BNP Paribas' Pearson on EV Value Chain

Let’s talk about your latest research as well into the EV space. There’s been a bit of an EV winter that starting to see, you know, some clawing of success, at least here in Hong Kong, some of the big EV makers. The prices are up since February, but where are we in that evolution of the downturn? And you are quite bullish compared to others. Yeah, for sure. There’s definitely been an EV slowdown over the last year or so. And we actually think we’re approaching probably near the through of that slowdown. Actually when we look at the drivers of that, I mean there’s been subsidies removed in various markets such as in Europe. But I think one of the biggest issues has really been some of the macroeconomic headwinds, in other words, higher interest rates impacting affordability. But we’re starting to see that moderate and actually we think you’re starting to see an inflection and an acceleration in growth, which I think you’ll see come through as soon as some of the April figures and certainly into next year. We think driven by regulation in Europe, but also the huge cost compression that’s going on driving prices. Now you’re seeing the cost parity to the internal combustion engine cars starting to level out by 2028. Is that, yeah, I think by 2028 and some car makers will get there sooner. When we look at across the whole value chain from the battery cell makers, you know mining up to EV assembly all throughout this value chain, there’s a huge amount of work going on to drive costs down, you know, performance improvements and that’s really going to end up in much lower prices for the consumer basically. So I think by 20/27/2020, eight we should be able to make something medium range cars at the same price. As I said at that point, EV should sell themselves. It’s not about regulation. So this is sort of an investor conference as well and Hong Kong looks at where the investability is in this space. But a lot of these Chinese automakers, I was just at the Beijing auto show, they dominated the buzz, definitely, whether it’s a Xiaomi SU-7, BYD taking over the top spot over Tesla. But a lot of these, most of them are not profitable and there’s a price war domestically that’s driving things down. So where does the investor who looks at this space looks at your bullish report and says, where do I get into the game? Yeah, that’s the difficult part and that’s what we’re here at our conference to try and find out. And look, there is excess capacity throughout this value chain, right from certainly from the mining side, right up towards the forward side and EV assembly, how much is it? Well, on the battery cell side, you’ve probably got 40 to 50% oversupply. On the EV assembly side, probably 30 to 40%, but that part is growing pretty fast and we talk about over capacity in EVs, but there’s huge over capacity in ICE as well and there always has been in the car industry. I think it’s the direction that’s important and we think EV sales are going to quadruple by the time you get to 2030. So that over capacity should dissipate over time. And actually we think the, the utilisation of that capacity is going to be improving over the next few years. So in terms of where to invest, of course you have to tread carefully and there’s different companies in each stage of the value chain that can be attractive. But that forward side, some of the EV assemblers, we think you’ll see some of those margins start to inflect positively pretty soon. Is it going to be driven by these Chinese makers at the expense of the legacy automakers who have not kept up either on the autonomous driving space or in, you know, the gadget laden cars that the Chinese SU-7 from Xiaomi and others have offered? Look, I think it’s undeniable the huge progress that China has made and there’s been a huge shift of gravity of the industry towards China. But I think the answer to that question depends on which region you’re you’re talking about because certainly in, in the West, the the brands do still count for something in, in the European, the US markets. And of course, it’s not necessarily easy from a trade perspective to move cars, cars around the world. So I think it’s less about where you’re from, but how you compete going forward. So let’s talk Europe though then what’s going to be the strategy for the Chinese makers if they’re going to be faced with 20% tariffs as it’s likely? Leap Motor just said we’ve been planning for it. It’s going to happen. the US, it’s a different ball game, probably not going to be allowing the Chinese makers to come in. But Europe, what are the legacy car makers have to do to fend off that competition? Yeah. Look, I think firstly, whether we have tariffs on that, ultimately the Chinese will need to produce Europe to sell in Europe in the mass market and mass cars don’t travel globally that well because of the price point. So we will see local production for the Chinese and at which point the cost advantage narrows a little bit because of the labor rates. But in the meantime, the incumbent car makers need to use that time to drive down their fixed costs and be very lean on their labor costs, on their R&D costs, reduce complexity and also partner with others. And think about where in the value chain do they want to compete. Do you want to be super vertically integrated like BYD or do you want to work with the best in the industry to benefit from the best cost and best technology? Because at the auto show, the Mercedes CEO and they’ve had joint ventures, they paired back their joint venture with BYD and Denza down to 10%. They also have a partnership with Geely. But he was essentially saying we’re not looking at doing more joint ventures with actual car makers, but technology partners. Yeah, Is that the key there? Because the big buzz at the auto show was the SU-7 from Xiaomi technology companies coming in and and and making a play. I think it’s looking about what is the gap in your skill set and your your R&D processes as a as a company like Mercedes or any other western firm and and who can help you plug that gap. So Mercedes doesn’t need to learn anything probably about manufacturing its cars. It’s not aiming to be a huge volume maker. So yes it makes sense for them to team up with technology partners for somebody else. So we’re looking at Stellantis teaming up with Leap Motor, getting access to cost EV platform of manufacturing. Then there’s a different rationale. So I think it’s a different strategy for different car makers. So the big buzz last week as well was Elon Musk flying into Beijing signing or basically getting approval for FSD full self driving with its partner Baidu. Is that a game changer or a watershed moment? Who needs whom? More obviously Elon Musk and Tesla need China, but does China need FSD? Yeah, look, that was clearly a positive development for Tesla because others were starting to get ahead of them in terms of self driving that you could capabilities that they’re offering in China. So our view on that is I wouldn’t call it a watershed moment, but I think it certainly helps Tesla, Tesla catch up where the competition are. But Tesla really needs China, obviously’s biggest car market in the world. They want to lead on full self driving globally and they weren’t doing that in China. So this at least helps them close that gap to the Piers, which was starting to open, but they still have a lot of work to do to really become a leader on that in Tesla in trouble in China. That wouldn’t say Tesla’s in trouble in China at all. They were still selling, you know, a huge amount of cars here, but they need to prove that they can catch up on the self driving.