This is the story of how Western automakers are inviting the Chinese to take their US & Canadian market share.
Unless you’ve been under a rock for the last two years you already know that the price of everything has gone through the roof. Cars have been no exception. The price of used vehicles is up about 35% over 2019 and new vehicle prices have jumped about 20%. Specifically the average price of a new vehicle in the United States is an overwhelming $47,000 ($43,000 if you exclude luxury vehicles).
Some of auto industry pundits say that prices will return to normal in a year or so when supply chains get back into balance. We believe that that is absolutely wrong and that the Chinese are going to fill the void.
The Auto Industry Today & Tomorrow
In the years leading up to 2020 it became normal for the auto industry to have 65 days of inventory, but huge consumer demand combined with component shortages have transformed auto inventories down to a meager 32 days. That imbalance between supply and demand has done two things:
- allowed major auto manufacturers to queue up hundreds of thousands of orders for new vehicles. The most notable example of this is the Tesla Cyber Truck which currently has about 1.2 million on back order. Ford stopped taking deposits on their F150 lightning pickup truck after they quadrupled their original allotment and sold out all 200,000. Kia has so many preorders for its awesome EV6 SUV that they have also stopped taking deposits.
- provided historic record breaking profits to both dealerships and manufacturers like Mercedes, Volkswagen and Toyota. A recent report on Bloomberg calculated that Ford was the hardest hit of all of the major OEM’s resulting in them being short more than a million vehicles in 2021 but they still made $18 billion in profit. To put that in context, Ford lost $1.3 billion in 2020. And not to be outdone General Motors broke its previous all time record reporting $10 billion in net income which was up 55% from its previous year.
When the supply chains do level out and manufacturers can match production supply to consumer demand, these two factors are going to come together to keep price is high and “at the dealership” inventories low. Manufacturers have learned that an awful lot of consumers will wait for a special order vehicle and it is anticipated that the traditional western auto manufacturers will never go back to 65 days of inventory but instead settle out somewhere in the 45 day range by the end of 2023.
Profits for Car Company Investors Are Overdue
Much like Oil and Gas investors have demanded companies return billions in profits to shareholders while they can, auto manufacturer investors are absolutely going to insist that Ford GM, Mercedes, Volkswagen, and the other usual suspects pay them out after years of mediocre returns. Western auto builders are going to focus on just two things in the next decade:
- returning profits to shareholders through dividends and share buybacks (that drive up the price of shares)
- continued investment in electric vehicles because even short term shareholders know that consumer demand for EV’s is going to skyrocket as governments bring in new regulations to both encourage electric vehicle purchases and too heavily dissuade internal combustion engine vehicle production. This will leave little money for Western auto manufacturers to invest in developing lower margin, entry level EV’s.
Ford, VW, Mercedes, GM and the other big auto makers are going to be busy working on mid-to-high range to maximize their profitability.
So at this point you might be asking what does this have to do with the Chinese? Good question!
Chinese Auto’s Are High Quality & Coming Soon
This shortage of reasonably priced automobiles in Western markets like The United Kingdom, Germany, France, Germany, Canada, The United states, Australia… leaves a gigantic hole in the market at a time when Chinese auto manufacturers are more than just considering opening western dealerships.
The amazing Chinese electric vehicle auto manufacturer Nio, headed by a very Elon Musk like serial entrepreneur named William Li, opened up dealerships in Norway last year and is opening dealerships in Germany in 2022. And in case you’re thinking nobody could be as good as Elon Musk and Tesla, think again.
Nio has, arguably, a superior product to Tesla in many ways.
- Nio’s self-driving tech is apparently better than Tesla’s
- Nio has a broader range of vehicles not just four vehicles. (There are really just two volume Tesla models)
- all Nio’s have the ability to swap batteries. This means Nio has many more configuration choices than Tesla does. They could profitably sell their $50,000 Tesla model 3 equivalent for $35,000 and make up the difference with monthly or consumption based subscription to the battery. Keep in mind that you don’t have to swap your Nio battery, you can still plug it into the wall like a Tesla or any other electric vehicle, but if you want to swap it out it can be done faster than most people can fill up their vehicle with gasoline.
- We think the Nio product looks better than Tesla’s. Their design is more appealing to our eye but, of course, that is subjective.
Then there’s the company called VinFast which you probably haven’t heard of yet. To be clear, they’re not Chinese, they are Vietnamese. VinFast is opening dealerships in the United States and Canada in 2022. They made a big splash at the LA Auto Show and their great looking product is going to sell in North America. They are already taking deposits and we are one of them.
If you think that you would never buy a Chinese vehicle because you remember the low quality Chinese products of yesteryear, again, you need to think again. Did you know that the Cadillac CT6 plug in hybrid and the Buick Envision are exclusively manufactured in China but sold all over the world, including North America today?
There are other Chinese juggernauts like BYD, XPeng and Geely, to name just a few:
- Geely owns Volvo, Polestar, Smart (formerly Mercedes Smart) and Lotus, among a dozen successful brands
- BYD sold a massive 600,000 electric vehicles in 2021 and is financed by America’s highest profile long term value investor, Warren Buffet.
- XPeng sold 53,000 of their X7 SUV’s last year
- For comparison, Ford sold 55,000 Mustang Mach-E’s in 2021 and is correctly being hailed as a giant success by both consumers and stock market investors.
All three of these Chinese companies have publicly stated that they will expand into Western Europe, Canada and the United states.
Low Inventories & High Prices Invite The Chinese
This situation means that the Chinese timing for an invasion of the lucrative North American and Western European auto market couldn’t be better. Western manufacturers like Ford, Mercedes, and Volkswagen will continue to ignore the mid-market, as they are forced to focus on higher margin vehicles.
By 2025 or 2026 we expect at least three substantive Chinese auto manufacturers to be selling their high demand, high quality, electric vehicles in a showroom near you.