Last month, a senior Chinese official said the country’s government wanted to encourage consolidation of its sprawling electric vehicle industry. It’s no surprise that China has more than 300 electric vehicle start-ups, many of which have no hope of ever becoming profitable.
But what does this mean for companies like Nio (NYSE: NIO), Xpeng (NYSE: XPEV), and Li Auto (NASDAQ: LI) which have become popular with American electric vehicle investors?
In this Motley Fool Live broadcast, recorded September 23, Focus on industry host Nick Sciple and Motley Fool senior automotive specialist John Rosevear take a closer look at the government‘s likely intentions, how they could be both good and bad for Nio and his rivals – and why a similar wave of consolidation of electric vehicles is likely to play elsewhere as well.
A transcript is below the video.
Nick Sciple: You mentioned China earlier in supply chains, I wanted to talk a bit about China here. Earlier this month, Chinese Minister of Industry and Information Technology Xiao Yaqing. Hopefully I said this right, I made the headlines saying that China has “Too many electric vehicle manufacturers and the government would encourage consolidation.” It comes in the midst of this great disruption that we have seen in the tech sector in China following sudden government intervention. Should investors in Chinese electric vehicle companies have any concerns about these government comments?
John Rosevear: Well, the companies that we are looking at, companies like NIO, Xpeng, Li Auto, BYD. These are the companies that stand out because they have had some success. They ship vehicles, they have satisfied customers, their sales are increasing. It’s harder to see from the United States, as there are around 300 electric vehicle start-ups in China, many of which are nothing more than a shingle on a warehouse. At this point, they’ve never been anywhere. There was a time when grants from national and local authorities were quite generous. A lot of people have said, “We’re going to try to give ourselves grants. There was probably some level of scamming, but there’s a lot of genuine effort that just never took off, including some pretty big ones. To the extent that they encourage consolidation. If I were an investor, say, NIO, what I would worry about is the government is going to put pressure on me to buy competitors that I maybe don’t need what they have. Some, it’s just traction. It might not be the best use of capital or so on. I think for companies, again, the ones we talked about, this is going to be more difficult down the road at most things. It may even help them to some extent from the perspective of Chinese consumers. The thing to understand about the Chinese auto market is that all the auto brands that you have heard of as a westerner are for sale in China, as well as a whole bunch of Chinese brands that you don’t know. you may have never heard of it. By clearing the ground a little, they can stand out more. If we go from 300 electric vehicles in China, electric vehicle enterprises in China. To have eight, consumers know what they are buying and who has what and they can see more clearly rather than being overwhelming. It could be good for NIO or Xpeng.
Nick Sciple: We’ll see what happens. I think every time the government gets involved in business operations it adds a level of unpredictability to a company that is already on the cutting edge of technology. We will see what happens and we will pay attention to it. Apart from these involved macro-government events, what are you paying attention in China when it comes to electric vehicles these days?
John Rosevear: Well, what I’m looking at right now is that Xpeng has just started production of a new model. It’s called the P5. It’s a smaller sedan than their P7. Everyone is probably, if you’ve been paying attention to Chinese EVs, you’ve seen photos of the P7. It’s a really very elegant sedan. The P5 is more stable, straighter. Not so pretty, but it starts after grants of around $ 25,000, which will be very attractive in China. They started production. They say deliveries start next month. What I’ll be interested in seeing is how it plays out in the short term with that rival Neo in mind, which is a company that many of us have been watching for quite some time. In America, a lot of crazy people took an interest in it. NIO doesn’t have any new models coming until next year. Their growth may stabilize a bit as Xpeng continues to share its shares with its new low cost and presumably higher volume products. I’m going to watch this over the next couple of months and see how it starts to come apart.
Nick Sciple: When we see this growth of these new electric vehicle companies, you mentioned Xpeng, NIO, there are others. As a person living in North America, is there a credible route for these vehicles to be available for sale here or is there still a store only in China?
John Rosevear: They are looking at Europe and to some extent Norway has caught everyone’s attention because it is the only country that has led the world in the adoption of electric vehicles. You’re here there were a lot of sales there, Ford Motor Company sells every Mach-E that they can ship to Norway, et cetera. NIO and Xpeng have targeted this. I think Xpeng has already delivered a few cars to Norway and NIO is in the process of opening their business. They may have already shipped some for delivery there. I think at some point later they might try to come to America if they get a beachhead in Europe and can make it a profitable and stable business. But at the same time, what we’re going to see over the next few years is the avalanche of electric vehicles from established automakers who already have the production capacity. Who already have supplier relationships, who already have customer loyalty and so on. It makes me think that what may not be on the radar just yet is a consolidation both among traditional automakers and among these new entrants. I think we’re headed for a shakeout. Certainly, as we have talked about, there is one coming to China. But elsewhere too. Is there room for Nicolas and Lucid and all these other companies, Workaholic, Lordstown Engines that we’ve been talking about over the past two years? Not all of these companies will do it. It will be interesting to see who are the buyers and who become the assets. I think a shakeout is coming up and it’s going to be interesting to watch. That’s my opinion.
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