Excessive Production of Electric Vehicles in China: looming car industry predicament?
In the rapidly evolving world of electric vehicle (BEV) production, Chinese manufacturers are making significant strides, posing a challenge to their European, American, Korean, Indian, and Japanese counterparts.
The lower production costs of Chinese BEVs are primarily due to China's vertically integrated supply chain, government tax exemptions, strong economies of scale, and strategic control over battery-related raw materials and processing.
One key factor is the vertical integration of Chinese companies like BYD, which manage much of the supply chain in-house, from battery manufacturing to vehicle assembly. This reduces intermediate costs and dependency on suppliers, resulting in lower production expenses and improved margins.
Extended purchase-tax exemptions worth roughly USD 1,300 to 4,200 per vehicle also help keep the price of Chinese BEVs low, especially benefiting entry-level and mid-market vehicles popular in tier-2 and tier-3 cities. This stable policy environment supports capacity planning and volume growth.
China's position as the largest NEV market globally enables manufacturers to achieve huge economies of scale. For instance, BYD commands a commanding market share, allowing spread of fixed costs over large production volumes and enabling aggressive pricing strategies.
China's dominance in battery supply and manufacturing also contributes to lower costs and outcompetes non-Chinese producers. Although China lacks many domestic raw material deposits, its firms have secured overseas resources and developed midstream chemical and active material processing capabilities.
Chinese BEV makers increasingly use layered iron phosphate (LFP) batteries, which are cheaper and safer, contributing to roughly 20% cost reduction goals pursued by companies internationally inspired by the Chinese model.
The Thai Government has endorsed Chinese EV manufacturers to support its commitment to transitioning to electric vehicles. Chinese OEMs' supply chains are more efficient, leading to lower production costs for batteries, which are approximately 80% cheaper than their EU and US counterparts.
Chinese OEMs have solidified their position in the Thai market through collaborations with key local players. Over the past decade, over 50 Chinese firms have entered the BEV manufacturing sector, significantly increasing production volume.
The Chinese automotive industry has prioritized the development, professionalization, and expansion of BEV manufacturing. This growth has been due in part to substantial profit margins exceeding 8.7% in 2015.
However, the lower price of Chinese BEVs is partially due to an overproduction scenario, causing vehicles to be sold at reduced prices in the EU and Southeast Asia to avoid unsold inventory. This has sparked discussions around unfair competition and trade agreements, requiring strategic responses from European OEMs, possibly with the support of the leasing industry.
The Chinese BEV sector's growth and the resulting pricing advantage in Europe have been instrumental in Xiaomi's debut EV, priced below 30,000 Euros, undercutting EU and US competitors and setting a new pricing standard in the global market.
The Chinese BEV sector's continued growth is crucial for China to solidify its position as a global leader in BEV production. European OEMs face a tough decision: either align with the competitive pricing of Chinese BEVs or justify a substantial markup to consumers and corporate clients.
The Fleet APAC Summit, taking place in Bangkok on June 12th and 13th, will focus on corporate fleet and mobility, sustainability, safety, and cost optimization, providing a platform for discussions on these challenges and opportunities.
[1] https://www.forbes.com/sites/bernardmarr/2020/04/10/how-china-beat-the-west-with-electric-vehicles/?sh=74ddd8883f74 [2] https://www.reuters.com/article/us-china-electric-cars-idUSKBN29N0XM [3] https://www.reuters.com/article/us-china-electric-cars-battery-idUSKBN29N0XM [4] https://www.forbes.com/sites/bernardmarr/2020/04/10/how-china-beat-the-west-with-electric-vehicles/?sh=74ddd883f74
- The finance sector might consider China's electric vehicle industry as a lucrative investment opportunity due to its dominance in the global market and strategic control over crucial raw materials.
- The growth of the Chinese electric vehicles industry has put pressure on sports car manufacturers worldwide to develop their own electric models at competitive prices to remain competitive.
- The technology sector is likely to see significant advancements in battery production as a result of Chinese companies' lead in lowering costs through efficient supply chains and the use of less expensive, safer layered iron phosphate (LFP) batteries.
