May 22, 2020

Chinese EV Market - Demand Expected Down Through 2020, but TSLA Gaining

1211 HK, 175 HK, TSLA
By Sun Jina
Chinese electric vehicle sales are expected to be under pressure through 2020, despite an anticipated improvement in 2H20, but Tesla is gaining share because of its Model 3 price reduction and eligibility for government subsidies.
  • EV sales down yy for 7 of 10 sources during past 90 days; government subsidies on EV purchases driving some near-term activity, but reduction of subsidy in July could pressure sales
  • 5 of 10 sources expect 2020 Chinese EV sales down yy; 2020 sales estimated at 0.75-1.2 million units (vs. 1.24 million units in 2019)
  • EV pricing during past 90 days down qq for 5 of 10 sources, incentives up qq for 6; TSLA increasingly aggressive on price
  • BYD (1211 HK), TSLA gaining share; high-priced EVs from BMW GR, DAI GR, VOW GR losing

EV Sales Down Significantly

EV Sales Estimates YY
(number of sources)
 Past 90 DaysNext 90 Days2020
Up 16%-20%1-1
Up 11%-15%121
Up 6%-10%-1-
Up111
Flat--2
Down265
Down 26%-30%2--
Down 51%-60%2--
Down 61%-70%1--
AverageDown 28%-33%--

Seven of 10 Chinese sales executives said electric vehicle (EV) sales have decreased during the past 90 days, averaging down 28%-33% yy. Sources said EV demand started to decline in 2H19 following significant subsidy cuts for EVs, and the coronavirus (COVID-19) pandemic further pressured the market. Sources said buyers are reticent to make auto purchases given increased anxiety surrounding the pandemic, the economy and employment. “Our EV sales decreased more than 30% during the past 90 days [yy]. I think the biggest reason is the coronavirus outbreak,” one source said. “In February, our store was closed. In March and April, we reopened, but EV sales still decreased sharply [yy] because of low customer traffic and buyer caution.”

The three sources reporting higher sales during the past 90 days cited a variety of factors, including increased production capacity, more aggressive promotions and infection concerns among affluent customers. “Our EV sales increased 20% during the past 90 days [yy] because we expanded local production capacity and increased price discounts to attract buyers,” one source said. Another said, “Because of the risk of taking public transportation, people that have enough money have a strong desire to buy cars right now.”

Quotes
“The pandemic is affecting China’s economy, supply chain and buyers’ consumption levels.”

“Compared to gasoline-powered cars, EV battery performance falls down greatly in winter in northeast China. And EV infrastructure is not mature. In the residential areas, it is hard to find the charge points at present.”

“Our February sales decreased 90% [yy], March sales increased about 10% [yy] and April sales decreased about 10% [yy].”

“Our current customer traffic is improving because our local situation is good. But compared with the normal season, the customers are not fully returning.”

Impact of Subsidy Policy Mixed
Several sources said greater sales declines during the past 90 days were avoided -- at least in part -- by buyers wanting to take advantage of subsidies ahead of policy changes. The Chinese government announced a new subsidy policy for EVs on April 23. In July 2020, subsidies will decrease 10% yy, then decrease another 20% in 2021 and 30% in 2022. But until July, buyers can take advantage of a transition period during which subsidies are equal to 50% of 2019 levels. Before the pandemic, sources expected the government to decrease all subsidies after 2020. “EV sales were up during the past 90 days [yy] as subsidies will be further cut in July,” one source said. But after the subsidy cuts in July, many expect pressure on EV sales to increase. “EV sales might continue to decrease during the next 90 days. As the government subsidy decreases, people don’t have the motivation to choose EVs,” one source said.

Quotes
“The government support and subsidies are the most positive factor driving EV sales in China. But the subsidies are declining each year, so EV sales aren’t very good. I think the car license limitation policy helps with EV sales, especially in tier-1 cities, as car licenses are so hard to get and so expensive that many people have to consider EV purchases.”

“When the government has big subsidies for EVs, the sales were good. But after several years of sales and with government subsidies decreasing, the EV market cooled down. Without enough subsidies, people are less inclined to purchase EVs.”

Full-Year Outlook Weak, but Tier-1 Cities Fare Better
Although sales during the next 90 days are expected to improve, sources said 2H20 sales growth may not offset 1H20 sales declines. Consequently, five of 10 sources expect EV sales to decrease yy during 2020 and two others expect sales to remain flat. “I think our EV sales will have big declines in 1H20. In 2H20, I am not positive because of lower subsidies. I think our 2020 EV sales will decrease [yy],” one said.

Sources -- including those with exposure to Tesla Inc. sales -- said the demand outlook in large cities is relatively stronger compared with other cities, noting a high penetration rate and better EV infrastructure. Local governments limiting the issuance of new car license plates in order to ease traffic congestion was another factor reported. All three sources expecting higher yy sales during the next 90 days are based in tier-1 cities. “The capacity of Tesla’s Shanghai factory will reach 150,000 units by the end of 2020. Tesla may sell 80,000-100,000 Model 3 units in China,” one source said. “We think Tesla’s 2020 EV sales will increase more than 20% [yy] because of expanding capacity and localization strategy.”

China’s 2020 NEV Sales Estimates
750,000 units1
800,000 units1
1,000,000 units1
1,150,000 units1
1,200,000 units2

The six sources who were able to provide estimates for the Chinese market in 2020 reported a wide range, from 750,000 to 1.2 million units for 2020, lower than the 1.24 million units in 2019 reported by the China Automotive Association, which sources said is assuming a strong 2H20 recovery. “China sold 1.24 million units in 2019, down 2.2% [yy] because of sluggish demand in 2H19. China’s EV sales decreased more than 40% [yy] during the first four months [of 2020] because of the pandemic. China’s 2020 EV sales may decrease 10% [yy] to around 1.1 million units,” one said.

Quotes
“Impacted by coronavirus and the slowing market, I expect our sales to decrease in 2020.”

“The coronavirus pandemic has impacted our sales plans. For this, we have to decrease our goal for 2020. I think our 2020 EV sales will not see a big increase [yy].”

“August is the traditional peak season for our EV sales. We hope there will be some positive policies to boost the EV market by the government.”

“Total sales will be around 1.1-1.2 million units. It will largely depend on 2H20 demand.”

Tesla Gains With Lower Prices

Market Share Trends for EV Manufacturers in Past 90 Days
(number of sources)
 GainingLosing
BYD71
Tesla5-
NIO Inc.1-
JAC Motors (Anhui Jianghuai Automobile Group Corp. Ltd., 600418 CH)1-
None11
Zotye Automobile Co. Ltd.-1
International manufacturers-2

Five of 10 sources said prices decreased qq during the past 90 day, citing sluggish demand and increased competition. Meanwhile, EV manufacturer incentives increased qq for six of 10 sources during the past 90 days. “February was the bottom for the incentives from EV manufacturers to end customers. Since March, the incentives are increasing,” one source said.

Sources specifically cited Tesla as being aggressive with pricing. “Prices of the Tesla Model 3 decreased from 323,800 yuan to 291,800 yuan. Buyers do not need to pay for the purchase tax. And the price after the subsidies was even lower: 271,550 yuan,” one source said. Another source said, “Tesla had a big price cut, which is very aggressive. The official price of the Model 3 is below 300,000 yuan at present. With the government subsidy, its selling price is about 270,000 yuan, which is very attractive for customers.” Tesla’s ability to price under the 300,000 yuan mark is especially important as it qualifies vehicles for government subsidies. As a result of its lower prices and qualifying for subsidies, five sources said Tesla is gaining share in the high-end segment.

Seven sources said BYD Co. Ltd. (1211 HK) has gained share in the midrange and low-end markets during the past 90 days, as it has developed many low-priced EV models and has a reputation for quality, service and battery technology. “BYD is gaining share in the medium-low ends because of its low price and brand reputation. Model Qin was the most popular EV model in April,” an EV dealer said.

With Tesla gaining share at the high end and BYD at the low end, two sources said high-priced EV cars (above 300,000 yuan) of other international manufacturers (including Volkswagen AG’s Audi, BMW AG and Daimler AG’s Mercedes-Benz, etc.) lost share. “High-end brands like Audi, BMW and Daimler’s Mercedes are losing share to Chinese OEMs because the low-medium market is the mainstream in China. … They don’t benefit from subsidies and buyers prefer lower-priced models because of the uncertainty surrounding the pandemic,” an EV dealer said.

Quotes
“For Geely Automobile Holdings Ltd. (175 HK) and Chery Automobile Co. Ltd., I think Tesla’s low-price strategy will not have an impact because their price and customer bases are far different.”

“I think this will bring along big price pressure for similar-level EVs because Tesla’s brand reputation is so big, which is very attractive for customers.”

“[Tesla’s] lower-pricing strategy will pressure the market, especially for those EV models with a price range of 200,000-400,000 yuan,” an EV dealer said.

“Chinese OEMs will face more challenges, but it’s a good thing for the whole industry. OEMs need to compete and continue to improve technology at lower costs. This will help with the popularization of EV,” “BYD is doing better than other brands because its EVs are widely known. People normally consider BYD when they want to purchase EV.”

“We already see competition from Tesla. … I heard that from January to March, the unit sales of Tesla were more than BYD. But in April, Tesla sold fewer units than BYD.”

“I don’t see competition from Tesla at the moment. People that choose EVs are normally female. They use EVs to take their kids places. Normally, they would choose EVs that are priced around 100,000 yuan. The price of Tesla remains too high for them. But Tesla might sell well in tier-1 cities.”