Chinese electric-vehicle makers battered by double whammy of product price war and surging raw material prices

Lithium carbonate prices have jumped by over 60 per cent in the past month as the auto industry’s electrification rush has spawned a race to lock in supplies of materials
Carmakers in China from petrol car assemblers Volkswagen to battery-powered vehicle producers like Tesla and BYD have slashed prices to lure customers

Electric & new energy vehicles

Daniel Renin Shanghai

Published: 6:30am, 23 May 2023

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Chinese electric-vehicle (EV) makers, already scuppered by a bruising price war, have to now contend with galloping raw material costs which could further jeopardise their balance sheets, most of which remain awash with red ink.

Lithium carbonate prices have jumped by over 60 per cent in the past month as the car industry’s electrification rush has spawned a race to lock in supplies of materials used in battery-making. That surge would increase the cost of a 75 kilowatt-hour (kWh) battery pack used in a premium EV by about 3 to 5 per cent or about 5,000 yuan (US$712), according to Davis Zhang, a senior executive at Suzhou Hazardtex, a supplier of specialised vehicle batteries. Battery costs make up as much as 40 per cent the production cost of a typical EV.

The price war and escalating raw material costs are a setback for dozens of EV start-ups, most of whom have yet to turn in a profit.

Li Auto, which has stayed away from the price war made a net profit of 933.8 million yuan for the first three months of this year, compared to a net loss of 10.9 million yuan for the same period last year. But for the rest, the price war and the escalating costs will be a test of survival – Nio and Xpeng, ranked third and fourth in China’s premium EV segment, have yet to post a profit owing to massive research and development costs and heavy spending on marketing and sales.

NANTONG, CHINA – APRIL 12, 2023 – Workers rush to make lithium battery products for domestic and international markets in Nantong, Jiangsu province, China, April 12, 2023. Photo: Getty Images

“This is yet another setback for China’s 200 EV makers,” said Zhang. “A potential increase in EV battery prices, particularly at a time when price competition already hurts the companies’ profitability, could be detrimental to some underachieving players.”

The price of lithium carbonate, a raw material used in manufacturing lithium-ion batteries, soared to 300,000 yuan per tonne last Friday, up from 180,000 yuan on April 20, according to EV data provider CnEVpost.

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The recent surge has rocked the mainland’s EV industry as it follows a gut-wrenching surge between 2021 and 2022.

“Resource nationalism is a growing headwind for the supply of critical minerals, and could limit the pace of the world’s transition to lower-emitting energy,” ANZ analysts Daniel Hynes and Soni Kumari, said in a note last month.

“In a race to decarbonise the transport sector, countries around the world have enacted policies that could spell the end of the internal combustion engine (ICE),” the note said, referring to the COP26 (the 26th summit of Conference of the Parties), where more than 100 counterparties signed an agreement to end the sale of internal combustion engines by 2035 in leading markets and by 2040 worldwide. The summit was attended by the countries that signed the United Nations Framework Convention on Climate Change (UNFCCC) – a treaty that came into force in 1994.

“Tightness in the crude oil market is adding pressure to move to EVs, as gasoline and distillate prices rise. Google searches on the term ‘electric vehicles’ have been increasing steadily since the pandemic began and surged this year,” the ANZ report said.

Still, the spot price of battery-grade lithium carbonate, which had climbed tenfold to 600,000 yuan a tonne in November 2022, plummeted to a low of 180,000 yuan last month. Analysts say the collapse was sparked by softening growth in China’s EV sales, exacerbated by concerns around a new wave of commodity supplies.

Haitong International Securities analyst Yang Bin said in a March 30 report, the price drop translated into a cost reduction of about 15,000 yuan or 10 to 15 per cent in a 75 kWh battery pack.

To make a lithium iron phosphate (LFP) battery pack that powers a typical EV, about 30 to 40 kilograms of lithium carbonate are need, the Haitong report said.

In the face of dwindling consumer demand, dozens of carmakers from primarily ICE car assemblers Volkswagen and General Motors to battery-powered vehicle producers including Tesla and BYD slashed prices to lure customers early this year.

EV makers usually have forward contracts in place for their future lithium purchases which allows them to lock in prices, but any further escalation could translate into higher costs.

Further, the price war failed to boost EV sales as expected because consumers reined in spending, amid worries about employment and savings. Instead, they held back purchases anticipating further cuts.

In April, retail sales of pure electric and plug-in hybrid passenger cars across the mainland fell 3.6 per cent from a month earlier to 527,000 units, data from the China Passenger Car Association (CPCA) showed.

In the first four months of 2023, China reported sales of 5.9 million vehicles, petrol and electric, which represent a decline of 1.3 per cent year on year albeit with heavy price cuts, according to the CPCA.

“Price competition in this cutthroat market will knock out some unprofitable EV start-ups whose production models cannot convince consumers,” said Zhao Zhen, a sales director with Shanghai-based dealer Wan Zhuo Auto. “Some carmakers cannot afford to make additional price cuts.”

Citic Securities said positive signs had emerged for the sector in that the price war had shown signs of abating even as car deliveries were strong in the first week of May.

Chinese carmakers delivered 375,000 units to customers between May and 7, an increase of 46 per cent over the same period in April, according to the CPCA.

“We believe pricing pressure may continue beyond 2Q23 given the lithium price correction, ongoing EV/ICE bifurcation, and accelerated consolidation,” said HSBC analysts in a note.

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