Will Chinese electric vehicle manufacturers dominate the “affordable market”?
There is a well-known Harvard Business School case study where the Japanese automakers tried to enter the U.S. market in the late-1960s and kept returning home with their tail between their legs as their early vehicles were not designed for big distances on the open American road. Fast forward 50 years and Toyota consistently has one of the largest market shares in the U.S., and not so long-ago Lexus was much preferred over other luxury brands including BMW and Mercedes.
A similar story can now be told in the electric vehicle space which has brought about a change in buying patterns. Consumer preferences have shifted, and Chinese brands now account for 80 per cent of the Chinese electric vehicle market, whereas European imports did well in the Chinese combustible engine market. Market share from domestic manufactures has grown because a budget electric car in China now costs around U.S.$5,000.
Aggressive investment creating overcapacity has meant Europe has become a target for excess capacity from the Chinese electric vehicle manufacturers. According to an article in the Financial Times, there are 200 vehicle manufacturers in China with aggregate production capacity exceeding 15 million units, about twice the current anticipated local demand. Worse still, there are 50 companies manufacturing electric batteries at an aggregate supply of four times the current domestic demand. Further, the local prices of raw materials including battery grade lithium carbonate, a significant cost of the electric battery, has plunged this year and it seems much of the spare and cheap manufacturing capacity will be exported, with a focus on Europe.
Over the past eight years, the average Chinese Electric Vehicle has halved in price, whilst its European counterpart has gone up. The weak renminbi has assisted in lowering costs. As the European Union aims to grow its electric vehicle fleet from 3 million in 2022 to 30 million in 2030, it seems likely the market share of Chinese (or more importantly European and Chinese joint ventures) will increase dramatically from the current estimate of 10 per cent. Whilst Tesla currently has nearly 40 per cent market share in Europe, one wonders whether it can also compete at the “affordable” end of the electric vehicle market.
Potential tariffs from the European Commission’s probe into China’s subsidies for electric vehicles may delay this growth from the current low base, but European and U.S. manufacturers only need to look at South-East Asia for insights. Currently, China’s electric vehicles account for 75 per cent of that market.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
