Battle lines emerge in China’s shifting NEV market

As China winds down the generous consumer subsidies that helped its market for new-energy vehicles surpass that of any other country, the landscape is shifting.

While the largest players — Tesla and homegrown giant BYD — look set to hold onto their leading positions for now, second-tier companies are facing increasing challenges.

The U.S.-listed trio of companies that make up the second string — Nio, Xpeng and Li Auto — are seeing their first-mover advantage erode.

In part, this fresh competition is coming from state-owned carmakers flush with cash and ready to invest in development. They’re being helped by the entry of companies like Huawei and Baidu into the smart-car software market, as investors seek relative regulatory safe havens in the Chinese government priority area.

The companies offer tech expertise to roll out smart vehicles — an area many traditional carmakers have long lagged in.

Startup trio

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As China’s market for electric vehicles rapidly expanded in recent years, Nio, Xpeng and Li Auto became the leading homegrown NEV startups. In 2021, the companies sold 90,000 vehicles combined.

Local EV brands are popular in China, holding around four-fifths of the market in the first seven months this year, according to the China Passenger Car Association (CPCA). But despite their significant footprint and the market’s robust growth, profitability remains elusive for the three.

Nio, once touted as China’s Tesla challenger, was only the country’s fifth biggest seller in July, having failed to break into the top three at any time this year. Along with its slipping down the rankings, the company’s corporate reputation was dented in June by allegations it had been exaggerating its revenue through sketchy sales to a related company.

Nio sees its route to profitability as scaling up production and introducing new product lines. While CEO Li Bin has been adamant that Nio would not price its cars under 300,000 yuan, Nio insiders told Caixin that a cheaper subbrand, code-named Alps, would launch in 2024.

Nio electric vehicles are displayed during the China International Fair for Trade in Services in Beijing on Sept.1. © Reuters

The Shanghai-based company had revenue of 9.9 billion yuan in the first quarter of 2022 and a net loss of 1.78 billion yuan. From 2019 to 2021, its losses were 11.3 billion yuan, 5.3 billion yuan and 4 billion yuan.

While Xpeng has positioned itself as a budget option compared to the likes of Nio it still had to cut prices in July to keep its sales ahead of Li Auto and Nio. An industry insider told Caixin that Xpeng positioned its electric vehicles as competitors to traditional vehicles, but this strategy hasn’t had the hoped-for results. While it outsold Nio and Li Auto in the first half, the company lost 1.7 billion yuan and had the lowest revenue and profit margin of the three.

In the first quarter of 2022, Li Auto made 9.56 billion yuan with a net loss of 10.9 million yuan. In June, the company released its latest hybrid, the L9, which sold well at first, racking up over 30,000 orders by Aug. 1, with deliveries set to start this month. That was despite a hiccup in which potential issues were found with the car’s suspension, Chinese state media reported in July. Li Auto soon announced it had extended its warranty terms to include free repairs for any defective suspension systems on the L9.

People visit the booth of Chinese electric vehicle maker Li Auto during a media day for the Auto Shanghai show in Shanghai in April 2021. © Reuters

Amid the trio’s poor financial performance, it remains to be seen whether they’ll continue to receive the robust support from the capital market that has propelled them thus far. “Running fast doesn’t necessarily mean running for a long way,” said a source from a multinational component-maker who did not want to be named.

Smart car future

The component-maker source said that despite their lackluster financials, the NEV startup trio has created anxiety for traditional carmakers. He told Caixin that traditional car companies realize that electrifying their cars will not be enough — they also need to be able to compete when it comes to intelligent features and vehicle autonomy.

Qin Lihong, co-founder of Nio, said that while many traditional carmakers have released electric cars of varying quality, they have been playing catch-up when it comes to the software needed to make truly “intelligent” vehicles. He said a large part of the success of the NEV startup trio and Tesla has come from the companies’ smart-car chops.

Huawei, reeling from the devastating impact of U.S. sanctions on its once-lucrative smartphone business, has been positioning itself as offering the traditional auto giants a solution. It only entered the industry a year ago, but its smart systems have already found favor.

In the past 18 months, Huawei has established partnerships with some of China’s biggest automakers and their EV subsidiaries to help them build subbrands using Huawei’s autonomous driving technology. That includes Beijing Automotive Group subsidiary BAIC BluePark New Energy Technology Co. Ltd., GAC Group, Chongqing Changan Automobile Co. Ltd. and Chongqing Sokon Industry Group Co. Ltd.

The latter partnership — with Chongqing Sokon — raised eyebrows. Huawei has long sought to present itself as a car parts supplier to the stars, rather than a carmaker, including through a leaked memo from its founding chairman, Ren Zhengfei, rebuking the idea the company would ever build cars.

BAIC BluePark’s Arcfox, Changan’s Avatar E11 and GAC’s Aion, use the Huawei Inside smart cockpit and include “HI” in their model names. But rather than a business-to-business partnership, the Huawei-Sokon model sees Huawei providing traditional business-to-consumer support such as sales channels as well as development and marketing.

That collaboration resulted in the Seres subbrand, which debuted in April 2021 with the Seres SF5 hybrid SUV. That was followed by several models under Seres’ luxury brand Aito.

Seres says it sold 21,581 vehicles in the first half of this year, representing an 885% year-on-year increase.

In July, the Aito M7 was put on sale and managed to win over 60,000 orders in the first three days. On Aug. 1, Seres announced it had delivered over 7,000 M7s in July and had sold a cumulative 26,348 M5s since March.

Huawei is not the only Chinese tech giant looking to smart cars for future growth. Baidu and Geely’s Jidu Auto joint venture in June this year launched a concept “robocar” powered by Baidu’s intelligent driving technology.

People check out the Aito M5, a plug-in hybrid electric vehicle running on Huawei’s Harmony OS, in a Huawei store in Shanghai in December 2021. © AP

Zeekr, Geely’s own electric car unit, announced in July it would replace its first model’s Qualcomm 8155 smart cockpit chip for free.

SAIC Motor has invested in AI chip company Horizon and autonomous driving technology company Momenta. In April 2021, it said it planned to invest 300 billion yuan in smart electric cars within five years.

“When auto companies start to compete for the first to be equipped with the most advanced chips or systems, it means that great changes in the industry are coming,” said Ken Ying, founder of Chinese smart car solutions provider Pateo.

Subbrand strategy

But competing with the NEV trio also poses an organizational challenge for traditional carmakers.

Making smart electric cars requires traditional car companies to retool their internal organization, with new departments arising as others diminish in importance. This can lead to conflicts, especially when it comes to state-owned companies. “It’s like a person cutting off his right hand with his left hand. His right hand will definitely resist,” said a former employee of a legacy carmaker.

One way companies are trying to address this is by spinning off their electric-car subbrands and allowing them to follow the startups’ playbook.

Aion, the pure-electric subbrand of state-owned carmaker GAC Group, is the clearest example. In July, it sold 25,000 units.

For years, traditional vehicles were GAC’s profit mainstay and NEVs were just a branch of the traditional vehicle business. Like other legacy carmakers, its early NEV models were based on its traditional vehicles.

In November 2020, GAC’s NEV unit changed its name to GAC Aion as part of a plan to build a stand-alone brand with more independence. Since then, Aion has opened up to outside financing and is seeking an independent listing.

Authors: AN LIMIN, HEATHER MOWBRAY, NIKKEI Asia

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