Will Chinese electric vehicles (EVs) win globally?

At a breathtaking speed since 2020, China has turned from a net importer into the world's largest exporter of cars. Following the latest addition of BYD Seal (<USD30k EV) to the UBS EV Teardown series, we deep dive into BYD, the latest-gen model from China's number one carmaker, to help better understand its technology, supply chains and cost structures. Why does this matter now? BYD and other leading Chinese OEMs are set to dominate the global automotive market with high-tech, low-cost EVs for the masses, hereby accelerating worldwide EV adoption – this is amid the EV transition of legacy original equipment manufacturers (OEMs) which is progressing at a moderate pace. A more challenging China macro-outlook could even intensify globalisation efforts of those OEMs that can afford it. 

Electric Vehicle
Source: UBS

Cost leadership

Even with growing trade barriers in mind, there is a sustainable ~25% cost advantage for BYD over legacy competitors, bearing the potential to disrupt legacy OEMs on their home turfs. We expect Chinese OEMs to double their global market share by 2030. We estimate 16% gross margin and 5% EBIT margin for BYD Seal, similar to profits made on mass-market combustion engine cars globally. Compared with mass EVs from legacy OEMs, BYD Seal is the better and much cheaper car, thanks to high vertical integration that leverages BYD's cost lead in battery cells, vehicle integration, powertrain and electronics modules. Connectivity and advanced driver assistance systems are also state of the art. 

In contrast, mass EVs from typical legacy OEMs have a much lower degree of vertical integration (we estimate about 30%). When it comes to leveraging the cost advantage in China, BYD can use its China capacity as global production hub, whereas legacy OEMs are just JV partners (usually 50% or less) so that using China capacity to serve the global market is a financially substandard choice. Nonetheless, we expect a handful of Chinese EV leaders to expand their production footprint globally, with Europe being a top priority.

Chinse EV
Source: UBS

Globalisation of Chinese OEMs – how will it play out?

Europe is the biggest potential win for Chinese OEMs, for several reasons:

  • Largest and highest-mix market next to the US, which got ringfenced by IRA;
  • Fast-growing EV market with the perspective of becoming 100% electric by 2035;
  • No local European disruptor companies, just legacy OEMs transitioning to EV era at more or less moderate speed;
  • High segmental overlap with China, i.e., the same vehicle categories (small and compact crossovers and SUVs are the most popular segments in both regions);
  • Cost advantage for Chinese OEMs that will be very difficult (if not impossible) for European OEMs to replicate

For legacy OEMs in Europe, the risk of being disrupted on the home turf is very high.

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