EquitiesFirst: A strategy for financing consolidation in the Chinese electric vehicle market
China’s meteoric rise in the electric vehicle market is well documented. EV sales have grown from 2% to 18% of global auto sales in the last six years, and Chinese EVs now account for roughly 60% of all EVs sold. Tariffs have limited imports of Chinese EVs in the United States, but the EV supply chain, from mineral refining to battery manufacturing and vehicle construction, is still strongly tied to China.
However, the Chinese EV boom has been followed by a cyclical downturn, tied in large part to geopolitical tensions, increased competition, and declining domestic sales due to subsidy cuts.
While China is still entrenched as an industry leader, the recent headwinds suggest that consolidation within the Chinese EV market is likely as it establishes its long-term stability. Increased competition and declining sales have led to price cuts and falling profits in a war for market share. According to some estimates, only 25 to 30 of the roughly 160 Chinese EV brands are expected to remain viable by 2030.
There’s an opportunity to finance the mergers and acquisitions that will be the backbone of the continued growth of the Chinese EV Market moving forward. Those looking to participate in the wealth creation tied to M&As while retaining long-term exposure to their assets may turn to EquitiesFirst, a company that provides access to short-term liquidity based on a client’s equity portfolio.
The rise of Chinese EVs
According to a Bloomberg New Energy Finance report, 75% of global passenger vehicle sales are projected to be EVs by 2040.
China has bet on its low-cost manufacturing capabilities and well-established battery supply chains to position itself to support this increase in demand.
In 2023 alone, Chinese automakers launched 68 new all-electric passenger car models, dwarfing the mere 27 gas-powered models and 43 plug-in hybrids introduced during the same period. These Chinese EVs tend to be smaller, cheaper, and more accessible to the mass market, undercutting foreign rivals on price while meeting demand for more sustainable, energy-efficient transportation.
BYD, the Chinese company that overtook Tesla as the world’s largest producer of EVs, offers its Seagull hatchback at under $10,000, less than a quarter of the price of Tesla’s cheapest model, the Model 3.
One of the core factors underpinning China’s ability to construct low-cost vehicles is its control over the global battery supply chain, particularly when it comes to manufacturing battery cells and assembling the electric vehicles themselves.
According to the International Energy Agency, China handles the processing of over half of the world’s lithium, around two-thirds of its cobalt, more than 70% of its graphite, and approximately one-third of its nickel. China maintains a roughly 75% share of battery cell production and about a 50% share of final EV assembly. This vertically integrated control over the entire supply chain enables Chinese EV makers to streamline logistics and reduce costs.
Chinese EV market headwinds
The specter of geopolitical tensions looms large over the Chinese EV market, however, with nations scrambling to secure their strategic interests and protect domestic industries through trade policy.
The U.S., in particular, has taken an aggressive stance, imposing a 100% import tariff on Chinese EVs and implementing measures designed to limit access to Chinese producers in favor of allies like South Korea.
The European Union, despite being the largest market for Chinese EV exports, is actively investigating anti-subsidy measures to counter the perceived threat to its domestic automotive industry.
More broadly, a recent EquitiesFirst survey of more than 300 chief investment officers, portfolio managers, and other institutional investors found that 60% considered trade relations and tariffs as the greatest concern for the Asia-Pacific equities market, driven in large part by uncertainty over Chinese markets.
But some analysts think the cost advantages for Chinese manufacturers remain so substantial that punitive tariffs may struggle to stem the tide of Chinese imports. Others point out that the largest growth markets for EVs will likely be in Asia, particularly Southeast Asia, where the demand for lower-cost vehicles could give Chinese EVs an edge.
And even as China attempts to gradually wean domestic consumers off generous subsidies, manufacturing incentives remain in place. According to BloombergNEF, the estimated cost of constructing a lithium-ion phosphate battery cell plant in China is approximately $650 million, a figure that balloons to $865 million in the U.S. and Germany. This cost differential is primarily driven by lower land acquisition and construction expenses in China, as well as the availability of supporting facilities and ancillary infrastructure.
The crucible of competition
But the recent cuts in subsidies that drove high domestic sales of Chinese EVs have led to a decline in demand within China. At the same time, intense competition among EV companies has eroded pricing power, putting immense pressure on profit margins and forcing companies to seek new avenues for growth and cost optimization. The peak of the EV boom has left a gap between declining demand and a glut of Chinese EV companies built to compete by producing a high volume of vehicles at razor-thin margins.
This crucible of competition should ultimately lead to consolidation within the Chinese EV industry, with a winnowing of startups that can no longer compete in a lower-demand, less-subsidized environment, and an influx of capital needed to support the companies that remain, as well as to finance mergers and acquisitions. While perhaps painful for the broader market in the short term, this could be a wealth-creation event for those who invest and acquire, creating value for shareholders and positioning the survivors for a sustained long-term presence.
Equities-based financing opportunities
Chinese EV companies will require access to capital to finance consolidation, a challenging proposition in an industry still in its infancy and grappling with geopolitical concerns and cyclical downturns. Traditional lenders may be hesitant to extend financing, necessitating a more creative approach.
One such approach could be the sort of equities-based financing provided by EquitiesFirst. This enables entrepreneurs and professional investors to leverage equity holdings, such as relatively illiquid stocks or real estate, to secure the liquidity required for business operations, expansion plans, and strategic initiatives. Tapping into this alternative capital, Chinese EV companies can unlock the funding necessary to fuel their growth ambitions in the short term, while retaining access to the value of their assets in the long term.
These strategies could also enable foreign and domestic institutional investors to participate in wealth creation tied to industry consolidation, investing in the EV firms that will retain pricing power in the long-term as competitors fall away.
The road ahead
It’s far from certain how the Chinese EV industry will adjust to geopolitical tensions, intense competition, and cyclical downturns.
Successful financing in this market will require a keen eye for identifying companies that excel in areas such as cost optimization, supply chain management, and technological innovation. It will demand a nuanced understanding of the complex geopolitical landscape and the ability to navigate ever-shifting trade agreements and regulations.
But while the Chinese EV market will no doubt look different in the years to come, it has established itself as a growing presence on the global stage, and well-considered equities-based financing could play a role in continuing that growth.
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