LI - Thanks To EV Push China Is Now The World's Largest Exporter Of Vehicles

2023-10-24 10:12:11 ET

Summary

• China has become the world's largest vehicle exporter, with a significant portion of its growth attributed to new energy vehicles, particularly electric vehicles.
• Europe is driving the demand for Chinese EVs, while gas-powered vehicles are more popular in Russia.
• Chinese EV manufacturers have a competitive advantage in terms of technology, scale, and cost, but they face challenges such as potential tariffs and a downturn in the Chinese EV market.

By Andrew Prochnow

For approximately 140 years, the internal combustion engine ("ICE") has remained the standard in passenger vehicles. This journey began in 1886, when Karl Benz commenced the commercial production of motor vehicles featuring these engines. However, based on recent statistics, sales of vehicles with internal combustion engines reached their zenith in 2017, with a total of 86 million units .

In the present day, electric vehicles ("EVs") have become the new sensation . In contrast to conventional ICE vehicles, which rely on fuel combustion, EVs are powered by batteries . This technological revolution isn't just altering the means of vehicle propulsion; it's also reshaping the landscape of those engaged in their manufacture.

As per data collected in the first half of 2023, China has now assumed the position of the world's largest vehicle exporter. A substantial portion of China's recent export growth can be attributed to what is termed "new energy vehicles" (NEVs), encompassing EVs.

Global trade data indicates that in the first quarter, China exported slightly over 1 million vehicles , surpassing Japan by approximately 50,000 units.

During the first seven months of 2023, China exported a total of 2.8 million vehicles , of which 1.8 million were gas-powered.

According to these statistics, China is expected to export around 4.8 million vehicles in the year 2023. Projections indicate that this number could surge to 9 million by 2030, significantly boosting China's global market share from 16% in 2022 to 30%.

In 2023, the upsurge in Chinese exports is driven by heightened demand from Europe. Due to the conflict in Ukraine, Russia's Western vehicle imports have sharply declined, leading it to rely on China to bridge the gap.

Consequently, the Geely Automobile Holdings (GELYF) Coolray crossover, a gas-powered vehicle, has emerged as one of the most popular new cars in Russia, with an average price of approximately $14,000. In Western Europe, however, consumers exhibit a clear preference for Chinese EVs over gas-powered vehicles.

As depicted below, Europe has become the first region to import more EVs from China than traditional gas-powered vehicles.

The escalating demand for Chinese electric vehicles can be attributed to technological advancements within the Chinese market. Additionally, Chinese EVs often come at a lower price point compared to EVs manufactured in Europe, Japan, and the United States.

Speaking to these competitive advantages, the chairman and founder of the Chinese EV manufacturer BYD Company Limited (BYDDF) - Wang Chuanfu - recently told analysts , "the Chinese EV industry is three to five years ahead of foreign legacy automakers in terms of technology and scale, and as much as 10 years ahead in terms of cost advantage."

Independent research conducted by UBS appears to corroborate some of those assertions. Teaming up with an engineering team, UBS analysts took apart one of BYD's most popular EVs - the Seal - and concluded that it probably cost 35% less to manufacture as compared to a similar EV produced by a European manufacturer.

With the relatively modest labor costs in China, it's undeniable that Chinese car manufacturers hold a competitive edge in terms of production expenses. However, this is where the "yin" or the "shady side" of the equation comes into play for the rapidly growing EV industry in China.

Chinese EV Sector Landscape

China enjoys lower labor costs as compared to many of the other key regions where EVs are produced, including Japan, Europe, and the United States.

However, many experts have argued that government subsidies also play a big role in the Chinese automotive industry . And many competing EV manufacturers headquartered outside of China view those subsidies as anti-competitive and illegal.

Consequently, automobile manufacturers in Europe and the United States have been urging lawmakers to tighten restrictions on Chinese EV imports.

In the United States, such protective measures are already largely in effect. Back in 2018, during the inception of the well-known U.S.-China trade conflict, then-President Donald Trump imposed a 27.5% tariff on vehicle imports from China. Consequently, Chinese EVs have been unable to make significant inroads into the American market, in contrast to their presence in Europe.

However, based on recent developments, the European Union might be considering a similar tariff approach in the near future. On October 4, the European Commission formally initiated an anti-subsidy investigation into imports of battery electric vehicles (BEVs) from China.

According to the official press release , the investigation:

"will first determine whether BEV value chains in China benefit from illegal subsidization and whether this subsidization causes or threatens to cause economic injury to EU BEV producers."

Furthermore, based on the findings of the investigation:

"the Commission will establish whether it is in the EU's interest to remedy the effects of the unfair trade practices found by imposing anti-subsidy duties on imports of battery electric vehicles from China."

Based on an analysis conducted by Politico , any provisional tariffs stemming from the investigation will need to be imposed within nine months of the start of the investigation. Moreover, any "definitive" tariffs would need to be imposed by early November of 2024.

Past investigations of this sort have resulted in tariffs ranging from 10-20%, which would be considerably less than the tariff currently imposed by the United States of 27.5%.

Leaders in China have already expressed their disappointment with the European investigation, and have threatened retaliatory measures if the tariffs are ultimately put in place.

A report by The New York Times recently highlighted how the Chinese EV manufacturer NIO Inc. ( NIO ) currently loses on average about $35,000 per vehicle that it produces. That's based on the company's Q2 earnings report, which revealed the company had lost roughly $835 million for the quarter.

On the other end of the spectrum is China's largest producer of EVs - BYD - which recently announced that it expects to book roughly $1.3 billion in profit during Q3 .

BYD isn't just the largest producer of EVs in China, it's also one of the top two manufacturers in the world, along with Tesla, Inc. (TSLA). And current projections suggest that BYD will become the world's largest BEV manufacturer by the end of this year.

In addition to BYD, some of the other large vehicle manufacturers in China are listed below (sorted by total annual production - largest to smallest - along with year-to-date stock return, where applicable):

• SAIC Motor

• Geely Auto, -26%

• BYD, +21%

• Changan

• Chery Motor

• Great Wall Motor (GWLLF), -4%

• Dongfeng (DNFGF), -28%

• GAC Auto (GNZUF), -29%

• BAIC Motor (BMCLF), +5%

• FAW Group

• JAC Motors

• Hozon Auto

• Li Auto (LI), +52%

• NIO, -21%

• XPeng (XPEV), +32%

• Leapmotor

• AITO

From the companies listed above, startups like AITO, Li Auto, Hozon, Leapmotor, and XPeng are focused primarily on BEVs, much like BYD and NIO. But of those seven companies, only BYD, Li Auto, NIO, and XPeng are publicly traded in the United States.

Some of China's legacy vehicle manufacturers are also breaking into the EV space, and count among the world's top 20 by the number of vehicles produced annually.

A total of 10 Chinese companies are included in that list, including BYD, Geely, GAC, SAIC, Chery, Changan, Dongfeng, and Hozon. However, several of the aforementioned Chinese EV startups are on the cusp of breaking into the world's top 20, including Li Auto, Leapmotor, NIO, and XPeng.

Chinese EV Sector Faces Significant Headwinds

The main question going forward is where all those Chinese EVs will be sold. Demand for EVs is highest in China, Western Europe, and Northern America. And the two latter regions aren't looking like fertile ground for Chinese EV manufacturers, due to the aforementioned tariff issue.

Chinese producers could attempt to skirt those tariffs by building factories in Europe and North America, but that would increase the average cost of production. In July, SAIC announced that it was considering building a production facility in Europe, but thus far, others haven't followed suit.

Furthermore, electric vehicle sales in China have experienced a recent downturn in conjunction with the deceleration of the Chinese economy. As illustrated below, the softer conditions in the Chinese EV market have also contributed to corrections in the lithium, cobalt, and nickel markets, all of which are crucial materials in the production of EV batteries.

Collectively, this information suggests that potential further price increases in the stocks of Chinese vehicle manufacturers may depend on a turnaround in the Chinese economy or, even more favorably, a recovery in the global economy.

On the other hand, an unexpected decision by the European Commission to uphold moderate tariffs on Chinese EVs, rather than the currently contemplated 10-20% tariff, could serve as a significant catalyst for Chinese EV stocks such as BYD, Li Auto, NIO, and XPeng.

Significantly, Tesla's shares have also declined by approximately 30% since their peak in mid-July. Tesla reported Q3 earnings weaker than anticipated during the week of October 16, which undeniably had a negative impact on the broader EV sector.

In sum, this implies that the challenges facing Chinese EV stocks are likely to be more formidable than the favorable factors for the remainder of this year and probably extending into early 2024 as well.

Barring a big turnaround in the global economy, there are probably better places to deploy capital for the time being than Chinese EV stocks, especially considering that bonds have historically outperformed stocks during previous economic contractions.

Andrew Prochnow has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader. Andrew is a frequent contributor to Luckbox magazine.

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