How China EV market will re-shape the Automotive Industry
The EV revolution is (really!) coming
Tesla, Nio, Xpeng, Li Auto and the EV transition
In these days everyone is talking about the inclusion of Tesla into the S&P 500 Index. It was about time, if you consider that it will be the biggest company to ever been added to the index, with a current capitalization or around 470 billions of USD. But this is not just the acknowledgement of the fact that Tesla is finally a fully profitable company and must be taken into account in the Stock Market. It is also a sign of the fact that times are changing, and that we are on the verge of a EV revolution, so many times announced in the last 10 years. This time is for real, and the biggest reason is actually to be looked for in China, to its huge automotive market and to its aggressive policy, which is set to phase out ICE (Internal Combustion Engine).
The EV market in China presently accounts for just the 5% of the total car sales, but the government plan is to push this value to 20% in 2025, and to 50% in 2035.
Let’s translate these percentages into actual numbers:
- In 2020, due to the COVID pandemic, the size of the total car market has decreased, but we are anyway talking about something like 22,5 millions of cars. 5% of this number equal to around 1,1 Millions of EVs for 2020. Tesla accounts for around 12%, or 130.000 vehicles
- The projection is to have around 30 millions cars sold in 2035. 50% of EVs on the total, would means 15 millions of EVs would have to be sold in China alone!
- Just to give you an idea of what this means in terms of production capacity, Tesla this year should be able to produce “only” 500.000 vehicles globally
- Tesla is projected to take the leadership of the market, but even if it could remain at the present 12% share of EVs, this would translate into 1,8 Millions of cars, only in China
- Going from 500.000 global deliveries to 1,8 Millions deliveries only for China Market, and considering that China stands from around 1/3 of the global automotive market, could means that Tesla will need a total production capacity of around 5 to 6 Millions. It is a 10 to 12 fold jump in only 15 years. Can it even be done?
But this is just one aspect of what is coming. Let’s first of all consider why it make so much sense for China to push this kind of policy and phase out of ICE technology.
- China ranks 2nd, after USA, in the world for Oil consumption, accounting for around 13% or the total.
- Even if China is the 4th top producer of Oil in the World, this is not even close to be sufficient to cover its consumptions. Therefore, China is a Net Importer of Oil, and in fact, it imports around 60% of the total consumed every year. In 2016 this could translate into 7,5 Millions of barrels a day.
- Nowadays a barrel of oil costs around 50 USD, so this is around 350–400 Millions of USD every single day!
It can be easily understood that China have all the interest into diminishing the total amount of Oil that it needs to import. Every dollar they use to push the change to EV of consumers, is actually helping them to keep one more dollar into the country, and to make it flow in the national economy.
But of course, is not only that. China had, in the last years, a huge problem of pollution. Its cities were becoming more and more dense of PM2,5 and its air every day more dangerous. There was a need for a change of policy, not only for the car industry, but also in the way energy is generated and managed, and that is exactly what is happening. And since China started to take action a few years ago, the results are slowly but surely becoming visible in the sky’s color.
Finally, China is taking more and more the central stage as the new Leader of the World, both economically and, even most importantly, politically, specially after the Trump’s Administration. The Environment Protection and the Energy Transition are surely to be the biggest problem that we will have to solve as humans in this century, and China want to give the general direction here, to prove that this is “China Century” we are living in. Altought the political side could change with Biden’s presidency, it is difficult that the economy will shift away from the Asian giant in the short term.
Put all of the previous considerations together, and you will get why a change of policy in the automotive industry, could really mean a revolution for the whole world this time.
Let’s recap for a moment. We have a strong push that is coming from one of the Top Economies of the world, to back a full transition from ICE to EV vehicles. This push translate from one side to the subsides that are given to everyone that buy electric. But even more importantly, this also translate into the backing up of several Chinese EV makers and battery producers, as we will see, and into enormous investments into the infrastructure needed for this transitions. The numbers expected are huge, and this is opening up the chance for new actors to come to the scene.
Who are than the main EV producers which are coming into the spotlight and are seen as having the potential to take the Automotive Market by storm in the coming decade? Let’s check some of them.
- Tesla. This is obvious, so I will not spend so much time talking about this company and its visionary founder Elon Musk. But I want to remark once again the numbers we have seen before. If Tesla could only retain it’s 12% market share in China, and delivery somehow a comparable number of cars globally, it would need to scale up from the 500.000 vehicles of 2020, to around 5 to 6 Millions in 2035. Nevertheless, the total China market would account for a total of 15 Millions and Tesla would take around 1,8–2 Millions of them, leaving space for another 13 Millions sold from other companies. Keep this huge number in mind. 13 Additional Millions to be divided from other Brands. The cake is huge and could be enough for everyone, is not even a question of competition anymore.
- Nio. Everyone is now talking about Nio like the “New Tesla” or the “Tesla of China”. But Nio is also so much more because:
- They are backed from Tencent, one of the Giants of China’s Economy
- They have a peculiar business model, they target the “New Riches” of the growing Chinese middle class, and they offer the Battery as a Service (BaaS), which helps them to decrease the starting price of their cars.
- The BaaS, whit the possibility to replace the battery into swapping stations in just 3 minuts, as opposed to waiting for charging, is also backed by the Chinese government, which have recently announces the plan to define the swapping standard. The plan as been dubbed “Blue Sky” and guess what is the Chinese name of Nio? Weilai…Blue Sky Coming. Nice coincidence!
- If you think about it, it make so much sense to have a distributed net of batteries which can be connected to the main energy grid, and act as smoothers for energy’s picks requests. Swapping stations can become a integral part of a smart grid. No wonder government is pushing for this adoption.
- Nio’s battery suppliers is CATL, which is also the battery supplier of Tesla’s Shanghai Gigafactory, and that will also be a partner into the Battery Swap Service and BaaS. CATL is also backed from the Chinese government, which actively invest into the rare elements needed to produce batteries, practically giving costs advantages to companies such as CATL. CATL, by itself, is therefore another actor to be kept in mind in this EV revolution.
- This November Nio have just announced a new 100 kWh battery pack, which will take the range of their cars past 600 km. A 150 kWh is currently being also developed, which could take the range to 900 km. Still scared about EVs range limitations?
- So far they have been selling only SUVs, but a new Sedan should be on the way and be officially presented on January 2021, and possibly another one during the year. China is the biggest Sedan market in the world, so if they can already achieve so big results, without even takling this market…
Nio have seen the deliveries numbers skyrocketing this year, and will close the year with around 45000 deliveries, growing around 150% from last year alone. They are prospected to achieve 100.000 vehicles next year, growing once again more than 100% from current level, and some analyst thinks they could take up to 30% of the global High End market of EV in 2035…again, we are talking about maybe 1–3 Millions of cars only in China, starting from less than 50000 this year! Is a giant leap, which call for massive investments into production capacity. But still, is not even close to saturating the market.
- Li Auto: this is not exactly a full EV maker, as it currently produce only one SUV, which has a range extender, a small ICE that is used with the only purpose of charging the batteries, increasing the total range of the vechicle. But the deliveries of this SUV have been quite good recently, and by the end of the year they should sell more than 30000. This is quite impressive, like the fact that they have already a good gross margin on its production. They have probably the chance to catch up, but can they put out new vehicles in the market fast and still with good results? Will they go into the pure EV space? Do they have the money to make all these investments in such a small time? The market is surely open enough to welcome them too
- Xpeng: this is the brand which is more trying to follow and emulate (someone say copy) Tesla. The new P7 is quite nice as you can see, and is a direct competitor of Tesla Model 3. Their prices are quite cheap compared to Tesla, so they are trying to get the lowest price piece of the EV cake. This is quite risky, as margins are going to be lower than other competitors, and this is making difficult to reach profitability, specially at the beginning, where they will need to make huge investments to achieve volumes and to roll out new vehicles. But Xpeng is also the only chinese full EV company to currently own their production facilities, they are even building their second plant already, and they are backed from the local Guangzhou government, as well as from the other big Tech Giant of China, Alibaba. Also, they are very active in the development of sotware required to achieve the autopilot stage, with many managers coming from Xiaomi for this purpose. Their deliveries are also growing at a fast rate, with very good numbers of P7, but it seems that the other model, the G3 SUV, is not performing as well, and this could be a problem long term.
- BYD: not so many people is paying enough attention to BYD, but it must be noticed that among the pack, they are the biggest Car Manufacture, even if they not only produce EVs. But they also are the biggest Electric Buses manufacturer in the world, plus they produce their own batteries, and not only for the car business, also for residencial and consumer field. Also, and it is not a small thing considering who we are talking about, among their investors they have Warren Buffett, who usually do not make mistakes when he put his money into some company.
This is pretty much the playground right now. Is difficult to say who will win. Of course Tesla is the main company here, and I personally think it will emerge globally as the top EV maker, and one of the biggest company in the whole world long term. But the race is on, and there is a lot of space for everyone.
It is worth noting also that we didn’t mention any of the traditional brand of the industry. It seems they are quite sleeping and late to the party, but is that really so? New vehicles will be more and more on the market.
Toyota is the world leader in the Hybrid market, and is also the top producer of the world. Can they change direction and embrace the full EV revolution?
What about the Germans Giants? VW is investing heavily into the EV space, and the ID.3 is surely going to sell well, specially in Europe. BMW already have a range of EV vehicles.
Also, for all the big guys, they will need to make a new range of EVs if they want to keep into the China market, which is the biggest one in the world, and therefore they are pretty much obliged to invest in that direction, to comply with the Chinese Government’s policy. There is no other options, or better there is one, and is complete annihilation.
And do not forget that design also is important. You want one wonderful example? Check out the new Fiat 500e. Isn’t she gorgeous? Ok, I am Italian, so I am clearly biased here, but I mean…come on people!
Let’s also consider that the new Stellantis group, joint venture between FCA and PSA, is born to join forces in order to make good use of three vehicles platforms needed to make a big entrance into the EV marketspace, and will create the 4th largest Carmaker in the world by volume.
Finally, let’s talk about what is expecting us down the road and what will be the bigger trends waiting for us and shaping the new world
- Autonomous cars: everyone is working on it, and results are coming. But how far are we really from sitting in our cars without the need to drive them?
- One more step: if the car is driving itself, do we really need to own a car? can’t we just call for a Robotaxi? Or can we own the car, but let it go to make money for us while we are at work during the day, like Elon Musk have been envisioning already? The Robotaxi business is the next big thing, and it could be worth a few trillions dollars, according to ARK Invest.
- Uber, Waymo, Lyft, Tesla, will surely be a huge player here, but so will be the Chinese makers, and there is one more company, the “Chinese Uber” (and in fact so powerful they have pushed Uber out of China market), so called DIDI, which have just presented the D1, the first Custom-Built EV for Ride-Hailing, which is their platform for the autonomous driving and future robotaxi industry, and by the way… is made in partnership with BYD.
- Infrastructure: it is quite obvious that in order to have so many EVs on the roads, huge investments must be done also in infrastructure. Charging points, swapping stations like for Nio’s business model? Is not clear yet which direction the market will take, but what is clear is that Chinese Goverment is pushing on the swapping model, and Nio’s could take profit, if its standard is widely adopted, also from the swapping stations, and also from vehicles not directly produced. Let’s consider also what Biden could bring to the table for USA. One of his key campaign promises was to create over 1 Million jobs, from new and improved roads, to EV charging stations. There are currently 27000 stations, and Biden promised to take that number to around 500000. One of the main companies which could benefit from this policy is Chargepoint Inc, which already make the technology and operates the lagest online network of indipendently owned EV charging stations operating in 14 countries. Chargepoint is going to merge in December with Switchback Energy Acquisition in an enterprise value deal of 2,4 Billions USD
I am a EV enthusiast since many years ago, when I have been in charge of technical development of Electric and Hybrid Buses for a small Italian company, since Elon announces he was going to change the world, not only with Tesla, but with many other ideas which are going to shape our future. Plus, I spend a lot of time in China since 10 years, I have been seeing with my own eyes how they are developing around here, and honestly, I am seeing so many Nio and Teslas these days, and so many other “green plates” indicating NEV (electric and hybrids basically), that I am quite confident.
Maybe I am over optimistic, but this time I believe the EV revolution is (really!) coming.