Wall Street is pouring money into China’s new energy vehicle sector at an astonishing rate.
Some analysts have argued that the Chinese start-ups at the center of the frenzy are merely riding on the coattails of Tesla– that if it wasn’t for the California-based pioneer paving the way; these companies would be mere shadows of themselves.
Michael Dunne, a former GM exec and founder of consultancy ZoZo Go, said, “If I was the founder of [these companies] I’d be sending really generous early Christmas gifts to Elon Musk.”
“I’m not saying that the companies are in terrible shape – quite the opposite,” he added. “But on their own merit, without Tesla, they would be operating hand to mouth.”
Dunne is of course not the only voice to express this sentiment — many have attributed Wall Street’s sudden interest in China’s NEV market to Tesla’s sudden rise.
Riding the Tesla wave?
Proponents of this position tend to argue that on the one hand, as the industry poster child, Tesla has helped educate consumers and advance the acceptance of electric vehicles. At the same time, the company’s near-900-percent gains inside a year, have caused almost every investor on the planet to obsess over what the next Tesla could be?
And, while both statements are largely true, the belief that the likes of Nio, Li Auto’s and Xpeng, somehow owe their success to Tesla, is entirely erroneous. First, this potion fails to recognize the standalone merits of the companies themselves. But, more importantly, it fails to understand the driving forces behind what is essentially a global revolution.
Elon Musk – while no-doubt a genius and a pioneer – is not responsible for the success of the entire EV industry any more than Mark Zuckerberg is responsible for the success of the internet.
The trend towards EV’s
The great march towards vehicle electrification is driven primarily by the recognition that climate change represents the greatest existential threat to our species and environment. That in order to curb greenhouse gas emissions, the world must move away from carbon-based energy.
The industry has known this for some time of course, but a number of factors have impeded its ability to transition. The main issue has been the cost and performance of the battery: Historically, costs were high, performance low, and charging infrastructure – extremely limited.
Over the past decade, however, the landscape has shifted considerably. Battery prices are now a mere fraction of what they were, range has improved, and charging infrastructure is steadily increasing. Lithium-ion battery pack prices for example – which were above $1,100 per kilowatt-hour in 2010 — have since fallen 89% in real terms to $137/kWh. Meanwhile, the majority of new EV’s now have a range of 400km, making them ideal for intra-city and inter-city commuting.
At the heart of this transformation lies the global sea change in energy policy, underscored most notably by the Paris Climate Agreement. Following the signing of this landmark agreement, some governments have gone on to make further commitments and laid out detailed roadmaps as to how they will get there.
As part of China’s pledge to achieve carbon neutrality by 2060 with peak emissions by 2030, policy leaders in Beijing have positioned EV’s at the center of their strategy. Building on a decade-long policy of subsidies and an impressive infrastructure rollout, the aim is to have electric vehicle sales comprise 20 percent of all new car sales by 2025, rising to at least 40 percent by 2030.
The future of the EV market
According to market analysts, Beijing’s targets are entirely achievable.
Last year, against the backdrop of the COVID-19 pandemic which notably decimated global car sales, electric vehicle sales in China grew 12 percent. This year, the China Association of Automobile Manufacturers projects that EV sales will rise more than 30 percent to 1.8 million units.
Early indicators show that the year is already off to an explosive start with monthly EV sales registering their sixth consecutive record in January. The three homegrown startups singled out by Wall Street, were amongst the best performers – posting year-on-year sales growth of over 350 percent each.
A survey of 500 investors and traders discovered that Nio, founded less than seven years and boasting a market cap nearly twice that of Ford, is the favored Chinese EV stock pick for 2021. Of the respondents, 62 percent said Nio will grow the most by the end of the year.
The Shanghai-based startup, backed notably by Beijing to the tune of $1 billion, recently announced plans to expand production and enter the European market. Industry expert and CEO at Automobility Limited Bill Russo said that as the EV market continues to grow, Nio is “well-positioned” to capture a sizeable chunk of it.
Estimates vary regarding the expected growth of the global EV market. Morgan Stanley estimates growth will stand at over 50 percent, while London-based information broker HIS Markit puts the figure closer to 70 percent.
The reason why Wall Street is bullish on the EV market – and the Chinese EV market in particular – is because all the available data points to the same outcome. Namely that 2020 was only the beginning of a very long electric vehicle adoption cycle. The best is, therefore, yet to come.
