China EV – The shakeout

There will be fewer Chinese car makers.

• Recent price cuts from BYD are accelerating a price war against a backdrop of weak domestic demand, meaning that the inevitable consolidation of Chinese car companies is coming sooner rather than later.
• RFM Research estimates that there are at least 100 car makers in China, which have around 200 vehicle brands compared to 10-15 major companies with 26 brands for the rest of the world.
• The non-Chinese companies mostly operate in the world of economic reality, which is why the European car industry is having such difficulty and why there are only 26 brands outside of China.
• BYD has decided to offer discounts on 22 of its EV and hybrid models until the end of June to kickstart sluggish demand in the domestic market.
• The problem is that this discount is coming straight out of profitability, which is why the share price dropped by 8% yesterday and is down by another 3% in Hong Kong this morning.
• BYD’s smaller and weaker peers immediately followed suit, resulting in share price falls at Great Wall Motor and Geely, to name but two.
• This will help BYD to make its numbers for Q2 2025, but it does nothing in terms of margins, and it won’t do much to fix the two main underlying problems with the Chinese vehicle market, which are:

• • First, oversupply: where there are way too many car makers and way too much inventory to ensure an orderly market.
  • Stock levels at dealerships, let alone work in progress or finished goods currently stands at 3.5m units or 57 days which is the highest that has been seen for some time.
  • Furthermore, BYD dealerships are beginning to go out of business, which is yet another sign that all is far from well.
  • In order to fix the problem, the number of car makers and brands needs to drop radically to reflect the level of Chinese demand, which is still growing but is less than many expected.
  • Second, domestic consumption: which remains moribund as a result of the weakness in the domestic economy.
  • China has failed to bounce back from the COVID pandemic which combined with a heavy state intervention in the technology sector has led to a great deal of nervousness in the private sector more generally.
  • The resulting general unwillingness to take risks or invest combined with the ongoing weakness in the real estate market, continues to keep a lid on domestic consumption.
  • Consequently, I suspect that this is going to stagnate for the foreseeable future as the state has proven to be largely incapable of spurring the economy back to growth.
  • Where it has been more successful is in subsidies, which the state is using to repeat what it has done in solar panels in the electric vehicle industry.
• This means that oversupply of vehicles and EVs in particular is likely to persist for some time, meaning that more consolidation is coming.
• As the largest and most vertically integrated of any of the Chinese EV players, BYD’s strategy is to outlast all of its rivals, meaning that this is not the last that we are going to see of price cuts and discounting.
• The net result is that prices are likely to continue falling in China and there will also be renewed pushes by Chinese companies to offload their excess capacity in overseas markets.
• Hence, there is likely to be more pressure in Europe, Latin America, Africa and Southeast Asia as failing Chinese brands seek more sales outside of China.
• The luxury segment is less affected, but the mass market vehicle makers are in for a rough ride while the Chinese industry resizes which is going to take some time.
• It is still unknown to what degree the Chinese state is willing to subsidise its EV aspirations, but with the economic and debt situations not in very good shape, I suspect that this is already beginning to wane.
• BYD is likely to emerge as one of the winners, but during the struggle, the market has already signalled that it will not be pain-free, meaning that I would not want to be exposed until there is a sign of a bottom.