In 2024, the theme of China's new energy vehicles is to reduce prices. The price war is escalating, and many car companies have entered a stage of fighting each other. However, some analysts pointed out that this trend of price war across the industry may not be sustainable.

Citigroup pointed out in its research report released on June 24 that the price war in China's new energy vehicle market is expected to ease from the second half of this year and will be concentrated among a few major manufacturers instead of all manufacturers.

Citigroup gives seven reasons for the trend of price war easing:

1. Considering that material costs have already dropped significantly, future price reductions will be limited.

In the past few years, the price competition in China's new energy vehicle market has been fierce. Citigroup found that in 2023, new energy vehicle companies were still able to absorb the impact of the price war through the decrease in raw material costs (mainly the decrease in battery costs). Now that the cost of batteries has dropped significantly, Citigroup expects that the synergistic effect of using cost compression advantages to sell cars may end. Therefore, only those car companies with large-scale production capabilities can continue to fight the price war in the future.

2. Many joint venture brands (gasoline vehicle companies) currently have slim or even negative profit margins and cannot further reduce prices.

Starting from 2023, the profits of joint venture car companies, including Honda, Nissan, Volkswagen, GM, Peugeot Citroen, and Mazda, have been generally eroded. Considering that the net profit level of most joint venture brands is currently low, even negative, we believe that joint venture brands cannot further reduce prices. On the contrary, they may take defensive measures to give up a portion of their market share in China's new energy vehicle market and maintain stable profits by earning high-profit margins in North America.

(3) Joint venture car companies have not taken drastic price reductions to join this year's price war, which has slowed the deterioration of the new energy vehicle industry's price war.

According to our analysis, pure electric vehicle and plug-in hybrid vehicle (PHEV) brands took large-scale price reduction measures in the first quarter of this year, but joint venture car companies did not. The main reason may be consistent with our above second analysis point, that is, joint venture car companies generally have poor profitability, which limits their space for price reductions.

(4) The growth of new energy vehicles mainly comes from plug-in hybrid electric vehicles (PHEVs) and extended-range electric vehicles (EREVs), and only a few profitable companies have the bottom line to continue fighting the price war in the future.

According to Thinkercar's data, from the first four months of 2024, the sales volume of new energy vehicles (domestic) increased by 42% YoY to 2.42 million vehicles, of which plug-in hybrid electric vehicles and extended-range electric vehicles (1 million vehicles) increased by 82% YoY, higher than the 22% of pure electric vehicles (1.42 million vehicles). Therefore, we expect that the short-term incremental growth in the new energy vehicle market will mainly come from plug-in hybrid electric vehicles and extended-range electric vehicles, which are also concentrated in several major Chinese new energy vehicle brands (not joint venture brands, nor all Chinese brands). For example, BYD, Geely, GM, Changan, and GAC have already accounted for around 90% of the market share in plug-in hybrid electric cars, while NIO, Sokon, and Changan have accounted for over 90% of the extended-range electric car market share. Looking ahead, we expect that, due to the better market prospects of plug-in hybrid electric vehicles and extended-range electric vehicles, the increase in China's new energy vehicle sales penetration rate in the future will mainly benefit the relevant companies in terms of sales volume and profit margin.

(5) The dividend of the growth of new energy vehicles exports only benefits a small number of large car companies.

Considering that the export business of China's new energy vehicles is affected by logistics factors, the accounts receivable cycle has become longer, and small cars are more popular in overseas markets. We believe that the dividend of export growth only benefits large car companies with product advantages and strong financial capabilities in small cars. According to data from the China Passenger Car Association (CPCA), the top seven car companies account for about 80% of the market share of new energy vehicle exports, namely SAIC Group, Chery, BYD, Geely, Great Wall Motor, Changan Automobile, and Dongfeng Automobile.

(6) The negative gross profit margin of car companies has led to the suspension of new entrants.

Taking the price war in the photovoltaic industry as a reference, when the gross profit margin of the product is lower than zero for a certain period of time, the manufacturer will stop production to reduce the loss, because every additional product they produce will bring more losses at the overall income level.

This also applies to the new energy vehicle industry. We expect that when the gross profit margin is lower than 0% for a certain period of time, some new entrant car companies will stop production. In the future, new rounds of price reduction may occur in the new energy vehicle industry, coupled with a slowdown in market growth, which means that the gross profit margin of some new entrant new energy vehicle companies may drop to 0%.

The China Passenger Car Association is also expected to see a slowdown in the trend of price wars as the number of discounted models decreases.

According to CPCA data, in the first five months of 2024, 136 new energy vehicles experienced price reductions, which is close to the 139 models reduced in the whole year of 2023. This also indicates that the price war in 2024 is more intense than last year. However, unlike the uniform distribution of price reductions throughout the year in 2023, the number of discounted models in February, March, and April of 2024 increased significantly to 29, 49, and 54 respectively, followed by a sharp drop to a low level of 10 in May, which also means that the price war has temporarily come to an end.

Edited by Jeffrey