Competition Weighs on Chinese Electric Vehicle Makers

Shares of Chinese electric vehicle (EV) makers, which soared during the pandemic bull market of 2020 and 2021, have been in freefall this year.  The American depositary receipts (ADRs) of Nio Inc (NIO), XPeng Inc (XPEV), and Li Auto (LI), are down by more than 50% just since June, and the outlook for 2023 doesn’t look much better. 

GAM Investment Management said, “competition is heating up very much in the space.  In addition to pure EV players, all the traditional automakers are also joining the race.  This means that for individual companies, growth could slow further from this year.” While most analysts have kept their buy recommendations on Chinese EV makers, they’ve cut their average 12-month price targets by more than 40% for many of the companies over the course of this year.

The reversal in market sentiment for Chinese EV makers is a massive turnaround from the euphoria that peaked at the start of 2021.  The ADRs of Nio Inc have surged more than 10-fold in 2020, while XPeng Inc rallied to nearly $72 in November of 2021 from its IPO price of just $15 three months earlier. According to Bloomberg data, both stocks have tumbled more than 60% this year, making them some of the worst-performing automakers among those with market values over $500 million.

Even though growth in the EV sector is expected to keep gaining ground over the traditional internal-combustion-engine manufacturers, the days of surging expansion may have ended. Growth in China EV sales is seen slowing to around 35% in 2023, versus 90% this year, as market penetration reaches a limit and government subsidies are set to expire.  Daiwa Capital Markets, which downgraded XPeng Inc to sell from buy this week, citing “weaker competitiveness and a gloomy outlook,” expects some EV makers to run into cash problems as financing becomes more difficult. 

Sentiment toward the Chinese EV sector was undermined this week after Warren Buffet’s Berkshire Hathaway offloaded 1.3 million Hong Kong listed shares of BYD Co (BYDDY), reducing a quarter of its position in the company in the last five months.  Also, Bloomberg reported this week that Tesla (TSLA) is planning to cut production at its Shanghai plant by about 20%.  Thornburg Investment said, “the competitive challenges within the EV industry mean that it is harder for companies to have a sustainable and visible level of profitability.” 

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