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The Challenge for China’s Traditional Automakers in the Electric Vehicle Transition


The transition to electric vehicles in China has not been easy for the country’s traditional automakers. While the market share of battery-electric vehicles has surged in recent years, the same cannot be said for manufacturers primarily focused on gasoline-powered cars. This disparity highlights the predicament that automakers like Ford Motor and General Motors now find themselves in.

According to recent data, battery-electric vehicles are projected to command approximately 25% of new car sales in China by the end of 2023. This substantial increase from just 4% five years ago has propelled companies like Tesla and BYD to become some of the most valuable players in the global automotive industry. However, China’s traditional automakers have not been able to capitalize on this trend in the same way.

Between 2019 and 2022, these traditional automakers managed to maintain an operating profit margin of around 5%. Yet, as the market share of electric vehicles continues to rise, their profit margins have suffered. In 2022, the operating profit margin dropped to less than 3%, and projections indicate that it will only reach around 4% in 2023. This decline comes at a time when overall industry sales volume is expected to be at near-record levels.

Typically, as industry volumes grow, car companies should see an increase in profit margins. However, the majority of these gains are being channeled into the electric vehicle segment. In contrast, sales of gasoline-powered cars in China are estimated to reach approximately 17 million units in 2023, a decrease of over 20% from five years ago. This decrease in volume leads to underutilized plant capacity and inefficiencies, ultimately impacting profit margins.

In conclusion, China’s traditional automakers face a significant challenge as they navigate the transition to electric vehicles. While battery-powered cars continue to gain traction in the market, gasoline-powered vehicles are experiencing a decline in sales and profitability. As the industry evolves, it becomes crucial for these traditional automakers to adapt their strategies and investments to stay competitive in a rapidly changing landscape.

The Electric Vehicle Dilemma for Ford and GM

The electric vehicle (EV) revolution presents a crucial challenge for traditional automakers like Ford and GM. If they fail to invest significantly in EVs, they risk losing market share and experiencing a decline in profitability. On the other hand, even if they do invest in EVs, there is no guarantee that they will be able to compete against emerging competitors like Tesla and Rivian Automotive.

Investors are aware of this predicament. Currently, GM stock is trading at less than five times the estimated 2024 earnings, while Ford stock is trading at less than seven times. These relatively low multiples indicate that investors are adopting a cautious approach and closely monitoring market developments.

Although it may be tempting for these legacy automakers to focus solely on gasoline-powered cars, they cannot overlook the prevailing trends. EV technology continues to advance, making these vehicles increasingly superior and cost-effective. Moreover, global environmental policies strongly support the adoption of EVs.

Ford and GM are facing a clear decision: they must invest in EVs and take all necessary measures to ensure that their existing customer base transitions towards EVs as more US consumers consider embracing electric mobility.

In terms of the stock market performance, Ford shares remained relatively stable in Friday trading, while GM shares experienced a 0.9% increase. In contrast, the S&P 500 and Dow Jones Industrial Average recorded declines of 1.2% and 0.8% respectively. It is noteworthy that labor developments have had a greater impact on these stocks recently, particularly due to the United Auto Workers (UAW) strike that commenced after the expiration of a four-year labor agreement on Thursday night.

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