A BYD Tang was sighted in the parking lot of Chrysler’s headquarters in Auburn Hills, Michigan in June. Chrysler purchased the vehicle as a reference for its forthcoming 2018 Jeep Cherokee. A US automaker was ‘learning’ from BYD Tang’s experience.
It was an watershed moment for China’s new energy car industry. Many companies’ stocks have trended upward in recent years, but what is the logic behind this investment? What is the main direction? The author attempts to find an answer in these short passages.
The basic investment logic in new energy automobiles can be summed up in three sentences: the general trend determines the tendency; the pattern determines the elasticity; and the structure determines the future. With the knowledge of general trends, patterns and structures, any related investments may be smoother. This passage talks about general trends, the picture and the pattern.
General Trend: ‘Chinese Style’ Catch-Up
The rise of a great power must be accompanied by the rise of its trade sector, the most important part of which is manufacturing. China’s manufacturing industry has transformed dramatically over the past 20 or 30 years, when it began in low-end manufacturing. Consider household appliances and mobile phones for example. Chinese products compete in price, product quality and user experience. In these fields, Chinese companies have improved more than their counterparts in Europe, the US, Japan and South Korea. Giants like Midea, Gree, Haier, Huawei, Xiaomi, OV, Skyworth, Hisense and TCL have advantages in technology and scale in their respective industries. Their game of catch-up has moved on from manufacturing and product application to core technology. For instance, Huawei’s chips, Gree and Midea’s compressors and Lexy’s motors have all reached a high level.
Many people have recognized the catch-up going on in the fields of home appliances and mobile phones, but that doesn’t mean much. To be recognized as a manufacturing power, China must seize the crown of manufacturing: the car.
The last two years have seen a rise in the use of domestic cars, and their domestic market share is almost 60 percent. But in the combustion engine car sector, China lags far behind. In terms of market share, vehicles manufactured in China have a weak overseas demand with limited exports. It’s a very different situation from Chinese home appliances and mobile phones. And, more importantly, in terms of core technology, China is still very backward. For instance, major domestic factories cannot manufacture a highly technical transmission, and they are limited to producing dual-clutch gearboxes. In terms of quality and stability, China’s products are far behind those made in Europe and the United States. No Chinese companies can product an automatic gearbox , the most technical component.
The electric car has handed China a huge opportunity. Chrysler may have purchased BYD’s Tang, but it’s impossible to imagine a foreign automotive giant studying China’s fuel-powered cars. Chinese products in the new energy automotive field are good enough for foreign giants to study.
It’s a small, but giant step.
The automobile industry is undergoing a drastic shift to an electric era. China leads the world in electric vehicle sales. In terms of technology and product quality, it lags behind luxury brands but meets foreign expectations in the mid-range market. Most importantly, China has the world’s most complete new energy automotive industry chain, from the batteries to motors, electric controls, materials, lithium and cobalt metallurgy and mining and battery manufacture. The Chinese market has created BYD, CATL, Tianqi Lithium, Ganfeng Lithium, Luoyang Molybdenum, Huayou Cobalt, GEM, LEAD, Shanshan Co, Tianci Materials, BTR and SEMCORP and other companies with world-class technology and capacity. No other country has so many related companies.
Of course, critics say it is a false prosperity promoted by national policy, which can only be regarded as total failure to understand related laws. In an industry where high scale and technological progress drive down costs, a rapid increase in quantity results in a massive reduction in cost. The cost of electric cars is quickly approaching that of fuel cars. When that happens, the era of electric vehicles will accelerate. Without any policy support at the beginning, it would have been a slow process. The decision to offer support is beyond reproach, and now the world is learning from China’s experience.
“Made in China” has proved its advantage in efficiency and cost. In the field of electric cars, China has developed excellent technology. There is good reason to expect strong future performance based on Chinese enterprises’ ability to iterate. The idea of China’s carmakers overtaking their foreign competitors is very possible.
China’s electric buses are now running on the streets of London, Tokyo, Australia and the United States, and China’s domestic branded electric buses have been among the world’s leading public transportation vehicles. We can make a bold prediction: a decade from now, we may see China’s cars running in Europe and America, and 20 years from now, we are likely to see China’s electric cars enjoy the same worldwide acclaim that Japan’s Toyota and Honda do today.
The new energy car is the most important landmark in China’s rise. That is the general trend we want to see.
Do you want to drink from the upper, middle or lower stream?
In spite of the general trend, all levels of new energy automobiles have been popular. In the last three to four years, the share prices of Tianqi Lithium, Ganfeng Lithium, Huayou Cobalt and Hanrui Cobalt have increased 10 times: that rise continues. The price of Guoxuan, LEAD and others producers only increase four to six times, and most never hit a record high during the stock price roller coaster. Why is the gap is so obvious? The reason is the pattern.
Presently, the upper, middle or lower stream of the electric car industry chain have different comfort levels and significant gaps.
As for the cobalt and lithium upstream, due to natural limits of the resources and the bullwhip effect, and oligopoly has formed. Tianqi Lithium, Ganfeng Lithium, Huayou Cobalt and Hanrui Cobalt all have their own mineral resources and processing companies. Thus, they enjoy a relatively comfortable position in the industry.
The pure manufacturing end has a less comfortable pattern: manufacturers don’t have the same resource or brand barriers. Their ordinary products don’t have high technical barriers. The crowding in of capital has expanded capacity, and prices continue to decline. Batteries are an obvious example. At the end of 2016, actual demand was less than 30 GWH, but planned production capacity reached 100 GWH. In 2017, even enterprises making sesame paste has started to make batteries, which caused a continuous fall in the price. People familiar with finance must know the influence of price elasticity in corporate profits. When prices rapidly increase, a is Davis Double Play or Davis Double Killing is reflected in the share price.
The downstream pattern is chaos. Although BYD Tang and Song both reached monthly sales records of more than 5,000, they do not have a truly popular model. We look forward to a new energy vehicle whose monthly sales exceed 10,000 units. At that point, the overall valuation of new energy vehicles will embark on a higher level.
The general trend tells us the new energy automobile industry should pay attention. The pattern tells us the investment in each stage of the industry has a large differentiation. What about the future? The future investment probability will be determined by the industry structure, which we will discuss in next week’s column.