The thriving of the EV industry requires increasing support of upstream players
Preface
EV industry practitioners regard 2022 as a crucial year of relief for producing critical EV components, a sector that has been plagued by supply shortages for a while. But based on current demand and supply, that relief has been long in coming.
Nascent EV brands like ORA and Geometry, an EV subsidiary under Geely, struggle to get enough fairly-priced chips and batteries to make cars. On the contrary, Tesla, BYD and smaller players like NETA have solidified their market position.
The contrast makes OEMs realize that the EV competition has evolved from the 1.0 era, when OEMs put an emphasis on marketing, into the 2.0 era. During this period, OEMs need to contend with peers in the whole process from supply chain management to aftersales service.
The flourishing of the EV sector is accompanied by the dark side of consumers' complaints. According to 12365auto.com, a website focusing on statistics about car-related complaints in China, NEVs represent the bulk of all complaints recorded on the platform.
The gasoline-powered version of BYD’s best-selling SUV model Song Plus has received 248 consumer complaints by far this year, with the inability to upgrade Over The Air (OTA) being the most-cited flaw. Another 201 complaints were lodged during the same period against Geely's Geometry brand by buyers impatient with the long delivery time. Consumers also filed some 200 reports against Great Wall Motor’s feminine brand ORA over the company's alleged "false advertising."
BYD may fix the software issues on Song models as engineers work on the problem. On the other side, Geometry and ORA have a hard nut to crack as there are no proactive — and effective — measures to deal with the supply chain imbalance.
Solving the chip and battery shortage for Geometry and ORA is more complex. The chip shortage stems from many factors, including “cyclical” problems confronting foundries, the pandemic, booming smartphone and PC sales, and a series of accidents. So there is no better solution for OEMs than waiting.
Supply chain chaos
The rising cost of making batteries has become another headache for carmakers. The spot price of lithium, a major raw material of battery packs, has multiplied tenfold in the past 12 months. Although OEMs signed long-term contracts with suppliers, which somewhat lessens the cost, their gross margins are still eroded significantly.
Last but not least, the Ukraine-Russia war has even exacerbated the problems above. Nickel, a critical raw material for producing some EV cells, has doubled in price since the war began. Other metals like aluminum, zinc and copper have joined the price hike. The spiking oil price also caused rampant inflation. Though almost everything is getting more expensive, most OEMs are not adjusting the prices of EVs accordingly as they don't want to lose potential consumers.
The supply chain chaos led to distinct performances of various EV makers. BYD dominated the market by selling 91,000 units in February, with a YoY growth of 753%. NETA, an EV startup backed by Qihoo 360, surprised observers with 7,117 buyers taking delivery of its cars during the same month, up 255% YoY.
As a result, the company has unseated Nio in February to enter China's EV “New Force,” a club of emerging new energy auto producers that used to comprise mainly XPeng, Li Auto and Nio. In comparison, the sales of Nio, previously the frontrunner of the trio, has declined for four consecutive months.
Analysts attribute the relative success of NETA to its focus on the middle-to-low-end market. The company's hit model is NETA V, an SUV whose prices range between a mere CNY 60,000 (USD 9,508) and CNY 80,000. This affordable model earned lots of recognition from consumers with limited budgets and helped democratize EVs to some extent, just as Wuling’s MiniEV did.
Together with BYD's hatchback Dolphin, NETA V has generated buzz in the niche market. On the whole, China's EV market is evolving from a “barbell-shaped” structure into a shape more resembling a “spindle”— meaning that the mid-market segment will become the mainstay.
NETA also shows overall product strengths relative to the modest sticker prices of its models. NETA V Pro, a compact car known for its performance-price ratio, possesses functions like Level 2 driver assistant, Automatic Parking Assistance (APA) system, remote parking, and OTA upgrade capability that consumers often expect to find in higher-priced models.
The company also built a solid relationship with players from the EV ecosystem. It received strategic investment from top cybersecurity software provider Qihoo 360. NETA also signed an agreement with Huawei, AI chip designer Horizon Robotics and CATL to sharpen its competitive edge.
Bottom line
In all, China's EV market has evolved from the 1.0 era, when practically all the EV companies concentrated on growing sales and attracting capital. To do that, BYD, Wuling’s MiniEV and Nio, XPeng and Li Auto were all busy opening new stores, delivering cars and trying to differentiate their offerings.
But the good times didn't last. Since the start of 2022, the demand for low-to-middle-end vehicles has gathered momentum, the sales of medium-priced models started to pick up, and prolonged supply chain bottlenecks have left EV makers struggling to keep up with the increasing demand.
Throughout this process, some OEMs lost market share. This will prompt EV contenders to upgrade their own capabilities, to become ready for new challenges presented by the industry’s 2.0 era. This will partly require them to be dedicated to tackling problems from the upper reaches of the industrial chain. OEMs have to connect with and engage suppliers more closely. Some of them are reaching out to foundries to get access to chips; others selected second and third battery suppliers to secure supply.
In sum, in the new era, EV makers will be moving up the industrial chain to integrate more deeply with upstream players. Whether this movement will be conducive to the industry, in the form of, say, less strain on production and delivery, remains to be seen in the months to come.