Research Recap | Why is China's Electric Vehicle Industry on the Rise?

 

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Nick Lai: Hi, everyone. Welcome to Research Recap on J.P. Morgan's Making Sense podcast channel. This is Nick Lai, head of China research and head of APAC Auto research at J.P. Morgan. Today, I'm joined by my colleague Rebecca Wen, who cover China EV battery and auto parts sector and J.P. Morgan. And we are here to talk about the rise of China's EV market. Thank you for joining us, Rebecca. Can you tell us about yourself, your role, and your coverage at J.P. Morgan?

 

Rebecca Wen: Yes, sure, Nick. And thank you for having me here. So I've been with J.P. Morgan for 10 years now. I've been covering the China auto parts and battery supply chain here at J.P. Morgan. But Nick, I would like to hear a little bit about your background as well.

 

Nick Lai: Yeah, thanks, Rebecca. This year marks my 19th year in J.P. Morgan. I've been moving, initially from Taiwan, and then to Hong Kong, and last four years in China, I currently cover the auto sector in China and also responsible for regional auto product and, on top of that, I'm also managing China research team from Shanghai.

 

Rebecca Wen: Nick, perhaps I will start by asking you to give us an idea of what EV penetration is currently like in China, how has it increased in recent years?

 

Nick Lai: Yes, thanks, Rebecca. The penetration of growth of an EV or new energy vehicle market has been very strong in China. By first half of this year, for instance, new energy vehicle market grew by about 45% year on year, and that translates into about 28% penetration. And that includes both passenger and commercial vehicles. If we look at only passenger car, the penetration will be even higher. We focus passenger and EV penetration will top 34% this year and increase further to about 50% by 2025. And that compares with 28% last year or below 20% before 2021. Aside from that, within an EV market, one niche segment that investors tend to overlook in China is PHEV, or plug-in hybrid segment. We focus PHEV market will account for about 30% of total new energy vehicle market this year, up from 23% last year or 18% in '21. In the next one or two years, we believe PHEV will remain an important part of China's EV market.

 

Rebecca Wen: Thanks, Nick. That's impressive. Clearly, EV penetration is running ahead of expectations. What do you think is fueling the popularity of EVs in China?

 

Nick Lai: Yes, we believe the growth of China's EV market can be divided into two stages. The first stage was between 2015 and 2020. During this period, EV penetration grew steadily and also slowly by about one percentage point each year, driven mainly by government subsidy. By 2020, an EV penetration was 5%, up from only 1% back in 2015. The second stage started from 2021 till today. EV penetration increased dramatically each year, driven by not only the cost reduction on the battery side, but also longer driving range and the better charging infrastructure across China. In this period, China's government subsidy has been reduced every year and was completely phased out in 2023. However, it did not stop the growth of EV demand. In fact, EV penetration was even more than double in 2021, to 13%, and double again in '22 to 26%. This year, we expect an EV demand of penetration will further exceed 30%. And, in addition, to improved battery technology and better charging infrastructure, we also noticed an increased tendency where the customer prefer EV over conventional gasoline car due to lower ownership costs-- i.e., charging the car is much cheaper than filling up the tank.

 

Rebecca Wen: So Nick, would you share with us a bit about how the electric vehicle industry in China compares to Europe and US?

 

Nick Lai: Yes, thanks. EV penetration has been very strong globally in the past few years, but in terms of the absolute number of demand or growth, we are seeing stronger attack rate or penetration in China and followed by certain country in Europe. In the longer term, we believe China's EV market will see strong demand in both pure battery electric vehicle and plug-in hybrid that I mentioned earlier. And as for European market, we are seeing much stronger demand in Germany and France and Western Europe, but that's pretty much driven by pure ev demand. And after Europe, we believe we'll see continued growth slowly from Japan as well as US. But all in all, we think the trend will be very positive.

Also, on the EV battery technology, it's an important topic when we talk about industry growth and outlook. So, Rebecca, can you give us an overview of the EV battery sector in China?

 

Rebecca Wen: Yes, certainly. Along with the rise in EV penetration, China's EV battery shipment volume also witnessed massive growth in the past few years. Total battery shipments in the industry grew from less than 70 gigawatt hours in 2020 to over 450 gigawatt hours last year, at a massive 170% CAGR.

Aside from the domestic EV sales, we are also seeing increasing battery shipments going overseas, including batteries installed in vehicles in China and then exported to overseas market or direct battery export to the overseas market. From now towards 2025, we forecast that domestic EV battery demand will grow at around 25% to 30% CAGR and battery export at around 45% to 50% CAGR.

The global EV battery market is pretty consolidated, with the top three players taking over 65% of the market share. Top two battery makers are both from China, CATL and BYD. CATL had around 37% global market share in the first half of this year. As we pointed out earlier, we are seeing growing exports of China's EV and EV battery. Thanks to this, CATL's market share in the ex-China battery market had doubled in the past two years.

 

Nick Lai: Oh, yes, that's very interesting. Can you share with us how are the firms competing on the battery technology to move ahead and what are some key innovations that we are seeing right now?

 

Rebecca Wen: Yes, there are lots of innovations in the battery technology that's fueling the growth of EVs. For instance, CATL and BYD came up with the improved structure designs for battery packs back in 2020. Through CATL's cell to pack technology and BYD's blade battery technology, energy density at battery pack level was boosted by around 10% to 15%. This had enabled the battery EV models to run for a longer driving range than we could in the past. For instance, when Tesla first launched its LFP version Model 3 in October 2020, the new Model 3 had a longer driving range, but with selling price 8% to 10% lower than the old version. This was thanks to the use of LFP battery and CATL's new technology. Tesla's Model 3 sales picked up massively after the introduction of LFP standard range version. With the improvement in battery technology, LFP-powered electric vehicles can now run 600-700 kilometers driving range. This compares to usually below 300 or 400 kilometers in the past. This year, CATL has introduced two improved versions of LFP battery. One is the M3P product, or most people simply say LMFP. That's LFP, adding the [INAUDIBLE] in it. This could further improve the energy density of LFP at similar cost, which means the EV models could be running at longer driving range with the same cost. Another innovative product from CATL was the super fast charging 4C LFP battery. With this new battery technology, we now only need 10 minutes time to charge for 400 kilometers driving range. This can greatly reduce customers' range anxiety. Turning back to you, Nick, what do you think the future holds for China's EV industry? What are the key challenges the industry needs to overcome, and what can we expect to see in the next three to five years?

 

Nick Lai: First of all, I think we should expect a continued increase in EV penetration in China towards '25 and beyond. We currently focus China's EV penetration approach 50% by 2025 and with a move toward 70% potentially by 2030. And in the next few years, one important data point that we should focus is where the battery costs can really drop to $100 per kilowatt hour or lower by 2025. And that, if materialized, will mark an important milestone for EV production costs and, hence, stronger demand beyond '25. And in addition to EV, we believe the growth of autonomous driving market or industry is another important area that investors should focus. And most of the EVs sold today in China are equipped with a so-called level 2 [INAUDIBLE] functionality. And toward '25 we believe the industry will gradually move toward level three and higher. And lastly, I think we should also pay attention to China's export overseas opportunity. Historically, China exported about 1 million cars each year, and that number began to rise substantially since 2021. And last year, China's car export reached 3 million units. And this year, we believe the number can further increase to 4.5 million units. So all in all, investors should look at three potential growth opportunity in China in the longer term-- first, the continued growth in EV market along with lower battery input costs, and second, the advancement in autonomous driving market or industry, and third, China's overseas expansion. So that's all we have today. Thank you, Rebecca, for such an interesting conversation. It's always a pleasure to speak with you. And thank you, everybody, listening to us today.

 

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