Wall Street Journal: BYD is driving on the speed bumps
The Chinese electric vehicle leader is feeling the pressure of cost pressure and the economic slowdown
Byd, China's electric vehicle leader, hasn't encountered any speed traps — at least in terms of revenue. But cost pressures and a slowdown in China's economy may soon cause some problems with its tyres.
The Warren Buffett-backed Chinese automaker reported on Tuesday that revenue rose an impressive 36 percent year-over-year increase in the last quarter. The company has benefited from the boom in electric vehicles in China.
According to the China Association of Automobile Manufacturers, sales of new energy vehicles, including plug-in hybrids, will nearly triple in 2021. BYD is China's best-selling brand, and last year's sales of new energy vehicles were also three times that of 2020. According to Goldman Sachs, the company's share of China's new energy vehicle market last quarter was about one-fifth. A year ago it was 13.4%.
However, in the three months to December, BYD's net profit fell 27% year-on-year. This was partly due to lower profits in its mobile phone parts business, as well as one-off factors such as impairment losses and asset revaluations. But according to Goldman Sachs, gross margin for the quarter was also down 3.7 percentage points from the same period last year, which may be due to raw material costs this year, which may still be a problem this year. Prices of materials, including lithium and nickel, have soared. Russia's invasion of Ukraine further exacerbates the problem. Chip shortages remain a potential drag on production, especially with the recent resurgence of Covid-19 in China.
Another uncertainty is whether China's economic slowdown will eventually hit demand. Although electric vehicles performed well last year as more buyers switched from gasoline cars, despite the overall car market downturn. The outbreak of Covid-19, especially as it led to lockdowns in major cities like Shanghai, could also hurt car sales.
BYD's stock price has fallen 16 percent this year after performing well in the first two years — reflecting that concern. Other Chinese electric vehicle stocks also fell.
China's auto sales in the first two months of 2022 have slowed from their peak levels at the end of 2021, but remain at a high level. Part of the reason is that buyers rushed to buy late last year before the EV subsidy cut. The home subsidy will be completely eliminated after this year.
After the rapid development of the past few years, China's electric vehicle market may slow down a little this year – which also seems to affect BYD.
BYD has successfully raised car prices twice this year, which has helped ease the blow of rising costs. Another desirable point is that rising gasoline prices increase the relative appeal of electric vehicles. Citi said the company's management remained optimistic during Wednesday's earnings call, targeting to sell at least 1.5 million new energy vehicles in China this year, more than double last year's sales.
With strong revenue growth, structural tailwinds from the eviction transition, and a firm grip on its leading market position, BYD is likely to remain ahead of its competitors.