Competition, lower costs escalate China's EV price war

Chinese electric vehicle (EV) manufacturers have escalated a price war over the past couple of months, mainly prompted by intensifying market competition and falling battery manufacturing costs, according to market participants.

Chinese EV producer Nio, whose sales surged by 31pc year-on-year to 160,000 units in 2023, on 1 April began offering a 1bn yuan ($138mn) package of subsidies to encourage gas-fuelled car owners to trade in their cars for a Nio-produced EV. Fellow automaker Chery on the same day also announced a "10bn yuan subsidy" campaign to offer discounts, coupons and purchase tax credits to car buyers.

Nio, founded in 2014, took the lead in adopting an aggressive money-burning strategy to expand its share in the Chinese new energy vehicle (NEV) market, to take advantage of the country's ambitions to accelerate vehicle electrification. The strategy proved to be unsustainable and the firm faced financial issues around late 2019 when it had accumulated a loss of Yn26bn. This forced Nio to look for investors, and it received Yn7bn from the Hefei municipal government in April 2020.

These promotion campaigns are in response to a plan introduced by the Chinese government in early March to promote the replacement of industrial equipment and consumer goods through large-scale trade-ins, as part of Beijing's efforts to meet its economic growth target. China in early March set this year's economic growth target at 5pc, stable from the previous year's target, but lower than the actual growth of 5.2pc achieved in 2023.

The automakers' promotion campaigns are adding fuel to the flames of competition in the Chinese EV market. China's largest EV producer BYD has reduced prices by as much as Yn20,000/unit for some NEV models to boost sales after the 10-17 February lunar new year holiday, with many of its domestic NEV counterparts, including SAIC GM-Wuling, Neta, X-Peng and Zeekr, following suit by cutting vehicle prices to attract orders.

China has led global EV sales over the past decade, driven by its 2030 and 2060 decarbonisation targets, but the Chinese EV market is facing a higher risk of overcapacity given an increasing number of new participants in the industry, which are called "new car-building forces" in China. There are more than 20 of such companies, with the major ones being Li Auto, X-Peng, Nio, AITO, Leapmotor, Zeekr and Xiaomi.

Chinese technology firm Xiaomi, which designs and manufactures consumer electronics and home appliances, on 28 March launched its first EV model, the Xiaomi SU7, a battery electric full-sized sedan, that marked the firm's entry into China's fiercely competitive EV market. Xiaomi adjusted the debut prices for the SU7 down by more than Yn20,000 at the last minute, in view of the ongoing price war.

Domestic EV manufacturers' promotions are also part of their efforts to compete with vehicles running on fossil fuels, as EVs have not yet gained dominance in the Chinese automotive market, despite increased consumer adoption in recent years. A lack of public charging facilities is the main reason for consumers' dissatisfaction with EVs, especially in the country's third- and fourth-tier cities, as well as rural areas.

The competition between internal combustion engine vehicles and EVs is expected to continue in the longer term. China's growing sales of NEVs — mostly battery electric vehicles — are eliminating gasoline demand by 25,000 b/d, according to Argus estimates. BYD last month unveiled a forecast that China's NEV penetration in weekly sales is likely to exceed 50pc in the coming three months.

Falling battery manufacturing costs resulting from lower feedstock prices have created room for EV manufacturers to make price concessions. Argus-assessed costs for battery cathode active material lithium iron phosphate have fallen by nearly 80pc from November 2022 when lithium feedstock prices hit a record high, to $13.95/kwh currently. Continuous output expansions at Chinese lithium refineries and overseas mining firms have outweighed demand growth from the EV battery segment, causing lithium feedstock prices to fall significantly over the same period. Argus-assessed prices for key battery feedstock lithium carbonate decreased by 80pc to Yn109,500-113,500/t ex-works over the same period.