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China’s next export is an electric-vehicle fight

By Katrina Hamlin

June 19, 20234:45 AM GMT+1Updated 2 months ago

Commentary

By Katrina Hamlin

Auto Shanghai show, in Shanghai

Visitors look at a BYD Seal electric vehicle at the Auto Shanghai show, in Shanghai, China April 18, 2023. REUTERS/Aly Song Acquire Licensing Rights

HONG KONG, June 19 (Reuters Breakingviews) - Chinese automakers will road test Western protectionism. Electric-car marques led by BYD (002594.SZ), (1211.HK) are establishing their supremacy at home against global brands such as Tesla (TSLA.O) and Volkswagen (VOWG_p.DE) thanks to efficient supply chains. As sales stall in the People’s Republic, their desire to drive further overseas including to Europe is turning into a necessity. But rising anti-China sentiment will make for a difficult journey.

It’s a big milestone. In the last two months of 2022, Chinese buyers bought more local brands than multinational marques for the first time since the country opened up to automakers following China’s accession to the World Trade Organization at the turn of the century, according to Bill Russo, founder of Automobility, a Shanghai-based consultancy. Electric vehicles drove that change. They account for around a third of China’s total sales.

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Yet generous official subsidies have dried up, a price war is raging and consumer sentiment in the $18 trillion economy is weak. Overall, the International Energy Agency expects registrations of battery-powered cars in China will rise 30% this year. Last year, sales of new energy vehicles in the country nearly doubled, per Refinitiv. The deceleration is happening before many local automakers are on a sure financial footing.

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Take Nio (9866.HK): the $16 billion company sold a fifth more cars in the quarter ending March against the same period in 2022, but vehicle revenue was flat. Its net loss more than doubled to roughly $700 million and its cash of $5.5 billion was down by around a third. Nio and peers tapped equity markets from Hong Kong to New York but plunging valuations makes that a tough route to keep following for funding. Finding customers elsewhere is an obvious fix.

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China already sells lots of automobiles overseas: surging global interest in electric vehicles has made it the world’s largest exporter ahead of Japan, according to the Global Times. Although vehicles from Tesla’s sprawling Shanghai Gigafactory accounted for almost a tenth of the roughly three million cars exported last year, the rest of the top ten marques were Chinese.

Some wins abroad have been easy. Sales to emerging markets, including those in the Belt and Road initiative through which Beijing has loaned hundreds of billions of dollars, made up nearly half of the figure in the first four months of this year according to state media. Chinese marques also stepped up where Western peers retreated. In the first quarter of 2023, Russians purchased more Chinese cars than Lada, the beloved Soviet-era marque. Geely continues to sell its brands there, as do Great Wall Motor (601633.SS) and Chery. But motoring to richer destinations like Europe is the real prize.

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ESCAPE HATCH

On paper, Chinese companies are competitive enough to win wherever they want to go. One reason is vast economies of scale in the supply chain. Battery makers Contemporary Amperex Technology (CATL) (300750.SZ) and BYD, which makes power cells both for its own-brand vehicles as well as for third parties, account for around half of global battery production.

That helps Chinese manufacturers churn out an electric vehicle for around 10,000 euros less than European competitors, according to Grant Thornton. A BYD car priced at