Niche Electrical Vehicle Competition
On May 14, President Biden announced a plan to lift tariffs on various items imported from China. In one of the key sectors, import tariffs on electric vehicles (EVs) manufactured in China will be increased from 25% to 100%. The official announcement stressed that this was the feedback of the concerns of American Car Manufacturing industry might be affected by the fast growing China EV manufacturing industry due to unfair subsidization, despite the fact that only 1,700 Chinese make EVs exported to the US by the first quarter of 2024. EVs, the hotspot of economic growth for the coming years, are competing head-to-head between the US and China: the International Energy Agency forecasts 17 million electric vehicles to be sold in 2024 globally. Since there will be one electric car per five cars sold in 2024, nobody can ignore the importance of electric cars.
TESLA, BYD, VW, GEELY, and GAC (Guangzhou Automobile Group) are among the most well known EV brands/markers, but there are still lots of startups and SME trying very hard to gain a slice of this rapidly growing market. There were even some who wished to achieve a legendary status on EVs like Tesla and BYD. A Vietnamese EV maker caught the attention of investors as their stock price in NASDAQ soared 60% within a week of the new tariffs announced, giving hope that this small maker might benefit from US-China tension.
VinFast: Legendary or Just a Gold Rush Story
VinFast was founded in 2017 and is part of VinGroup, the largest conglomerate in Vietnam. In 2019, VinFast started selling products to the domestic market after setting up a production plant in Hai Phong, Vietnam. With support from VinGroup founder Pham Nhat Vuong (the richest man in Vietnam), VinFast announced plans in 2022 to build a plant in Chatham, NC that will produce 150,000 electric vehicles by 2026. NASDAQ listed VinFast (NASDAQ:VFS) a month after the ground breaking ceremony for the Chatham plant in July 2023. The market cap of VinFast reached $200 billion at its all-time high within two weeks of its IPO (larger than Boeing's market cap). As with fireworks, this high value was not sustained; stock prices plunged rapidly and remained at 25% of IPO levels for months.
Headwind News Keeps on Coming
VinFast's Hai Phong plant was set for 300,000 cars per year, but only 35,000 cars were sold in 2023. It was later reported that 75% of these were delivered to a taxi company affiliated with VinGroup. The deal accounted for 82% of VinFast's revenue, so their ability to sell was questioned. Despite low sales in 2023, the company set an ambitious sales target of 100,000 cars worldwide in 2024 (more than double the sales in 2023) and 750,000 by 2026 when Chatham is completed. However, the deliveries in Q1 2024 were just about 10% of the annual target.
As a result of a construction site check recently, some media criticized VinFast's commitment to Chatham production, commenting that "No stone was turned after the groundbreaking ceremony." In response, VinFast claimed that their Chatham plant construction was still on track; with the potential to produce 150,000 cars per year, by 2025.
To expand its sales, VinFast was negotiating with India and other ASEAN countries like Philippines and Indonesia to set up factories or dealerships there. Aside from the $11.4 billion investment accumulated, Mr. Pham (the owner of 98% of VinFast) promised another $1 billion to the company. In order to ease negative cash flow due to low sales targets and massive investments in new production facilities and sales support down the road, Mr. Pham (the owner of 98% of VinFast) promised to inject another $1 billion. After the book closed for 2023, VinFast reported a net loss of $2.4 billion. In the last few days, the stock price rose 60% from the historical low by riding the sentiment to new tariffs on EVs made in China.
Big VisionsDifficult to Fulfill
There are a number of emerging electric vehicle manufacturers who share VinFast's story. Several articles and studies have summarized the hurdles that EV start-ups or new comers face, especially those with very limited experience within the automobile industry, including Supply Chain Issues (a handful of serious suppliers for core parts, e.g. batteries, critical electronic components etc.); Lack of production management and knowledge; Too small or too crowded domestic market for sales ramping up in start up stage; Heavy initial investment for big capacity (instead of progressive expansion from small) to achieve profitability promised; Demanding and never ended new capacities roll-out plan domestic and overseas requested as time to market was an critical wining factor; Price sensitive and easily influenced by other big players which could hurt the margin of the company overnight (when Tesla sneezes, every EV makers catch a cold); Augment products/services (charging posts, in car entertainment or navigation system etc.) expectation increase rapidly. These are only a few critical factors that EV manufacturers need to address to avoid failure, but not enough to be successful.
Money, Money, and More Money …
According to some trade reports, more than 300 companies worldwide are registered as EV makers in the EV market, which is a promising market. As a result of the heavy running stream, the number of sustainable enterprises was in doubt.
As icons of EV makers, Tesla and BYD could make reasonable profits from their businesses: Tesla reported $13.4 billion net profit from 1.8 million cars sold in 2023. In 2023, BYD sold 3 million cars (including 1.5 million EVs) and earned RMB 30 billion ($4.7 billion). XPENG (XPEV), LI AUTO (LI) and NIO (NIO) are the famous pure electric vehicle makers in China. Their financial reports in 2023 could reflect the situation of smaller makers in the industry within the country: LI AUTO sold 376,000 cars and earned RMB 11.81 billion ($1.66 billion): a first for the company since volume production began in 2019. XPENG delivered 141,000 cars with a net loss of RMB 10.38 billion ($1.46 billion) during the same period; NIO sold 160,000 cars with a loss of RMB 20.7 billion ($2.9 billion). Therefore, both makers require capital in order to become profitable.
As the EV arena has not reached the final round yet, it is expected that many new players will join the game. However, players require huge amounts of investment to stay afloat or else would be wiped out.
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