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.
[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/
Disclaimer
Past performance does not guarantee future returns, and individual returns are not guaranteed or warranted.
This Document is intended solely for accredited investors, sophisticated investors, professional investors, or otherwise qualified investors, as may be required by law or otherwise, and it is not intended for, and should not be used by, persons who do not meet the relevant requirements. The content provided herein is for informational purposes only and is general in nature and not targeted to any specific objective or financial need. The views and opinions expressed in this Document have been prepared by third parties and do not necessarily reflect the views and opinions of EquitiesFirst. EquitiesFirst has not independently examined or verified the information provided herein, and no representation is made that it is accurate or complete. Opinions and information herein are subject to change without notice. The content provided does not constitute an offer to sell (or solicitation of an offer to purchase) any securities, investments, or any financial products (“Offer”). Any such Offer shall only be made through a relevant offering or other documentation which sets forth its material terms and conditions. Nothing contained in this Document shall constitute a recommendation, solicitation, invitation, inducement, promotion, or offer for the purchase or sale of any investment product by Equities First Holdings, LLC or its subsidiaries (collectively, “EquitiesFirst”), nor shall this Document be construed in any way as investment, legal, or tax advice, or as a recommendation, reference, or endorsement by EquitiesFirst. You should seek independent financial advice prior to making an investment decision about a financial product.
This Document contains the intellectual property of EquitiesFirst in the United States and other countries, including, without limitation, their respective logos and other registered and unregistered trademarks and service marks. EquitiesFirst reserves all rights in and to their intellectual property contained in this Document. The Document should not be distributed, published, reproduced or otherwise made available in whole or in part by recipients to any other person and, in particular, should not be distributed to persons in any country where such distribution may lead to a breach of any legal or regulatory requirement.
EquitiesFirst make no representation or warranty with respect to this Document and expressly disclaim any implied warranty under law. You acknowledge that EquitiesFirst is not liable under any circumstances for any direct, indirect, special, consequential, incidental, or punitive damages whatsoever, including, without limitation, any lost profits or lost opportunity, even if EquitiesFirst has been advised of the possibility of such damages.
EquitiesFirst makes the following further statements that may be applicable in the stated jurisdiction:
Australia: Equities First Holdings (Australia) Pty Ltd (ACN: 142 644 399) holds an Australian Financial Services Licence (AFSL Number: 387079). All rights reserved.
The information contained on this Document is intended for persons located in Australia only and classified as a Wholesale Client only as defined in Section 761G of the Corporations Act 2001. The distribution of information to persons outside this criteria may be restricted by law and persons who come into possession of it should seek advice and observe any such restriction.
The material contained in this Document is for information purposes only and should not be construed as an offer or solicitation or recommendation to buy or sell financial products.
The information contained in this Document is intended to be general in nature and is not personal financial product advice. Any advice contained in the Document is general advice only and has been prepared without considering your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. You should seek independent financial advice and read the relevant disclosure statements or other offer documents prior to making an investment decision about a financial product.
Dubai: Equities First Holdings Hong Kong Ltd (DIFC Representative Office) at Gate Precinct Building 4, 6th Floor, Office 7, Dubai International Financial Centre (commercial license number CL7354) is regulated by the Dubai Financial Services Authority (“DFSA”) as a Representative Office (DFSA Firm Reference No.: F008752). All rights reserved.
The information contained in this document is intended to be general in nature, and, to the extent that it is perceived as advice, any advice contained in this document is general advice only and has been prepared without considering your objectives, financial situation, suitability of the financial products or your needs.
The material contained in this document is for information purposes only and should not be construed as financial advice, including an offer or solicitation or recommendation to buy or sell financial products. The information contained in this document is intended to be general in nature and any advice contained in this document is general advice only and has been prepared without considering your objectives, financial situation, suitability of the financial products or your needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. If you do not understand the contents of this document, you should consult an authorised financial adviser.
This document relates to a financial product which is not subject to any form of regulation or approval by the DFSA. The DFSA has no responsibility for reviewing or verifying any documents in connection with this financial product. Accordingly, the DFSA has not approved this document or any other associated documents nor taken any steps to verify the information set out in this document, and has no responsibility for it.
Hong Kong: Equities First Holdings Hong Kong Limited is licensed under the Money Lenders Ordinance (Money Lender’s Licence No. 1659/2024) and to carry on the business of dealing in securities (Type 1 licence) under the Securities and Futures Ordinance (“SFO”) (CE No. BFJ407). This Document has not been reviewed by the Hong Kong Securities and Futures Commission. It is not intended as an offer to sell securities or a solicitation to buy any product managed or provided by Equities First Holdings Hong Kong Limited and is only intended for persons who qualify as Professional Investors under the SFO. This document is not directed to individuals or organizations for whom such offers or invitations would be unlawful or prohibited.
Korea: The foregoing is intended solely for sophisticated investors, professional investors or otherwise qualified investors who have sufficient knowledge and experience in entering into securities financing transactions. It is not intended for, and should not be used by, persons who do not meet those criteria.
United Kingdom: Equities First (London) Limited is authorised and regulated in the UK by the Financial Conduct Authority (“FCA”). In the UK, this Document is only being distributed and made available to persons of the kind described in Article 19(5) (investment professionals) and Article 49(2) (high net worth companies, unincorporated associations etc.) of Part IV of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (‘’FPO’’) and any investment activity to which this presentation relates is only available to, and will only be engaged in with, such persons. Persons who do not have professional experience in matters relating to investment or who are not persons to whom Article 49 of the FPO applies should not rely on this document. This Document is only prepared for and available to persons who qualify as Professional Investors under the Markets in Financial Instruments Directive.
