A brutal round of eliminations is reshaping the world’s largest market for electric cars

A brutal round of eliminations is reshaping the world’s largest market for electric cars

A “race to the death” has begun in the world’s largest market for electric vehicles (EVs).

Chinese EV makers showing off their latest models at Auto China, which kicks off in Beijing on Thursday, have enjoyed generous support from the government for years, with some growing rapidly to become global players. BYD, for example, is currently competing with Tesla to lead the battery electric vehicle market.

But all of the country’s more than 200 EV manufacturers are now struggling with a massive oversupply, and experts predict many smaller companies won’t survive in the fiercely competitive environment.

From a brutal price war to slow sales in a weakening economy, challenges in China have also forced some global automakers to pull back. And, it doesn’t help that enthusiasm for EVs is waning in other markets around the world.

“China’s EV industry will only grow from strength to strength as a whole, but not every player today will see the finish line,” said Mark Rainford, a Shanghai-based automotive industry commentator who hosts the YouTube channel “Inside China Auto.”

Even Chinese officials say that the automaker will need an iron stomach to make it through the next few months.

“Competition in the new energy vehicle (NEV) industry will be very intense in 2024,” the National Development and Reform Commission (NDRC), the country’s main economic planner, said on Monday.

More than a dozen passenger car makers disappeared from the market last year, according to statistics from the China Passenger Car Association. These include once-popular EV brands, such as WM Motor, Byton, Aiways and Levdeo. Several global automakers have also been forced to restructure their businesses or close operations. In October, Mitsubishi Motors announced it would end car production at its joint venture in China. Honda ( HMC ), Hyundai and Ford ( F ) have also taken steps, including layoffs and plant sales, to cut costs, according to stock exchange filings and state media reports.

By 2030, China may have fewer than five major EV players, Richard Yu, CEO of Huawei’s consumer business division, predicted last June. Huawei has partnered with several automakers to produce EVs.

So what makes the industry so difficult for both local and foreign players, and what will happen to EV makers in the world’s second largest economy?

A bruising price war
Aggressive price cutting is a huge headache.

The price war began in October 2022, when Tesla ( TSLA ) cut prices for its Model 3 and Model Y cars in China by 9%. Three months later, it discounted its cars again, triggering a wave of price cuts that will hit the country’s auto industry in 2023, including gasoline carmakers.

The pressure became stronger.

Just this week, Tesla again cut the starting price of four models sold in mainland China, its largest overseas market, by 14,000 yuan ($1,932). Xpeng and Li Auto, China’s fastest-growing car brands, immediately followed suit, offering deep discounts or tens of millions of dollars in subsidies to attract buyers.

“The price war is likely to continue into this year, although it’s hard to imagine prices falling any further than they already are,” Rainford said.

The deals available to Chinese car buyers are now very attractive, but some brands will not be able to maintain these discounts forever, he said.

“They will need deep pockets and smart marketing to pick up enough business,” he added.

Price cuts have squeezed profits. In 2023, the average profit margin for China’s auto industry will decline to 5%, the lowest level in at least a decade, according to data from the China Association of Auto Manufacturers (CAAM).

Too many players
Congestion is another major issue plaguing China’s EV industry.

NDRC expects more than 110 new NEV models to be launched this year, adding to the flood of EVs entering the market.

For 2024, BYD, Huawei Aito and Li Auto alone plan to increase deliveries by 2.3 million vehicles, the NDRC said. But total market demand is forecast to increase by only 2.1 million cars.

“The market will be oversupplied for a long time,” he added.

And now, more companies are joining the overcrowded field.

Last month, Xiaomi, the Chinese smartphone brand, launched its electric car, the SU7 sedan. CEO Lei Jun said he wants to take on Tesla and Porsche with a new premium car that comes with a starting price of just 215,900 yuan ($29,794) Last November, Meizu, another smartphone maker, announced it would partner with Geely Auto and launch the first. EV, Meizu DreamCar MX, in 2024.

In the same month, Huawei launched its first electric sedan, the Luxeed S7, developed with Chery Auto with the aim of taking on Tesla’s Model S.

CAAM has forecast the country’s total passenger car sales to be around 26.8 million vehicles for 2024. But the combined sales target by major manufacturers so far has reached almost 30 million units.

The oversupply means the company will have to accelerate sales, including by increasing exports — at the risk of increasing tensions with key trading partners. Failure to do so can cause cash flow problems and plunge the producer into crisis.

And the battle may become more difficult for foreign players.

Tesla was narrowly edged out by BYD as the world’s best-selling EV brand in the fourth quarter of last year. BYD’s entry-level model sells in China for the equivalent of just under $10,000. In contrast, Tesla’s Model 3, its cheapest model, now costs at least 231,900 yuan ($32,002) after the latest price cut.

“Current product quality, combined with the unparalleled level of automation and innovation going into Chinese cars, means traditional foreign players will feel increased pressure as more Chinese brands showcase their wares in the international market,” Rainford said.

Knockout round
As competition intensifies, many automakers will be wiped out in the coming months, according to the CEO of China’s EV company.

“Entering 2024, the knockout round of China’s auto industry will begin comprehensively, and the industry will enter a period of consolidation, with a complete overhaul,” said Gan Jiayue, chief executive officer of Geely Auto, at the company. earnings conference in March.

Wang Chuanfu, chairman of BYD, also predicted in March that a “cruel elimination round” was coming.

“China’s EV industry has entered a cyclical adjustment stage after two decades of growth,” he said at a forum in Beijing. “Companies must establish economies of scale and brand advantages as quickly as possible.”

Further industry consolidation means more small to medium-sized companies could be wiped out, industry insiders predict.

According to Yin Tongyue, chairman of Chery Auto, the EV maker is entering a “life and death race.” He added last month that his company will launch 39 new pure electric and hybrid models in 2024 and 2025 to gain a top position in the EV market.

But for those still alive, the future is not entirely bleak.

In 2024, electric car market share could reach up to 45% in China, supported by competition between manufacturers, falling battery and car prices and continued policy support, according to the International Energy Agency.

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