China’s EV startups suffer mounting losses despite sales increase

China’s EV startups suffer mounting losses despite sales increase

HONG KONG – China’s electric vehicle market is booming, but the country’s most popular EV startups are seeing losses grow, even as sales soar.

Rising battery prices and supply chain delays this year have further pushed up costs for emerging EV makers. The startups are already burning money to introduce newer, smarter models — complete with heated massage seats or battery change services — to gain a foothold in the world’s largest auto market.

Among that hit are three US-listed startups that are popular with Chinese buyers: NIO Inc.,

NIO 3.72%

which markets premium EVs; xpeng Inc.,

XPEV 7.42%

who touts its driving software as a rival to Tesla Inc.’s

; and Li Auto Inc.,

LI 4.73%

the youngest of the trio. All three companies reported higher revenues and larger losses in the second quarter than a year earlier, due to rising costs and disrupted deliveries. Xpeng said it was also hampered by the chip shortage.

The startups saw their momentum slow towards break even. Xpeng cited China’s Covid-19 restrictions and city lockdowns to dampen customer visits to showrooms, while Li Auto said orders had been delayed as customers now wait for the next model.

There’s a lot at stake for the newcomers to China’s crowded EV sector, especially as they take on Tesla and BYD Co.

Those two more established auto giants are taking up significant market share, while older foreign car brands are also introducing more electric models to maintain their place in the market. BYD tripled last year’s profits to more than $500 million in the six months to June.

Another company hoping to make it into China’s cutthroat EV market is China Evergrande New Energy Vehicle Group Ltd., a subsidiary of real estate developer China Evergrande Group. Mass production began on Friday and the finished products will be delivered to customers in October, the company said.

Most Chinese EV makers remained unprofitable for 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 growing on the back of favorable policies, including purchase tax exemptions, cash subsidies and relaxed licensing quotas, to boost sales of new EVs over traditional combustion engine vehicles. Monthly sales of new energy vehicles have doubled or even tripled year on year this year.

The China Passenger Car Association predicts that the country will sell 6.5 million electric and plug-in hybrid vehicles this year. The Chinese government said earlier this year it wants new energy vehicles to take 20% of the market share by 2025, but that figure was surpassed in August, when nearly 30% of all passenger cars sold used new energy. The passenger car association predicts that new energy cars will take a 55% market share by 2025.

Xpeng said it was hampered by the chip shortage.


Photo:

VCG/Getty Images

Shanghai-based NIO brought in $1.5 billion in second-quarter revenue and broke its own records, but reported a loss of $411 million, nearly five times more than a year earlier. Guangzhou-based Xpeng broke through in China’s top 10 EV sellers by nearly doubling its sales and revenue to $1.1 billion in the same quarter. Losses were $403 million, more than double from a year earlier.

Xpeng Chief Executive He Xiaopeng said chip and battery shortages have been a major challenge for the company since last year. Mr He said the situation has gradually improved, but the company is currently still at high risk of shortage of 10 varieties of chips. Chip shortages remain a major problem but should ease early next year, he said.

Higher battery costs were partially offset by price increases, Xpeng executives said, although the automaker was unable to fully recoup its expenses due to an order backlog that meant some of the vehicles it supplied had previously sold at a lower price.

The full potential of China’s EV sales rally has also been limited this year by lockdowns and a weakening consumer economy.

Li Auto president Kevin Shen said the company was hit hard in the second quarter by the resurgence of Covid-19. The company would remain cautiously optimistic while wary, said Mr. Shen on a profit call last month.

Li Auto’s second-quarter revenue was 73% higher than a year earlier, but the loss more than doubled to $96 million.

Li Auto’s second-quarter sales grew 73% year-on-year, but the loss more than doubled.


Photo:

jade gao/Agence France-Presse/Getty Images

Xpeng and Li Auto both provided conservative estimates for third quarter delivery figures. Xpeng said some car buyers may have cut back on purchases as they waited for new models to launch later in the year. The automaker launched the G9 sports car in August, a model that industry observers say is a potential competitor to Tesla’s Model Y. Delivery is expected to begin in October.

All three startups will have to continue navigating supply chain issues, with little change in China’s Covid policy in sight, analysts say.

Unlike incumbent companies, EV startups have little wiggle room by cutting costs or research and development to limit losses, said Barclays analyst Jiong Shao. The companies must continue to invest 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 can differentiate itself by successfully differentiating its products in the marketplace, a hurdle BYD has overcome, Mr. Shao said.

“If they don’t invest now, it will be over for them in two years,” said Mr. shao.

With gas prices on a wild ride, many consumers are exploring whether buying an electric vehicle can save them money in the long run. WSJ’s George Downs breaks down four factors to consider when buying a new car. Photo Composite: George Downs

Write to Selina Cheng at selina.cheng@wsj.com

Corrections & Reinforcements
Kevin Shen is the chairman of Li Auto. An earlier version of this article did not give his full name. (Corrected Sept 19.)

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