China's EV market share in the EU is only 5–6%, giving plenty of room to grow. (UBS)

This tipping point for auto electrification comes alongside another milestone, with Tesla’s US market share slipping to a record low of just half the market, down sharply from around 62% in the first quarter. By contrast, Mercedes and BMW's third quarter EV sales tripled year-over-year in the US, according to the COX data, while Hyundai, Nissan, and Volvo all saw growth above 200%.

While there are merits to investing in familiar legacy automakers transitioning to EVs, they will likely face challenges making the transition. We think investors seeking global EV exposure should also look to China’s leading EV players:

Pure-play EVs have some innate advantages over legacy automakers. Entrenched automakers are finally delivering competitive EV offerings, but brand loyalty amid early stage EV technology may not be as strong as in the past. An S&P Global Mobility data survey reported half of new EV purchasers (ex-Tesla) in the US went back to an internal combustion engine (ICE) car either as a replacement or for their second vehicle.

The transition for ICE carmakers isn’t easy either, with strikes among unionized workforce in the US right now underscoring both workforce and facility retooling challenges. By contrast, we think pure-play China EV automakers can move faster than legacy competitors in terms of time from EV development to market, while avoiding transition complications and capturing early-mover advantages in technology innovation, particularly with respect to EV powertrain solutions, autonomous driving, and infotainment systems.

China’s EV sector resilience into a slowing domestic economy suggests structural growth. The continued expansion of China’s domestic electric vehicle market in 2023 despite a domestic consumption slowdown points to structural growth in EVs. From January to August 2023, China’s new electric vehicle (NEV) market grew 36% year-over-year, versus just 1.8% for the broader passenger vehicle market. Intense price competition in China for new electric vehicles has continued to push EV prices down and improve affordability. But a key reason for lower prices is lower battery costs, increased local chip sourcing, and growing scale benefits. By contrast, top EV makers in the US have recently signaled more caution on expanding EV production amid higher rates, falling prices and margins, and slowing demand.

China’s EV exports are rising, and will play a greater role in future growth. China’s domestic electric vehicle makers have begun to grow their presence in global export markets, most notably in Europe and Southeast Asia. That has generated concern at the EU Commission, which has launched a probe on alleged Chinese EV sector subsidies and threatened tariffs. We think the risks are relatively muted, with Europe’s own significant exposure to China’s domestic auto market likely to temper any response. So far, China's EV market share in the EU is only 5–6%, giving plenty of room to grow. Our base case is for the EU to harmonize its current 10% import tariff on Chinese auto imports with the 15% which China imposes on EU imports, which we think would not meaningfully deter Chinese automakers.

So, within the Chinese EV value chain, we prefer downstream EV manufacturers with a focus on pure-play EV automakers emerging as domestic market share or innovation leaders. We view the electrification of the auto sector as the first step toward a new decade of smart mobility, with next-gen sensors, battery tech, and artificial intelligence helping to unlock further value for automakers. By 2025, we expect around 80% of all new cars could be equipped with some kind of basic autonomous equipment. Pure-play EV makers rank among a new class of disruptive tech companies that we think can reshape its market and create long-term portfolio value for investors.

Main contributors - Solita Marcelli, Mark Haefele, Carl Berrisford, Jon Gordon, Christopher Swann, Matthew Carter, Jennifer Stahmer

Original report - The dark horse automakers stalking the global EV market, 19 October 2023.