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Should you invest in the Chinese EV sector?

29 Aug 2022

Chinese electric vehicle (EV) makers are leading the global EV race. We share how you can get a slice of the growing Chinese EV sector.

Nikko China EV Cover

This post was created in partnership with Nikko Asset Management Asia Limited. All views and opinions expressed in this article are Beansprout's independent and professional opinions. 

TL;DR

  • Every one out of two electric vehicles (EVs) sold globally today is in China, as automakers such as NIO, Xpeng, Li Auto, and BYD wrestle in the EV market with Tesla. 
  • China’s dominance in the EV market extends across the entire supply chain, as it also has a lead in EV batteries and lithium processing. 
  • With EV sales in China expected to double by 2025, you can get exposure either through single stocks or a basket of stocks via an exchange-traded fund (ETF). 
  • The NikkoAM-StraitsTrading MSCI China Electric Vehicles and Future Mobility ETF (Ticker EVS SP) has performed better than NIO and Xpeng since its listing on the SGX earlier this year.

 

If you have not heard by now, Tesla is no longer the biggest electric vehicle (EV) maker in the world. 

BYD, the Chinese EV company backed by Warren Buffett, has overtaken Tesla as the world’s largest EV maker by sales.

Based on numbers disclosed by the companies, BYD sold 641,000 EVs in the first half of this year, surpassing the 564,000 vehicles sold by Tesla over the same period. 

Elon Musk, who dismissed BYD more than a decade ago, will not be too pleased about this development. 

In 2011, he laughed in a Bloomberg interview saying “Have you seen their car? I don’t think they have a great product. I don’t think it’s particularly attractive, the technology is not very strong.”

The rapid growth of BYD is just a reflection of how the Chinese electric vehicle market has risen in dominance over the past decade.

Let’s take a look at the many other ways they have come to have the last laugh. 

Elon Musk interview

3 reasons to look at the Chinese EV market

#1 China leads the US in EV sales

Did you know that every one out of every two EVs sold globally today goes to China? 

EV sales in China reached 3.3 million vehicles in 2021, more than doubling from the previous year. 

With 6.6 million EVs sold globally last year, this also means that one out of every two EVs in the world goes to China. 

This far exceeds the number of EVs sold in the next largest market – Europe, which saw 2.3 million EVs sold in 2021.

And the US? It’s trailing behind with just 630,000 EVs sold.

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#2 - China leads the US in EV adoption rate

China’s lead in the EV market doesn’t come about simply because of its sheer market size. 

What’s amazing is that in terms of how likely car owners are to pick an EV over a traditional internal combustion engine (ICE) vehicle, China also remains far ahead of the US. 

According to the International Energy Agency (IEA), electric cars represent 16% of cars sales in China in 2021, jumping from just 5% in 2020

This means that for every 100 cars sold in China last year, 16 were EVs. 

Globally, 9% of all cars sold were electric. In the US, it’s just at 4.5%.

Only Europe surpassed China’s level of EV adoption, with 17% of cars sold being electric last year. 

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#3 – China’s dominance is not likely to go away

The Chinese EV market is not only the largest in the world currently. It is also projected to be the largest in the next 5 to 10 years. 

The IEA projects EV sales in China to reach 7.5 million units in 2025, more than doubling last year’s sales. 

With global sales expected to reach 15.7 million units then, China is likely to retain its dominant position in global EV sales.

Europe is expected to follow closely behind with EV sales potentially reaching 5.0 million units in 2025, supported by a continually high adoption rate. 

Yes, EV sales in the US are expected to pick up as more electric trucks become commercially available. 

But the 1.5 million EVs expected to be sold in 2025 remains a fraction of what is sold in China. 

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How China came to dominate the EV supply chain

By now, you’ve probably gotten the idea that China is where a lot of the excitement about the EV market lies.

As the saying goes, Rome wasn’t built in one day. 

Likewise, China’s dominance in the global EV market did not come about by chance. 

Just what did China do right to be ahead of the rest?

#1 – Supportive government policy

To understand why China is so determined to be ahead in the EV market, we need to go back close to 100 years. 

Since the industrial revolution, Western economies had an early lead in the combustion engine automotive market.

When we all think about the combustion engine vehicle, we will probably think about the Ford T model. 

When we think about EVs in the future, will we be thinking about the BYD Han, Wuling Hongguang MINI, NIO EP9, or XPeng G3? 

Chinese EV Wuling.png
Wuling Hongguang embraced by China’s Gen Z (Source: Xiaohongshu)

 

On the demand side, the Chinese government initially provided consumers with generous subsidies amounting to as much as RMB 50,000 for an RMB 250,000 vehicle to incentivise them to switch to EVs.

On the supply side, the Chinese government has more recently set a requirement for automakers to have a certain portion of vehicles sold per year battery-powered.  

From the looks of it, the Chinese government has its eyes set on achieving its target of having electric vehicles represent 40% of all car sales in 2030!

Did you know that Beijing only issues 10,000 permits for combustion engine registrations per month? If you think that this sounds like Singapore’s Certificate of Entitlement (COE) system, you’re probably right! The move is intended to incentivise its residents to switch to EVs.

#2 – Push across the entire supply chain

Elon Musk knows more than anyone else the importance of batteries in the electric vehicle supply chain. That’s why he recently called lithium batteries “the new oil”. 

Musk lithium.png
Source: Twitter

 

To understand how China’s lead in the EV market can be seen across the entire supply chain, let’s start with EV batteries 

Apart from having the largest EV maker in the world, did you also know that the largest EV battery maker in the world also comes from China?

Meet Contemporary Amperex Technology Co Ltd (CATL), the leading EV battery maker which produces three out of every ten EV batteries globally. 

In fact, six of the ten largest EV battery makers are based in China. 

Further up the supply chain, we can also look at lithium, which has become an increasingly prized resource as a vital component of batteries. 

Here, Chinese companies have signed preferential agreements with countries rich in lithium such as Australia. 

And then the lithium ore that is mined needs to be processed and refined. 

Again, China has a dominant position here. It dominates the global production of lithium-ion batteries (a key component for the EVFM industry) and is forecasted to account for almost 70% of the production capacity by 2029. 

Local EV manufacturers are expected to benefit from the ease of access to this important battery component to produce EVs faster and at a lower cost.

China’s strong position across the entire EV supply chain – from lithium processing to battery makers, will likely ensure that it continues to be the leader in the global EV market. 

China's dominance in battery production and supply

2029 Lithium-ion battery chart forecast.png
Source: Nikko AM

#3 – Infrastructure

If you have ever considered buying an electric vehicle, you’d probably be first thinking about the cost of owning one.

Then the next question is often “How would I be able to charge my EV?”

What this means is that for EVs to take off, having good infrastructure in the form of ample charging points is critical. 

As of 2021, China had close to 1.15 million public EV charging points.

In contrast, the US has about 110,000 charging points in total. That’s less than the 240,000 points China installed in the past year alone! 

Alternatively, emerging battery technologies such as battery swap offer innovative ways to overcome infrastructure challenges. 

Imagine being able to drive into a battery swap station, and be able to replace your depleted battery with a fresh pack in less than five minutes. 

Here, Nio is a leader and already operating over 900 swap stations in China. 

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Battery swap station Source: NIO 

What are the risks?

#1 – Policy changes

As with anything that is linked to Chinese regulations, there is no certainty that the very strong support by the Chinese government will continue. 

The Chinese government has already cut subsidies on EVs by 30% this year, and there are concerns that the subsidies might be removed completely by the end of this year.  

What we can draw comfort from is that there are press reports that the Chinese government is in talks with automakers about extending the subsidies. The focus on meeting its carbon emission goals is also unlikely to go away. 

#2 – Ability to expand globally

We will also be looking out closely for Chinese EV makers’ ability to expand into international markets. For example, Nio expects to launch into 25 countries and regions worldwide by 2025. 

Closer to home, we have already seen more EVs on our roads over the past year. Almost one in 10 new cars sold in Singapore in the first half of this year was an electric vehicle! 

Here, BYD ranks as one of the top 3 EV makers by car sales. You might also have noticed one of Stride Taxi's bright green electric taxis run on the China-made MG5 model. 

It does seem like Chinese EV makers are increasing their presence in overseas markets. 

#3 - EV stocks can be volatile

As always, all investments carry risks. Likewise, we should also think about risks when investing in EV stocks. 

This is especially so with many EV stocks perceived to be high-growth. And as we’ve seen from NASDAQ’s close to 30% fall in the first half of 2022, these high-growth stocks can face a significant sell-off when there is an aggressive increase in interest rates. 

Next, there are also risks from investing in Chinese stocks. Apart from the potential policy changes we mentioned above, some investors are also increasingly worried about the health of the Chinese economy. 

Thankfully, the Chinese government has announced various measures to support economic growth, including tax rebates for more industries. 

More recently, China’s Central Bank has also cut interest rates to provide a boost to the economy.

How to get exposure to the Chinese EV market?

If you are thinking of tapping the long-term growth opportunity of the Chinese EV market, there are several ways to do so. 

You can consider looking at single stocks such as NIO, Xpeng, and BYD, which are leading companies in their respective fields. 

But investing in single stocks requires time to do research and you should not be blindly putting your money into these stocks. 

To us, this is something important to note with the volatility in EV stocks we mentioned earlier. Remember, always DYODD! 

You can also consider an exchange-traded fund (ETF), which is a basket of stocks providing broad-based exposure to the theme at a low fee.

Introducing the NikkoAM-StraitsTrading MSCI China Electric Vehicles and Future Mobility ETF (Ticker EVS SP)

In case you have not heard, the NikkoAM-StraitsTrading MSCI China Electric Vehicles and Future Mobility (EVFM) ETF (Bloomberg Ticker EVS SP) provides you with diversified exposure across the value chain of the fast-growing Chinese EV sector.

You would be able to gain access to the structural theme at a low fee while reducing the risks that come along with owning individual stocks.  

The ETF was listed on the Singapore Exchange on 20th January this year, and is available for trading in Singapore Dollar or US Dollar. 

What we found to be quite remarkable is that since its listing, the share price of the ETF has performed better than owning either NIO or Xpeng as single stocks. 

While past performance should not be a guide to future performance, this likely demonstrates the advantages of having diversified exposure! 

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Source: Tradingview

What’s EVFM? 

By now, EVs probably don’t need much further introduction. 

But the ETF also covers the scope of future mobility, which is a broader concept covering the future of transport.

This would include companies involved in autonomous vehicles and ride-hailing services.  

As an owner of the ETF, you will be holding on to a basket of stocks* that include the following:

     EV makers NIO, Xpeng, Geely Auto

     Battery makers CATL, Eve Energy

     Lithium producers Ganfeng Lithium, Tianqi Lithium

*based on the holdings of the ETF as of 1 August 2022

And of course, you’d be able to join Warren Buffett in backing BYD!

The NikkoAM-StraitsTrading MSCI China Electric Vehicles and Future Mobility (EVFM) ETF trades on the SGX with the Bloomberg ticker EVS SP or SGX Stock Code EVS, and can be bought and sold through your usual stock brokerage account. 

Find out more about the NikkoAM-StraitsTrading MSCI China Electric Vehicles and Future Mobility ETF here.

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Cover image credit: Adobe Stock, BBC and Yahoo Finance

 

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