In a new report, credit rating firm Fitch Ratings reckons China’s new energy vehicle (NEV) sales will grow strongly again this year, despite the ending of most purchase subsidies on December 31 – and in doing so start a transition that could damage slow moving carmakers who stick too long to internal combustion engine powered cars (ICE).
And among those ICE groups, the most vulnerable will be joint ventures – either of local makers, or local or foreign groups. Most of those in danger are state-owned, according to Fitch.
If Fitch is right, the pressure from rapidly growing NEVS purchases by consumers will trigger a round of rationalisation among the slow-moving, old-fashioned car makers in China
China’s Association of Automobile Manufacturers expects sales of EVs and plug-in hybrids to surge by 35% in 2023 to 9 million vehicles – nearly a third of China’s total new vehicle sales.
That will be up from 6.5 million units sold in 2022, with the figure boosted by the generous subsidies from national and other governments.
China’s NEV sector is dominated by BYD, Tesla and Nio, Xpeng, Geely, Li Auto and BAIC. They make both B-Evs (Battery) or Plug-Ins.
Fitch forecast in a February 10 research note that sales of internal-combustion-engine vehicles in China will fall by more than a dozen percentage points in 2023, while sales of passenger NEVs will continue to grow by more than 30%.
That will drive continued market share losses for mass-market joint venture brands, which have limited presence in the NEV market.
Global joint venture brands are under growing pressure to step up the pace of the electrified vehicle development and production, but low electric vehicle (EV) profitability and large upfront investments needed to build plant and infrastructure could prove to be powerful inhibitors for these groups.
Fitch said that two state-owned groups – China First Automobile Group Co (FAW). and Dongfeng Motor Group Co. – saw their overall market share shrink by 1.4 to 1.6 percentage points last year. The joint ventures accounted for 82% and 75% respectively of their total 2022 sales.
Dongfeng faces more challenges given its mass-market brand positioning and the slow NEV transition of its Japanese joint venture partners Honda and Nissan, Fitch said.
Sino-Japanese joint ventures whose NEVs once enjoyed good profitability may find it difficult to increase NEV sales without eroding margins thanks to the recent rounds of price cuts by leading makers, from BYD, Tesla, Li, Nio and others.
Fitch said that the FAW-Volkswagen joint venture has focused on China’s luxury car segment and could be less affected by the accelerating pace of EV penetration.
With VW, it also has a more aggressive EV strategy than other joint ventures, so FAW could end up being more resilient, according to Fitch.
FAW also has a JV with Toyota which is one of the most prominent of foreign laggards in electrifying its car fleets, preferring hybrids and in the future, hydrogen.
Volkswagen was one of the first foreign automakers to commit to investing in EV platforms and ecosystems, selling nearly 150,000 NEVs in China through its two joint ventures in 2022, Fitch said.
Despite the lost market shares this year, Fitch reckons FAW and Dongfeng will maintain their top three positions in the market over the next year or two, supported by the large sales base and infrastructure.
However, the risk of them being left behind by faster NEV adapters will only increase over the same period.
Fitch warns that as the new players and their NEVS take sales and market share from existing ICE makers, a price war could develop – both between NEVS and ICE models and within each group.
That would put pressure on markets for all makers.
…………
Meanwhile Warren Buffett’s has further trimmed his holdings in BYD.
Berkshire Hathaway sold another 4.235 million of BYD’s Hong Kong-listed shares, a filing on the Hong Kong stock exchange showed a week ago.
After the share sale, Berkshire’s holding in BYD’s issued H-shares has fallen to 11.87% from 12.26% in late January.
The stake reduction was the latest in a string of share sales by Berkshire to reduce its holdings in BYD. Buffett’s company has now sold around 95 million of its original holding of 225 million BYD shares.
Interestingly, Berkshire vice chair, Charlie Munger (Warren Buffett’s bestie) praised bYD this week and ignored the sales.
He said in the US Charlie Munger said Wednesday that Tesla pales into comparison with BYD.
“I have never helped do anything at Berkshire [Hathaway] that was as good as BYD and I only did it once,” the 99-year-old investor said at the Daily Journal’s virtual annual meeting Wednesday (he owns the Daily Journal). Berkshire’s initial investment is now “worth about $8 billion or maybe [$9 billion]. That’s a pretty good rate of return,” said Munger.
“At the current price of BYD stock, little BYD is worth more than the entire Mercedes corporation. It’s not a cheap stock, but on the other hand, it’s a very remarkable company,” Munger said. “BYD is so much ahead of Tesla in China … it’s almost ridiculous,” Munger added.
