As mainland China backs away from its zero-COVID policy and loosens restrictions, business optimism and a slight return to normalcy are welcome changes for citizens and investors.
One large area of the Chinese economy that will be impacted is the manufacturing sector, and the auto industry in particular. China has the largest auto market in the world and sells by far and away the most EVs of any country.
COVID-related disruptions — such as lockdowns of entire cities or plant closures — have been major disruptors for the auto industry. Just last week a major plant for Volkswagen in Chengdu was shut down, though it reopened a few days ago.
“It has been a nightmare,” Wedbush senior analyst Dan Ives told Yahoo Finance regarding COVID's impact on automakers in China. “I think you're starting to see cracks in the armor for the first time in many years and obviously competition is increasing in the EV land, and I almost call it a 'Game of Thrones' going on between Tesla and others, and I think that's the heart and lungs of the EV story — there is pressure on the automakers and it is a storm to navigate.”
Tesla (TSLA), which is extremely levered to its China operations for both domestic and international market supply, has had its share of issues in the past year in China. In addition to COVID-related shutdowns in the spring, now the automaker is facing demand-related issues, leading to reported plant output cuts, price cuts of its vehicles in China, and even the addition of insurance subsidies.
“You're starting to see some demand cracks,” Ives said about Tesla. “I don't believe the longer term story in China is thrown out the window, I just think they're navigating now some really, for the first time in years, some growth challenges, they're cutting prices, ... some supply chain reductions, and now, we got to see not just in Q4, but 2023, 2 million units, that's the line in the sand globally.”
That two million figure would be the goal for Tesla deliveries in 2023, representing a 50% CAGR (compound annual growth rate) that Tesla internally targets.
Another big U.S. operator in China is General Motors (GM). Unlike Tesla, which operates independently, GM has had to set up various joint ventures with Chinese companies, selling under the Cadillac, Buick, Chevrolet, Wuling, and Baojun brands.
“I think right now, the most underestimated story across automotive is GM,” Ives said, fresh off a visit with GM management in Detroit.
“I think the transformation that [GM CEO] Mary [Barra] and the team are building on EVs, a lot of skepticism, but I believe we’re going to see two or three years from now and view it as a pivotal chapter for the company, because they ultimately own that food chain,” Ives said. “You start to do some math, I believe this could be a stock that gets significantly re-rated, and even if China for them is insignificant, in terms of what the conversion opportunity for GM is - there is a renaissance in the 313 area code between GM as well as Ford.”
While GM, Tesla, Ford and domestic automakers like Nio (NIO) and BYD duke it out in China, Ives believes the pie is big enough for all the automakers to eat. That’s how big the China market opportunity is, with its over 1.4 billion citizens.
“It is not a zero sum game and I think that's important,” Ives said. “You will see a lot of vendors continue to benefit; you still have conversion in terms of overall EVs, and the opportunity for multiple, different competitors.”