Recently, Donald Trump made headlines in the media when he warned that there would be a ‘bloodbath’ if he lost the US elections. The bloodbath Trump was referring to? The threat American car companies face from Chinese auto players. Trump promised a 100% tariff on auto imports if he was elected.
Foreign companies are convenient villains for politicians running for election. US President Biden and Donald Trump have been trying to outdo each other in sounding tough on China in particular. So Biden in response, imposed new tariffs on Chinese products on May 14, including a 100% tariff on Chinese electric vehicles (EVs).
Biden said, “The competition hasn’t been fair. For years, the Chinese government has poured state money into Chinese companies. This is not competition, it's cheating”.
It is not just the US that is worried about cheaper, technologically advanced Chinese EV cars. In Europe, almost a fifth of the EVs sold last year were made in China, a share expected to reach 25% in 2024. The Chinese presence is being felt in India as well. Two major Chinese EV players, BYD and MG Motors are among the fastest-growing EV manufacturers in India.
Will high import taxes by the US shift China’s EV plans to India and heat up the competition in this segment? Let’s dive in.
In this week’s Analyticks,
- Chinese cars come for everyone: Can China's EV makers disrupt the global auto industry?
- Screener: Auto stocks outperforming the sector with the highest revenue and net profit growth in Q4FY24
US decides ‘prevention is better than cure’, limits Chinese EVs before they grow
On May 14, US President Joe Biden imposed a big tariff hike on Chinese products, expected to affect around $18 billion in yearly imports from China. The highlight was tariffs on Chinese EVs quadrupling to 100% to protect domestic auto companies.
US raises tariffs on Chinese EVs to 100%
When it comes to pricing, it's very hard to beat Chinese EV makers. China's EV edge is not just about low wages - it dominates the supply chain for a key, critical technology, lithium-ion batteries. China holds 85-95% of production capacity for major battery components. And subsidies by the Chinese government significantly helps bring down costs.
These advantages have helped China corner the market: it dominates the global electric vehicle industry, accounting for 60% of EVs sold worldwide
One example of a value-for-money EV is BYD’s sub $10,000 Seagull electric car. The car undercuts the average price of an American EV by more than $50,000. Even with tariffs, Seagull will be the cheapest EV in the US.
India is no different when it comes to the threat of Chinese EVs. India already has two Chinese EV makers selling here: BYD, which imports from China, and MG Motors, which manufactures with a local partnership with the JSW Group. With the US imposing high tariffs, analysts are worried about China trying to storm the Indian market.
The Indian government had previously reduced the import duty of EVs to 15% from 100%, and required that companies make a minimum investment of $500 million to start local manufacturing. Chinese companies can avoid tariffs completely if they manufacture locally via joint ventures.
One example of this is Chinese EV startup Leapmotor partnering with the third-largest carmaker Stellantis, which owns several brands including Citroën, Fiat and Jeep. Stellantis is considering manufacturing electric vehicles from its Chinese joint venture partner Leapmotor at its Tamil Nadu plant.
The company is planning a small EV, T03, and an SUV, C10. If launched, the price of T03 would be below Rs 6 lakh while that of SUV C10 would be below Rs 15 lakh.
Chinese players offer EVs across price segments
At less than Rs 6 lakh, T03 can easily undercut MG Motor’s popular MG Comet, which is priced at Rs 7 lakh (ex-showroom New Delhi). And the SUV C10 will give tough competition to top-selling EV models from Tata Motors and Mahindra & Mahindra.
Currently, Tata Motors holds over 70% of the EV market, followed by MG Motors, Mahindra & Mahindra, Citroen and BYD. Analysts expect Chinese players to give Indian EV makers like Tata Motors a run for their money.
One factor that has been helping EV sales in India is the FAME subsidies, which reduces the prices for an EV buyer. But this can change with the new budget allocation in place.
India cuts EV subsidies, while the Chinese government pumps money into EV manufacturers
In the interim budget 2024, the Centre cut the allocation for its FAME scheme by 44% to Rs 2,671 crore. FAME 2, which ended on March 31 was extended through a new scheme, the Electric Mobility Promotion Scheme (EMPS), to promote the sale of electric two-wheelers and three-wheelers in the country. Notably, four-wheelers were left out of the list. Car makers will have to rely on the Auto PLI scheme (outlay of Rs 25,938 crore) to reduce their costs.
In India, the Income Tax department allows the buyer to claim tax savings of up to Rs 1.5 lakh ($1,800) on interest paid on a loan made to purchase an electric car. This is small potatoes compared to the US, which gives consumers a $7,500 (Rs 6.2 lakh) clean-vehicle tax credit while China offers $4,180.
China is also doubling down on EV subsidies. China spent roughly $173 billion in subsidies to support the new energy-vehicle sector between 2009 and 2022.
There have also been instances of the Chinese government pumping money into struggling companies—in one case, giving the equivalent of $27.5 million to a company that had sold fewer than 2,000 cars in the first quarter of 2024.
With such generous government subsidies, Chinese automakers may even be competitive with the tariffs in place. Research firm Rhodium Group says that Chinese EVs can extract higher profits in Europe, as price wars back home push their margins to the floor. The Seal U model makes BYD a $15,300 profit in the EU, but a mere $1,400 profit in China. So the expected EU tariff (15% to 30%) isn’t going to deter automakers from shipping to the EU.
Given all these moving parts, the Indian government may have to rethink its strategy regarding EV subsidies and tariffs. This will become especially important once JVs from Chinese companies pick up.
While the option to form JVs with Chinese companies is also available to Tata Motors and M&M, this route may not go down too well with Indian consumers as sentiment towards Chinese companies has soured. We will have to wait and see if the Centre will put the brakes on Chinese EVs, and how the competition will pan out.
Screener: Auto stocks outperforming the sector with the highest revenue and net profit growth in Q4FY24
Auto parts & equipment stocks have the highest revenue and net profit YoY growth in Q4
As we enter the final leg of the Q4 results season, we take a look at the automobile & auto components stocks with the highest YoY growth in revenue and net profit. This screener shows automobiles & auto components stocks that have outperformed the sector over the past month, and had the highest revenue and net profit YoY growth in Q4FY24.
The screener is dominated by stocks from the auto parts & equipment and commercial vehicles industries. Major stocks that appear in the screener are Jupiter Wagons, JBM Auto, UNO Minda, Samvardhana Motherson International, TVS Motor, Endurance Technologies, TVS Holdings and Gabriel India.
Jupiter Wagons has the highest YoY growth in revenue and net profit at 56.7% and 168.2%, respectively in Q4FY24. Revenue rose on the back of the commercial vehicles company’s order wins worth Rs 1,530 crore in the railways, defence and auto equipment manufacturing segments. The sharp increase in net profit was mainly due to a 95.7% YoY reduction in deferred tax.
TVS Motor’s Q4FY24 revenue rose by 25% YoY to Rs 9,998.9 crore, while its net profit grew by 15.1% YoY to Rs 387 crore. Its revenue increased on the back of a jump in sales volumes and the introduction of new products (iQube e-scooter in India and Ronin motorcycle in Colombia) to its portfolio. The 2/3-wheeler company’s net profit rose due to the company’s price hikes during the quarter, and as raw material costs fell.
You can find more screeners here.
