Chinese EV Automakers Are Presenting Shakey Profits Even As Demand Soars

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Global demand for electric vehicles (EVs) has continued to grow on the back of wider macroeconomic problems. While this is good news for automakers in the businesses, and investors throwing their cash at these companies, some manufacturers in China are having a hard time posting positive profits.

Despite these EV automakers seeing increased demand from consumers in both China, and abroad, and delivering more vehicles than in the last few years, some companies have yet to be profitable since their inception.

While some EV manufacturers, such as BYD have seen improvements in their bottom line over recent years, other leading names such as Xpeng, Li Auto, and Nio have been struggling to post profits despite demand soaring in their native countries.

Xpeng

Although the automaker managed to deliver roughly 22,000 vehicles in Q4 2022, bringing up total deliveries to 120,000 units for last year, the company still reported a record-shattering net loss of $1.32 billion in 2022, which marked an increase of 88.1% compared to 2021.

The company has been largely transparent about its meager performance during last year, with Xpeng Inc (NYSE:XPEV) chairman, He Xiaopeng, claiming that macroeconomic headwinds and steady competition in the EV industry have been key challenges for their lackluster performance.

To improve conditions, the board appointed Wang Fengying, the former president of Great Wall Motor as the company’s new president. The adjustment to its structural network has also seen Xpeng expecting to increase its delivery for Q1 2023.

Overall, Xpeng expects to deliver between 18,000 and 19,000 new vehicles, marking a year-on-year decrease of 45% to 47.9%. The company has found itself in a tight squeeze considering rising material costs, and even tighter supply chain conditions, even if most of its assembly takes place within China.

As part of its cost reduction strategy, the company plans to reduce automated driving technology costs between 2023 and 2024 by 50%. Furthermore, it aims to reduce vehicle hardware costs by 25% over the next several years.

Whether these tactics might work in their favor, the company has to navigate further challenges ahead, as Tesla’s price war could make it harder for Xpeng to penetrate the Western auto market.

Li Auto

Things might be looking up for Li Auto Inc (NASDAQ:LI) this year, after the company managed to deliver 20,823 vehicles in March 2023, totaling deliveries of 52,584 for the first three months of the year. This is an increase of 66% from the same period last year.

Li Auto mainly holds all SUV powertrains,  and the company claims that it now holds a 20% share of the 300,000 yuan ($43,674) to 500,000 yuan SUV price range in China. In comparison to Tesla, these prices are still relatively high, with Tesla’s mid-size SUV – Model Y – selling in the price range of 261,900 yuan to 361,900 yuan.

Overall, Li Auto remains a strong competitor to the likes of Xpeng in the Chinese buyer market, with the company saying it’s expecting to see its delivery volume increase significantly this year.

There is however the question of whether or not the company could post improved full-year profits this year.

The automaker saw its Q3 2022 net loss widen to $237.55 million last year according to a Reuters report in December 2022. The total net loss for Q3 2021 came in at $31 million, indicating a strong jump in overall expenses and costs.

Similar to Xpeng and other EV makers, Li Auto said that although it was expecting higher deliveries, it had a hard time having to navigate rising materials costs and the impending global chip shortage, something which even U.S. automakers have been struggling with.

The company is however continuously improving the performance of its vehicles, with all of them being manufactured with a fuel tank to increase road range capacity. Still, it’s not easy for them to price out even Tesla in their market.

NIO

Nio Inc (NYSE:NIO) is singing to a similar tone as both Xpeng and Li Auto. The company witnessed a 60.2% Q4 2022 vehicle sales increase compared to Q4 2021, and an increase of 23.7% from Q3 2022, yet overall profits and vehicle margins have fallen even further.

For starters, the company reported a vehicle margin of 6.8% in Q4 2022, a decline of 20.9% from Q4 2021, and 16.4% from Q3 2022. The most eye-opening statistic is the 169.9% increase in net loss between Q4 2021 and Q4 2022, with the company reporting more than $838.9 million loss in the final quarter of last year.

Between the third and fourth quarters of 2022, total net loss jumped by 40%. Finally, its full net loss for last year was $2,093.2 million.

The company said that its single digital margins have been negatively impacted by inventory issues, depreciation on production facilities, and losses on purchase commitments for its ES8, ES6, and EC6 generation models.

So far this year, the company has managed to deliver just over 8,500 units in January, and more than 12,000 in February, with February 2023 marking a solid 98.3% increase in year-over-year (YoY) deliveries compared to February 2022.

As of February 2023, total cumulative deliveries for NIO managed to reach 310,219 units, a seemingly good track record for a company that’s to steadily enter itself into developed buying markets such as Australia and Europe.

The company holds a steady position that this year it could see further growth on its development side of the business, which it hopes in return could cut costs of its production line.

NIO however shows to have a tough skin, eagerly developing cost-cutting measures and initiating new strategies that could help it improve its bottom line by the end of 2023. Hopefully, these estimates can see the company hold on to its promises, while at the same time keeping up with soaring demand for its premium-end vehicle range.

Ford Is Also Biting The Bullet

It’s not only Chinese EV automakers that are having a hard time with their paltry profits, Ford Motor Co (NYSE:F) has said that it expects its EV business unit to lose $3 billion this year.

On top of this, the legacy automaker sees a cumulative three-year loss from 2021 to 2023 of $6 billion for its Model E range. The company does however expect its Mustang Mach E and F150 Lighting to be profitable on a pretax basis by the end of next year, but the ongoing price war with Tesla could further falter their predictions.

While Ford managed to post better-than-expected Q1 2023 earnings, sales numbers for the Ford F series were down 10% YoY. In general, U.S. automotive sales have been looking increasingly tight this year with prices continuing on an upward trajectory and narrower margins are eating into automakers’ profits.

On May 2, Ford announced that it will cut the price of its electric crossover by 8%, marking the second price cut this year for its EV crossover, as it looks to compete with the Tesla Model Y.

The price war between legacy makers and EV manufacturers comes after Tesla announced in January this year, that it will be dropping the prices of all its vehicles by 20%. Tesla has been trying to regain its foothold on the global EV market in recent months, after witnessing a decline in unit demand between July 2022 and December 2022.

Earlier data compiled by Reuters showed that Tesla’s margins on some of its models are significantly higher than nearly every EV manufacturer, including Ford, General Motors, BYD, Toyota, and Hyundai.

EV automakers across different markets, from China to the U.S., and Europe are hitting record sales volumes quarter-over-quarter (QoQ), there are however economic elements that have made it harder for them to see their profits rise, on the back of wider macro-challenges and financial headwinds.

EV makers are not alone in this, as consumers with rising outstanding debt, as delinquencies rise, and stubbornly high inflation figures have further meant many of them are tightening their purse strings even more this year. Latest figures showed that credit card balances rose by 11.1% in January 2023 on an annualized basis, according to Bankrate.

The large jumps in credit card balances have been related to inflation, as a growing number of consumers are racking in higher debt and diving deeper into their savings costs continue to climb.

Additionally, headwinds have been aggressive monetary tightening, with the U.S. Federal Reserve hiking base interest rates by 25 basis points on May 3, 2023, bringing federal overnight interest rates up to 5% and 5.25%. This marked the 10th consecutive, and potentially the last rate hike, as the central bank looks to pause its tightening cycle.

For consumers, the knock-on effects have been felt for several months, as costs continue to climb, even as inflation starts to cool down. For EV makers that are navigating a price war and having to deal with industry-related headwinds, chances are they might only be seeing the start of yet another demanding, and challenging year as macroeconomic problems deepen further.

Looking Forward

It’s a compelling truth that Chinese EV automakers are struggling to see their profits jump, despite an increase in demand from the Chinese auto market. On top of this, many manufacturers in the region are continuing their efforts to tap into newer markets such as Europe, the Middle East, and Africa.

While there is upside potential for these automakers, it could be yet another hard year for them to navigate the further slowdown of the global economy. It’s a bitter pill to swallow, but it seems that although China is looking to become the powerhouse of electric vehicles globally, the companies that supply the nation are having a hard time managing their bottomline.