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Electric cars in China

Chinese EV startups' sales accelerate despite pressure from Tesla

Unfazed by US rival's price cuts, Nio, Xpeng and Li Auto seen profitable in 2022

The U.S.-listed shares of Nio, Xpeng and Li Auto have surged over the past year, pushing their valuations higher than some of the world's biggest automakers. (Source photos by AP and Reuters) 

HONG KONG -- China's emerging electric vehicle brands have reported strong sales and narrowed losses last year despite Tesla's aggressive pricing strategy to gain customers in the world's largest auto market.

While overall car sales have declined for three consecutive years in China due to a slowing economy, sales of electric vehicles are still growing strongly. Analysts say more people in China have been enticed to replace their internal combustion engine (ICE) cars with clean-energy models thanks to Tesla's popularity and policy support from Beijing.

Domestic brands Nio and Xpeng more than doubled their sales in 2020 from a year earlier. Li Auto, which started selling its first model in December 2019, reported quarter-on-quarter growth all last year.

The three companies' U.S.-listed shares have surged over the past year, pushing their valuations higher than some of the world's most-established automakers. But their stock prices have retreated over the past month as investors reap the gains. Reuters has reported that the trio are preparing secondary listings in Hong Kong.

Looking ahead, however, the local startups are expected to face steep competition from Tesla and more-established automakers as they start rolling out more EV models in the Chinese market.

The global shortage of semiconductor chips for autos also could constrain the growth of the startups, and the hefty investments required to develop new cutting-edge features could put pressure on their cash flow, analysts warn.

"Tesla without question has helped accelerate the adoption of EVs in China," said Le Tu, managing director of Beijing-based Sino Auto Insights. "Chinese consumers reacted by purchasing thousands of its vehicles, and things really took off when Tesla began manufacturing locally."

The Chinese government wants electric vehicles to make up 20% of all car sales by 2025. Last year, sales of electric vehicles rose 11% to 1.17 million, while overall sales of passenger cars were down 6.8% to 19.3 million, according to statistics compiled by the China Passenger Car Association.

Tesla has been a leader in China since it started selling its Shanghai-produced Model 3 early last year. It cut prices for the model several times last year, making it the country's bestselling electric vehicle before a $4,500 budget car produced by a joint venture between General Motors and state-owned SAIC Motor claimed that top spot in January. The U.S. company also began selling locally made sport utility vehicle Model Y in January at a price about 30% lower than the quote given during presales.

Instead of losing customers to Tesla, the top domestic brands were thriving under their U.S. rival's aggressive China sales moves.

Both Nio CEO William Li and Xpeng CEO He Xiaopeng said Tesla's January price cuts have had little impact on their companies' orders. Li also said that his company will not lower prices to boost sales.

The global shortage of auto chips is having a major impact on Nio's supply chain and limits the company's production capacity to 7,500 units a month instead of 10,000.   © Reuters

"Our approach is quite different from Tesla because we would like to make sure we have a stable order performance instead of these ups and downs in the order backlog," he told investors during a conference call last week. "For us, we don't actually want to cut the price to boost the order backlog."

Toliver Ma, an analyst at Guotai Junan in Hong Kong, said the strong results of Li Auto, Xpeng and Nio are "a good sign" for the industry and new players. "It means that profit will come eventually," he said, adding that their earnings will continue to improve as penetration of electric vehicles increases in China.

While the three companies were still posting losses, their gross profit margins all turned positive last year. Ma expects they will turn a net profit around 2022.

But he warns that the increasing need for capital investment in areas such as autonomous driving, connectivity, ride-hailing and semiconductors could put pressure on the companies' cash flow. "So, we see only strong names can survive," Ma said.

The biggest concern for the industry right now, however, is the global shortage of auto chips.

Li of Nio said the shortage is having a "very big impact" on the company's supply chain and limits its production capacity to 7,500 units a month instead of 10,000.

"We believe for the second quarter, we should have the chip supply to meet basic demand, but the risk is still quite high," he said during the conference call.

However, Le of Sino Auto Insights believes the chip shortage will not only hurt Chinese EV startups since the problem is industrywide. Instead, they should be more concerned about the challenges from established car manufacturers, such as Volkswagen Group, which will be launching more EV models in the coming years.

"The China automotive market is the most important market in the world for most legacy [original equipment manufacturers], certainly VW, Daimler, GM, Ford, Toyota, Hyundai and others," Le said.

"So the fact that China wanted to move to EVs forced the automakers to revisit their global product strategy to pull in plans for EV manufacturing and kill off ICEs earlier than originally planned," he said.

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