Transcript
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, Head of Asian Equity Strategy here at HSBC.
Speaker: On today's podcast, we're asking why Asian electric vehicle and EV battery makers are seeing their share prices fall as their popularity rises.
Speaker: Joining me to tackle this particular subject are Yu-Chen Ding, head of China Autos Research, based in Beijing, and Will Cho, our EV battery autos and technology analyst based in Seoul in South Korea.
Speaker: This is a hot topic right now, and we're going to get to the bottom of it right here under the banyan tree.
Speaker: We want to bring you a few key numbers that will help put today's conversation in context.
Speaker: Electric vehicles globally are about to hit a penetration rate of about 20%, which means sales are on course for one out of five vehicles sold around the world to be an electric car in 2024.
Speaker: It's also worth noting that 40% of the production cost of an EV and electric vehicle is a battery alone.
Speaker: So the battery is by far the biggest expense that these companies have.
Speaker: Now, you might think being on the cusp of an important milestone would be good for the share prices of these electric vehicles.
Speaker: But actually, a lot of these electric vehicle companies, they've seen their stocks fall, with losses in the double digits in some cases.
Speaker: The same can be said for battery makers in China and Korea.
Speaker: So there seems to be something going on.
Speaker: On the one hand, we see that the world is adopting EVs.
Speaker: On the other hand, share prices are coming down.
Speaker: It's time now to bring in my guest to explain what's going on here.
Speaker: Will and Yuchen, thank you both for joining us on the podcast.
Speaker: Thanks for having us.
Speaker: Thank you, Harold.
Speaker: So Yuchen, broadly speaking, how many percent decline have we seen in the share prices of these EV makers?
Speaker: So we do see this massive variation between different EV stocks in the space.
Speaker: We noticed the market leaders such as BYD has rose 30% since beginning of the year, but there's also many subscale laggers.
Speaker: The stock price has corrected more than 50% since beginning of the year.
Speaker: So I would say it's various between different players.
Speaker: Let's take a step back first.
Speaker: We spoke about electric vehicles maybe, say, four or five months ago or something like that.
Speaker: And at the time, you said that electric vehicles were particularly popular in China.
Speaker: I think about one out of three cars in China at the time sold was an electric vehicle.
Speaker: Where are we now?
Speaker: Are they still going up?
Speaker: Is it still a popular product in mainland China?
Speaker: Yes, the EV percentage of the new car sales was close to 30%.
Speaker: Last time we speak, now it's close to 40%.
Speaker: And yes, EV is still popular in China and is increasingly the preferred choice for most of the consumers.
Speaker: But on the other side, we do notice that competition is also getting more intense.
Speaker: By the beginning of the year, we have around 400 EV models on sale.
Speaker: By the end of the year, we might be reaching more than 500 EV models in the market.
Speaker: 500 models.
Speaker: How many companies are there that actually sell these models?
Speaker: Like 50, 60, 70?
Speaker: Yeah, there is probably around 70 to 80 EV brands out there, and the market is quite fragmented.
Speaker: The top 10 brands take three quarters of the market share, while the rest, the 60, 70 brands, share the rest of the pie.
Speaker: So we clearly see the industry consolidation is taking place now.
Speaker: And industry consolidation means that the top five or six brands, they are becoming bigger and bigger in this market?
Speaker: Yeah, exactly.
Speaker: The market leaders will eventually take more market share while these struggling laggers who is loss making, they eventually will get squeezed out of the competition.
Speaker: So they really struggle, right?
Speaker: Now, what we also spoke about in the past is that these Chinese electric vehicle makers, they're now looking to sell their products in other countries, right?
Speaker: They want to export.
Speaker: Yes, EV did become a new highlight for the China vehicle export, but still so far we see the majority of the China EV export still goes to the emerging market.
Speaker: While the developed market such as Europe is strategically important, but we do see the China local brand to build traction there is a decade-long march.
Speaker: the local production and local design would be necessary for the China local brand to really build attraction in Europe.
Speaker: But of course, to build a plant in Europe and really build up the brand over there, indeed, it would take more time than they do in China.
Speaker: And it is meaningfully more difficult.
Speaker: And I presume that the exports are still a small portion of their overall sales?
Speaker: Yes, people love to talk about it, but taking the leading EV brand BYD, for example, only 10% of the current monthly sales coming from the overseas market.
Speaker: So the exposure is indeed quite limited versus the domestic market.
Speaker: Okay.
Speaker: So...
Speaker: We have a market whereby most of it is still sold in China for these companies.
Speaker: 10% is exported for, at least for the leading, for a lot of them it's even less so.
Speaker: But the Chinese market, as you said, is incredibly competitive.
Speaker: So what is happening with pricing of these cars?
Speaker: Is that coming down now?
Speaker: Because a lot of these smaller ones, as you said, they're hardly making any money.
Speaker: They must be desperate to try to sell these cars, right?
Speaker: Yeah, exactly.
Speaker: The price has been coming down since the competition has been crazy.
Speaker: And we also noticed that the competition dynamic is quite different in China and outside of China.
Speaker: So in China, we noticed the EV space has booked a price cut versus beginning of the year.
Speaker: And we also noticed the new model usually set the price lower than their pre-sale price, or the refreshed model with better content is also selling at a lower than last generation's price.
Speaker: But the dynamic is different outside of China.
Speaker: We noticed BYD's European model is twice the price point of what they've said in China because of the competition environment is rather easy versus what they have in China.
Speaker: Wow.
Speaker: So can we put a number to this?
Speaker: So if I would, for example, you talk about BYD, right?
Speaker: But if I would buy kind of the run of the mill electric vehicle, how much does it cost in China now if I would buy one today?
Speaker: Yeah, taking BYD's average, roughly it's around 20 to 25,000 US dollars.
Speaker: Although the price point at the same product offering will be almost twice in Europe.
Speaker: Talking about over $40,000.
Speaker: Okay.
Speaker: So if it's now 20, say 20 to 25,000 US dollars, how much would the price have been, say, two or three years ago?
Speaker: I would say generally, today's EV could be around 10 to 20% cheaper than what it used to offer last year.
Speaker: Okay, okay.
Speaker: It's pretty clear.
Speaker: There's intense competition in China.
Speaker: There's a lot of producers.
Speaker: They try to sell about 500 models.
Speaker: Some of them, yeah, will struggle.
Speaker: They can't go for the export markets.
Speaker: That's not a saver for them.
Speaker: So the only way out for them is try to cut their prices to gain market share.
Speaker: The leading brands can do so, but a lot of other companies will struggle to do so.
Speaker: Now, Will, on the battery side, is that exactly the same what you're seeing there as well?
Speaker: That some battery makers have really seen a massive decline in share prices, but a few other ones have hold up reasonably well?
Speaker: Yes, correct.
Speaker: Concerns about the slowing electric vehicle demand.
Speaker: negatively affected the short performance of battery supply chains.
Speaker: On average, the battery suppliers' stock price is down around 30% over the past three months.
Speaker: However, leading battery makers' stock price decline was smaller than that of small-scale players.
Speaker: Let's take that a little bit further.
Speaker: As we mentioned earlier, the battery is by far the biggest expense.
Speaker: Effectively, an electric vehicle is like a battery with wheels in it, right?
Speaker: So if these EV prices are coming down, these battery costs, the prices for these batteries are probably coming down as well.
Speaker: Is that correct, Will?
Speaker: A good point, Harold.
Speaker: Let me explain this way.
Speaker: The battery prices have been always a key topic in the sector as battery is a critical component to power electric vehicles.
Speaker: As you mentioned earlier, electric vehicles are expected to account for 20% of the total cost sales in 2024.
Speaker: And this means that we are about to enter the mass market.
Speaker: And the mass market consumers are very price sensitive.
Speaker: So to attract these consumers,
Speaker: Carmakers will seek to aggressively reduce costs, and this will lead to strong downward pricing pressure on batteries.
Speaker: Yeah.
Speaker: And broadly speaking, what kind of profit margins does a battery maker make?
Speaker: And what were those profit margins, say, two years ago?
Speaker: Currently, the leading battery producers operating profit margins are 5 to 10 percent, which contrasts sharply with the operating loss of electric vehicles and major companies.
Speaker: But two years ago, battery makers also made a loss or barely break even because of insufficient scale and high material cost.
Speaker: However, thanks to EB boom in China and Europe, economies of scale, better product mix, battery producers' profitability has improved significantly over the past couple of years.
Speaker: So two years ago, the demand for batteries was rising, but there were not sufficient amount of batteries made to actually make this a profitable business.
Speaker: Now this becomes a profitable business because now they can make sufficient amount of batteries.
Speaker: If you make one battery, you have a whole factory.
Speaker: That's really expensive, right?
Speaker: So now there's people want thousands, if not millions of these batteries.
Speaker: So now they have economies of scale, as we call this in jargon, right?
Speaker: You become big enough to make profits.
Speaker: But then at exactly that time, these car companies come through and says, we can't pay you that much for these batteries.
Speaker: And you only make 5% margins.
Speaker: To be honest, 5% margins, that's not a really profitable business, right?
Speaker: Yeah.
Speaker: The battery producers seek to lower cost in three ways.
Speaker: Firstly, economies of scale.
Speaker: And second one is production efficiency.
Speaker: And lastly, the technology is also a key part of cost innovation, as technology not only enables the use of cheaper and abundant materials, but also improves the battery performance per unit cost.
Speaker: So you see a little bit on the battery side in this industry exactly what happens on the EV side.
Speaker: You have too many people coming in.
Speaker: They're not making money.
Speaker: At some point in time in the future, a lot of them will probably leave the industry and only the leading players will probably survive, the ones that can actually increase the technology and these sort of things.
Speaker: But I guess this will take a bit of time, right, before that really materializes, that you have full consolidation of the industry.
Speaker: Yes, in fact, electric vehicle battery industry consolidation has been underway.
Speaker: But as you mentioned, at a modest pace so far.
Speaker: However, we think the pace of industry consolidation will accelerate going forward with the leading player presence being solidified.
Speaker: This is because the challenging environment, such as volatile near-term EV demand, higher material cost burden, regulatory barrier to entry, all these will likely squeeze out small-scale, second-tier players out of the market.
Speaker: Only leading battery makers will be able to supply quality batteries and reduce cost effectively should survive the challenging environment.
Speaker: And for these battery makers, is there an other industry where they can sell to?
Speaker: Like, I don't know, selling batteries to ships or any other industry that needs batteries?
Speaker: Or are they really dependent on these EV makers?
Speaker: Battery is a core part of decarbonization of transportation.
Speaker: Although the batteries are widely used in various applications, such as a laptop, smartphones, power tools, but still electric vehicles or other mobility tools such as e-bikes and e-scooters will be key demand drive going forward, thanks to policy tailwind.
Speaker: So there are other users for these batteries, but it's not big enough to really offset that or help them out, right?
Speaker: Yes, correct.
Speaker: Now, I think we've answered the question here.
Speaker: It is an exciting industry, great for consumers, but not so much for producers.
Speaker: Share prices are coming down, and in particular for the ones that the market says, I'm not quite sure if these companies are actually going to come through.
Speaker: But it also starts to identify who the leading and winning companies
Speaker: electric vehicle makers are and who the leading and winning battery makers are.
Speaker: Will and Yu-Chen, thanks a lot for these insights.
Speaker: Thank you for having us, Harold.
Speaker: Thank you for helping me on podcast.
Speaker: That's a wrap for this week's podcast, ladies and gentlemen.
Speaker: You've been listening to Under the Banyan Tree from HSBC Global Research.
Speaker: Many thanks to our guest Yu-Chen in China and Will in Korea.
Speaker: And a big thanks to all of your listeners around the world for joining us.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
