Western automakers face a race to catch up as Chinese EVs arrive


It took around 60 years for all US households to gain access to electricity. It took even longer for them to get telephones. But only 25 years for them to get mobile phones, as the chart shows.

And the pace of change continues to increase:

  • Nokia captured the initial cellphone market in the 1990s, but then missed smartphone developments and disappeared
  • Similarly Kodak dominated photography for decades, but missed the move to electronic cameras
  • Now Western automakers, and their suppliers, are in a race to create a range of Electric Vehicles (EVs)

CHINA’S EV SALES ARE RISING EXPONENTIALLY

Their problem is that China is at least 3 years ahead of them in market development.

EVs were 35% of sales last year, and are growing very fast. It would be no great surprise if they reach 50% of sales sometime next year:

  • The government is keen for them to replace gasoline/diesel sales due to air quality concerns
  • It also sees a major opportunity for China to dominate the global market as EV exports take off
  • BYD (backed by Warren Buffett) overtook Tesla in Q4 last year, with sales rising 20% to 1.8m

And importantly, Chinese companies are focused on selling into the Value segment. Unlike Western companies who are still focused on the disappearing Middle Market.

WESTERN AUTOMAKERS ARE FOCUSED ON THE MIDDLE MARKET

The chart from Cox Automotive highlights the Western companies issue:

  • Back in 2012, the average US car was selling for a very affordable $30k
  • But then they began to focus on the Middle Market to boost profits
  • By 2021, the average price had risen 33% to $40k
  • And last year it peaked at $50k before falling back to $47k last month

Most Americans take out a loan to buy a car. And the higher prices didn’t matter so much as central banks cut interest rates as St Louis Federal Reserve data shows:

  • Loan costs halved from nearly 8% in 2008 to 4% in 2016 for a 60-month loan
  • And when rates first began to rise, buyers simply extended the loan period
  • This helped to keep the average loan “affordable”.

But then, interest rates began to return to more normal levels in 2022. And today, car buyers are under major pressure.

Credit agency Experian report that the average new car payment is now $738/month, with the average loan now 68 months. Used car buyers are paying $532/month.

VW AND OTHERS ARE NOW STRUGGLING FOR SURVIVAL


VW used to be the world’s largest automaker in terms of sales. But today, as the Wall Street Journal warns, it:

“Is the archetypal legacy automaker: flabby, slow-moving and valued as if it is going out of business.”

It is losing share in the key Chinese market, with profits expected to halve to €1.5bn-€2bn this year versus 2022.

And it is under pressure from domestic producers like BYD. They are focused on the Value segment as Reuters reports:

“China’s top-selling EV maker has set a starting price for its new Yuan Plus crossover – known as the Atto 3 in overseas markets – at 119,800 yuan ($16,644)”.

THE AUTO VALUE CHAIN WILL SEE WINNERS AND LOSERS EMERGE

Autos are the world’s largest industry, employing tens of millions of people directly and indirectly.  It is now facing 2 major challenges:

  • The move to EVs is gathering pace, with sales at 22% in Europe and close to 10% in the USA
  • The return to more normal interest rates is accelerating the decline of the Middle Market

Automakers therefore have very little time – maybe as little as 5 years – to reposition themselves.

They not only need to develop an integrated EV supply chain. But they also need to follow Stellantis’ lead and go back to selling affordable Value cars at €25k.

It is always tempting to assume that nothing will ever change. But as Nokia and Kodak remind us, those who fail to adapt can easily disappear.