Tesla and other electric vehicle (EV) shares are trading lower in US premarket price action today. While the broader markets are also looking weak with the futures pointing to shares opening in the red today, Xpeng Motors comments on a bloodbath in the EV industry also seem to be weighing heavy on sentiments.
In an employee memo, Xpeng Motors’ CEO He Xiaopeng said that the price war in the EV industry could end in a “bloodbath.” Notably, there has been a brutal price war in the Chinese EV industry since Q4 of 2022 when Tesla started to cut car prices to spur sales.
Tesla’s price cuts were followed by similar announcements from other carmakers including Xpeng Motors, Ford, Toyota, and Nissan.
Last year, even NIO lowered car prices. Previously the company had categorically said that it wouldn’t join the price war.
The Elon Musk-run company has since lowered prices multiple times including in January. Last year, The China Association of Auto Manufacturers (CAAM) tried to bring about a truce in the price war.
China EV price war
A total of 16 automakers including Tesla (which was the only foreign automaker in the lot) signed the pledge at an industry conference in Shanghai which stated they “take on the heavy responsibility of maintaining steady growth, strengthening confidence and preventing risks.”
However, the truce failed and shortly CAAM retracted the pledge and said that the EV price war agreement violated China’s antitrust law.
Analysts have also been apprehensive about EV shares amid the brutal price war. In its report last month, Bernstein said, “We expect competition within the domestic market to remain intense and put pressure on pricing and profitability.”
Analysts are apprehensive about Chinese EV shares
It added, “Competitive landscape will be more challenging, and pricing pressure to ensue. Although EV demand is set to remain resilient, the industry will confront three major challenges on the supply side: overcapacity, new model launches and the rise of new tech entrants such as Huawei and Xiaomi, which point to growing competition.”
Morgan Stanley, which is otherwise bullish on Tesla and Ford is also cautious on Chinese EV shares in 2024 and said in its note, “Investors remain cautious as China’s auto market has had a volatile start to the year as competition and macro uncertainties persist.”
In its report last November, Fitch Ratings said, “We expect the market to consolidate as a result, with smaller niche EV producers that require capital for development to merge with or be acquired by stronger market participants.”
Price war has taken a toll on margins
The price war was taking a toll on the earnings of startup Chinese EV companies. Both NIO and Xpeng Motors posted negative gross margins in Q2 amid the price war and slowing sales, While NIO managed to post positive gross margins in Q3, Xpeng Motors’ gross margins were still negative even as the company expects meaningful improvement in 2024. Tesla’s operating margins have also fallen and were just above 8% in the fourth quarter of 2023 which is less than half of what they were at the peak. That said, Tesla’s margins are still among the highest in the industry and the company expects to make up later with sales of software products like self-driving.
Musk believes Chinese EV companies could “demolish” competitors
In Q4 2023, China’s BYD surpassed Tesla to become the largest seller of EVs globally. In May last year, Musk termed China-based EV maker BYD “highly competitive.” Notably in 2011, the billionaire had laughed at the possibility of BYD as a competitor to Tesla.
Musk meanwhile has been all praise for Chinese EV companies and during the Q4 2022 earnings call last month he said, “Frankly, I think, if there are not trade barriers established, they will pretty much demolish most other companies in the world.”
He added, “The Chinese car companies are the most competitive car companies in the world. So, I think they will have significant success outside of China depending on what kind of tariffs or trade barriers are established.”
To be sure, this is not the first time that Musk has praised Chinese EV companies and he has made similar comments multiple times in the past including during Tesla’s Q4 2022 earnings call.
“I think we have a lot of respect for the car companies in China. They are the most competitive in the world. That is our experience,” Musk had then said.
The billionaire added, “And the Chinese market is the most competitive. They work the hardest and they work the smartest. That’s — so a lot of respect for the China car companies that we’re competing against. And so, if I would have guessed, there are probably some company out of China as the most likely to be second to Tesla.”
Ford CEO Jim Farley has also praised Chinese EV companies. Notably, Ford has slowed down its ambitious pivot to build electric cars and is instead doubling down on hybrids.
Xpeng Motors to spend aggressively on AI
Coming back to Xpeng Motors, despite the price war and margin compression, the company committed to invest $486.2 million towards artificial intelligence technology focused on “intelligent driving.”
Earlier this year, it said that it had rolled out its XNGP driver assistance system to 243 cities a year ahead of schedule and emphasized that it is on track to roll out the feature to Europe soon.
Xpeng Motors has been advancing its autonomous driving capabilities and last year it also acquired the self-driving assets of Chinese ride-hailing app Didi. As part of the $744 million deal, Didi took a 3.25% stake in Xpeng in exchange for its EV and autonomous driving assets. Xpeng Motors will launch a new EV brand “MONA” as part of the partnership and will produce vehicles in the RMB150,000 price range.
Last year only, Volkswagen partnered with Xpeng Motors to build two EVs on its platform and also buy a stake in the company. The deal was a milestone for the Chinese EV ecosystem as it reflected the confidence of Volkswagen in a startup EV company. It was also a testimony to Xpeng Motor’s self-driving capabilities which the company intends to further build upon.
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Mohit Oberoi
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