined and technological thresholds have risen, meaning that the policy-driven development of the industry has shifted to meeting market demand.
Electrification and IT application in the auto industry have caused steep rises in expenses for R&D, sales, and administration. The phenomenon is especially prominent among the EV startups. In the second quarter of this year, Nio’s R&D expenses rose by 143 percent year on year to the highest level since 2020, and its sales and administrative expenses were up 52 percent. XPeng’s R&D expenses rose by 46.5 percent year on year, and its sales and administrative expenses were up 61 percent. Li Auto’s R&D expenses rose by 134.4 percent year on year, with sales and administrative expenses up 58.64 percent.
Gong Yue opined that traditional car manufacturers have accumulated independent production capacity, customer stickiness, and market share over a long period of time. Many have also carried out industrial coordination and cross-border cooperation, which has intensified market competition. In contrast, EV startups had to invest a lot in production capacity enhancement and market exploration in the initial stage. They may have made some gains in the medium-high-end market, but they came at great cost.
A new energy industry researcher at Ernst & Young Accountants explained the normalcy of new energy car manufacturers losing money in the initial stage of market exploration. Expenses on R&D, fixed assets, and long-term strategy are manifested as losses in financial reports. Expenses become shared and diluted only when production and sales reach a certain scale.
Industrial Chain Pressure
The disruption of global supply chains has led to increased costs for batteries, which has added to the costs of EV manufacturing.
Data from the Shanghai Steel Union Logistics Company showed that the price of lithium carbonate soared nearly 10 times from 50,000 yuan/ton (US$7,690/ton) in early 2021 to 515,000 yuan/ton (US$79,230/ton) this year, resulting in tremendous pressure on battery production.
On July 21, GAC Chairman Zeng Qinghong said at the 2022 World Power Battery Conference that power batteries account for nearly 60 percent of the total cost of electric vehicles, and that most EV manufacturers were suffering steep losses. GAC gets half of its batteries from the manufacturer CATL. “Aren’t we working for CATL now?” asked Zeng with humorous self-deprecation. The CATL response came from its chief scientist Wu Kai: “Our company is also struggling on a narrow margin of profit, very painfully so.”
Gong Yue said that the rising costs of raw materials from the pandemic and the tense international situation have ultimately affected the prices of finished vehicles. EV manufacturers have paid more and more attention to the upstream supply side, resulting in both pressure and motivation.
BYD has excelled among the many EV manufacturers with its rising sales and expanding production scale. Its success can also be attributed to advantages in the vertical layout of its industrial chain, which have helped reduce pressure on the supply chain from chip shortages and inadequate power battery production capacity.
He Xiaopeng, chairman of XPeng, said at a press conference for the release of the company’s new model G9 that the XPeng and its peers are currently navigating a sharp curve. “It’s important to drive with the right skills, at the right speed,” he said. “However, BYD has already reached a new straightaway after successfully navigating the curve from fuel power to electric energy and digital energy.”
The BAIC BluePark manager predicted that EV manufacturers would not be able to overcome supply chain problems unless they take the initiative to enhance cooperation, change philosophies on cooperation, innovate their cooperation model, and open channels of cooperation.
In the current complex and volatile globalized market, competition between enterprises not only involves competition between products, but also competition in the industrial chain. To ensure a stable supply and price in the midstream and downstream of the supply chain, EV manufacturers should strengthen their technological competitiveness while also enhancing their control over the core resources upstream to establish a sound industrial supply chain. Midstream and downstream manufacturers could eventually win a real new competitive edge if they manage to avoid being “strangled” by upstream suppliers.
Gong Yue opined that an open international environment, integrated economic conditions, and mature technology will foster a more stable supply chain for EV manufacturers to be more competitive in the complex international market. The rich mineral reserves in Southeast Asian countries will create favorable conditions for the development of electric vehicles there. New opportunities for EV manufacturers to operate there will help build closer ties between China and ASEAN countries. Chen Tao concluded by stressing that the most crucial factor in China’s auto industry achieving further progress is the ability to continuously improve the industrial chain for electric vehicles and the products’ competitiveness in the international market.