EV price war

Several automakers are offering discounts on EV (electric vehicles) models in China as the price war seems to escalate amid slowing sales of vehicles in the world’s largest automotive market.

Vehicle sales in China fell 20% in the first two months of the year even as the overall retail sales rose 3.5% over the period.

Amid slowing sales, several automakers including Ford, General Motors, and Volkswagen are offering discounts to clear inventory.

Tesla too announced a price cut in China earlier this year which was quickly followed by price cuts from other pure-play EV companies like Xpeng Motors.

Xpeng Motors’ deliveries and earnings have disappointed markets for the last couple of quarters and the company’s losses ballooned in Q4 2022.

Its delivery guidance for the first quarter of 2023 also spoked markets as the upper end of the guidance implied deliveries of a mere 7,772 EVs in March.

When China abandoned its zero-COVID policy late last year, most economists expected the country’s economy to rebound in 2023. However, while economic activity has picked up somewhat, things haven’t been too rosy for the country’s automotive sector.

China Ended Its EV Subsidies from 2023

Notably, beginning this year, China has ended the subsidies for EVs as part of the gradual phasing down. Also, the country ended tax cuts on ICE (internal combustion engine) cars.

The withdrawal of government support coupled with the macroeconomic slowdown has taken a toll on sales of high-value goods including automobiles. David Zhang, a Shanghai-based independent automobile analyst said that sales of some automakers have fallen drastically.

He added, “At this rate, the manufacturers’ production and dealership networks will collapse.”

Thanks to government support in the form of subsidies, China’s EV sales have soared over the few years. In 2022, 26% of the 23.5 million passenger cars sold in China were NEVs (new energy vehicles), which include both BEVs (battery electric vehicles) and PHEVs (plug-in hybrid electric).

China EV Price War Escalates amid Slowing Growth

China’s NEV penetration rates grew to nearly 29% in the first two months of 2023. However, it wasn’t enough to make up for the steep decline in overall car sales.

The country’s EV penetration levels are far ahead of Europe as well as the US. In the US, which is home to Tesla, the world’s largest BEV seller, EV penetration rates are still in single digits.

Last year, President Joe Biden signed the Inflation Reduction Act of 2022 which among others aims to boost the country’s EV penetration rates.

Analysts see the Act as a positive for Tesla as the company’s cars, which did not qualify for the $7,500 EV tax credit, are now also eligible for the tax credit beginning in 2023.

Price Cuts Would Lead to Margin Compression for Automakers

Automakers find themselves in a bind amid the price war. While offering discounts and lowering vehicle prices would help them increase sales, it would also lead to margin compression. The margins of many companies like NIO and Xpeng Motors anyways tumbled in Q4 2022 on higher costs.

Tesla has been quite vocal about its price cuts and said that while it would have an adverse impact on margins, it expects to offset that with economies of scale, operating efficiencies, and lower input costs.

The Elon Musk-run company has been pretty much setting the agenda for other automakers who have scrambled to respond to its price cuts.

Ford also Lowered Car Prices after Tesla

Ford cut Mach-E prices in the US days after market leader Tesla lowered Model 3 and Model Y prices in the US and Europe.

In an apparent reference to Tesla’s price cuts, Ford said that the price cut would make “Mustang Mach-E even more accessible to customers and keeping it competitive in the marketplace.”

Notably, Ford was the second largest EV seller in the US last year even as it trailed Tesla by a wide margin. By the end of 2023, Ford is targeting an EV production capacity of 600,000.

Meanwhile, the EV price war especially makes things tougher for startup EV companies which are anyways posting losses. Their losses and cash burn might only intensify amid the price war.

Startup EV Companies are Grappling with Massive Cash Burn

Several startup EV companies including Lucid Motors, Rivian, and Nikola have raised cash over the last year to bolster their balance sheets. However, given the perennial cash burn, their cash pile continues to dwindle with every passing quarter.

Multiple EV companies went public between 2020 and 2021 forecasting rosy sales numbers. However, they are either running behind on production timelines or their 2023 production guidance is way below what they forecasted while going public.

For instance, during their Q4 2022 earnings call, Lucid Motors forecasted production between 10,00-14,000 cars in 2023-a fraction of the 49,000 that it forecast during the merger presentation in 2021.

EV companies’ did not factor in a macroeconomic slowdown, supply chain issues, and EV price war which means that practically all the newly listed EV companies are running way behind on production and deliveries, while their losses are ahead of what they forecast.

Looking at the price war and the deteriorating economy, things might not get better for startup EV companies anytime soon.

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