Surging Costs, Price-Conscious Buyers Add to EV Makers’ Woes

(Bloomberg) -- China's electric carmakers have a conundrum on their hands. Rising raw material costs have begun to squeeze margins, and many have raised sticker prices in response. But tipping EVs into the too expensive basket for consumers risks undermining demand just as the government is seeking to spur adoption.

That's not a problem confined to China. Automakers the world over are experiencing the same pressures. What makes China unique is its commitment to simultaneously rolling back EV subsidies, setting up a delicate balance between growth and profit in the world's biggest market for clean cars.

One company after another hiked prices in March, from Tesla Inc. to BYD Co., Xpeng Inc. and Li Auto Inc. Contemporary Amperex Technology Co. Ltd., the world's biggest EV battery maker, was transparent about its plans, saying that due to the price surge of upstream raw materials, it was making “dynamic adjustments to the prices of some of our battery products.”

“We're operating in a very challenging environment as you can see in China,” XPeng President Brian Gu told Bloomberg TV last week. “The industry is facing very strong headwinds in terms of cost escalation.”

That's on top of chips and Covid-related production issues, all of which threaten to make an EV sales forecast of over 5.5 million units in China this year challenging.

BYD, the carmaker backed by Warren Buffett, reported results last week that missed analyst expectations. Gross margins at the Shenzhen-based company slipped to a 10-year low of 13.3% while margins for autos and related products also tumbled. BYD has increased EV prices twice this year.

On an earnings call in March, Nio Inc. was also talking about chip supply volatility, raw material cost increases and the impact of the pandemic. It's resisted raising prices for now and expects gross margins this year of between 18% to 20%.

“We'll try our best to safeguard production and deliveries going forward,” Chief Executive Officer William Li said.

Despite Xpeng raising prices by between 10,100 yuan ($1,590) and 20,000 yuan, Gu believes momentum is still on EV makers' side, considering fuel costs for combustion engine cars have been increasing as well, giving battery-powered vehicles, with their technological advantages, an edge. “I think the EV appeal and also the momentum of EV sales in China will be very strong,” he said.

Some analysts say makers of higher-end EVs will be able to better absorb costs than lower-end manufacturers like SAIC-GM-Wuling Automobile Co., whose entry level Hongguang Mini costs less than 30,000 yuan. And the expiration of EV subsidies should “pull forward” demand in the second half, according to Bernstein autos analyst Eunice Lee.

Still, Credit Suisse Group AG's co-head of autos securities research, Bin Wang, said EV makers are prepared to act if demand starts to weaken.

“Some automakers are already preparing for a pricing adjustment, which means they'll provide promotions or discounts in the second half,” he said. “That's likely to happen to maintain their annual targets.”

Certainly consumer demand in China appears robust, for now. Xpeng's revenue jumped more than 200% from a year earlier to 8.56 billion yuan in the fourth quarter after it delivered a record 41,751 cars. Tesla shipped almost 71,000 EVs from its Shanghai factory in December and another some 116,000 in the first two months of this year.

Indeed demand may be so strong that the real issue lies with supply of battery ingredients, like lithium, according to Cameron Perks, a Melbourne-based analyst at Benchmark Mineral Intelligence. He predicts supply may not meet demand until 2026.

“It means the EV roll out will be slower in the short term,” Perks said. Automakers are “very worried about where they're going to get lithium to feed their growth plans.”