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China & US Auto Market — Chinese Auto Disrupting Everyone Else

August 10, 20241 month ago Paul Fosse 0 Comments

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In this article, I’m analyzing at a high level what is happening to the auto industry across propulsion types. I’ll break it down by region and also discuss individual companies. For the purposes of this article, I assume that level 5 self-driving and driverless taxis don’t come for a while. I don’t know if that is true, but since that would change everything, I will ignore it for now, even though tremendous progress is being made. This excellent video by Sam Evans (The Electric Viking) inspired this article.

China

The big news is that “New Energy Vehicle” (NEV, which is BEV plus PHEV) sales in July exceeded 50% of sales for the first time ever! How did that happen? BYD and Tesla have been selling great electric cars in China for some time, and those sales continue to grow, but the bigger change is that BYD, Geely, and Li Auto (and others) have come out with low priced (around $10,000 to $20,000) plug-in hybrids that are the same price as gas cars but have far more advanced technology and cost a lot less to fuel and maintain. These plug-ins also help with range anxiety, since although early adopters generally have the stomach for radical change, mainstream buyers are more cautious. Note that overall car sales have been flat as the Chinese economy has stalled.

Tesla growth is stalled until they release new models or FSD reaches driverless capability, both of which are expected, but the timing is uncertain.
Domestic Chinese automakers are doing comparatively well in a brutally competitive market. They are quickly expanding their sales of both BEVs and PHEVs to domestic customers, while they are also quickly expanding their exports of both their world leading electrified offerings and their gas models that are uncompetitive in the Chinese domestic market.
Foreign automakers (except Tesla) were all forced to have joint ventures with domestic companies when they entered the market many years ago. These partnerships worked well, with many companies like VW and GM making billions of dollars a year. I don’t know all the reasons these joint ventures have been so slow to electrify and put in modern technology into their cars. It might just be complacency. For many years, you could just manufacture mediocre cars in China and the demand was so high that the customers would just snap them up. Foreign brands had the prestige and domestic brands were low quality and low status. That has quickly reversed in the last few years and the Chinese have become proud of their domestic companies’ products. Michael Dunne explains how major automakers’ sales have risen or dropped from 2016/2017 to 2024 (forecast) in this excellent article. Some highlights:
- GM has lost over half its sales, going from 4.1 million to 1.8 million
- Hyundai and Kia have lost over 80% of their sales, going from 1.2 million to 220,000
- VW has dropped almost half of its sales, going from 4 million to 2.5 million
- BYD sales have risen over 8 fold, from 420,000 to 3.6 million

Now that the domestic automakers can produce modern plug-ins at scale and price parity with the low-priced gas sedans (such as the Honda Civic, Nissan Sentra/Sylphy, and Toyota Corolla), which sold well in China for many years, there is no reason they can’t force most of these companies out of the Chinese market. The way the auto industry works is that if your sales drop dramatically, the fixed costs of an auto factory are so high, you will take big losses. So, every automaker has to keep capacity fairly close to demand or they will lose a lot of money.

With massive overcapacity in the Chinese market, especially at the joint ventures, they will try to use this capacity to produce cars for export to other markets. This may work, but will be somewhat hampered by protectionism in some markets, transportation costs, and some companies having obsolete products that may have trouble competing with the latest models.

United States

I like to break up the US auto market into 6 groups:

Tesla’s growth is stalled until it either comes out with more affordable models or it gets Full Self Driving working good enough to be unsupervised. Tesla is promising both, and I expect it will deliver both, but I expect affordable models before major FSD progress.
The big 3 (GM, Ford, and Stellantis) have a lot of challenges. They are all losing (or have lost) most of their sales in China at a shocking pace. Both Ford and GM have retreated from many global markets, and all 3 seem to have abandoned the sedan market. So, instead of having a diverse portfolio of products, they are betting everything on trucks and SUVs. I expect they will be able to hide in this popular and profitable segment for a few years, but eventually they will be attacked on their home turf and in these segments. These 3 companies have increased labor costs as a result of the recent UAW agreement. Many Stellantis executives have left recently and it is also offering buyouts to its salaried workers. GM has also had a few executives leave. I expect more layoffs if the economy continues to weaken. These companies are putting the brakes on their EV plans, which looks smart in the current environment, but when EV sales accelerate in a few years, they may get caught without enough product to sell.
The Japanese (Toyota/Honda/etc.) have done well this year, as they finally have the supply they need to sell. Although they have been slow to make electric cars, that has worked this year since hybrids are the sweet spot at the moment. The companies will suffer as they lose a lot of sales outside the US market, but they are doing well inside the US. I expect as EVs get more popular, they may have difficulty transitioning quickly enough.
The Korean manufacturers (Hyundai/Kia/Genesis) have had soft sales this year. They have lost some sales to Toyota and Honda. Many customers wanted a Toyota or Honda during the pandemic but couldn’t get one, so they took a Hyundai or Kia. Some of those buyers will stay, but some are returning to Toyota and Honda now that they have supply. Hyundai and Kia have designed a good mix of gas, hybrid, PHEV, and full electric cars, so they are well positioned to meet customers where they want to be. They also have been quick to move production to the US to take advantage of the tax credits that require cars to be made here.
The Germans seem lost. They all made EVs thinking they could sell them at a premium price, but now that prices have come down a lot, they seem unable to react. They have had a lot of software issues, so they keep partnering with other companies to try to solve them. In the end, it seems like they are just moving too slow to keep up.
The startups Rivian and Lucid are making great cars and large losses. The question they need to answer is if they can scale up to making cars profitably before their investors tire of financing their losses. We may see more deals like the one recently announced between VW and Rivian. These companies have good software and other technology that many legacy companies don’t. But these joint ventures are notoriously hard to manage, so I don’t expect them to be a panacea.

Conclusion

In China, the 3 trends that seem unstoppable:

Domestic automakers will continue to displace legacy automakers, forcing many to leave the country entirely.
Both domestic and legacy automakers will try to solve their overcapacity issues by exporting vehicles to other markets.
The percentage of NEVs should hit 60% this year and could reach 90% with a couple more years. Then there would be another transition from PHEV to EV, but I expect that to be quite fast, as everyone that I know who buys a PHEV is ready for an EV when they buy their next car.

In the US, all the automakers’ financials will be hurt by losing their profits in China and then later losing their profits in other international markets as China drives prices down and quality up in those markets. It looks like the election is 50/50 right now, so it could go to either party. But both parties are quite anti-China, so I expect whoever wins the presidency to try to protect the US market from Chinese competition. The question is what will they do about Chinese brands making cars in Mexico, Canada, or the US? Will they hinder those also? Probably. Even if they do, Tesla, Hyundai, Kia, GM, Ford, and Stellantis all plan profitable $25,000 EVs over the next couple of years. Not all of them will succeed, but if 2 or 3 of them do, that changes everything. There’s a whole lot of people that want to try an electric car but are waiting for the prices to come down. So, the Toyota Corolla, Honda Civic, and Nissan Sentra would be crushed in the US, just like they are losing sales in China to the inexpensive EVs in China.

Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV], NextEra Energy [NEP], and several ARK ETFs. But I offer no investment advice of any sort here.

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