Tesla, BYD and the EV market

The global EV market is moving at a million miles an hour. From trips to Australia and China and discussions with a significant Tesla investor, I’ve been fascinated by what's going on. Late last year I was in Sydney, Australia visiting some Yellowbrick Data customers. After visiting Lexis Nexis at their very nice North Sydney office, I called an Uber to the airport, and a friendly gentleman came and picked me up in a small sized SUV. The SUV was electric and made by a company called MG. The machine was clearly a different MG from the Morris Garages I saw in my hometown of Abingdon near Oxford in the UK where even beer like Old Speckled Hen was named after the company’s cars. It had a clunky ride but it was quiet and comfortable enough, capably performing the job of a runaround. Clearly not a drivers car, but something big and cheap that gets from A to B.

What astonished me the most about the vehicle was when the owner proudly stated his acquisition cost: Under US$20,000, new. It was built by Shanghai Automotive Industry Co, otherwise known as SAIC. The interior was similar to a Ford Focus or a lower cost Japanese or Korean vehicle. It had all the basics - a laggy 8 inch touch screen with navigation, electric windows and locks, active safety, cloth seats, LED headlights, and even a 3D parking camera (that actually works which my Tesla still doesn’t have. It had a 50KWH battery giving it a very respectable range of up to 320km. An upgraded model has folding heated mirrors, rain sensing wipers, false leather seats and wireless changing, and a long range model has a truly long range up to 440km by dint of a larger battery. 

As a second time Tesla Model 3 driver this got me interested in what was going on in the industry as a whole.

Can China really make good cars?

China is the world’s largest vehicle and EV market. For a long time we have been thinking the Chinese can’t make good cars but this is based on past preconceptions as the country works its way up the manufacturing complexity ladder. Whereas they used to manufacture cheap plastic and metal stuff that US retailers would sell for lots of money, now they already manufacture the best phones in the world (think iPhone, Huawei, Xiaomi etc), brilliant high speed trains, the best robotic vacuum cleaners, drones and even a commercial airliner. They dominate the supply chains for batteries and solar cells and make plenty of machinery. They make and export tons of automotive components and make most of the world’s LEDs, fans, and other stuff. They make fabrics and sew leather for many high end furniture brands, and export that too. So given they have the resources to do great components, electronics, seats and upholstery, infotainment and touch screens, do good enough software to allow drones and vacuum cleaners to navigate with AI, build robots and make the best EV batteries in the world, why can’t they do cars?

Of course they can.

I sat in a car called a HiPhi in Shanghai which had a stylish design and wonderful interior. I saw a Xiaomi car on the side of the road and it looked fabulous, when released this year it promises to have the best range, acceleration and control software in in dustry. My friend Torben, who is extraordinarily critical, test drove and reviewed the Xpeng P7 (and G9), and found them, by and large, better vehicles than the Tesla Model 3 Highland (which is better than the Tesla I have). The Tesla was slightly more of a drivers car and had better autonomous driving capability but those advantages will be rapidly eroded too. Of course, there’s BYD which manufactures many vehicle types and loads of batteries. They make e-buses and trains (including in the US) but more recently put their hand to passenger cars. Talking of Tesla, their Highland revision which updates the car to modern standards, smoothens the ride and fixes all the manufacturing problems was actually designed in China anyway. Their new "Giga" factory in Mexico is being built based on Shanghai. If you’re buying a Model 3 in Europe now, you’re buying a Chinese exported car anyway.

The effect of increased competition

Increased competition in this market will fuel innovation, accelerate the transition away from petrol cars and drive down EV margins. Building cars has become like building smart phones or other consumer appliances. EV prices will drop. Supply chain efficiencies and consolidation will drive down prices, as will continuing improvements to battery technology. The Chinese are the best at localising, optimising and improving supply chains and have an extraordinary work ethic.

BYD is the now the largest EV manufacturer and similarly collapsing the value chain of passenger vehicles. It’s of note that BYD’s stock price isn’t booming, simply because investors realise the margins for cars will be generally quite low, price war after price war. As a result, Tesla is cutting prices, as are the other vendors; many brands will go out of business and only the strongest will survive - in China, likely BYD, Geely, SAIC and NIO, perhaps Xiaomi. Tesla will also survive unless US<->China industrial policy forces it to pull out. This is a particularly big deal for the Chinese nation since the global automotive market is even larger than the phone market. The majority of the EV market will be a low margin, high volume play.

While the Chinese are well on the way to manufacturing cars as efficiently as smart phones, the rest of the world with the exception of Tesla are stuck overhauling outdated manufacturing facilities, techniques and supply chains. China has overtaken Japan in automotive exports and will keep on growing.

The EV shift is happening

Carl Benz invented the car and Rudolf Diesel invented the combustion engine. Both were Europeans. Even 100 years later the Chinese did not produce similarly compelling combustion engine vehicles for sale abroad. The service centres, networks and supply chain for such vehicles were very complicated and took a long time to establish unlike an EV, which one can buy online without a dealership and barely needs any servicing.

Yet at the end of last year BMW announced that they have ceased production of all combustion engines at their Munich plant. This is a company whose DNA is in engines, starting with aircraft, yet their main plant will be producing EVs only from 2027. EV engines are now commodity, as are the batteries. They don’t need much maintenance or servicing. Let’s also consider the largest automaker in the world, Volkswagen, with $300bn of revenue in 2022. They have admitted they are “uncompetitive” in EVs, not just in the China market but globally too. Their vehicles and the software that powers them are far inferior to the Chinese brands, yet they cost more.

At the low end, in China the cheapest EV can be purchased for US$10,000, which is under half the price of America’s cheapest EV the Chevy Bolt. It has 250 miles of range and can charge from 30% to 80% in half an hour. At the high end, the Chinese drive cheaper and better luxury EVs than we have access to in the US. If one were able to buy Chinese EVs at those prices, they would already be cost competitive with combustion engine cars in the US today. In fact, in China, plugin hybrid EVs are now cheaper than the cheapest combustion engine cars.

So on one hand, we have the trend of continually lower production costs due to improvements in manufacturing, localisation of value chains and advances in battery technology, and in the other hand, a growing second hand car market for EVs which further drives down the acquisition price. Combine that with the mandates from more and more governments to force market share of zero-emissions vehicles and it’s reasonable to assume that EVs will dominate combustion vehicles over the next decade. Even Bloomberg predicted that prices may well cross over in the next couple of years.

Is Tesla the Automotive Apple?

A substantial long term Tesla investor I talked to recently shared his philosophy. He feels that Tesla will be able to defend their product margins in light of competition from other vendors because they are the “Apple of cars.” In particular, their autonomous driving software will be the large differentiator that others don’t have.

I chose to disagree with this: Firstly, Tesla does not have the massive ecosystem lock-in across multiple device classes that Apple has. Secondly, Tesla doesn’t have a marketplace like Apple’s devices to that generate revenue beyond the device itself; perhaps the charging network would be the closest example but that is being standardised and opened up in many countries anyhow, with companies like Huawei on track to make more chargers this year than in Tesla's entire history. Thirdly, whatever that added value is, has to make a lot more difference for a $50,000 product than a $600 product and to this day I still don’t know a single person that can realistically drive a Tesla autonomously outside of freeways and car following, which is a far lower technology bar for the “95% use case.”

Lastly, Apple is built as a premium, high quality product but a Tesla really isn’t — everything they do is about taking cost out, removing useful controls, and continuing to produce a lower cost product with higher margins. My second Tesla Model 3 still doesn't have automatic wipers that work properly, or parking sensors or camera that are trustworthy, and it can't even go down the freeway without rattling. So I don’t think the analogy holds. What's more likely is old car manufacturers make hard drives, Tesla made the first expensive SSD, but soon the NAND fabs will all be making great, cheap SSDs that work better than the first one.

Watch out Europe and Japan

This puts European automotive manufacturers in a particularly tricky situation, especially the Germans who are Europe’s largest car exporters. The Germans are already behind on the transition to electric vehicles and are struggling to catch up. The EVs they do make import many components from China and most are still based on chassis manufactured for combustion engines. Meanwhile, sales of Chinese EVs in Europe as a whole are growing exponentially.

The European governments call this a “flood of subsidised imports,” lining up for a roughly yearlong process whereby they will determine whether or not to raise tariffs on Chinese car brands. They have partially missed the point though - it’s not just about the Chinese vehicles being cheaper and winning market share that way, they are actually *better* cars for less money. As a capitalist, I think loads of low margin products that are better than expensive high margin ones is generally a good thing. I’m sure they will ignore the fact that Tesla has benefitted from countless direct and indirect subsidies over the years as well.

The real wrinkle is that China is the largest export market for German cars. So any tariffs are likely to be met with punitive tariffs on the other side too. If this no-win scenario takes place there are several possible outcomes.

A first possible outcome is that it could leave the European car market in a similar place to that of the USA, with a protected market where people overpay for substandard vehicles, hurting consumption and effectively erode the purchasing power of the Euro, lowering standard of living and setting the continent back on the plan to be greener and transition fully to EVs.

A second possible outcome would be similar to what happened in the Trump trade wars; the imposed tariffs basically made no difference, the cost of the tariffs were passed on to the consumer, and the Chinese kept shipping stuff anyway because their cost:quality ratio was still so much better than anything made elsewhere; there was almost no alternative.

A third possible outcome would be that, to lower costs, the European manufacturers effectively outsource more production to Chinese ODMs, put their badge on, and become automotive integrators. You continue to buy new BMW EVs that are 80% made and assembled in China and finished in Germany and pay the price premium for the brand. This wouldn’t be so bad for the consumer, but would have a disastrous effect on unemployment within the manufacturing sector in Germany. In essence, this is already what’s happening with brands like Polestar.

For Tesla, it will of course survive, but losing global market share is an inevitability. If the EU and the US put up too many protectionist barriers, it may even be able to maintain margin in those markets because the legacy vehicle manufacturers are still behind. The likely outcome to me, though, is falling Tesla margins and falling Tesla market share because the “Tesla is Apple” argument simply doesn’t hold. Regardless of the outcome for Tesla, the Europeans are in for a really rough ride.