Chinese manufacturers are intensifying their efforts to dominate the electric vehicle (EV) market, while European companies such as Volkswagen and Renault face the risk of losing out, according to analysts at UBS.
BYD: Driving Competition with Sustainable Cost Advantage
Leading the charge in the EV space is BYD (ticker: 1211.HK), which holds a sustainable cost advantage of approximately 25% over traditional car manufacturers, states UBS analyst Patrick Hummel.
One of the reasons behind the threat BYD poses to the rest of the EV industry is its Seal battery-electric vehicle. By recently dropping its price to under $30,000, BYD has made this model significantly more affordable. UBS estimates that BYD is currently achieving a 16% gross margin and a 5% earnings before interest and tax margin on the Seal, comparable to the profits made on mass-market internal combustion engine cars globally.
Market Share Projections
According to Hummel, in UBS’s base case scenario, Chinese original equipment manufacturers (OEMs) could witness their global market share increase from 17% to 33% by 2030. On the contrary, European OEMs are expected to experience the greatest loss in market share. The global market share of legacy OEMs might drop from 81% to 58% between now and 2030, Hummel argues.
Tesla’s Growing Market Share
While BYD is often seen as a direct competitor to Tesla (TSLA), Hummel suggests that Elon Musk’s EV company will likely witness an increase in market share alongside its Chinese counterparts.
With Chinese manufacturers like BYD leading the way with their sustainable cost advantage and affordable EV models, the race to dominate the electric vehicle market is becoming even more intriguing. It remains to be seen how European manufacturers will respond to this increasing competition and whether they can regain lost ground in the years to come.
Tesla’s Upcoming Compact EV Could Dominate Affordable Segment
UBS, a global financial services firm, predicts that Tesla’s highly anticipated compact electric vehicle (EV) will have the potential to become a bestseller in the affordable segment. Expected to launch in 2025 or 2026, this new model is set to offer consumers low costs while benefiting from Tesla’s streamlined production processes.
Impact on European Manufacturers
While Tesla’s prospects are positive, UBS analysts have downgraded both Volkswagen and Renault. Volkswagen (VOW.Germany) and Renault (RNO.France) have been assigned a Sell rating instead of Neutral. In light of this, UBS has also lowered the target price for Volkswagen to €100 from €135, while Renault’s target has been revised to €31 from €42.
As a result, Volkswagen shares experienced a 3.2% decline, falling to €127.65 in Germany. Similarly, Renault shares also fell by 4.4% to €35.71 in France.
Volkswagen’s Vulnerability to Chinese Carmakers
According to UBS analyst Hummel, Volkswagen is at the highest risk globally due to the rise of Chinese carmakers. The UBS team estimates that Volkswagen will incur €15 billion in losses and require €30 billion in cash from 2023 to 2027 due to its batteries, software, and Scout EV units.
In an attempt to counter this threat, Volkswagen made a surprising investment of $700 million in Chinese EV manufacturer XPeng in July. However, UBS argues that collaborations between traditional automakers and disruptive startups like XPeng seldom yield successful outcomes.
Renault’s IPO Challenges Amplified
On the other hand, Renault plans to conduct an initial public offering (IPO) for its EV and software unit named Ampere. UBS analysts suggest that BYD and Tesla’s increasing market share in Europe could overshadow Ampere’s IPO, potentially limiting its valuation.
In conclusion, as Tesla’s compact EV prepares to make its mark in the market, European manufacturers must brace themselves for the potential disruption it may cause. While Tesla benefits from streamlined production processes and low costs, Volkswagen and Renault face challenges in maintaining their market footing amidst the rise of Chinese carmakers and the success of established players like Tesla and BYD.
