Chinese EV Market Gets Even Tougher As the US Pulls Back
Destruction of US ICE vehicle industry only delayed
For those reading stories about the “bust” of the EV market, the Chinese EV market, the biggest in the world and accounting for 60% of all global EV sales, puts a lie to such stories. In 2023, that Chinese market will have grown to over 8 million vehicles sold and end the year at over a 40% share of the light vehicle market. Its’ growth has not dimmed the level of competition, as a still large array of manufacturers fight over market share.
Even the leader BYD, which in the first few months of 2023 had a 40% EV market share, has slipped somewhat under the relentless competition from such domestic makers as Geely-Volvo, SAIC-SGW, Li Auto, GAC Aion, Changan and even new players such as Huawei’s Aito brand. Even the fallen favourites Xpeng and Nio have started to recover, and VW is desperately attempting to gain a solid footing in EVs to offset the accelerating fall in its Chinese ICE vehicles. “You didn’t mention Tesla?” you ask. That’s because Tesla has been losing market share since its 2nd big price cut driven sales jump in the first quarter when it reached a 9.61% EV market share; since then its share has fallen to 8.54% in Q2 and 6.46% in Q3. In Q4 it may get a small bump in sales from its face-lifted Model 3. Overall, the massive price cuts and the new Model 3 have resulted in Tesla simply maintaining its market share, from Q4 2022 to Q4 2023. Next year will not be so kind to Tesla, as the plethora of new competitive models hits the market right in the sweet spots of Model 3 and even more Model Y; with the latter scheduled for its face lift only at the end of 2024.
BYD launched its first true Model Y competitor at the end of July, with its luxury brand Denza N7, which competes with the more expensive versions of the Model Y. It has only been a modest success though, as so many other companies also launched their high-end Model Y competitors (e,g, Xpeng G6, the all-new Nio ES6 [EL7 in Europe], and the Li Auto L7). Then BYD launched the BYD Song L, more of a direct competitor to the full range of the Model Y, with pre-sales beginning at the end of October; there were over 28,000 pre-orders. With the later official launch of the Song L, BYD very significantly reduced its price! It now starts at RMB 189,800 (US$26,800) and the most expensive version is RMB 249,800 (US$35,280); prices which show the readiness of BYD to price cut to maintain/gain market share. BYD also announced that its much-awaited Sea Lion 07 which is another Model Y competitor, will begin deliveries in the first half of 2024, with pricing from RMB 200,000 to RMB 260,000. The cheapest version of the Model Y is RMB 266,400 and the most expensive is RMB 363,900! In parallel with the Song L launch has been the launch by the Baidu-Geely brand Jiyue of its 01, also a direct Model Y competitor, with a starting price of RMB 249,000 and a more expensive version at RMB 339,900.
BYD’s full year 2023 market share will be about 34%, vs. 31% in all of 2022, but as stated above its share has been falling through 2023. The very aggressive pricing of the Song L and Sea Lion 7 show a readiness to start a new price war if needed to gain/maintain market share. With the plethora of well-priced competitors for a Model Y which dominates its sales in China, and will not be refreshed until late 2024, Tesla may be faced with the very difficult choice between reducing prices (and therefore already thin margins) and losing market share. With an overall market that will probably grow at around 30%, Tesla could maintain sales levels while losing market share, but it risks becoming at best a niche supplier as many others overtake it. The entry of technology giants Baidu (through its joint venture Jiyue, with Geely) and Huawei (through its joint venture Luxeed, with Chery) into the EV marker shows that the level of competition is in many ways intensifying rather than reducing. Luxeed will be launching its own Model Y competitor in the second half of 2024, it already launched a direct competitor to the Model 3! Below are some test drives/reviews of the Model Y competitors:
This was made before the latest Song L price cuts:
With 30% growth, the Chinese EV market share may reach 50% by the end of 2024, starting to severely impact the predominantly European and Japanese ICE car manufacturers, which at the end of 2023 will already be down to about a 40% overall market share. By the end of 2024 that may be down to 30% given the growth in Chinese-dominated EV sales. Once EV market share is over 50%, EV sales may actually accelerate to a dominant position; resulting in the collapse of ICE sales perhaps in a 2-year period (2025 and 2026). Such continued rapid growth would only intensify the battle for market share as manufacturers jostle for position with respect to the time when EVs fully dominate, and market growth will rapidly subside. This does not auger well for the ICE manufacturers, who may very well desperately cut prices on their own EV models to gain a foothold, and for a Tesla which has struggled to maintain share and is stuck with two core mid-life models (one already face-lifted the other to be at the end of 2024) and two niche old models (which are themselves being attacked by an increasing number of Chinese competitors). At best, Tesla may be able to maintain market share but at the cost of further reduced margins (or even losses), at worst its Chinese market share will be shrunk into insignificance.
The new round of EV price cuts may also help accelerate EV adoption in China, as EVs become even more price-competitive against ICE cars. Li Auto, with its EREV (Extended Range Electric Vehicle) models that have both a good-sized battery (e.g. a 41 kWh battery in the L7) and a range extension ICE, has hit a sweet spot for such customer conversions in 2023 and has nearly trebled yearly sales from 2022 (which were themselves treble those of 2021); a trajectory very much like BYD. It is now moving into fully electric cars as well. The brutal competition in China will also help push increasing levels of Chinese EV exports, with Australian and Asian markets rapidly feeling the presence of the Chinese manufacturers; greatly increasing competition for Tesla in those markets and pushing out ICE manufacturers.
The most important aspect of the Chinese market is the continual reduction in prices which has opened up an ever-increasing share of light vehicle purchasers to EVs. This is the opposite of Europe, where prices have tended to increase over time; reflected in the 25% EV (and 16% BEV) market share and slower growth rate. The removal of French EV subsidies for foreign-made vehicles (e.g. the Tesla Model 3 and some Model Y models) and the German reduction in EV incentives, both at the end of this year, will not help the 2024 European EV sales growth rate. In the US, the lack of competition has allowed Tesla to keep prices much higher than in China, even after its price cuts at the start of 2023, and only recently have the dominant truck and large SUV markets been affected by EV models. In addition, China has an extensive high-speed rail system that is connected to city sub-ways, as does Europe, that significantly reduces “range anxiety”. Plus, the Chinese state and local governments have plowed money into the electric charging network and many cities offer benefits for EVs over ICE vehicles.
US truck and SUV EV prices have been affected by the strategy of the large US auto manufacturers to push prices higher to widen profit margins, especially during the COVID-related supply disruptions. The immediate response of US manufacturers to the US$7,500 IRA tax credit was predominantly to increase prices to capture the extra US$7,500 as profit. For example, Ford had launched the F150 Lightning at a starting price of US$40,000 but raised that to US$60,000 and has only reduced that back to US$49,000 which is still above US$40,000; even with the US$7,500 tax credit. For the cash strapped consumer, possibly underwater in their car loan and now having to restart payments again on their student loans, US$41,500 is still expensive. Also, one will be hard pressed to find the base model on dealer lots as against the much more expensive models. Up until recently, the car dealers made the situation even worse by slapping large “market adjustments” on top of the manufacturers recommended prices!
Such high price tactics were ameliorated for a while with the very low Fed interest rates, student loan payment abeyances, and extensions in light vehicle loan durations to as high as 72 months. With now much higher interest rates and many consumers “under water” (the vehicle is worth substantially less than the loan value) in their loans, such pricing is resulting in reduced demand. US high-speed rail is non-existent and local subway and bus services are limited and deteriorating (e.g. the New York subway), making range anxiety much more of an issue in the US. The response of the manufacturers has been to cut investments in EV production, citing “low demand” which has been produced by their high-pricing strategy and lack of state rail and local transport investment (partially a result of their own political lobbying efforts). The Tesla Cybertruck, which starts at US$60,000 (but only for 2025 deliveries) and prices as high as US$90,000 plus, while offering a range of only about 300 miles, will not change this dynamic.
The EREV strategy of Li Auto, and the mixed PHEV/EV strategy of BYD, may much better fit the dynamics of the US market. In 2023, US BEV market share will be about 8%, with a declining growth rate (50% in 2023, 64% in 2022, 95% in 2021).
The top comment on the video below puts the US manufacturer’s position well, “If EV makers would have targeted low cost, basic models (sub 30k) instead of bloated, luxury models costing 60k plus they would have been more popular.”
With the tightening of the IRA guidelines from the start of 2024, which has meant that even the Tesla Model 3 will be no longer eligible for the IRA tax credit, US EV sales may be significantly impacted. One trend that is being very significantly underreported is Tesla’s loss of market share in the US, from 62% BEV share in Q1 2023 to 57% in Q2, to 51% in Q3 and below 50% in Q4; with market share predominantly being taken by a plethora of predominantly foreign manufacturers (Audi, BMW, Hyundai-Kia, Mercedes, Geely-Volvo, VW and Rivian). Any benefit from the face-lifted Model 3 at the start of 2024 may be significantly blunted by the loss of the tax credit eligibility. With the introduction of the Volvo EX30 at a base price of US$34,950 in late 2024, cheaper than a Model 3 and less than the average cost of an ICE car in the US, the start of the Chinese disruption of the US market may be upon us.
With the US market somewhat protected by China tariffs and the ICE subsidies, the focus of the Chinese manufacturers will be heavily on the world outside the US. Chinese has actually already become the largest exporter of light vehicles in the world. But what happens in 2026, only two years away, when the Chinese market will be closing in on saturation and the other non-US markets outside Europe will be heavily penetrated by Chinese brands? With the European fast market growth of 2025, driven by the state-mandated mass installation of fast-chargers and tightening of vehicle emissions standards, in the rear-view mirror.
Will we be seeing a Chinese car invasion of non-IRA Canada and the rapid building of Chinese manufacturing plants in Mexico to serve the US market? With the massive cuts in investments in future EV production and models, the mainstream US car makers will be in very much the same position that they were with respect to the Japanese car manufacturers (who themselves will be in severe trouble in the next few years) in the late 1970s.
Even Tesla will still only have the current five models in place (Models 3, Y, S, X and Cybertruck) with its purported “Model 2” facing a wide range of extremely cheap Chinese competition. The US car manufacturers have been in long-term decline since the 1980s, the next step down for them in domestic market share (they have retreated from other car markets, excluding Tesla) may end up with foreign ownership for the remaining two of the “big three” (Chrysler already being part of Stellantis).
I'm curious about the market for EV buses. My preference would be to see more buses on the roads and fewer cars, for a whole slew of environmental and social reasons.