Intense Competition in China’s NEV Sector Could Trigger Industry Shocks
Since 2022, driven by rising energy prices and green transformation policies, the new energy vehicle (NEV) market has ushered in rapid development internationally. In the case of China, according to the latest data from the China Passenger Car Association (CPCA), major automobile companies had already actively promoted sales before the end of subsidies in December 2022. In December, the retail sales of new energy vehicles completed 640,000 units, a year-on-year increase of 35.2% and a month-on-month increase of 7.0%. In 2022, the annual retail sales were 5.674 million, a year-on-year increase of 90.0%, and the penetration rate reached 27.6%. This also signifies that the target of a 25% penetration rate of new energy vehicles was reached three years ahead of schedule. Statistics from the China Association of Automobile Manufacturers (CAAM) indicate that the country’s NEVs continued growing explosively in 2022, with production and sales of 7.058 million and 6.887 million vehicles, respectively, a year-on-year increase of 96.9% and 93.4%, ranking first in the world for eight consecutive years. However, with the rapid expansion of the NEV market, there is increasingly fierce competition in the Chinese market.
From the perspective of market participants, despite the rapid development of the NEV market in recent years, the situation in 2023 does not seem exactly optimistic. CPCA stated that the restoration of 10% of the car purchase tax in 2023 is an unexpected policy adjustment, which will bring growth pressure on the auto market at the end of the year. It expects that the overall passenger car will achieve zero growth in 2023. As it stands, the NEV market is slowing down significantly in 2023. A report published by the CPCA on January 18 stated that the growth of NEV sales has entered a bottleneck stage. After the phasing out of China’s NEV subsidies at the end of 2023, sales growth will be a serious problem. At the same time, the price of new energy models has increased too much in the early stage, and there are fewer orders. This, combined with the price cuts of leading companies such as Tesla, has caused consumers to take more of a wait-and-see attitude, and the month-on-month decline is relatively large. In addition, since the outbreak of the COVID-19 pandemic, the penetration rate of NEVs has risen more than expected, and then there will be a certain degree of natural decline.
The decline in market growth and the start of price wars mean that in the new year, the competition among NEV companies will enter a stage of a “decisive battle”. On the one hand, the upstream field will bring pressure on OEMs. The price cuts of auto companies led by Tesla have caused Chinese auto companies to face more intense price wars, and the phasing out of subsidies has put greater cost pressure on them. Although the overall market is still growing rapidly, the profit space of enterprises has narrowed, and the new forces in the industry, for instance, companies like Nio, XPeng, and Li Auto, are in the awkward situation of not gaining much.
Intense competition actually means that China’s NEVs are already in a stage of overcapacity, and future market clearing will be inevitable. Statistics from the CPCA show that by the end of 2021, the total production capacity of passenger vehicles in the country was 40.89 million, and the capacity utilization rate was only 52.47%. Although it is 4 percentage points higher than 48.45% in 2020, it is still in the range of serious overcapacity. Among the 86 companies included in the statistics, there were 19 companies with a capacity utilization rate of more than 80%, including 7 NEV companies. Despite the overall overcapacity, China still has 10.46 million vehicles under construction, most of which are NEVs. In fact, by the end of 2020, the total production capacity of new energy vehicles in China had reached 26.69 million, yet the market sales volume was only 1.367 million. Although the market sold about 7 million vehicles in 2022, compared with the existing and planned new capacity, there will still be a large amount of idle capacity. Furthermore, local governments are still scrambling to deploy NEV planning projects, and the overall capacity expansion plan has far exceeded the actual demand. This situation means that although the market size continues to expand, the competition in the market will become more intense. In particular, the products of various manufacturers are largely similar, and it is difficult to effectively distinguish between different market segments, as they rely more on the power of capital to compete for the scale.
Judging from the current reaction of the Chinese capital market, enthusiasm for NEVs has begun to decline last year. To cite an example, the Chinese NEV maker XPeng’s stock price fell by 79% in 2022. In the whole year of 2022, the company has delivered a total of 120,757 new cars, a year-on-year increase of 23%, which has a clear disadvantage compared with the market growth rate. During the period of rapid development in 2020 and 2021, the NEV index rose by 113.44% and 33.77% respectively. In 2022, the new energy vehicle index fell by 29.16% for the whole year. The public offering fund, which was previously the driver of the new energy bull market, began to adjust its positions in the fourth quarter of 2022 and reduced the holdings of the related stocks. Not only BYD, the leading NEV company in China but also CATL and Tianqi Lithium, which are in the upstream of the new energy field, have all been reduced by public offering institutions. This shows that institutional investors’ attention to new energy is returning to rationality. The departure of capital will cause the automakers to face a more severe situation, and that too, when they are already at a competitive disadvantage. This will inevitably accelerate the clearing-out of the market and form a new pattern in the NEV sector.
As a representative of the new economy, the NEV sector in China is regarded by the local governments not only as an emerging market and new development driver but also as one of the means for attracting capital market investors. Researchers at ANBOUND are of the opinion that, fierce competition has brought about an increasingly obvious “Matthew effect” in this field, i.e., certain companies that already have an edge over others will become even more successful. At the same time, we will also witness the reshuffling in the industry based on the principle of the survival of the fittest. In this process, disadvantaged companies will be phased out, which will also bring losses to some blind investors. In the end, although increasingly fierce competition is the driving force for the healthy development of the market, the bursting of the market bubble will also inevitably bring harm.
Despite the rapid development of China’s new energy vehicle market in recent years, its prospect in 2023 does not seem to be all that optimistic. On the one hand, the speed of market expansion will decrease, on the other hand, overcapacity will become more prominent. These changes are making the market competition in this sector to become increasingly intense, and investment in it will also reshuffle in relation to the survival of the fittest.
READ MORE ANALYSIS ABOUT THE REAL CHINA HERE: https://t.me/PublicPolicyThirdChannel