Jinrong Street Old Li

Yesterday, Shanghai announced that the city will enter the third stage, which is the stage of fully resuming normal production and daily life in the whole city, effective from June 1st. This is good news, as the comprehensive resumption of work and production is imminent. However, according to various sources, many car manufacturers are not optimistic about their market performance in the coming months, facing great challenges on both production and consumption sides.

Entering 2022, the entire automobile market has been struggling due to weak demand, chip shortages, rising component prices and other factors. Additionally, the unexpected two-month shutdowns have led to further troubles. In particular, new automotive powers, according to statistics from China Passenger Car Association, none of the new powers delivered any of the top six market sales in April. Even the delivery volumes of NIO and Ideal have dropped out of the top ten.

On the other side of the market, since the second quarter, BYD has continuously released “seal” and high-end brands. Li Yunfei’s display of BYD’s “Big Picture” in his friend circle is impressive, and “the leader of new energy vehicles” not only belongs to BYD, but also to China’s automobile industry. Changan Automobile’s Blue brand and Avita brand are also in full force. GAC Aion’s monthly delivery volume has even surpassed that of the new powers. The voice of traditional enterprises in the new energy field has already surpassed that of new powers.

After the second quarter, many industry colleagues believe that the overall market performance of the new automotive powers is not as good as last year. Even some industry insiders have proposed that 2022 may be the most dangerous year for new automotive powers. Today, Old Li will discuss with everyone why the Chinese new energy vehicle market will present a pattern of mixed battles in 2022? What are the industrial challenges for new automotive powers? What are the challenges for capital?

Pattern of Mixed Battles

BYD and Changan Automobile are the biggest highlights of the new energy industry this year. BYD represents Chinese brands as the real leader in the industry, while Changan Automobile represents the comprehensive deployment of traditional fuel vehicle giants in the field of new energy vehicles.

There is an indisputable fact that China’s new energy vehicle market is the fastest developing, largest, most complex, and most difficult-to-manage market in the world. Behind the large scale and many market opportunities, there is also the most demanding, diverse, and intense competition pattern.

In Old Li’s view, China’s intelligent electric vehicle market can actually be divided into four major camps: the first camp is represented by domestic traditional enterprises such as BYD, SAIC-GM-Wuling, and Great Wall Motors; the second camp is represented by domestic new forces such as WM, Leapmotor, and Weltmeister; the third camp is represented by foreign traditional enterprises such as Volkswagen and Toyota; and the fourth camp is represented by foreign new forces such as Tesla.If someone asks, what is the current pattern of China’s new energy vehicle sector? The most common answer would be that upstart domestic and foreign market players are dominating China’s new energy vehicle market. Over the past three years, many people believe that it is the upstart vehicle manufacturers that have driven the industry’s development, as their overall level of brand positioning, product forms, and overall sales far surpass those of traditional automakers.

As we enter 2022, upstart vehicle manufacturers are facing strong competitors and rivals, and an intense internal competitive landscape.

From 2019 to 2021, it can be said that this was the golden era of upstart vehicle manufacturers. Despite the market prospects looking good, upstart vehicle manufacturers have not been able to break into the top three annual new energy vehicle sales figures. In the past three years, the industry’s top three sales leaders have been BYD, SAIC-GM-Wuling, and Tesla, with a large gap between the fourth-ranking upstarts and the top three in terms of sales. Looking at sales figures, upstart vehicle manufacturers will find it difficult to achieve the top three positions within the industry over the next three years.

Many researchers have suggested that over the past year, there has been a shift in the automotive industry landscape, particularly in the area of new energy vehicles. Domestic and foreign traditional automakers are launching new products and focusing on sales with Guangzhou Auto Aeolus consistently exceeding the upstarts’ sales numbers for multiple months, and Volkswagen’s ID series gradually gaining consumer acceptance. Observers will see that among the top ten new energy vehicle sales leaders, the number of domestic brand owners is increasing. Traditional automakers such as Great Wall Motors and SAIC Passenger Vehicles are launching new products with high cost-effectiveness and excellent service, which have been well-received by the market.

Domestic upstart vehicle manufacturers can be divided into two classes. The first class, represented by NIO, Ideal, and XPeng, is high-profile, while the second class, represented by WM Motor, Leap Motor, and Neta, is pragmatic. Without analyzing sales figures, we can see from the market structure that upstart vehicle manufacturers have fierce internal competition. NIO and Ideal’s problems originate from limited market space, while XPeng, WM Motor, and Leap Motor face cutthroat economic market competition. Furthermore, WM Motor, Leap Motor, and Neta, and even XPeng’s vehicle product lines have significant overlaps, and their development space is restricted due to competition from traditional automakers such as SAIC, Great Wall, and BYD. Looking at delivery figures in April, traditional automakers specializing in cost-effective products have exceeded upstart vehicle manufacturers’ new energy vehicle delivery numbers.

Industry challenges facing the emerging forces of car-making

Apart from existing enterprises and products, many heavy-weight enterprises and models will land in the market in the future. Among foreign traditional brands, Volkswagen’s ID series has become the biggest competitor in the field of emerging car-making forces. In addition, enterprises such as Nissan, Toyota, and Honda have already launched or will launch products in the relevant sub-markets. Three years later, when Xiaomi enters the market, Lao Li believes that the true challenge for the emerging car-making forces is just beginning.

Lao Li loves a saying, “There are no successful enterprises, only enterprises of the times.” In the development process of China’s automobile industry, any enterprise is leading for three or five years, and it is difficult for any enterprise to be overwhelmingly dominant. Therefore, the strength and weakness of the emerging forces of car-making in different development stages are relative.

Looking back on the past decade, the development of China’s new energy vehicle industry can be divided into several stages: the first stage is before 2018, when China’s state-owned enterprises were basically the representatives of the development of the new energy vehicle industry. In the era when the product was not mature and relied on subsidies to make profits, state-owned enterprises had inherent development advantages. The second stage is from 2018 to 2021, a period in which the emerging forces of car-making soared. The emerging forces of car-making achieved good market results by virtue of their first-mover advantages in product experience.

However, when the timeline of the industry entered 2022, the industry pattern has already undergone significant changes. The advantages of the emerging forces of car-making are no longer advantages, and the disadvantages of some emerging forces of car-making are gradually becoming apparent.

Where are the advantages of emerging forces of car-making? It is in their products and users. In the process of the transfer of new energy vehicles from being product-oriented to user-oriented, new car-making companies and other new business models have emerged one after another. The new product definition method has given them strong product competitiveness. And new concepts such as direct sales and new marketing models, as well as strong connections with users, have brought great impact to the entire industry. The transformation of the emerging forces of car-making has brought a first-mover advantage.

According to incomplete statistics, before 2020, there were dozens of emerging forces of car-making in China. Among these companies, only a few survived as pioneers of the times. Some companies ran out of resources and ended up dismally, others faked it and became a laughingstock, and still others worked hard and overcame all obstacles.

Nowadays, the first and second tiers of the emerging forces of car-making have basically gone through the baptism of fire. Even so, when facing latecomers, they will face new challenges.

At present, traditional car-making giants in the industry have gradually followed the emerging forces of car-making in terms of product form and business models. From every aspect of the industrial chain to marketing, they are targeting the emerging forces of car-making. When consumers face similar products, they often choose products with high cost performance. In this context, the problem facing the emerging forces of car-making is how to ensure their respective market shares in the situation of too many mouths and too little food.During the incubation period of the market, new forces in the car industry encountered the best era, but during the mature period of the market, they also faced the worst era. At a time when the industry is thriving, most new car makers have already launched the first wave of products, while domestic traditional brands and foreign brands are launching a new generation of products, resulting in a mismatch of product advantages. From a product perspective, new car makers in 2022 do not have a big advantage.

The essence behind products lies in money and technology. FAW-Volkswagen, Great Wall Motors, and Geely can launch a large number of models during this period because they have strong financial resources and years of accumulated technology platforms, which is precisely the weakness of new car makers.

A technology platform means high investment, and high investment inevitably depends on the support of the capital market. However, the new energy vehicle capital market in 2022 is not optimistic.

Compared with industry competition, the prospects of the capital market are even more brutal.

As mentioned by Mr. Li in previous articles, the capital market is profit-driven, and even to a certain extent, it is emotionless. Why is the capital market crazy about investing in new energy vehicles? It is not because new energy vehicle technology is so advanced, but because during a social change caused by big data and artificial intelligence, the automotive industry is moving towards electrification and intellectualization. Human progress is driven by capital, and as long as it is an industry that meets future development expectations, capital will enter first.

The first wave of new car makers to enter the market, such as NIO, XPeng, and Li Auto, have broken the original valuation system of the capital market. They not only gained brand awareness in the capital market but also had greater advantages in fundraising. However, the second-tier companies are not optimistic in the capital market, for several reasons:

First, in the eyes of the capital market, the current high-quality targets of the new energy vehicle industry are decreasing. During the incubation period of the industry, leading companies will emerge, but it is not easy to create giant companies during the growth stage of the industry. Frankly speaking, the valuations of domestic second-tier new car makers in the secondary market are not outstanding after NIO, XPeng, and Li Auto went public.

Second, the first and the second tier of the capital market have not been good in 2022 and are essentially in a “money shortage” state, especially the secondary market, which has been performing poorly since the beginning of 2022. Many people believe that the industry has a bubble. From Mr. Li’s perspective, it cannot be simply judged whether there is a bubble based on the number of companies. First of all, we need to see if the direction of capital investment is accurate, whether the enterprise matches such value, and now the evaluation standards are completely different with more dimensions.From the perspective of currency issuance, there may be a small bubble, but from the perspective of industrial development, there is no bubble at all, because the new energy vehicle industry has huge development space. The current problem is the lack of incremental funds in the market and the overall undervaluation of the new energy vehicle sector. For new car makers that have not yet gone public, this is a great bearish signal.

Third, the IPO environment in 2022 is not friendly. Companies such as WM Motor and Leapmotor are all facing IPO issues. In fact, whether it is the United States, Hong Kong or the Science and Technology Innovation Board, none of them are the best place and time to go public this year.

In the context of unfavorable international conditions, the probability of overseas IPOs is practically zero. The Science and Technology Innovation Board is not friendly to automakers. Although when the Science and Technology Innovation Board was first established, the policy clearly stated that it would focus on encouraging the development of new energy and energy-saving and environmental protection, mainly including new energy, new energy vehicles, advanced energy-saving and environmental protection technologies and other fields, however, the requirements for enterprise R&D and finance in the Science and Technology Innovation Board are harsh, and most of the new car makers cannot meet the conditions. Therefore, there is no shadow of new car makers in the “wealth-attracting” land of the Science and Technology Innovation Board.

Many friends have suggested that Hong Kong may be the best place to go public in 2022. In Lao Li’s opinion, under the current situation, the Hong Kong IPO is only a compromise. In 2022, in the case of an unfavorable capital market, no matter where new car makers go public, they will be undervalued.

In summary, 2022 is a year of great challenge for new car makers in terms of products, markets, and capital. But change is always the biggest constant in the industry. In the growth stage of the industry, the market will face many changes. Although the challenges are huge, seizing opportunities in the changes will also be a good springboard for enterprises to develop and grow.

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