Tesla, emerging from the innovative mind of Elon Musk, represents one of the most groundbreaking concepts to date, setting it apart from other revolutionary ideas. Not only does Tesla manufacture electric vehicles, but it has also devised a mechanism that produces an astonishing volume of these automobiles.
Moreover, given Elon Musk’s track record of accurate predictions and insightful observations regarding the electric vehicle industry, it is essential to take his warnings about the financial challenges confronting specific automakers seriously. Once more, it seems that his predictions are coming true, shedding light on the astonishing collapse of the Chinese EV industry.
Join us as we explore the extraordinary turn of events that have occurred, looking at what led to this unexpected decline and considering what it might mean for the future of the market for electric vehicles.
During the 2023 Tesla shareholders meeting, Elon Musk delivered a detailed presentation addressing the rapid growth and intense competition in the global electric vehicle market. He highlighted that among the numerous players in the industry, only Tesla and BYD have achieved net profit, while other emerging car manufacturers are struggling to survive.
Elon Musk specifically mentioned the performances of various Chinese EV companies. He praised BYD as a strong contender that has successfully generated net profit. He also discussed the progress of NIO, XPENG, and Polestar, acknowledging their market share and attention but noting their current challenges in achieving profitability. Musk’s remarks on the difficulties faced by Chinese EV companies accurately reflect the industry’s current situation.
Recent data clearly shows that companies like BYD, NIO, Xpeng, and Polestar are grappling with profitability and maintaining a healthy cash flow. Their operating profit margins lag significantly behind Tesla, ranging from 14 to 74 percentage points. This significant gap underscores the difference in financial performance and suggests that they have not been able to match Tesla’s level of profitability. Furthermore, there is a substantial disparity in cash flow, with these Chinese companies lagging behind Tesla by as much as $16 to $20 billion.
Statistics also reveal a significant decline in the number of active companies in the industry. In 2018, there were roughly 500 new EV companies in China, but by 2023, only about 40 companies remained operational. This means that over 400 companies have disappeared, with more than 90% of car companies going bankrupt.
Among the remaining vehicle manufacturers, several companies from the second, third, and fourth tiers, including Aiways, Weltmeister, Hozon, Skywell, SiTech, Leapmotor, and Future Mobility, have faced substantial challenges in sustaining their operations. These emerging car manufacturers have encountered disruptions in their capital chains, primarily due to a lack of sufficient funds for product development, despite initially establishing production bases and acquiring vehicle manufacturing qualifications.
The insufficiency of capital has hindered their ability to maintain high product quality and competitiveness in the market. Consequently, these companies have experienced declining sales and increased losses, as exemplified by Aiways, Weltmeister, and SiTech, which have struggled due to relatively poor product quality and competitiveness.
Even with the $500 million in Series A funding raised in 2021, SiTech still faces similar challenges as the highly competitive and capital-intensive electric vehicle industry demands significant financial resources. The inadequate funding for product development restricts these companies’ ability to enhance their products and keep up with evolving market demands.
This situation puts them at a disadvantage compared to financially stronger competitors like Tesla, which can invest in research, development, and innovation. Furthermore, some companies have attempted to transition from manufacturing small electric vehicles to high-end electric vehicles, requiring substantial capital investment.
However, there have been cases where companies faced challenges and incurred further losses after transitioning to new vehicle models. For example, Leapmotor and Skywell Auto encountered difficulties in this regard. Additionally, some companies have struggled with limited vehicle deliveries. Hozon Auto, for instance, has only managed to deliver 900 vehicles to customers, which is relatively low compared to the monthly delivery volumes of tens of thousands in the market. Such low delivery figures can undermine consumer confidence in the company’s ability to meet demand.
Furthermore, certain companies, like Future Mobility, have faced difficulties generating sales despite launching new vehicle models. Sales performance has been extremely poor, with one model selling only 131 units over a year and a half, while the other model has experienced delivery delays since its release in June of the previous year. Even industry-leading companies like NIO and XPENG have been struggling. NIO, for example, has witnessed a significant drop in sales, with April 2023 sales reaching only 6,658 units, reflecting a month-over-month decrease of 35.8%.
This decline can be attributed to the growing number of brands in the luxury electric vehicle market, leading to heightened competition. The increased competition has had a significant impact on companies like NIO and XPENG. Furthermore, NIO’s strategy of actively launching battery swap stations has presented challenges in terms of skyrocketing liabilities and tight cash flow.
As of the fourth quarter of 2022, NIO’s total liabilities reached ¥68.62 billion, resulting in a debt ratio of 71.28%. However, the company’s cash and cash equivalents amounted to only ¥19.89 billion. These financial figures have presented challenges for NIO in repaying its debts. Conversely, XPENG is grappling with sales performance and competition issues. In April, XPENG recorded sales of only 7,079 units, and its primary model, the P7, faces strong competition from the Tesla Model 3.
The intense competition has made it difficult for XPENG to attract customers and expand its market share. Furthermore, XPENG’s quarterly financial report revealed that sales for the quarter stood at only 18,200 units, representing a year-on-year decrease of 58.2%. Consequently, market expectations for XPENG have turned increasingly pessimistic, resulting in a sharp decline in its stock prices and even the risk of delisting.
It is worth noting that these struggles faced by NIO and XPENG are not uncommon during the launch of new models. Elon Musk openly discussed the difficulties Tesla encountered in its manufacturing processes during the unveiling of the Model Y in 2019. Musk highlighted the complexity of scaling up production to meet high demand on a large scale, emphasizing that while creating a prototype can be relatively straightforward, mass production is a much more intricate task.
Musk emphasized the challenges and often overlooked value of manufacturing during a gathering of journalists, Wall Street analysts, and Tesla enthusiasts at the company’s design studio in Hawthorne, California. He stressed that while it may be relatively easy to create a prototype, achieving reliable mass production at scale is an extremely difficult task. He compared it to rocket science, stating that designing a manufacturing system for a rocket is likely ten times harder than designing the rocket itself. In the case of cars, Musk estimated that designing the manufacturing system is perhaps 100 times harder than designing the car itself.
In 2018, Tesla faced significant obstacles in scaling up production of the Model 3 sedan, which Musk famously referred to as “production hell.” The company was under immense pressure to increase production rates to meet customer orders and improve its financial situation. During this challenging period, Tesla took unconventional measures to expedite production.
One notable example was the construction of a large tent outside the company’s factory, which housed an additional production line. This temporary structure allowed Tesla to rapidly expand its manufacturing capacity and meet the growing demand for Model 3 vehicles. Musk and the entire team worked tirelessly, putting in grueling hours to address production bottlenecks and streamline the manufacturing process.
Despite the difficulties, Tesla achieved a significant milestone. In the third and fourth quarters of 2018, the company turned a profit. This success marked a transition from “production hell” to what Musk referred to as “delivery help,” where the focus shifted to ensuring smooth and timely deliveries of the newly produced vehicles to customers’ driveways.
Musk emphasized that the key challenge was not in designing the car itself but in establishing an efficient production system. He stated that having a good product design is relatively easy, while the factory and manufacturing processes pose real difficulties. As a result of Tesla’s strategy, the profit margins for its EV sales now range from a few thousand dollars to around $10,000 per vehicle, depending on the model and other factors. In comparison, BYD, the only other automaker making profits from EV sales, earns $1,200 from each car sale.
BYD, supported by Berkshire Hathaway Inc., led by Warren Buffett, has experienced a significant surge in its dominance over the past couple of years. Currently, more than one-third of new energy vehicles, or NEV, sold in China come from BYD, compared to less than 15% in late 2020, when the clean-car market started seeing monthly sales of over 100,000 units.
This success has put pressure on even the market’s second-largest player, Tesla, which had been gradually losing market share until a breakthrough in the first quarter. Now, Tesla is poised to capture around 11% of the market, bringing the combined share of the two leaders to nearly half.
Some of the early frontrunners in the industry have quietly faded away. Many of the initial electric vehicles were primarily designed to qualify for subsidies and meet regulatory requirements, often lacking high-quality design and performance. The Chinese electric vehicle industry has undergone significant transformations and challenges in recent years. While some companies have thrived and achieved success, many others have struggled to sustain their operations and compete in a highly competitive market.
The collapse of the EV industry in China serves as a stark reminder of the complexities and fierce competition within the market. As the industry continues to evolve, it is crucial for companies to navigate the changing landscape and adapt to emerging trends in order to secure their position and contribute to the future of electric mobility.