In 2024, the theme of China's new energy vehicles is price reduction. Price wars are erupting one after another, with many car companies entering a stage of fierce competition. However, some analysts point out that this industry-wide trend of price wars may not be sustainable.
In a research report released by Citigroup on June 24th, it is expected that starting from the second half of the year, the price war in China's new energy vehicles will ease, with the competition focusing on a few major manufacturers rather than all manufacturers.
Citigroup provided seven reasons for the easing of the price war:
1. Given that material costs have already significantly decreased, there is limited room for future price reductions.
<blockquote>
In the past few years, the competition in China's new energy vehicle market has been intense. Citigroup found that in 2023, new energy vehicle companies were able to absorb the impact of price wars through a decrease in raw material costs (mainly battery costs). Now, with battery costs having significantly decreased, Citigroup predicts that the synergistic effect of using cost compression advantages to sell cars at lower prices may come to an end. Therefore, only those car companies with large-scale production capabilities can continue to engage in price wars in the future.
</blockquote>
2. Many joint venture brands (traditional fuel vehicle companies) currently have slim or even negative profit margins, making it impossible for them to further reduce prices.
<blockquote>
Starting from 2023, the profits of joint venture brands such as Honda, Nissan, Volkswagen, General Motors, Peugeot Citroen, and Mazda have been generally eroded. Given that most joint venture brands currently have low or even negative net profit levels, we believe that they cannot further reduce prices. Instead, they may take defensive measures, relinquish some market share in China's new energy vehicle market, and maintain stable profits by earning high profit margins in North America.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d57e88d5-0a1f-4261-8ecb-b4337f494c96.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d57e88d5-0a1f-4261-8ecb-b4337f494c96.png"/>
</blockquote>
3. Joint venture brands have not significantly reduced prices to join this year's price war, which has slowed down the deterioration of the price war in the new energy vehicle industry.
<blockquote>
According to our analysis, pure electric and plug-in hybrid vehicle brands took significant price reduction measures in the first quarter of this year, but joint venture brands did not take such measures on a large scale. The main reason may be consistent with the analysis in our second point, that is, the generally poor profit situation of joint venture brands, which limits their room for price reductions.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/03755dec-a8d5-4761-98fe-12bd5293d95c.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/03755dec-a8d5-4761-98fe-12bd5293d95c.png"/>
</blockquote>
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 foundation to continue engaging in price wars in the future.
<blockquote>
According to Thinkercar's data, in the first four months of 2024, the sales volume of new energy vehicles (domestic) increased by 42% year-on-year to 2.42 million units, with plug-in hybrid electric vehicles and extended-range electric vehicles (1 million units) growing by 82%, higher than the 22% growth of pure electric vehicles (1.42 million units). Therefore, we expect that in the short term, the incremental growth in the field of new energy vehicles will mainly come from plug-in hybrid electric vehicles and extended-range electric vehicles, and this growth will also be concentrated in a few major Chinese new energy vehicle brands (not joint venture brands)
(5) The dividend of export growth in new energy vehicles only benefits a few large car companies.
</blockquote>
Considering that the export business of new energy vehicles in China 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 those large car companies with product advantages and financial capabilities in the small car segment. According to the data from the China Passenger Car Association (CPCA), the top seven car companies hold about 80% of the market share in the export of new energy vehicles, namely SAIC Group, Chery, BYD, Geely, Great Wall Motors, Changan Automobile, and Dongfeng Motor.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/bcb52540-bab6-4af4-afef-d3c1cd051276.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/bcb52540-bab6-4af4-afef-d3c1cd051276.png"/>
(6) Car companies' gross profit margins turn negative, leading to production halts for new entrants.
Drawing on the historical price wars in the photovoltaic industry, when the product gross profit margin remains below 0 for a certain period, manufacturers will stop production to reduce losses because producing one more product will result in more losses at the total revenue level.
This also applies to the new energy vehicle industry. We expect that when the gross profit margin remains below 0% for a certain period, some new entrant car companies will halt production. In the future, there may be more rounds of price reductions for new energy vehicles, coupled with a slowdown in market growth, which means that the gross profit margins of some new entrant new energy vehicle companies may drop to 0%.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/dfe8af5f-4aa4-47b9-811e-4a0766fa10dc.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/dfe8af5f-4aa4-47b9-811e-4a0766fa10dc.png"/>
(7) The China Passenger Car Association also predicts that with the reduction in the number of discounted models, the trend of price wars will ease.
According to CPCA data, in the first five months of 2024, there were 136 new energy vehicles that experienced price reductions, close to the level of 139 models for the entire year of 2023, indicating that the price war in 2024 was more intense than the previous year. However, unlike the even distribution of price reductions throughout the year in 2023, the number of discounted models in February, March, and April 2024 significantly increased to 29, 49, and 54 respectively, then sharply dropped to a low of 10 models in May, indicating a temporary halt to the price war
<blockquote>
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/a57380bd-9b22-4cf6-aaf5-621239974b43.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/a57380bd-9b22-4cf6-aaf5-621239974b43.png"/>
</blockquote>

IN00356

CP00013

Citi pointed out that starting from the second half of the year, the price war in China's new energy vehicle sector will ease, due to significant reductions in costs of materials such as batteries, thin to negative gross profit margins for joint venture automakers, a decrease in the number of discounted models, etc. Many automakers have reached their limit in terms of price reductions. In the future, only a few large-scale automakers capable of mass production will be able to continue offering discounts

Costs have "reached the lowest point", is the car price war almost over?