Consolidation in China’s EV Sector will Drive Wealth Creation and Demand for Liquidity

Chinese manufacturers are demolishing the two main barriers keeping consumers from making the switch to electric vehicles (EVs): high cost and lengthy charging times. China’s BYD, which recently overtook Tesla^[1] as the world’s largest producer of EVs, now offers a feature-packed hatchback for under USD10,000.^[2] And EV battery maker Gotion High-tech has just unveiled a new battery that is capable of charging from 10% to 80% capacity in under 10 minutes.^[3]

China is both the world’s leading exporter of EVs and the biggest domestic market for battery-powered cars, accounting for 60% of global sales in 2023.^[4] China’s rise to #1 in EV manufacturing is driving a seismic shift in personal transportation as well as wealth creation across the supply chain.

It looks very likely that China will retain its dominance as the global EV market grows. Chinese firms are developing new models considerably faster – around 30% by some estimates^[5] – than global auto giants, integrating the latest smart technologies and providing consumers with an array of affordable choices.

Bracing for a bumpy ride

The long-term potential of this sector is clear amid a global push to decarbonise transportation. Bloomberg NEF predicts that 75% of global passenger vehicle sales will be EVs by 2040.^[6] But China’s EV sector is facing near-term headwinds as the pace of domestic sales growth moderates, export markets impose tariffs and competition within the sector heats up. This has led to a price war that is cutting into profit margins. Firms are now prioritising market share over profit, prompting Goldman Sachs to warn that China’s automotive sector could slip into the red this year.^[7]

These dynamics are typical of fast-growing industries. A period of rapid growth often results in new entrants rushing in, which inevitably leads to a shakeout as profitability takes a hit. Of the more than 160 Chinese EV brands, only 25 to 30 are expected to remain financially viable by 2030, according to consultancy AlixPartners.^[8] The rest will go out of business or be acquired by larger and more efficient rivals, who will gradually regain pricing power as the industry consolidates and manufacturing costs continue falling.^[9]

Wealth effects of industry consolidation

In spite of the cyclical downturn, this process will be a significant wealth creation event. The entrepreneurs behind the firms that are acquired will, of course, be the immediate beneficiaries. Over the long term, however, those that invest and acquire have the potential to realise even greater value as the transition to EVs continues.

To be sure, efforts are underway to erode Chinese manufacturers’ dominance as EVs and EV batteries emerge as the next geopolitical battlefield after semiconductors.^[10] Chinese EV makers will likely face a growing range of tariffs and restrictions in foreign markets. The US government has announced a quadrupling of tariffs on China-made EVs from 25% to 100% this year. And the US Inflation Reduction Act (IRA) will limit access to Chinese producers in favor of those from what it deems “friendly” countries, such as South Korea.^[11]

The net effect of these developments on the prospects for Chinese EV manufacturers in the US is still unclear. There is also a chance that the tariff hike will eventually be rolled back: it has already been criticised for holding back the energy transition and for its potential to draw retaliatory measures from China.^[12] Even Tesla CEO Elon Musk has come out against it.^[13]

In other key markets, Chinese manufacturers are so much more competitive than their global peers that tariffs may not do much to stem the tide of Chinese imports. For example, in Europe, the biggest export market for Chinese EVs, a new analysis by Rhodium Group suggests that tariffs will have little impact on Chinese imports.^[14] Moreover, Chinese manufacturers can seek to get around these tariffs by setting up plants in Europe and Mexico.

Another important consideration is that the largest future demand growth for Chinese EVs will probably come from Asia, and especially the countries of Southeast Asia, where strong economic growth is driving greater affluence. China’s strategy of focusing on developing small and affordable EVs should, according to a new report from the International Energy Agency, prove a winner in these markets.^[15]

Gearing up for the future

Although China’s EV sector is going through a distinctly rough patch, there could be a smoother road on the horizon.

To get there, the industry needs to consolidate. This will require funding from a wide range of sources, including private credit and alternative financing, particularly since banks’ appetite to lend to many EV companies is likely to be limited given that this is still an emerging sector – and going through a downturn.

Wealth creation events, such as mergers and acquisitions involving listed companies, often create a need for liquidity among major shareholders. Acquirers may wish to raise cash to finance transactions without giving up their own equity. Sellers paid in shares may want to retain that equity, but also access liquidity to diversify their portfolios or pay down debt.

EquitiesFirst, a specialised provider of equity-based financing solutions, has a long track record of enabling Chinese clients to access liquidity against major shareholdings in listed companies. We are ready to support clients’ different liquidity needs through this cycle of consolidation in China’s EV sector. In an industry that is undergoing so much disruption, a smart approach to monetising a long-term shareholding could make the difference between wealth creation and wealth destruction over the long term.

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[1] https://www.scmp.com/business/china-business/article/3247041/chinas-byd-poised-overtake-tesla-worlds-largest-maker-pure-electric-vehicles-fourth-quarter-ev-sales

[2] https://www.bloomberg.com/news/articles/2024-03-18/chinese-ev-affordability-frightens-ford-gm-us-automakers

[3] https://asia.nikkei.com/Spotlight/Electric-cars-in-China/China-s-Gotion-breaks-10-minute-charge-barrier-in-EV-battery-race

[4] https://www.reuters.com/world/china/chinas-ev-strategy-going-small-cheap-pay-big-dividends-asia-russell-2024-04-23/

[5] https://www.wsj.com/business/autos/how-china-is-churning-out-evs-faster-than-everyone-else-df316c71

[6] https://assets.bbhub.io/professional/sites/24/2431510_BNEFElectricVehicleOutlook2023_ExecSummary.pdf

[7] https://www.scmp.com/business/china-business/article/3260527/china-ev-price-war-worsen-market-share-takes-priority-over-profit-hastening-demise-smaller-players

[8] https://restofworld.org/2024/china-ev-industry-slowdown/

[9] https://www.argusmedia.com/en/news-and-insights/latest-market-news/2553856-competition-lower-costs-escalate-china-s-ev-price-war

[10] https://natixis.us6.list-manage.com/track/click?u=25b26dfbf3a98b662bc5fd1b2&id=5fa682d833&e=1ed517a0c2

[11] https://research.natixis.com/Site/en/publication/xGTiD7wHBiUhY-qWCpz9aA%3D%3D

[12] https://www.bloomberg.com/opinion/articles/2024-05-26/biden-s-tariffs-on-chinese-evs-postpone-america-s-green-future-lwnhmusq

[13] https://www.bbc.com/news/articles/cq55zd2xjreo

[14] https://rhg.com/research/aint-no-duty-high-enough/

[15] https://www.reuters.com/world/china/chinas-ev-strategy-going-small-cheap-pay-big-dividends-asia-russell-2024-04-23/