The sharp decline in Chinese auto sales is flashing a red light on the health of the Chinese consumer. May sales figures, released this week, were abysmal, with a 17.6% year-on-year decline in wholesales and a 12.5% decline in retail sales according to the Chinese Passenger Car Association. Lest one believe that May was some sort of aberration, I would note that auto sales in China have now fallen for 12 consecutive months. This is a trend, and certainly a negative one for the global automakers.
Against the backdrop of slowing industry sales in China, electric vehicles (BEVs) have been held up by some as the beacon of a greener global auto industry. Momentum in BEV sales has slowed dramatically this year, however, with a gain of only 5.1% in sales of what the Chinese government refers to as new energy vehicles (NEVs; pure battery, hybrids and plug-in hybrids ) registered in May’s sales figures. Yes, NEV sales have risen 58% in China in the first five months of 2019 compared with the year-ago period, but, as any stock chartist can tell you, the most recent data is the most relevant.
These figures include only domestically-produced vehicles, so do not yet include sales of Tesla, which is building its Gigafactory 3 in Shanghai. As with Tesla in the U.S., though, the biggest negative factor for demand for BEVs is the reduction in government suisses. Teslas bought in the U.S will be eligible for a tax credit of only $1,875 beginning on July 1, down from the current level of $3,500 and the $7,500 that prevailed from 2012 until December 31st, 2018.
The reduction in subsidies in China will be much more draconian, though. According to the Financial Times, the subsidy for Chinese BEV purchases that currently averages 70,000 RMB ($10,100) will decline to 25,000 RMB ($3,607) by the end of this month. My research shows that this change will take place on June 22nd, so while the Chinese market might see a bump in BEV sales in before the deadline, I believe sales of BEVs will show a marked year-on-year decline in the second half of 2019.
This is terrible timing for Tesla, but Elon Musk has never been known for his tactical acumen. No, Tesla and the electric vehicle industry–including the estimated $10 billion raised by Chinese BEV start-ups like NIO, Byton, Xpeng, WM and others–have been given massive valuations by public and private investors on the back of a dream of a future of green cars.
There is only one problem with this dream: someone has to buy the electric cars the OEMs are scrambling to produce. As subsidy-driven demand dries up, consumer appetite for BEVs is just not there on a global basis. So, as Tesla stock has plummeted in 2019 based on the new narrative that the company will never achieve market dominance and faces permanent relegation to niche-player status, that is a reality that is reducing elevated valuations across the space.
Tesla shares have fallen 45% since Musk’s infamous funding secured tweet on August 7, 2018. NIO shares, which came public to much hoopla at $6.16 a month after Musk’s tweet, today hit a new low of $2.35 per share, an absolutely brutal post-IPO performance.
So, that’s a lesson I have learned the hard way in following autos for the past 27 years. Cars are consumer goods. No matter how much tech is put in them–and the established automakers still haven’t matched the coolness of Tesla’s UX seven years after the launch of the Model S–someone has to buy them. When the value proposition for any car model is reduced, in this case by a combination of lower gasoline prices and the reduction in government subsidies, finicky–and extremely price-sensitive–car buyers just won’t buy it. .
This is true everywhere. Decidedly “green” Germany saw an electric car penetration of just 2% last year. Except Norway, which saw an amazing 49% penetration for BEVs in 2018, there simply is no public groundswell for electric cars in any of the world’s auto markets. The numbers are clearly showing this, but delusional investors are losing billions of dollars on these misguided bets.
China, which is slightly more important to the global economy than Norway, is the true bellwether here. China’s electric car boom has already started to run out of gas. The tens of billions of dollars spent by the global automakers on battery and electrified drivetrain technology are not going to receive an adequate return.
That’s not hugely bearish for GM, Ford, VW or Toyota, as those companies receive low P/E multiples from the stock market, anyway. For former high-flyers like Tesla and NIO, though, the lack of a BEV revolution could be catastrophic, and, ultimately, fatal.