EV Makers in Trouble as China’s Market Hits the Brakes?

Chinese EV (electric vehicle) sales slid for the third straight month in September. Before we delve deeper into the company’s EV sales, let’s see how China’s overall auto market is performing.

Chinese auto sales slide

Chinese auto sales slid for the 15th month out of the last 16 in September. The slide worsened the auto market slowdown in the country amid softer domestic demand and growing trade tensions. Ford’s (F) and General Motors’ (GM) Chinese sales also slid in the third quarter, worsening their US slowdown woes.

NEVs (new energy vehicle) were the bright spot in this otherwise fading market until June. However, now even the sales of EVs have started slowing. China rolled back subsidies on NEVs with less than 250 kilometers (about 155 miles) of electric range, and it halved subsidies for higher ranges.

China’s NEV sales declined for the third consecutive month

The rollback, along with otherwise soft demand, saw NEV sales decline by 34.2% YoY (year-over-year) in September compared to declines of 15.8% and 4.7% in August and July, respectively. CAAM (China Association of Automobile Manufacturers) released this data today. For the first nine months, sales showed growth of 20.8% YoY. NEV sales fell for the first time in July, which was followed by August’s accelerated decline.

China’s EV markets reeling from EV slowdown

Chinese domestic EV makers, including Geely, BYD (BYDDF), and JAC Motors, reported weaker sales figures on October 10. China’s largest EV maker, BYD, reported a 51% YoY decline in NEV sales in September. Due to the continued decline in NEV sales, CAAM reduced the annual sales projection to 1.5 million units from 1.6 million units.

NIO is under extreme pressure as China’s EV sales subside

NIO (NIO), China’s so-called Tesla equivalent, is especially reeling from crumbling NEV sales along with company-specific issues. The Tencent-backed (TCEHY) EV maker reported worse-than-expected second-quarter results in late September. The company also guided for much lower revenue in the third quarter compared to analysts’ expectations.

NIO’s high cash burn rate and survival issues

NIO’s high cash burn rate against the backdrop of rising competition and diminishing government support have raised questions about its survival. Many analysts have thus downgraded the stock. On October 8, NIO released its third-quarter delivery report. Its delivery figure of 4,799 vehicles during the quarter surpassed the guidance of 4,200–4,440 units it provided during its second-quarter results. This had a positive impact on its stock price. The company’s problems, however, are still far from over.

Tesla’s Gigafactory is coming at the right time

One such challenge comes from Tesla (TSLA). Tesla is in the process of completing a Gigafactory in Shanghai, which will produce locally made Model 3s and Model Ys. The company will produce these vehicles for less than it costs to import them from the US. This development, along with the removal of trade uncertainty around the units, should enable Tesla to pass on the benefits of lower costs to consumers, thereby giving its sales a boost. Read How Tesla Plans to Lead in the EV Race in China for more info. You can also check out How NIO Is Failing Where Musk’s Tesla Is Thriving for a comparative analysis of NIO and Tesla.

Softer Chinese EV demand could affect Tesla’s Chinese sales too

If the overall trend for EVs remains a downward one, Tesla will also be affected by the resulting softer demand. One advantage for Tesla, though, is that it never had the benefit of the EV subsidies in the first place. Therefore, a subsidy rollback won’t have any negative effect on it. In fact, the change has somewhat leveled the playing field between domestic EV makers and foreign automakers operating in the country.

As domestic companies are experiencing pain from the subsidy’s removal, foreign automakers Toyota Motor (TM) and Volkswagen (VLKAF) are making increased pushes to gain market share in China.