Power Shift Part 2: Western Brands In China's EV Market

seekingalpha06-27

The Chinese market is increasingly dominated by domestic brands in the electric vehicle (EV) sector, posing a threat to Western manufacturers.This article provides an updated analysis of the EV market...

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ASKA Introduction This article is about the rapidly changing market, the growth of Chinese companies, and the challenges faced by Western manufacturers. Toward the end of the article, I discuss two different ETFs, Global X Autonomous & Electric Vehicles ETF  & KraneShares Electric Vehicles and Future Mobility Index ETF , as well as other general ideas that will hopefully help you in your future decisions regarding your own trading with car manufacturers. 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ASKA Introduction This article is about the rapidly changing market, the growth of Chinese companies, and the challenges faced by Western manufacturers. Toward the end of the article, I discuss two different ETFs, Global X Autonomous & Electric Vehicles ETF (NASDAQ:DRIV) & KraneShares Electric Vehicles and Future Mobility Index ETF (NYSEARCA:KARS), as well as other general ideas that will hopefully help you in your future decisions regarding your own trading with car manufacturers. Why part 2? I wrote an article titled \"Power Shift: China's EV Market, Impact On Western Brands, And Some Trading Ideas\" almost one year ago. In my opinion, this is one of my best articles to date and contains essential information for anyone interested in car manufacturer shares. Why? In recent decades, the Chinese market has been a significant part of the sales figures of Western car manufacturers, with up to 40% of sales going to China alone. For most manufacturers, the percentage was double-digit. However, this market is increasingly threatening to collapse, signaling a dangerous development for Western brands: - the trend is that more and more electric cars are being sold in China. At the same time, Chinese companies have overwhelming market shares in the EV market. If these two trends continue, almost all non-Chinese brands could lose up to 40% of their previous total sales figures I will analyze how developments have continued since the May 2023 article and evaluate whether these trends will continue or intensify. I will also focus on the global market, often called the \"rest of the world,\" as it is becoming increasingly critical in global sales. Where appropriate, I will include comparisons with the figures from the last article. For understanding: this article refers specifically to 2023 figures and last year's article to 2022. Part of a series Reading the old (rather long) article first is still interesting, but not necessary, as this is supposed to be the updated version. I plan to write two articles that give a general overview: This and soon an article on the future cost of electric cars compared to internal combustion engines - in other words, an article that shows which technology is most likely to prevail in the long term. Over the next few weeks, I will analyze the various carmakers individually. All of this together should give you a comprehensive picture of the industry. Global automobile production In Part One, I included the same graph from Statista, but it only covered up to 2021. In this updated version, the trend looks like we could soon reach a new all-time high in global car production. Currently, we stand at 94M vehicles. Statista  Production by region Oica.net offers a detailed breakdown of the 2023 vs. 2022 production statistics. The website provides the exact details; here are a few selected countries.     2023 Change   USA 10.6M +6%   China 30M +12%   Germany 4.1M +18%   Canada 1.5M +26%   India 5.8M +7%   Japan 9M +15%   Click to enlarge Pretty much all major manufacturing countries were able to increase their production, which is not surprising given that the total annual output in 2023 is 9M more than in 2022. Let's take a look at some longer-term trends.     2019 2023 Change   Europe 21.2M 18.1M -15%   USA 10.9M 10.6M -3%   China 25.7M 30.1M +17%   India 4.5M 5.8M +29%   Click to enlarge With these figures, it is important to note that global production in 2023 is higher overall than in 2019; the first chart above shows that the peak was reached in 2017 and 2018, but 2019 saw a relatively sharp drop, and we are now above that level. To summarise, the USA has remained relatively constant, Europe has lost a lot, and production has shifted even more to Asia. This trend has been going on for a long time and seems to continue. Total global vehicle sales It makes economic sense for manufacturers to produce where they sell. Therefore, it is not surprising that the trend in global sales is relatively similar to the trend in global production: Europe and the US tend to stagnate, and in 2023, they will even fall relatively sharply compared to 2016. China, on the other hand, grew from 16 to 26 million units and now sells almost as much as the US and Europe combined.   Region 2023 2019 2016 2013   Europe (EU+UK+EFTA) 12,847,500 15,805,800 15,131,700 12,308,200   USA* 15,457,400 16,965,200 17,465,000 15,531,600   Japan 3,992,700 4,301,100 4,146,500 4,562,300   Brazil* 2,180,200 2,665,600 1,988,600 3,579,900   India 4,101,700 2,962,100 2,966,600 2,554,000   China 25,798,000 21,045,000 23,693,400 16,303,700   Mexico* 1,360,100         Click to enlarge The relative importance and future of the four markets It's a rough categorization, but I would divide the market into the US, Europe, China, and the rest of the world. In 2013, global production was about 83M; today, it is 11M more. A production of 94M in 2023 does not necessarily mean sales of 94M, but for the sake of simplicity, we will assume it is the same, as the exact sales figures are difficult to find and put together. Sales in Europe and the US are no higher today than in 2013, meaning that their relative importance has declined. Sales in China increased by 9.5 million over the same period. If we add the increase in India (now the third-largest market), there is no growth left for the rest of the world. However, we can see from the table above that Brazil fell very sharply, and Japan fell by around 15%. Based on all this data, I would summarise that the markets in the USA, Europe, and Japan are stagnating, maybe because they are saturated. The percentage of car owners is already so high that it can hardly increase further. Add to this is an unfavorable demographic development, an economy that is tending to stagnate, especially in Europe, and the ever-increasing focus on climate and environmental protection, all of which are contributing to the fact that more and more people either don't want a car or can't afford one, or want to drive their existing vehicle for as long as possible before replacing it with a new one. In contrast, the demographic development in many Southeast Asian countries and India is considerably better, i.e., considerably younger. Furthermore, the car is seen even more as a status symbol here, as a sign that one has made it from the lower social class to the middle class. I suspect that the importance of Southeast Asia, South America, and probably also Africa will increase in relative terms over the next ten years. On the other hand, China will probably soon reach a point where, due to the same dynamics (demographics and saturation), the growth momentum there will likely slow down in a few years.  China has a rather high car ownership rate, mostly because of the status symbol that comes with vehicles. According to the survey conducted by Rakuten Insight, about 71.4 percent of the Chinese respondents stated they owned a car. statista.com  A word about Russia: this may not be a huge market, but 937K cars were sold in 2023. The sanctions have not had the desired effect in any area, and the car market is an example of this. Western company sales have slumped by 90% or more. Russia has no shortage of cars but is now simply importing from other countries. Chinese companies gladly take advantage of this; they now dominate this market without much competition. The importance of China for Western brands As we have seen, China is the largest and most important market in the world, both in terms of production and sales, and it continues to grow dynamically. Therefore, I want to analyze how important China is as a market for various companies and the percentage of development. In Part One, I analyzed this aspect for the following companies: General Motors (GM), Ford (F), Tesla (TSLA), and Volkswagen (OTCPK:VWAGY, OTCPK:VLKAF, OTCPK:VWAPY). Since Ford hardly plays any role in China, I will not include them here. Tesla China is Tesla's second most important market, accounting for just over 20% of sales. Tesla is still growing in China but less rapidly than in the other two areas listed. Also note here how the rise in revenue in the USA is slowing done, despite heavy tax incentives of up to $7500 in 2023. stockdividendscreener.com General Motors GM sold 6.19M cars in 2023, 2.1M of which were in China. In 2021, the number was 2.9M. Out of interest, I looked up the sales figures in China for General Motors' record year 2016; it was 3.8M. All in all, a sharp decline, and all this while overall sales volumes in China have risen massively. statista Mercedes The company (OTCPK:MBGAF, OTCPK:MBGYY) sold 2.5M cars and vans in 2023. The company grew 7% in Europe compared to the previous year but lost 1% in the USA. In China, 737k cars were sold, a decrease of 2% compared to last year. Overall, the Chinese market accounts for around 25% of total sales. Volkswagen This company was one of the most successful Western companies in China for a long time and held the top position in market share for several years. In 2023, it was handed over to BYD (OTCPK:BYDDF). Annual sales totaled 2.2M, which corresponds to -0.2% YoY. Volkswagen has stated 3.2M, but this includes the joint venture programs. Worldwide sales are 9.24M, which means the company remains one of the global top players, but the share of EVs is relatively small.  At the same time, the Volkswagen Group successfully continued its transformation and delivered 771,100 fully electric vehicles. This corresponds to an increase of 34.7 percent compared to the previous year. The share of all-electric vehicles in deliveries rose to 8.3 percent compared to 6.9 percent in 2022. 2023 report  Others Here is an overview of the top 10 brands. BYD jumps to the top, and the two previous foreign leaders, Volkswagen and Toyota (TM), lose in absolute sales figures and market share. carnewschina.com All the statistics I've seen so far indicate that most of the foreign companies' sales mentioned above are combustion engine cars. BMW has sold about 100K EVs, which is 14% of the 700k total sales in China. News from late November 2023 reports that Toyota plans to cut Production and the number of dealers: \"Toyota dealers will be cut to 66,000 in December, 60,000 in January, and 38,000 in February\". The article also states that Toyota's September 2023 sales fell by 9% year-on-year, which could indicate that the decline is accelerating. In the case of Volkswagen, only about 190k of the 2.2M vehicles sold were EVs, so less than 10%.  The internal combustion engine (\"ICE\") segment continues to provide a robust foundation for the Volkswagen Group’s long-term business development in China. Based on deliveries of 2,997,184 ICE vehicles, the Group expanded its market share to over 20% in 2023. High unit sales and a good cost structure for the ICE models enable Volkswagen Group China to build up its financial position for an accelerated transformation and take the next leap in innovation in connection with its “In China for China” approach. Volkswagen Group China  This quote provides interesting details. On the one hand, Volkswagen's market share in ICE cars is significantly higher. On the other hand, the margin is also better than that of the very competitive electric vehicle business. The report also indicates that the competition is extremely tough and has considerable price pressure.   Global market share of EVs A quick reminder about the year 2022 so that we can easily compare it to 2023:  According to Virta.global´s detailed report, in 2022, over 10M EVs were sold for the first time, and the market share increased to 14%. Over 6M of these 10M were sold in China. Still, even in China, EVs only have a 25% market share of new sales. Power Shift Part 1  virta.global How have these numbers developed in 2023? According to iea.org, there were about 14M worldwide sales, which is a 35% increase year over year. According to this article, about every third car sold in China in 2023 was an EV, up from 25% in 2022. Please note that the figures on the various websites differ slightly. I have encountered this problem several times during my research. But usually, the numbers are not far apart.     China Europe USA Rest of the World   2022 sales 6.2M 2.7M 1.1M 1.1M   2023 sales 8.1M 3.2M 1.4M 1.9M   2022 EV market share 25% 20% 7%     2023 EV market share 33% 21% 10%     Click to enlarge   We could interpret these figures in different ways. The Chinese market might be saturated sooner; Europe and especially the USA will be saturated later (with EVs; as mentioned above, they are pretty saturated with vehicles overall, but switching to EVs will take them longer than the Chinese). Of course, this assumes that electric cars will prevail over combustion engines in the long term. It could also mean that the Chinese market flattens towards the end of the decade, while a significant boom in Europe could still be ahead of the USA and the rest of the world. Skepticism towards electric vehicles in Western countries is still much greater than in China. In Europe, there is also the central problem of electricity being quite expensive. There have recently been reports in Germany that charging a car with electricity is almost as expensive as filling it up with petrol. This is all the more astonishing when you consider that petrol prices in Germany are heavily taxed, while the production of so-called renewable energy is actually subsidized. However, that is not the point of this article because I want to analyze the situation in the Chinese market, which has been extremely important for Western companies in recent decades. EVs are globally just starting As specified in the table above, I could not find the EV market share for the rest of the world, but it's relatively small. However, with 1.9M sales in 2023, the \"rest of the world\" is becoming increasingly important. Note that these are 500k more sales than in the US. One of the growth drivers are Southeast Asian countries:  In Thailand, electric car registrations more than quadrupled year-on-year to nearly 90,000, reaching a notable 10% sales share – comparable to the share in the United States. This is all the more impressive given that overall car sales in the country decreased from 2022 to 2023. New subsidies, including for domestic battery manufacturing, and lower import and excise taxes, combined with the growing presence of Chinese carmakers, have contributed to rapidly increasing sales. Chinese companies account for over half the sales to date, and they could become even more prominent given that BYD plans to start operating EV production facilities in Thailand in 2024, with an annual production capacity of 150 000 vehicles for an investment of just under USD 500 million. In Vietnam, after an exceptional 2022 for the overall car market, car sales contracted by 25% in 2023, but electric car sales still recorded unprecedented growth: from under 100 in 2021, to 7 000 in 2022, and over 30 000 in 2023, reaching a 15% sales share. Domestic front-runner VinFast, established in 2017, accounted for nearly all domestic sales. iea.org  By the way, I spend time in Thailand every year, and I'm writing these lines in a café in Vietnam right now. I can see and confirm what is written in the paragraphs above. BYD cars are especially present on the roads in Thailand and VinFast (VFS) in Vietnam. Other fast-growing markets are Malaysia, Brazil, Colombia, and Mexico.  In Brazil, electric car registrations nearly tripled year-on-year to more than 50 000, a market share of 3%. Growth in Brazil was underpinned by the entry of Chinese carmakers, such as BYD with its Song and Dolphin models, Great Wall with its H6, and Chery with its Tiggo 8, which immediately ranked among the best-selling models in 2023. iea.org  Western brands under pressure in 3 markets What do I mean by that? I mean China, then the respective domestic markets or the Western world. Mercedes is also a well-known and respected brand in the USA, and Tesla is a renowned brand in Europe. The third market is the rest of the world, the global emerging markets, where most people live but where purchasing power is significantly lower (but rising). It would be a disaster for almost all classic car brands if they lost significant market share in China, but that is not the only danger. At the same time, Chinese brands are pushing into the Western home markets. As far as I know, no Chinese manufacturer is producing in Europe, but that will soon change with a BYD plant in Hungary. Currently, everything is bought via imports, and in the first nine months of 2023, there were more sales than in the whole of 2022. uk.motor1.com In China, we see that the more EVs gain market share, the more Chinese manufacturers gain market share too. Does this also mean for Europe that the more EVs are sold, the greater the Chinese market share in Europe? At the moment, it looks that way. The rise to almost 5% market share from zero in 2019 is impressive. However, the development is still in its infancy; we will only see whether consumers will accept Chinese brands in the next few years. But perhaps they won't be given the choice. The protectionist measures are getting stronger and have already been partially implemented. The media recently reported that the USA is introducing a 100% tariff on Chinese-made electric vehicles to protect itself from cheaper competition from the East. Elon Musk said not long ago that Chinese brands would \"demolish\" rivals without trade barriers. The European Union is also considering protectionist measures and has already launched a formal investigation, arguing that Chinese overcapacity and artificially low prices are unfair practices.  The investigation will first determine whether BEV value chains in China benefit from illegal subsidisation and whether this subsidisation causes or threatens to cause economic injury to EU BEV producers. ec.europa.eu  Therefore, I think it is very likely that Europe will also introduce some restrictions. And then what? First, this will hurt the population in the US and Europe because they will not benefit from the opportunity to buy cheap EVs. They will have to pay a higher price so that they will have less money available for other things. Also, China could retaliate and hurt sales of Western brands in China. This will be another area of the trade war between the West and China; ultimately, it is about who will be the global superpower of the 21st century. We need to keep an eye on this. Most likely, all major economic sectors will be part of the trade war, and the other side can always retaliate. These are two areas of the global EV battlefield, and the third is the rest of the world, where, in the past, Western and Japanese brands have captured all the sales because there was no competition. These markets should not be underestimated; they are home to large parts of the world's population. There is economic growth and a growing middle class. Thailand, Vietnam, and Brazil have already been mentioned above; here is an overview of other countries.  Last year, Chinese automotive manufacturers achieved double-digit market share in regions such as the Middle East and Eurasia and 10 percent in Africa. In Latin America, however, the market share increased by two percentage points compared to 2021. The market share of Chinese automotive brands in poor and developing economies went from 4.79 percent in 2021 to 6.46 percent in 2022. In contrast, European brands lost 2.7 points of share and Koreans one point. In South Africa, for example, market share increased from 6.08 percent in 2022 to 8.83 percent in H1 2023 for passenger cars. In Israel, the percentage jumped from 8.51 percent to 16.26 percent over the same period. Russia and its isolation from the West due to sanctions have become the big prize for Chinese cars. Their market share more than doubled, going from 20.17 percent in 2022 to 50.20 percent in the first half of 2023. Something similar also happened in neighboring Kazakhstan. motor1.com  Overall, the trend is clear and highly worrying for Western brands, mainly European and Japanese. The US is isolating itself from Chinese competition, which is an admission that it can't compete. Ford and GM can sell in the US, but they will probably disappear elsewhere because they won't be able to produce the volumes necessary to compete on price in other countries. Concrete idea one: DRIV ETF I want to give the readers some concrete ideas and discuss two different ETFs based on all the other information provided in this article. The first is the \"Global X Autonomous & Electric Vehicles ETF\" (DRIV).  Expense ratio: 0.68% AUM: $512M Holdings: 80  The first thing to notice is that this ETF's expense ratio is quite high, which, in my opinion, is a huge negative. Secondly, the trading volume is low but still seems high enough (the 3-month average is about 93,000 traded shares daily). Another thing I noticed is that the assets under management are rapidly decreasing; one year ago, in my first article, the number was $796M, so now it's almost $300M less. If this pace continues, the ETF could soon cease to exist. According to the fund issuer GlobalX, the ETF \"seeks to invest in companies involved in the development of autonomous vehicle technology, electric vehicles (“EVs”), and EV components and materials\". But when we look at the top 10 positions, it's hard to even see the EV connection. GlobalX Apple, for example, literally ended all of its EV ambitions a short time ago. Sometimes, ETFs have requirements that the companies included must generate at least a certain percentage of their revenue from the specified sector. Such a requirement does not seem to exist here and is not mentioned on their website. The entire list of positions can be viewed under the GlobalX link above. It includes a few car manufacturers, such as Toyota, Ford, and Renault, as well as lithium and some battery manufacturers. But for my taste, this is too little for an Electric vehicle ETF. Most investors probably already have the top 10 positions in their portfolios, either as individual stocks or in the form of other ETFs. If you want to profit specifically from the EV boom, this ETF is the wrong choice, in my opinion. Looking at the top positions in relation to the information provided in this article, it is clear that this ETF is not the right way to profit from the Chinese EV boom. Therefore, I would like to introduce a second ETF that is better suited for this purpose. Concrete idea two: KARS ETF  Expense ratio: 0.72% AUM: $85M Holdings: 65  Firstly, the negative aspects: the KARS ETF is also relatively expensive, and has also lost a massive amount of assets under management, even more than DRIV (around 50% in the past year). The 3-month average trading volume is even lower, at only 25,000 daily. I think one reason for this is the high proportion of Chinese shares, from which there has generally been a high outflow of Western investment money. In addition, there is the end of the EV hype, or in other words, growing doubts about the technology's ability to compete with combustion cars. As shown in this article, these doubts are not justified for the Chinese market and many other markets worldwide, where EVs continue to gain more and more market share. So whether this ETF will still exist in 5 years is not certain. Looking at the first 10 places, a completely different picture emerges that fits much better with the general statements and conclusions in this article. The largest EV manufacturer is in 1st place, Tesla in 2nd place, followed by three battery manufacturers, including the largest EV battery manufacturer in 4th place, followed by more Chinese manufacturers and the world's largest lithium producer, Albemarle (ALB), as 8th largest holding. You can download the full list from the KraneShares website. But to summarise, the rest of the list continues in a similar spirit, including smaller car, battery, and raw material producers. KraneShares In my view, this ETF is an opportunity to invest in numerous companies that you would otherwise never have in your portfolio and that most people possibly don't even know about. Some companies, like CATL, can only be bought in China anyway. If I could put together an ETF, it would look similar to KARS. In my opinion, an EV ETF must have a strong focus on Asia and battery manufacturers. Another alternative is to buy individual stocks on the Hong Kong or Shenzhen stock exchanges if your broker allows it. Of course, it is important to realize that this also involves political risks as the trade war intensifies (the trade war is essentially about who the superpower of the 21st century will be, so we don't know how hot this war will be). These risks are constantly being priced in, which also explains the sharp fall in Chinese equity prices. I personally diversify globally and in currencies, and I am prepared to buy individual shares on the Hong Kong Stock Exchange. As far as the weighting of China and Taiwan is concerned, I keep it relatively low. Some other general ideas based on this article In general, the companies that currently make a large share of their total sales in China, such as Volkswagen, are in a worse position. Furthermore, companies traditionally selling in the middle and lower price segments have a harder time: Volkswagen, Honda, Toyota, etc. Some companies, such as Mercedes, are responding by moving away from the mid-price segment and establishing themselves as luxury brands. BMW (OTCPK:BMWYY) is trying to do something similar. These companies have global brands and a good image, but the market for expensive luxury cars is limited, and this move may not be successful for everyone. Tesla was successful because of its first-mover advantage, bringing in excellent margins. They have been very good at quickly building a recognizable brand, with Elon as an eccentric but interesting CEO. However, China is also an important market for Tesla, and Tesla is, therefore, in danger of becoming a victim of the trade war and getting caught in the middle. Furthermore, the growing competition has already started to eat into margins, considerably dampening the stock market's euphoria. I will soon write a separate article on Tesla and numerous other car brands, providing an even clearer overall picture. Conclusion I tried my best to deliver an overview of what is happening and where we are heading. To conclude and answer the questions asked at the beginning of the article: - EVs continue to gain market share in China - Western brands still mainly sell ICE cars in China and continue to lose market share as the market share of EVs is rising - Chinese brands are pushing into the European and global markets; politicians are likely to respond with trade tariffs, which will probably lead to a Chinese response. This could save the Western market for Western brands but would still likely lead to a significant loss of market share in China and the rest of the world. Overall, this is massive, unprecedented competition, and chances are that some established car brands will not survive. Of course, covering every aspect and detail in an article like this isn't easy, but I think the information provided gives a good overview of the current situation. There may be another update in the future on how the car markets are developing.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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