HONG KONG – China’s electric vehicle market is booming, but the country’s hottest EV startups are seeing growing losses even as sales pick up.
Rising battery prices and supply chain delays this year have pushed up costs even more for emerging EV makers. The startups are already burning cash to introduce newer, smarter models—complete with heated seats or battery-swapping services—to gain a foothold in the world’s largest auto market.
Among those affected are three US-listed start-ups that were popular with Chinese buyers: NIO Inc.,
that markets premium EVs; Xpeng Inc.,
which touts its autodrive software as a rival to Tesla inc
; and Li Auto Inc.,
the youngest of the three. All three companies reported higher revenues and recorded larger losses in the second quarter than a year earlier, citing rising costs and supply disruptions. Xpeng said he was also affected by the chip shortage.
The startups saw their momentum towards breakeven slow. Xpeng cited China’s Covid-19 restrictions and the city’s lockdown to dampen customer visits to showrooms, while Li Auto said orders had been delayed as customers are now waiting for its next model.
The stakes are high for the newcomers in China’s crowded EV sector, especially as they take on the likes of Tesla and BYD Co.
Both of those more established car giants are increasing significant market share, while legacy foreign car brands are also introducing more electric models to maintain their market place. BYD tripled last year’s profit to more than $500 million in the six months to June.
Another company hoping to make it in China’s cutthroat EV market is China Evergrande New Energy Vehicle Group Ltd., a subsidiary of cash-strapped property developer China Evergrande Group. Mass production began on Friday, and final products will be made available to customers in October, the company said.
Most Chinese EV manufacturers remained unprofitable during the first six months of this year and are unlikely to break even in the next 12 to 18 months, Fitch Ratings said in a note last week.
China’s lucrative EV market is buoyed by favorable policies, including purchase tax exemptions, cash subsidies and relaxed license quotas, to increase sales of new EVs over traditional combustion engine vehicles. Monthly sales of new energy vehicles this year have doubled or even tripled year over year.
The China Passenger Car Association predicts the nation will sell 6.5 million electric and plug-in hybrid vehicles this year. The Chinese government said earlier this year that it wanted new energy vehicles to take up to 20% of the market share by 2025, but that figure was surpassed in August, when almost 30% of cars used all passengers are sold new energy. The passenger car association predicts that renewable energy cars will take up 55% of the market share by 2025.
Shanghai-based NIO made $1.5 billion in revenue in the second quarter, breaking its own records, but reported a loss of $411 million, nearly five times more than a year earlier. Guangzhou-based Xpeng broke into the top 10 EV sellers in China by doubling the number of cars it sold and its revenue to $1.1 billion in the same quarter. Its losses totaled $403 million, more than double a year earlier.
Xpeng CEO He Xiaopeng said that the shortage of chips and batteries has been a big challenge for the company since last year. Mr. He said that the situation has gradually improved, but that the company was still at high risk of running short on 10 types of chips at the moment. The chip shortage is still a major problem but should ease early next year, he said.
Increased battery costs were partially offset by raising prices, Xpeng executives said, although the automaker could not fully recoup outlays because of an order backlog that meant some vehicles it delivered earlier were sold at a lower price.
The full potential of China’s EV sales rally is also limited this year by greenbacks and a weakening consumer economy.
President of Li Auto, Kevin Shen, said the company was severely affected during the second quarter by the resurgence of Covid-19. The company would remain cautiously optimistic, Mr. Shen said during an earnings call last month.
Li Auto’s second-quarter revenue rose 73% from a year earlier, but its loss more than doubled to $96 million.
Both Xpeng and Li Auto gave conservative estimates for third quarter delivery figures. Xpeng said some car buyers may have pushed back purchases as they await the launch of a new model later in the year. The automaker launched the G9 sport utility vehicle in August, a model that industry observers say could rival Tesla’s Model Y. Deliveries are expected to begin in October.
The three startups will have to continue to grapple with supply chain problems, with little change in China’s Covid policies in sight, analysts say.
Unlike established companies, EV startups have little room by cutting back on costs or research and development to prevent losses, said Barclays analyst Jiong Shao. The companies must continue spending to develop and build new models.
NIO and Li Auto both doubled their research and development spending in the quarter, while Xpeng increased it by 46%.
Investors should focus on whether a company could stand out by successfully differentiating its products in the market, a hurdle BYD crossed, Mr. Shao said.
“If they don’t invest now, two years from now it’s game over for them,” Mr Shao said.
Write to Selina Cheng at firstname.lastname@example.org
Corrections & Amplifications
Kevin Shen is the president of Li Auto. An earlier version of this article failed to give his full name. (Corrected on 19 September.)
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