Buy a car early.


Looking back at Q1 2022, a season full of bad news, we suddenly found out that the increase in electric vehicle prices was the least of the problems.

According to recent data, this round of price hikes for new energy vehicles has covered every aspect, with a trace of it visible at the beginning of the new year. Many models have seen their terminal prices rise due to the new subsidy policy for 2022 (effective on January 1st), and even price increases initiated by manufacturers were generally limited and did not receive widespread attention.

The public memory of the trigger point was on March 10th, when Tesla launched its own “7-day 3 consecutive increases” campaign. Subsequently, almost all well-known new energy brands/series, including BYD, XPeng, Nio, WM Motor, Leapmotor, Ora, Wuling, Volkswagen ID, and IDEAL, had completed (or announced) this round of significant price increases except for Nio.

No sensible manufacturer would increase prices in a situation where they didn’t have to. The only reasonable explanation for everyone raising prices is that there was “no other choice”. In fact, the rise in electric vehicle prices is not too sudden, but rather long overdue.

In the article “In New Energy Industry, One Must Consider The Ass End As Well,” I mentioned that the main raw material prices for electric vehicles started to increase at the beginning of 2020 and have been rising ever since. As for a certain military conflict and the related incident of nickel prices being forced up, it was only the last straw(s).

In other words, it took two years for the upstream raw material price increase to be transmitted to the consumer end of the entire new energy vehicle industry chain.

Putting aside nickel for the time being. Based on the cost increase in the main materials of power batteries over the past year, if it is an electric vehicle using a 70kWh NCM811 battery pack, the cost of the battery pack alone has increased from about 35,000 yuan to about 63,000 yuan. If it is a low-cost electric vehicle equipped with a 50kWh iron-phosphate battery pack, the cost of the battery pack alone has increased from about 13,000 yuan to about 33,000 yuan (estimated, only for reference).

We do not know the current gross profit margin for the entire industry, but we can refer to some car companies that have already established themselves in the EV market. Tesla and Nio have a gross profit margin of about 20%, and their gross margin space is around 60,000-80,000 yuan according to their average unit price of 300,000 and 400,000 yuan, respectively. XPeng, with a relatively lower vehicle price, has a gross profit margin of about 15%, estimated at about 30,000 yuan, based on its average price of 200,000 yuan.As we can see, even for top-tier automakers like Tesla, NIO, and XPeng, the increase in battery costs over the past year has equated to at least half, and sometimes even more than half, of the gross profit per vehicle in the most recent quarter. The price of nickel has experienced even more dramatic fluctuations– within just two days on March 7th and 8th, the London nickel futures prices skyrocketed from around 30,000 USD/tonne to 100,000 USD/tonne, leading to what is now known as the “monster nickel” short squeeze by Qingshan Group. This means that for a high-nickel ternary lithium battery electric vehicle like the long-range version of a Tesla Model 3 with a 70 kWh battery pack (assuming about 40 kg of nickel used per vehicle), the value of just the nickel used in the car tripled from approximately 7,500 RMB to 25,000 RMB over a 48-hour period from March 7th to March 8th.

For most electric vehicle owners, March 8th, 2022, may well be the most financially lucrative day of their lives– though it’s important to note that we mean this somewhat facetiously. All of this is to say that the rise in raw material costs for power batteries has been so significant and rapid as to be at the point of being completely untenable– even laypeople can tell you that costs have to rise under these circumstances.

Those who have been paying close attention to the automotive industry may have noticed that, despite cars seeming to be expensive purchases that can easily run upwards of six figures, many companies’ profit margins are razor-thin, with competitiveness often coming down to bare-knuckled, penny-pinching tactics. It’s not uncommon to see even low-end models skimping on features as basic as sun visors or mirrors, while components like aluminum forgings used in BBA luxury vehicles– which may cost just a few hundred RMB in materials– can command valuations in the thousands. For any given feature that’s valued in the hundreds, wider-market economic vehicles are at risk for potentially massive profit hits, since it doesn’t take much error in pricing to completely eliminate margins altogether.

If, say, a car is sold to a consumer for several hundred thousands of RMB, only for battery costs to rise by “several tens of thousands of RMB” over the course of a year, the enormous pressure of rising battery costs has now become a threat to carmakers’ profitability and survival for the past couple of years, with manufacturers being forced to squeeze by in a competition that has so far been dominated by who can brave the risk of raising prices the soonest and taking the brunt of consumer backlash.

This also explains why, during March, one after another of the New Energy Vehicle (NEV) manufacturers such as Tesla and BYD announced price increases, forcing the previously-resistant majority of other NEV makers to follow suit.Currently, car manufacturers that have not announced price increases are mostly traditional brands except for NIO. However, it should be noted that traditional car manufacturers mostly do not sell vehicles using the direct sales and fixed pricing model of new car makers. Instead, there is often some room for discounts in 4S dealership channels. So, even though the official guidance price of many traditional brand new energy vehicles has not been increased, they may actually be adjusted by tightening the discount policy.

Among the top new energy vehicle makers, only NIO has stated that it will not increase prices in the near future. This is partly due to the “separation of vehicle and battery” model brought about by BaaS, which has a considerable amount of “extra” battery packs in the swap network, which is like having more “inventory” as a buffer space.

However, during last week’s earnings conference call, NIO did not completely rule out the possibility of price hikes in the future. The recent rise in raw material prices is not limited to battery materials, as the increase in copper, aluminum, and other materials over the past year has also been significant, and the buffer space brought by swapping stations is ultimately limited. NIO will launch the 2022 models of ES8/ES6/EC6 in May this year, which could be a possible window for observing the situation and even adjusting prices.

No one can tell you if this is the top

As mentioned in the linked article, the recent rise in raw material prices is a long-term process that has lasted for two years, not a sudden reaction to regional conflicts. The latter only serves as a trigger to make consumer prices “catch up” with the rising production costs.

Therefore, first of all, the resolution of conflicts alone is not enough to support a decisive fall in raw material prices (similar to oil prices).

Car manufacturers always need to be cautious about raising terminal prices (except for Tesla, of course). If it is finally decided to raise prices by 5% or even more – an increase that is almost impossible for any consumer to ignore – from the perspective of car manufacturers, it is highly likely that cost pressures will not receive significant improvement in the short or even medium term.

Prior to this, car manufacturers had been maintaining their prices, absorbing and digesting the increase in costs. Apart from the dilemma mentioned earlier of “who will be the first,” it was also partly due to the judgment on the future trend of raw materials. If the expectation is that high-priced raw materials will not persist, adjusting prices may be too hasty and not worth losing consumer confidence – the reverse effect is imaginable.

At the 2022 Electric Vehicle Forum over the weekend, the price increase of battery raw materials was naturally the focus of the whole event. Academician Ouyang Minggao of the Chinese Academy of Sciences estimated that the balance of supply and demand for lithium resources may return to normal in two to three years. This further implies that at least in the short term, the rising trend is unlikely to reverse or turn downward solely based on lithium costs.

China has abundant lithium resources, but it takes time to improve the mining speed. Capital invested in lithium mining requires (at least foreseeable) high lithium prices to bring rich returns. In the long term, lithium recycling may replace lithium mining, but it is a more distant matter to achieve low-cost battery material recycling and low-cost recovery means (currently expected to be after 2040).

Meanwhile, lithium is not the only factor driving battery cost hikes, and batteries are not the only factor driving electric vehicle cost hikes.

After the epic nickel squeeze in early March, the London nickel futures stopped trading for several days, and the price fluctuated between 30,000-40,000 USD/ton after reopening. Although it is known that the high price of 100,000 USD/ton on March 8 cannot be sustained, the ups and downs since then have even touched the level of “Demon Nickel” before its surge.

Excluding the abnormal fluctuations on March 7-8, nickel prices are still in an upward trend for nearly two years.

If the prices of lithium and nickel are largely affected by the surge in demand for electric vehicle batteries, then other basic metals such as copper and aluminum are more independent and difficult to be shaken by the upstream and downstream of electric vehicles. Even crude oil prices, which determine global logistics costs, indirectly affect the price fluctuations of all commodities, including electric vehicles. When most commodity prices are rising, electric vehicles have no reason to stay out of the trend.

From the consumer market perspective, the mark-up of electric car prices by a few percentage points will inevitably weaken the demand for upstream raw materials. The widening price gap between ternary lithium batteries and lithium iron phosphate will also, to some extent, suppress the demand for nickel. This will definitely slow down the upward pace of raw material prices, but it is not yet sufficient to cause them to reverse course or produce a low-price expectation that could prompt automakers to quickly lower vehicle prices.

For consumers, although car prices are affected by raw material prices, buying a car is ultimately a consumption behavior rather than an investment. Excessive attention to the ups and downs of bulk futures is unnecessary. “Buying a car like investing” is true this year, but don’t forget that a car is a consumer product. Even if the price of electric vehicles falls back to the level of two years ago in a few years, it will not offset the value of vehicle use during this time.

Both the fundamentals of the upstream commodity market and the judgments and actions of industry professionals to automakers indicate that there is no foreseeable significant possibility of a short or medium-term reduction in the cost of electric vehicles. Therefore, locking in the following price risks by purchasing as early as possible is the better choice as long as the car purchase demand is not deferred to more than three years away.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email