COMMENTARY: Vehicle Sales Slow in China but Companies are Going All In on Electric Cars

As Tesla opens new factory, Toyota starts a joint venture and VW launches a big push to build and sell EVs in the world’s biggest market.

Mark Melnicoe
    Nov 09, 2019 5:00 AM  PT
COMMENTARY: Vehicle Sales Slow in China but Companies are Going All In on Electric Cars
author: Mark Melnicoe   

China's auto sales may be slowing, but that is not stopping a rush among manufacturers to build mass-market electric cars to sell in the world's largest vehicle market.

Because rules capping foreign ownership of car manufacturing are being lifted as part of the country's opening up, companies from around the world are joining the rush. The most visible result is Tesla (Nasdaq: TSLA), which last month began trial production of its Model 3 sedan at a just-opened factory in Shanghai.

Elon Musk's California-based company made waves because, first, it's Tesla – the marquee brand in e-vehicles – but also because it's the first wholly owned foreign auto factory in China. Analysts have noted how it got up and running in an incredibly quick six months from initial permits to completion, a reflection of the Chinese government's interest in promoting it. Tesla plans to build 1,000 cars a week by year-end and ramp that up to 500,000 cars a year by the end of 2020.

While Musk has made his share of mistakes and overpromises in leading Tesla, he is wise to zero in on China. It's Tesla's No. 2 market behind the U.S., where federal tax subsidies for its electric cars are phasing out. In China, the government is providing strong incentives for electric vehicle (EV) ownership. As a result, more than half the world's EV sales are taking place in the Middle Kingdom, where 1.2 million of them were sold last year.

By building its so-called gigafactory in China, Tesla avoids 25% tariffs imposed on U.S. imports as part of the trade war, and it also gets cheaper workers and lower freight costs. That will allow it to sell its Model 3 for 328,000 yuan – about $47,000. Bloomberg News noted that this price makes Tesla somewhat competitive with lower-cost (and lower quality) domestic manufacturers, such as BAIC Motor Corp., (HKEX: 1958) and BYD Co. (OTC: BYDDF), which it says offer functional sedans for about 200,000 yuan. 

To be sure, Tesla will face fierce competition from domestic and multinational competitors. BYD this week entered into a joint R&D venture with Toyota, which will bring in the financial resources of the world's biggest automaker to scale up EV production. 

This came in the wake of a disastrous quarter for BYD, which saw its third-quarter net income plunge 89%. Auto sales have dipped in China for 15 consecutive months after a multi-year rise that saw it surpass the U.S. as the world's biggest market. 

BYD is unknown to almost all Americans, but it has worked for 10 years in China on EVs and batteries. It also builds electric buses at a factory in Southern California and has 40,000 e-buses in operation around the world. The partnership with Toyota will bring in much-needed capital at just the right moment for BYD. 

Need for Capital

China's EV market has fallen this year after the government's cutback on buyer subsidies. With China's overall economy also slowing, car sales slipped to 1.81 million units in September, according to the China Association of Automobile Manufacturers. That was down 6.6% from a year earlier.

All told, China has put $50 billion into EV subsidies over the past decade, pushing it into global leadership. Now the big question is whether the industry can stand on its own as those subsidies are phased out and amid the trade war with the U.S. 

The big carmakers certainly think it will bounce back. Volkswagen (DE: VOW3), the world's No. 2 automaker, is making big plans for building and selling EVs in China. According to Reuters, VW plans to leapfrog Tesla by building 1 million EVs in the country by 2022. And that's only the beginning. The German company aims to build 22 million EVs worldwide by 2028, with more than half of them in China. 

It is working to bolster its manufacturing by retooling the FAW-Volkswagen factory in Foshan and the SAIC-Volkswagen plant in Anting next year to build EVs, Reuters reported. Combined production is expected to hit 600,000 vehicles annually, putting it ahead of Tesla in the country. VW wants to produce 15 EV models for the Chinese market five years from now. 

The fact that China's fledgling EV manufacturers are partnering with big international automakers is no accident. As Tesla has shown, it takes a huge amount of capital to get started making EVs. 

"The scale and speed of VW's electrification push marks a shift in favor of established manufacturers that can use existing factories and profit from combustion-engined sport utility vehicles (SUVs) to scale up faster than startups," Reuters reported. 

"The truth is barriers to entry in autos remain high," it quoted Max Warburton, an analyst at Bernstein Research, as saying. "Making cars is hard. The move to electric vehicles will be expensive, but will probably be led by traditional manufacturers." 

That means China's leading EV makers, such as Nio Inc. (Nasdaq: NIO) and private held companies like Byton, Xiaopeng and SF Motors, may need to join with bigger multinationals if they want to succeed. China's market is hypercompetitive, with 60 different EV brands now on the market or promised. 

A shakeout seems inevitable, and it will be interesting to see not only how well Tesla does but who the survivors will be over the next decade as China leads the world in electric car production and sales.