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ESG & the Rise of Electric Vehicles

Investors are lining up for ESG-friendly investments in the transportation sector

As the world moves closer to a low-carbon - and perhaps one day even a no-carbon - automotive future, electric vehicles (EVs) are increasingly seen as an attractive (and eventually low-cost) way to reach this goal. The challenge from an environment, social and governance standpoint is primarily in how EV manufacturers will be able to ensure that their supply chains also remain committed to reaching these goals. That concern aside, investments in EV manufacturers are very much in the eye of environment, social and governance (ESG) investors everywhere, with interest that is not only sustained but increasing dramatically on an annual basis.

Electric vehicles continue to attract increasing interest among global investors, due to date in large part because of the meteoric rise of Tesla. With China’s focus on becoming carbon neutral by 2060 and growing its leadership in the EV space, it is no surprise that local EV makers also have emerged and are becoming a disruptive force in the industry (see chart 1).

Yet despite requiring global original equipment manufacturers (OEMs) to enter the Chinese market through a 50%-50% joint venture (JV) structure with local companies, China arguably still lags behind foreign firms in internal combustion engine (ICE) technology. On the other hand, this is becoming less relevant as the transition to the EV era continues. Instead, it is now imperative for China’s leadership to ensure that the country seize the opportunity to reset and dominate this key sector and its technology, especially with China’s EVs now able to achieve the twin goals of reducing carbon emissions and creating new national champions. In this article, we will explore the progress made to date by Chinese EV brands, their advantage versus global manufacturers, and a quick comparison of some EV dedicated platforms.

The Chinese EV market is the largest globally due to a combination of robust government support, early investment in the sector, license plate restrictions on ICE cars, and more stringent environmental regulations. The total Chinese auto market comprises JVs between global OEMs) and national companies, such as Bayerische Motoren Werks (better known by its acronym BMW) and Guangzhou Auto, global EV names like Tesla, which recently increased production at its Shanghai plant, as well as domestic champions like BYD and Geely, along with local EV start-ups including Nio, Xpeng and Li Auto, all three of which have successfully listed in US markets.

Chinese EV makers benefit from a comprehensive, well developed domestic value chain. China’s strength in key components such as batteries (including important battery raw materials) and other parts such as electric motors. These advantages convinced Tesla to start production in the country specifically to enjoy these benefits. National EV makers also can capitalize on favorable government policy, consumer readiness to embrace these vehicles, and access to lower-cost parts by virtue of having a strong local market presence (chart 2). We examine below a few of the manufacturing capabilities of key EV players in China.

The growth of Tesla’s battery capacity is a core component of its long-term growth pillars, which include vehicle sales, stationary storage, and acting as a supplier to third parties. In the future, the company targets 2TWh of battery capacity and 20m units annually, figures twice the size of Toyota’s (the largest global automaker). Tesla’s Shanghai factory is the company’s first car manufacturing site outside the USA and a key part of Elon Musk’s ambition to boost sales in the world’s largest auto market while also avoiding high import tariffs on US-made cars.

The new plant, known as Gigafactory 3 (chart 3), is the first fully foreign-owned auto manufacturing plant in China. Tesla will produce mainly the Model 3 (sedan) and Model Y (compact SUV) here for the Chinese market. Tesla’s Model 3 was the top-selling plug-in car in 2020, with 19% market share, according to CNBC.1 The goal is to ramp up production to as many as 500k vehicles per year in two to three years’ time. Given that roughly 70% of Tesla’s components for production in China are still sourced from overseas, it makes sense to localize production to improve margins or lower average selling price (ASP), depending on the strategy that Tesla chooses in China.

BYD is a diversified manufacturer, principally engaged in automobile business, which includes both ICEs and new energy vehicles (NEVs) production, handset components and assembly services, and rechargeable battery and photovoltaic business. The company also actively promotes its urban rail transportation business segment. BYD has been in the battery business for a quarter century with its self-owned technology, and is a leading edge in lithium iron phosphate batteries. It recently introduced a super lithium-ion battery at a lower cost and with a higher intensity, known as the blade battery. Its advantages include better safety measures, longevity, and an extended travel range. The battery pack cost may average 30% less than comparable nickel cobalt manganese oxide batteries, according to the company. It aims to shift all existing battery electrical vehicle (BEV) models to blade battery use by 1Q21 and launch new low-cost, plug-in hybrid electric vehicle models in the same time frame. BYD is also the only automaker with in-house insulated gate bipolar transistor (IGBT) technology, an ideal switching transistor for high voltage applications in NEVs, especially was the industry focuses on energy saving and cost saving modes. The popularity of BYD’s Han model indicates that its IGBT4.0 technology is already well accepted by the market.

Nio’s vehicles are manufactured in partnership with Jianghuai Automobile Group (JAC) at its Hefei manufacturing plant. JAC is a major state-owned automobile manufacturer in China that also has a partnership with Volkswagen for manufacturing EVs. Nio pays JAC for each vehicle produced. It collaborates with Tencent, Baidu, Mobileye, and CATL. Nio has established Advanced Manufacturing Technology Centers in Nanjing for pilot production and motors, in Kunshan for inverters, and in Changshu for energy storage systems. Nio also launched a unique Battery-as-a-Service (BaaS) subscription model and set up a battery asset company with CATL, Hubei Science Technology Investment Group, and a subsidiary of Guotai Junan. This entity is dedicated to purchasing and owning battery assets, as well as to leasing batteries to users who subscribe to the BaaS model. This permits purchasing EVs and subscribing to using battery packs separately (Rmb980/month with free swaps at their 143 battery-swapping stations in more than 60 cities in China vs one-off Rmb100k battery cost) to improve consumer affordability and expand its addressable market (chart 4).

Li Auto is unique among its peers in that it uses EREV (extended-range electric vehicle) technology (chart 5). With regard to engineering, in addition to a 40.5kWh battery that offers a range of 180km according to the New European Driving Cycle (NEDC) range, the Li One carries a 1.2L three-cylinder combustion engine that charges the battery, and has a 45-liter capacity tank. These are similar to Nissan’s e-Power hybrid system, in that a gasoline engine drives a generator, which then powers e-motors, which in turn drive the wheels.

However, in contrast with the Nissan setup, the Li Auto EREV powertrain also includes a much larger EV battery. allowing for charging from a socket. This hybrid solution helps eliminate consumers’ “out of range” anxiety due to lack of charging infrastructure. With an 800km driving range. And users can keep the car running when filling up at gas stations. Relative to performance, Li Auto’s Li One is similar to an EV, offering instant torque and acceleration from 0 to 100km in 6.5 seconds. Due to the smaller battery, the cost is 25% lower than that of a comparable BEV (according to the company’s prospectus). This price point should give Li Auto a clear path towards breaking even. Li Auto’s Changzhou factory’s current capacity is 100k units annually and can be expanded to 200k double that amount.

XPeng’s vehicles target the mid-to-high end of the mass market and are characterized by a plentiful array of ‘Smart EV’ features, including voice recognition, large infotainment displays, enhanced connectivity, and various advanced driver assist systems (ADAS) such as radar-assisted adaptive cruise control, lane centering, and automated parking (chart 6). Its vehicles are noted for having the longest range in their respective price categories, with the P7 providing up to 706km of NEDC driving range (which is more than that offered by the more expensive Tesla Model 3). XPeng strategically established two Smart EV platforms (known as “David” and “Edward”) that are scalable for both SUVs and sedans with different wheelbases within a wide range. This allows the company to develop new models in a timely and cost-efficient manner. Currently available production capacity includes 150,000 units annually via its venture with Haima and another 100,000 units at the wholly owned Zhaoqing facility. As of 07 May-21 Xpeng had 1140 branded supercharging stations, several of which are self-operated.2 Xpeng also offers a charging network connected to more than 200k third-party charging stations consisting of large-scale providers such as TELD.

In conclusion, we believe that the future for China’s EV industry is bright, especially in light of the government’s consistent support, strong local supply chains, a huge easily addressable and educated market, and a first-mover advantage. Chinese EV start-ups have demonstrated their ability to hold their own against international competition and the product offerings now seen look more competitive when compared to those of the ICE era.

Although challenges, such as lack of charge stations and affordability issues, still exist, China nonetheless has the greatest chance of success, driven by cooperation between the state and private enterprise to roll out charging infrastructure and solve teething grid issues as long as EVs remain a key agenda for party leadership. Moreover, falling battery costs enabled by improving technology and China’s access to raw battery materials all combine to ensure that the price of EVs will become more economically viable for the public.

EVs also show signs of becoming the preferred vehicle of the next generation, and are enthusiastically embraced by ESG investors and governments that welcome non-polluting technology alternatives and regulations to limit non-disposable or non-renewable products, both of which EV manufacturers favor. As environmental impact and liability issues become greater concerns worldwide, many drivers and companies see the switch to EVs as only a matter of time.

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