To The Moon

Since the beginning of 2023, Tesla launched prices cut on Model 3 and Model Y. After the price reduction measures appeared, many Chinese car manufacturers have also joined the trend of price reduction ($Li Auto(LI)$ , $XPeng Inc.(XPEV)$ , $BYD Co., Ltd.(BYDDY)$ ).

At the same time, some midstream and downstream companies also cut prices. Can the Chinese car companies withstand the price reduction strategy? What else deep impacts on the industry?

Recently, Xin Ma, the co-director of Bosera Fund, was invited shown on Tiger Live to share about the strength of why Tesla’s price cuts, the reasons and impact behind the response of Chinese car companies, below are the summary of six points:

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Xin Ma

Disclaimer: The following views are from guest's live. The views are only for communication and not as direct investment advice.

1. Why did Tesla dare to cut prices first?

Xin Ma said that Tesla's price reduction action is essentially due to its advantages in production process improvement, material research and development advantages, and its strong bargaining advantage in the supply chain to reduce costs and improve efficiency.

①Process improvement advantages: Cell to Chassis (CTC) + integrated die-casting technology. Musk once said that the adoption of CTC technology and the introduction of integrated die-casting technology have revolutionized the traditional automobile manufacturing process, which can save 370 stamping and welding parts, reduce manufacturing costs by 40%, and reduce body weight by 10%. A 7% reduction in battery cost per kilowatt-hour corresponds to a 14% increase in cruising range.

②Material advantages: 4680+ electrodeless tabs + new silicon material + cobalt-free technology to achieve battery performance improvement and cost reduction. Tesla released the third-generation 4680 battery, which uses electrodeless ears, new silicon materials, and cobalt-free technology.

New silicon material, at the battery pack level, the cost per kilowatt-hour of the anode is reduced by 5%, the cost is reduced to 1.2$/KWh, and the cruising range of the vehicle is increased by 20%; the cost curve is further reduced through the cobalt-free "high-nickel cathode". 15% reduction in kWh costs.

③ Supply chain bargaining: Self-developed core links, outsourced other components, and mastered the right to speak in the supply chain. The main route of Tesla's industrial chain layout is self-developed and self-developed core links with high added value, other traditional components are outsourced, and core components such as power batteries, thermal management, and lightweight chassis are gradually outsourced.

Taking Model 3 as an example, BMS and motor control in the powertrain and AutoPilot in intelligent driving are self-made. While other parts are outsourced, the outsourcing rate of structural parts, body parts, interior and exterior parts, etc. is relatively high.

Source: Bosera Funds

2. What impact will Tesla's price cut have on Chinese EV makers?

Xin Ma believes that the impact of Tesla's price cuts is mainly reflected in two aspects: one is to follow short-term price cuts, and the other is to force EV companies to implement cost control and technological improvement reforms in terms of supply chains, materials, and technical processes.

In the short term, Chinese EV companies were forced to cut prices in response. Car companies that have been involved in price cuts include $XPeng Inc.(XPEV)$ , GAC Aion, Leap motor, Wenjie, $BYD Co., Ltd.(BYDDY)$ , etc.

But in the long run, Chinese EVs will also accelerate the increase in domestic penetration and grab the share of the entire overseas market.

According to data from the China Association of Automobile Manufacturers, China's auto export sales in February 2023 reached 329,000 units, +82.33% year-on-year and +9.41% month-on-month.

At the same time, it will also bring about a supply chain reform of Chinese EVs, including a general trend of material cost reduction and the integration of the entire manufacturing technology.

Taking Tesla's integrated die-casting technology as an example, car companies such as $NIO Inc.(NIO)$$NIO-SW(09866)$ $NIO Inc.(NIO.SI)$ , $XPeng Inc.(XPEV)$ $XPENG-W(09868)$ , Gaohe, Sailisi, $Li Auto(LI)$ , Jikrypton, Changan, FAW, etc. have all begun to follow up the layout and plan to apply integrated die-casting technology.

3. How can Chinese EV car companies catch up with the leading Tesla?

First, must increase the penetration rate of fine technology

Xin Ma said that in the future, Chinese EV companies must invest fully in research and development on the technology side, process side, and supply chain management. Only in this way can we have enough room for cost reduction and catch up with leading companies like Tesla in case prices are being cut.

For example, BYD previously relied on the successful research and development of blade batteries to create many successful models, and at the same time it exported this blade battery. With the development of battery technology from ternary batteries to lithium iron phosphate, technical iterations such as higher battery density and longer battery life in the future may accelerate Chinese car companies' pursuit of Tesla.

Second, the cost control is crucial

Xin Ma pointed out: Both $Apple(AAPL)$ or $Tesla Motors(TSLA)$ have strong advantage in supply chain management and strong bargaining power. As an industry with cutting-edge technology, EVs, in addition to traditional technologies, supply chain management is also crucial. The price drop will prompt car companies to increase demand for external supply. After all, the actual cost of pursuing the integrated car manufacturing link of upstream, midstream and downstream is very high. ​

Source: Bosera Funds

Therefore, even the price of lithium batteries rose to hit new highs in 2022, lithium mining companies were made a lot of money, but car manufacturers was suffered. In terms of profit margin, only $Tesla Motors(TSLA)$ 's profit margin can reach 27%, and $BYD COMPANY(01211)$ $BYD Co., Ltd.(BYDDY)$ barely maintains a 16%. The profit margins of many Chinese new energy car companies are very low, and most of them are not profitable.

Therefore, continue to optimize its own supply chain, increase the proportion of external supply, and select high-quality suppliers to reduce the cost of the entire supply. This is also a countermeasure that many car companies must take.

4. What else affected the development of Chinese automakers?

Due to the pandemic impact in the past 3 years, the supply chain, terminal supply and consumption have been dragged down, and the negative impact to EV companies is still there.

However, China has also carried out a round of large-scale consumption subsidies for the entire EVs industry. Ministries, commissions and corresponding departments have been taken a caring attitude towards the entire industry with fiscal policy, tax policy, technical knowledge support.

Some leading EV companies that have already emerged have continuously launched new models, which have also attracted more young customers.

At the same time, both the upstream raw material end, or the downstream vehicle manufacturing end, has see capital poured into the subdivided leading companies in related industries.

5. Any other industries have been affected by EVs price cuts ?

The price cuts of Tesla and other EV companies have also caused price cuts for midstream battery companies and upstream lithium mines. For example, The price of the main material of batteries-polysilicon was high last year, but after the start of 2023, the price has plummeted.

Source: Bosera Funds

However, polysilicon rose slowly again in February, probably because after the price cut, it drove sales and thus increased the demand for resources of mining companies, and the price began to rise. The price of lithium carbonate, the battery raw material, has gradually dropped from the previous high of more than 550,000 RMB/ton to the recent 275,000 RMB/ton.

6. Future prospect of Chinese EV industry

Xin Ma said that the current sales data of Chinese EVs in January is relatively bleak, but the data in February has a large increase from the previous month.

According to the official data of the China Automobile Association, in February 2023, domestic production of EVs was 549,000 units, +49.97% YoY and +29.38% MoM; sales were 523,000 units, +57.20% YoY and +28.24% MoM.

From the perspective of the medium and long-term value of individual stocks, Xin Ma believes that some EV manufacturers that have been oversold in the previous period may have fallen beyond their reach. Judging from the current price, many companies should be at a relatively bottom stage, and at the same time, the valuation of these companies is also at a very low bottom after the Davis double kill.

From the perspective of future expectations, Chinese EVs industry will gradually develop in a high-end and intelligent direction. In the next 3 years, it is expected that the entire EV Industry should have double-digit growth.