Bin Wang: Inflation is on the rise over the EV revolution
The global switch to electric vehicles (EVs) has been a major driver of growth-focused investors, but inflation, supply chain constraints and rising interest rates are weighing on valuations. We sit down with Bin Wang, Co-Head of Asia Pacific Autos Securities Research, Credit Suisse, to discuss how investors can plot a route towards further gains and steer clear of blackspots, and the effects of inflation on EV supply chain market in China.
New energy vehicle (NEV) sales in China increased 155% year-on-year (YoY) in 2021, representing more than 13% of new car sales. This growth has enabled China to overtake Europe as the global leader in EV sales. To what extent will China maintain this lead in the coming years?
Bin Wang: Let us take a look at the 2021 numbers first before talking about the future trend. In 2021, China’s NEV volume was 3.5 million units, with 13% penetration rate, compared to Europe’s total NEV sales volume of 2.3 million and 16% penetration.
Clearly, China’s volume was bigger in scale, but Europe enjoyed a higher NEV penetration. Worth highlighting, the scale of China’s total auto sales is roughly two times that of Europe in terms of volume. We expect the same trend to continue in 2022; China is expected to maintain its leadership in volume, while Europe will enjoy a higher penetration.
We estimate China’s NEV volume to increase 61% YoY to 5.67 million units in 2022, with a penetration rate of 20%. This compared to Europe’s NEV penetration to be estimated at 23%, with 3.5 million units in sales volume. The reason behind the continued growth in China is the volume growth moving from being policy-driven or subsidy-driven to demand driven.
Here are two examples:
First, China had introduced a low-cost plug-in hybrid vehicle (PHEV)at a cost that is the same as that of a traditional engine vehicle. This is a first-ever in the history of NEVs, which triggered significant demand. In 4Q 2021, China’s PHEV sales volume outperformed that of pure EVs, up 149% YoY, vs EV’s 127% YoY. The trend continued in January 2022. This did not happen in other countries, as no other country is able to offer such low-cost PHEVs yet.
Second, China’s EVs are intelligent vehicles. Chinese automakers are aggressive when it comes to integrating the Android ecosystem into the vehicle. In other words, China’s EVs are not just a transportation tool, but also smart data terminals. No other market has the big internet industry and ecosystem that China has.
We expect the same trend to continue in 2022; China is expected to maintain its leadership in volume, while Europe will enjoy a higher penetration.
During the global chip shortage, new EV players have outperformed their peers in terms of value and share performance. As the chip supply normalizes, will traditional automakers be able to narrow this gap?
Bin Wang: Indeed, the new EV players understand that they need to differentiate themselves by taking “reasonable risk” in order to survive.
The reason the new EV players’ sales volumes have outperformed is that they have made two “reasonable risk” moves. First, the new EV makers have been more flexible in paying a much higher price for the same chips.
Secondly, in addition to sourcing directly from chip manufacturers, new EV makers are willing to take the risk to diversify their suppliers to purchase from chip distributors.
In other words, the new EV companies take some quality risks by using chips from new chip distributors without any complex certification process.
As chip supply normalizes, the situation will be same for all auto makers, which means traditional automakers will be able to source much more supply.
Credit Suisse suggests that the global NEV penetration was 19% of the whole market last year, up from 12% in 2020. You forecast this number will be 73% by 2030E. What are the key factors for getting there?
Bin Wang: There are three main areas that we expect will drive strong growth in global EV penetration:
(a) Reducing cost or the EV price;
(b) Improving infrastructure, such as fast charging facilities; and
(c) Auto makers aggressively increasing supply, with more new EV products.
Regarding SME support, it is not just about cutting commissions. It is more important to leverage technologies to create products that enhance value and increase customer satisfaction. We believe this is a win-win situation that allows SMEs to earn more, customers to have better products, and internet platforms to reap higher returns.
Therefore, promoting the value of “technology for good” is consistent with the regulatory direction.
The AIC is celebrating its 25th anniversary this year. 25 years ago, the first EV to use a lithium-ion battery, had a range of 190km and only 200 units were ever produced. How much better are today’s models, and what improvements can we expect in the next 25 years?
Bin Wang: To date, the mainstream mid-end volume product EV batteries can offer a 700km range. For the high-end EVs, customers can get a 1,000km-range product already, if they are willing to pay more.
Global auto makers estimate that in five years, the EV cost will be the same as that of an engine vehicle. We expect EV margins will likely reach a level similar to today’s engine vehicles.
In 25 years, we expect there will be no engine vehicles. Further, we expect all the problems with EVs today will be fully resolved, such as range, cost, charging speed and weight.
More importantly, we see vehicles being transformed from a transportation tool to a 3D data terminal, similar to how the telephone has changed to today’s smartphone.
In other words, the vehicle of the future will serve as a data experience rather than simply act as a means of travel.