Global electric vehicles – Uneven acceleration across regions
Global electric vehicles – Uneven acceleration across regions
Investment summary
Global electric vehicle (EV) sales grew 19% year-on-year (YoY) in August, driven by a 35% increase in China. The US also saw a pickup, but Europe’s volumes fell 30% YoY and 15% month-on-month (MoM). This comes not as a total surprise since the comparison base from last year has been high in Europe as EV subsidies were phased out in Germany in the later part of 2023. Overall sentiment for Battery Electric Vehicles (BEV) purchases at the same time, is weak in Europe. Against such a backdrop, the European car association (ACEA) has called for a review of the tighter CO2 emission targets in 2025 for the industry.
In the US, the penetration rate of EVs remains relatively low compared to other key regions and growth will be at the country’s own preferred pace. The 100% tariff on electric vehicles and 25% tariff on lithium-ion batteries and battery parts will limit imports of EVs, batteries and battery materials into the US, but Morningstar still expects the US to see 40% EV adoption by 2030. For US automakers that are developing affordable EVs, such as Tesla, GM and Ford, this creates an opportunity to capture demand in this segment.
Where we see the greatest reshuffling of cards, however, is the Chinese domestic market and its exports. For global carmakers, China was not only the largest, but the fastest-growing market for more than a decade. This significant profit pool for global carmakers, however, is under threat as Chinese consumers gravitate to electric vehicles and autonomous driving.
On the exports side, the momentum in Chinese EV sales to Europe has declined following the announcement of the subsidy probe by the EU, with additional tariffs in place. In contrast, sales in Asia, Central and South America, and Central and Eastern Europe have seen remarkable growth in the first eight months of 2024. Looking ahead, we believe selected Chinese OEMs will accelerate their product localisation plans in the EU. We also expect a number of them to beat market expectations in the upcoming 3Q24 earnings season, given the recent strong sales figures.
- EV sales strong in China, weaker in Europe; US will grow at its own preferred pace
- Significant profit pool for global carmakers in China under threat with great reshuffling of cards
- Profitable local Chinese brands and select EV startups well-positioned but tech companies are also expanding into the auto industry
- Expecting stronger sales figures for Chinese OEMs in 3Q24 earnings season
EV sales strong in China, weaker in Europe
Global EV sales grew 19% YoY in August, driven by a 35% increase in China. The US also saw a pickup, but Europe’s volumes fell 30% YoY and 15% MoM. This comes not as a total surprise since the comparison base from last year has been high in Europe as EV subsidies phased out in Germany in the later part of 2023. Overall sentiment for BEV purchases at the same time, is weak in Europe. In France (where subsidies are still generous), BEV car sales declined by 33% YoY in August.
On a year-to-date (YTD) basis, EV sales in Europe account for only about 63% of 2023’s full year figure, while EV sales in the US and China YTD account for about 70% and 76% respectively of their 2023 full year figures.
As EV sales continue to be lacklustre in Europe, and carmakers are faced with tighter CO2 emission targets in 2025, calls for a review of the emission targets are being discussed more and more. The ACEA has already made a call on that in September, urging for a package of short-term relief of the 2025 targets for cars and vans, or there could be significant fines for carmakers.
In Volkswagen’s latest earnings release, the firm revised its full-year estimates downward in a challenging market environment, highlighting weakness in its core passenger and commercial vehicle segments, as well as technical components. The company has warned of further deterioration in its operating results for these segments, should the macroeconomic environment weaken further. The firm now expects to sell 9m vehicles in 2024, vs 9.24m in 2023. With regards to China, Volkswagen aims to remain the leading international OEM in China with its “in-China, for-China” strategy by investing significantly in an independent head office, R&D centre, and technology to match the faster pace of innovation in China. By doing this, it aims to reach its ambition of 15% market share and EUR 3b operating profit by 2030 compared with 14% share and EUR 2.6b operating profit in 2023.
Stellantis aims to reduce BEV costs by 40% by 2030. Renault seeks to reduce BEV and internal combustion engine (ICE) car unit production costs by 40% and 30%, respectively, by 2027. Volkswagen's “in-China, for China” strategy aims to leverage the cheaper Chinese cost base, aiming to reduce battery costs by one third and material costs by 40% in China by 2026.
US – penetration rate lower than other regions but room to grow
In the US, BEV penetration of light vehicles improved in September, rising from about 8.6% in August to 9.3% in September. EV sales as a percentage of total light vehicle sales continued to rise as well. The 100% tariff on electric vehicles and 25% tariff on lithium-ion batteries and battery parts will limit imports of EVs, batteries and battery materials into the US, but Morningstar still expects the US to see 40% EV adoption by 2030. EV adoption in the US is still in the early-adoption phase, and for US automakers that are developing affordable EVs, such as Tesla, GM and Ford, this creates an opportunity to capture US demand in this segment.
In the US, Tesla accounted for over 45% of all the battery electric cars ever sold as of 2023, but its share in new US electric car sales has been falling, from over 60% in 2020 to 45% in 2023. Hyundai-Kia overtook GM and Ford in 2023, and now accounts for 8% of US electric car sales, while European firms accounted for 25% of US electric car sales, led by Stellantis.
Tesla also sells solar panels and batteries used for energy storage to consumers and utilities, and as the solar generation and battery storage market expands, Tesla is well-positioned to grow accordingly.
China’s market heads towards further consolidation...
Where we see the greatest reshuffling of cards, however, is the Chinese domestic market and its exports. For global carmakers, China was not only the largest, but the fastest-growing market for more than a decade. Sales of global car brands in China, however, peaked in 2017 and started a steady decline since then, although for some foreign carmakers, the peak came earlier. German premium brands have exhibited relatively more resilience than others, for even after the 2017 industry volume peak and the impact of Covid-19 in 2020, growth continued due to the premiumisation trend. Locally produced Mercedes-Benz, BMW and Audi cars added a record ~2m units in 2023, before declining this year.
This significant profit pool for global carmakers, however, is under threat as Chinese consumers gravitate to electric vehicles and autonomous driving. First, it may be helpful to consider that industry players in China mainly comprise these different groups:
- Foreign carmakers and their joint ventures
- SOEs relying on joint ventures’ equity income
- Profitable local Chinese brands
- EV startups
- Tech companies that expanding into the auto industry
Foreign carmakers and their joint ventures
For many firms in this group, eroding profitability especially within the mass market would likely lead to reduced investment and marketing intensity in China, and result in lower market share over time.
SOEs relying on joint ventures’ equity income
For companies in this segment, they have been largely funded by contributions from their joint ventures with foreign carmakers. The decline in performance from the joint ventures is likely to force the SOEs to either increase capital expenditure and investment intensity to move into the third group (profitable local Chinese brands), or choose to reduce their investments in their own brands, resulting in loss of market share.
Profitable local Chinese brands
For profitable local Chinese brands, with the exception of BYD (which is already selling only BEVs and PHEVs), they are likely to continue with their transition to EVs, supported by their ICE vehicle sales in the meantime.
In comparison to Chinese counterparts, global incumbent carmakers are generally trading between mid- to high-single digit price-to-equity (P/E) levels, likely reflecting concerns on market share in the future, and challenges from electrification and the smart transition, which requires additional investments. Among Chinese firms, BYD has reached 100% EV transition (sells only EVs and no more ICE vehicles), while Geely is around 40-50%.
EV startups
For EV startups, they continue to seek to increase volume growth and attempt to achieve sustained profitability. Among them, Li Auto seems to have transitioned into the third group (profitable local Chinese brands), but for the rest, firms will have to balance their cash burn versus research & development and volume growth.
Tech companies that are expanding into the auto industry
Last but not least, tech companies that are expanding into the auto industry will be closely monitored for their forays, such as Huawei and Xiaomi. In our view, should they move faster-than-expected in the EV space, they may make it more difficult for the smaller EV startups to achieve the volume growth and profitability required to sustain operations. EV startups are also dependent on the capital market financing situation, and their ability to raise more funds from investors prior to achieving sustained profitability.
...while leading companies look abroad for expansion
As continued intense competition pushes the least profitable out of the race, China’s EV industry is consolidating around a smaller number of robust champions – and they are looking abroad for expansion. Chinese auto exports grew steeply in 2023, up 60% relative to 2022, making China the world’s largest car exporter, ahead of Japan and Germany. In 2023, the value of China’s EV exports to Europe was about 54% of China’s total EV exports, of which the bulk was to Western European countries. Among these, Belgium stood out with the highest import value, for it serves as a transit point for Chinese cars exported to Europe, as the EVs are further distributed to countries such as Germany, France, Italy and others. Asia was the second-largest market, accounting for about 27% of the total, of which Southeast Asia played a crucial role in this region’s demand for Chinese EVs. However, the momentum in Chinese EV sales to Europe has declined following the announcement of the subsidy probe by the EU, with additional tariffs in place. In contrast, sales in Asia, Central and South America, and Central and Eastern Europe have seen remarkable growth in the first eight months of 2024.
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