By: Equities First
The electric vehicle revolution is in full swing, and China is leading the charge. But as with any gold rush, the EV boom has attracted a horde of prospectors —some destined for fortune, others for failure. With over 160 Chinese EV brands jostling for position in the world’s largest auto market, industry insiders are predicting a shakeout and consolidation.
“Entering 2024, the knockout round of China’s auto industry will begin in an all-round way,” warned Gan Jiayue, CEO of Geely Auto, on an earnings call in March.
This impending consolidation presents both challenges and opportunities. While many smaller players face extinction, savvy investors and companies stand to benefit from establishing leading positions in a sector that maintains long-term growth potential. EquitiesFirst, a firm specializing in equities-based financing, could help support these investors and companies in the years ahead.
The Rise and Reckoning of China’s EV Market
China’s EV industry didn’t grow organically; it was cultivated through generous government subsidies and support. This strategy paid off spectacularly in terms of market dominance. Chinese companies now account for about 60% of global EV sales, transforming them to industry leaders within a decade. Subsidies, lower labor costs, and a robust battery supply chain infrastructure have enabled Chinese companies to produce EVs at significantly lower cost and sell them at lower prices.
BYD, once a battery manufacturer for the likes of Motorola, has dethroned Tesla as the world’s largest EV producer. Its Seagull hatchback, retailing for under $10,000, exemplifies the disruptive potential of Chinese EVs. It’s a stark contrast to Tesla’s cheapest offering, the Model 3, which starts at around $39,000 even after recent price cuts.
This success story, however, is showing signs of strain. The Chinese government has begun phasing out subsidies, leading to a slowdown in domestic demand as EV makers struggle to maintain low prices at razor-thin margins. Simultaneously, geopolitical tensions are throwing up roadblocks to expansion in key markets like the United States and Europe. The European Union is investigating potential anti-subsidy measures, while the U.S. has slapped a 100% tariff on Chinese EV imports.
The biggest threat may come from within. The gold rush mentality has led to a glut of EV manufacturers, all chasing a customer base that isn’t growing fast enough to sustain them. The China Association of Auto Manufacturers forecasts total passenger car sales of around 26.8 million for 2024. However, the combined sales targets of major manufacturers exceed 30 million units. Something’s got to give.
The Price War
In this hypercompetitive environment, price has become the weapon of choice. Tesla fired the opening salvo in October 2022, slashing prices on its Model 3 and Model Y by up to 9%. This triggered a cascading effect throughout the industry, with companies racing to the bottom in a bid to capture market share.
The carnage has been severe. Industrywide profit margins in China’s auto sector plummeted to 5% in 2023, the lowest in at least a decade. Even BYD, the current market leader, reported its slowest quarterly profit growth in two years.
“The price war is likely to rage on further into this year, though it’s hard to imagine prices can come down much further than they already have,” noted Mark Rainford, an automotive industry commentator based in Shanghai. “[Chinese EV makers] are going to need deep pockets and smart marketing to take enough business.”
The price war shows no signs of abating. In April, Tesla announced another round of cuts of 14,000 yuan (roughly $1,900) on four models sold in mainland China. Domestic competitors like XPeng and Li Auto immediately followed suit with their own discounts and subsidies.
Survival of the Fittest
As the industry grapples with oversupply and shrinking margins, consolidation seems inevitable.
BYD’s chairman, Wang Chuanfu, minced no words, predicting that a “brutal elimination” is around the corner.
“China’s EV industry has entered a stage of cyclical adjustment after two decades of growth,” he said. “Companies must form economies of scale and brand advantages as soon as possible.”
Some industry experts predict that fewer than 30 of the current EV brands in China will survive to 2030. This isn’t just idle speculation — we’re already seeing casualties. Over a dozen passenger carmakers vanished from the market last year, including once-promising EV startups like WM Motor, Byton, and Aiways.
Even established global players are feeling the heat. Mitsubishi Motors announced the end of production at its Chinese joint venture in October. Honda, Hyundai, and Ford have all taken steps to cut costs, including layoffs and factory sales.
Yet amid this chaos, new entrants continue to crowd in. Xiaomi, the smartphone giant, just launched its first EV, the SU7 sedan, aimed squarely at Tesla and Porsche. Not to be outdone, fellow phone maker Meizu announced a partnership with Geely to launch its own EV later this year.
EquitiesFirst: A Lifeline in Turbulent Times?
In this environment of intense competition and tightening margins, access to capital will be crucial. Traditional lenders may balk at the risks involved in financing an industry in the midst of this much immediate change. This is where alternative financing solutions like those offered by EquitiesFirst could play a pivotal role.
EquitiesFirst specializes in providing liquidity based on a client’s equity portfolio. This approach could be particularly appealing to EV companies looking to weather the storm or finance strategic acquisitions without giving up long-term ownership of their assets.
For entrepreneurs and investors in the Chinese EV space, this type of financing could provide the flexibility needed to navigate the upcoming consolidation phase. It allows companies to leverage their existing equity holdings to secure short-term capital for operations, expansion, or strategic moves.
This isn’t just about survival. For well-positioned players, the coming shakeout represents an opportunity to acquire assets, talent, and market share at fire-sale prices. Those with access to capital will be best placed to emerge as the industry’s new titans.
But while EquitiesFirst’s financing model offers intriguing possibilities, it’s not a silver bullet. Success in China’s EV market will require more than just deep pockets. Companies will need to excel in areas like cost optimization, supply chain management, and technological innovation.
Moreover, the geopolitical landscape adds another layer of complexity. Any financing strategy must account for the potential impact of trade tensions, tariffs, and evolving regulations across different markets.
For investors considering this space, due diligence is paramount. The potential rewards are significant, but so are the risks.
As Rainford puts it, “China’s EV industry is only going to go from strength to strength as a whole, but not every player today will see the finish line.”
Despite the challenges, the long-term outlook for EVs in China remains robust. The International Energy Agency projects that electric cars could capture up to 45% of the Chinese auto market in 2024. The country’s cost advantages in manufacturing and its control over key parts of the EV supply chain suggest that Chinese companies will continue to play a dominant role in the global EV landscape.
The End of the Beginning
China’s EV sector is entering a new phase. The easy growth fueled by government subsidies and a relatively uncrowded market is over. What comes next will be messier, more Darwinian, but ultimately necessary for the industry’s long-term health.
EquitiesFirst’s financing model offers one potential path through this transition. Providing liquidity without requiring companies to sell off their long-term assets could help bridge the gap between the current oversupply and the eventual equilibrium.
Published by: Martin De Juan
