Where has the momentum gone?
By Hadi Saad and Dr Mirko Wormuth, analysts in Research and Portfolio Management at DJE Kapital AG
Electric vehicle (EV) stocks have recently come under pressure - as have most companies in the battery value chain: in 2024 to date, for example, the share prices of the world's two leading EV producers have fallen. Up-and-coming, smaller listed companies have lost even more ground. Increasing global competition, combined with price cuts and weakening demand are the main reasons for the current share price decrease among electric car manufacturers.
A well-known Chinese electric car manufacturer has overtaken a its better-known US counterpart as the world's largest EV manufacturer in the fourth quarter. Although Chinese manufacturers still tend mainly supply their domestic market, they are likely to focus more on Europe in the future. However, the combination of better availability and weakening demand - mainly due to lower subsidies and purchase incentives - is putting pressure on the pricing power of e-car manufacturers. Some groups are lowering prices for certain models by around four to eleven per cent.
Falling sales prices will impact the profitability of most e-car manufacturers. Without corresponding purchase incentives, demand for e-cars in the western world is also unlikely to return to the (politically desired) growth trajectory any time soon. Even if the CEOs of the most important European automotive companies are almost unanimously communicating that there will be no comeback of the combustion engine, more and more suppliers have recently reported increasing orders from the classic combustion engine segment. Many customers are still finding it very difficult to switch to electric vehicles.
This is also reflected in car hire companies’ operations. For example, a major American car rental company announced that it would be selling around 20,000 electric vehicles from its US fleet (50,000 EVs in total) in favour of petrol-powered cars. The decision reflects the lack of sufficient demand for rental EVs. The high repair costs of EVs is contributing to this.
The loss from the sale is estimated at 245 million US dollars. The car rental company had originally planned to convert 25 per cent of its US fleet of over 400,000 cars into EVs by the end of the year. A major German car hire company, on the other hand, recently lost money on electric cars because the residual value suffered because of price cuts by the manufacturer.
Challenges such as the additional cost of renting an electric car and the more complex charging process, especially for inexperienced users, have influenced this decision. Many customers also find it hard to estimate the costs for ongoing maintenance and residual value. The charging infrastructure, not only on the road but also at home and at work, which is only being expanded slowly or not at all is also a problem.
China has the highest proportion of newly sold electric vehicles at just under 39 per cent. This is followed by Europe with around 23 per cent and the USA with around nine per cent. China is an exception here, as sales are supported by the state, including subsidies and preferential car registration. Additionally, the country’s dominant position in the battery value chain and its goal of reducing dependence on oil imports is a big benefit for the sector. In China, the market for e-cars is therefore growing at a completely different pace. In 2023, vehicle sales in China rose by twelve per cent to a new record of 30.09 million units, exceeding the original growth forecast of three per cent (by comparison, sales in the USA amounted to around 15 million).
This includes a significant increase in foreign sales of 58 per cent to 4.91 million units. China has thus overtaken Japan (with 3.99 million units) as the leading vehicle exporter. The most important export markets for China have recently been Russia and Mexico, but deliveries to Belgium and Thailand have also increased significantly. Current data shows a clear shift in Chinese consumers' preferences towards electric vehicles, including purely battery-powered vehicles and plug-in hybrids.
This is at the expense of combustion engines. The introduction of around 100 new EV models by local companies shows just how intense the competition is among electric car brands on the Chinese market.
The immense number of new suppliers, the fear of a deterioration in margins due to price cuts for various models in combination with a weakening economy in China: these negative factors are also affecting the market leader in China. Although domestic demand is likely to continue to rise, the industry will face three major challenges on the supply side: Overcapacity, the introduction of new models and the entry of new technology providers into the automotive market. According to various reports, numerous ships have been chartered and more than 150 new large car carriers have been ordered in order to export the excess capacity. The higher proportion of exports should help the margins of some manufacturers, as they are more profitable, even though they are targeting prices that are between ten and 20 per cent lower than those of competitors from Western sales markets.
Most recently, a major Chinese manufacturer also announced that it would be launching competitor models in the higher-priced segment, which would specifically target parts of the sales market of two German premium car manufacturers in China and have a higher margin profile.
An escalating conflict over market share would clearly be negative for European car manufacturers, especially German companies. European car manufacturers often have very high sales shares in China (sometimes over 50%). Import tariffs for electric vehicles are currently ten per cent in the EU and 27.5% in the USA, and the automotive sector accounts for 16% of EU exports to China. One major German manufacturer has already lost significant market share in China. A Chinese manufacturer is also planning to open a plant in southern Hungary, which could circumvent possible restrictions: it is estimated that the production costs per vehicle in an Eastern European plant such as Hungary would only be around 1,000 US dollars higher than in China. A further push by Chinese producers would have a significant impact on the margins of European manufacturers, who have a higher and less flexible cost base and would lose around 10,000 euros per vehicle for comparable models.
In recent years, several newcomers have also established themselves in China's electric car industry. One of them is focussing on the domestic market with plug-in hybrids in the high-end price segment, where the market is smaller, but the margins are also much more interesting and has been very successful.
Looking at the overcapacity in China brings back memories of the former German solar industry. It will be difficult or even impossible for German OEM car manufacturers to compete successfully here, especially as the Chinese designs are attractive. Added to this is the technological lead of the well-known American manufacturer in production, coupled with highly ambitious expansion plans.
This means for investors: There continues to be a lot of movement in this sector with opportunities and risks alike.
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