Traditional Automakers to Ramp Up EV Competition in China
Traditional automakers in China are likely to boost their electric vehicle (EV) market shares by absorbing more of the cost increase caused by ongoing supply-chain bottlenecks, says Fitch Ratings. They will be supported by their more profitable internal combustion engine vehicles (ICEVs) and more robust funding access, compared to the EV start-ups.
Battery costs have risen sharply since 2021 due to a supply shortage and will remain high at least in the near term, in our view. The renewal cycle for most contracts in China has also shortened to quarterly from annual, giving battery manufacturers more flexibility to pass through additional costs to downstream EV producers.
We expect the structural shortage of auto microchips to persist into 2024, although softening demand globally for consumer electronics may free up some supply capacity for the auto sector from 2H22.
However, several traditional automakers have refrained from large increases in the latest rounds of EV price hikes, despite higher input costs, suggesting they have more financial flexibility to absorb costs. This may support their strategic shift towards EVs.
Regulatory requirements will continue to pressure the traditional automakers to accelerate EV production. The dual-credit scheme, which assigns credits for producing green vehicles, requires non-compliant automakers to buy credits from other EV producers, translating into higher implicit costs for non-EVs. Recent data show that 64 of 129 passenger-vehicle companies failed to meet the corporate average fuel consumption target under the scheme in 2021 and only a few of them accumulated enough offsetting New Energy Vehicle (NEV) credits. The traditional Sino-foreign joint venture auto manufacturers remained underperformers.
The Ministry of Industry and Information Technology proposed much higher targets for 2024 and 2025 for the dual-credit scheme on 7 July 2022. The proposal, if implemented, could further accelerate EV production at the traditional automakers.
We believe traditional automakers have stronger bargaining power with suppliers and better cost control than EV start-ups, as well as more resilient and diversified supply chains. Apart from BYD, which sources all its EV batteries in-house, leading incumbents typically form joint-venture battery plants with critical suppliers, such as Contemporary Amperex Technology, while most EV start-ups rely on external suppliers and only recently started to plan in-house production. Traditional automakers have also been able to reallocate microchips that are in short supply from traditional cars to EVs.
We believe traditional automakers have an advantage in downcycles, as their shareholders are usually higher-profile and often government-related, and as a result they have a greater capacity to tolerate losses than newer rivals, particularly if equity funding becomes scarce. New EV brands, including those of traditional automakers and EV start-ups, have sustained losses due to high upfront costs and R&D, sales and marketing expenses, and these losses are likely to grow in a downcycle.
We expect high oil prices and the expiry of government subsidies at the end of 2022 to bolster EV demand in 2H22. Still, the growth in demand could be slower than in 1H22 because of continued price increases and the government’s latest stimulus measures that favour traditional vehicles over EVs. The EV market in China rebounded sharply in June, following an anaemic April and May due to severe Covid-19-related societal restrictions. New EV wholesale deliveries increased by 35% in June from a month earlier and 141% from a year ago, driven by deliveries of the accumulated order backlog.
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