China’s ballooning EV market faces looming headwinds

Three years ago, I wrote a piece detailing China’s growing EV market and the merits of watching out for local brands.
Within these three years, Chinese auto manufacturers have become a global export juggernaut - Chinese passenger car exports have grown from just under 1mn units1 a year to around 4.5 million at the expense of US, German, and Japanese manufacturers. Not only have Chinese auto players grown their dominance in electric vehicles (EV), but they’ve also captured the entry level sub-USD 10,000 internal combustion engine (ICE) car segment.
Indeed, speaking on the Q4 investor earnings call, one prominent founder of an American automotive and clean energy multinational noted how globally competitive Chinese carmakers had become, as his company reported earnings that came in below expectations and signaled slower growth in the year ahead.2
Chinese leaders have for a while prioritized the pivot from ICE to EVs as this supports the government’s longer-term policy priority of transitioning the economy from one that has historically relied on real estate investments and lower value manufacturing to one that’s driven by high-tech manufacturing and consumption. EV and EV battery companies in China employ over 1.5 million workers, many of whom are highly skilled and command high salaries.3
Thus, the industry continues to enjoy ample policy support in the form of consumer subsidies, tax rebates and government fleet purchases. Chinese EV companies have ready access to bank credit and cheap loans. Without a doubt, China has become the trendsetter for EV around the world, but there is a risk that this still nascent industry may be turning into a victim of its own success.
There are approximately 50 Chinese domestic EV companies producing EVs and plug-in hybrids4, but the market capitalization for Chinese EV companies has underperformed relative to global peers and the top five Chinese EV makers delivered tepid return on equity over the past year. With China EVs clearly the global leader, what is driving this underperformance?
The primary explanation is intense competition. This is great for price-conscious consumers – the latest small city car from China’s largest EV maker retails for around USD 11,000 and offers around 300km of range – such rock bottom prices have wreaked havoc on EV company margins as competitors ferociously battle it out to gain market share. Worryingly for investors in the segment, this market-wide margin pressure could well be occurring too early in the capital cycle to continue driving investments in innovation and efficiency.
Conversely, the overall market is also facing substantial overcapacity. Demand in the largest growth markets, China and Europe, show signs of plateauing – the European Automakers Association said Europe-wide EV sales in December 2023 declined for the first time since April 20205, while Chinese government authorities have flagged their intention to reduce overcapacity in the segment.6 With explosive growth over the past few years, the market has become saturated and EV demand hasn’t kept pace with supply.
Future EV sales may be challenged because early-adopters of new EV technologies have already made their purchases and the second tranche of prospective EV buyers are proving more dubious. The relatively rapid depreciation of EVs in the secondhand market is also giving pause to the next wave of potential buyers who worry that today’s EVs will soon be obsolete. At the same time, the resale value of EVs should be more resilient as EV batteries improve and the cost of replacement falls.
One often cited concern for EVs is the lack of charging infrastructure, which is a particularly acute problem in China as around 62% of EVs sold there do not have a private charging space, forcing owners to queue inconveniently at public stations.7 The situation is nonetheless rapidly improving, with around two million public charging stations now available in China on top of nearly five million private stations, from less than one million combined charging stations in 2019.8
Households have also shown some preference for hybrids over pure battery electric vehicles (BEVs). In the US, hybrid car sales grew faster last year than BEVs9, indicating that EV carmakers haven’t solved the “range anxiety” around pure EVs, and address a relative lack of charging infrastructure versus traditional petrol refueling. That said, meaningful incremental range improvements have indeed been made. The average EV globally has seen range increases of 10% annually over the past decade, and in the US this figure is closer to 13%.10
Hybrids are likely to continue to play a transitional role in the switch to full EVs. This will hold particularly true in regions like the US where the time spent, and distance travelled in vehicles is well above the global average.11 It’s possible that this transitional phase could be longer and more drawn out than many are anticipating.
Despite these headwinds, China’s EV makers are still growing, with technological advancement and adoption happening at a far greater pace than even the most optimistic predictions from several years ago. What’s new is the rising popularity of hybrid vehicles as they form an increasingly important bridge for households as they transition from ICE to fully battery-powered cars. Hybrids have become a good alternative as the EV industry addresses lingering concerns.
Still, China’s EV sector has adapted quickly to changing consumer preferences and enjoys policy support. EVs are expected to play a pivotal role in China’s structural economic shift, taking up the growth baton alongside other green sectors. Policymakers have been keen to emphasize “high quality development” along with doubling down on decarbonation efforts, and the EV sector will remain a key beneficiary.
A version of this article appeared in South China Morning Post on 30 January, 2024.
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The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.
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Footnotes
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1
Source: Macrobond, Chinese passenger cars on rolling 12month sum basis
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2
https://www.cnbc.com/2024/01/25/elon-musk-says-chinese-ev-makers-will-demolish-other-companies.html
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3
https://www.nytimes.com/2023/12/08/business/china-electric-vehicles.html
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4
https://www.ft.com/content/43da3223-2311-4b73-97d9-83d20baedc6a
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6
https://www.reuters.com/breakingviews/china-ev-overcapacity-fix-would-be-crowd-pleaser-2024-01-22/
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9
https://www.nytimes.com/2024/01/17/business/hybrid-cars-electric-vehicles.html
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