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Dissecting Trending Industries

Views 5131May 22, 2024

Market Insights: EV makers have seen impressive growth. Will the trend persist?

In recent years, the presence of electric vehicles (EVs) on our streets has markedly increased, a testament to the sector's explosive growth. This trend is driven not only by industry leaders like Tesla and BYD, and rising stars such as Li Auto and NIO, but also by traditional automotive giants like Mercedes-Benz, BMW, and Audi (known collectively as 'BBA'). These incumbents, keen to protect their market share, have joined the electric revolution by launching their own EVs.

The electric vehicle (EV) industry's dynamic growth has boosted the stock performance of some sector leaders. For example, Tesla's stock price has soared eightfold since 2020, and BYD's stock has climbed 4.5 times. However, with the industry now entering a consolidation phase, these stocks are facing heightened volatility.

Market Insights: EV makers have seen impressive growth. Will the trend persist? -1

The auto industry at large is enormous, and the increasing adoption of electric vehicles in recent years opens up a wealth of investment opportunities. This article offers an overview of the electric vehicle sector, including

  • The driving forces behind the swift rise of electric vehicles.

  • The market potential and growth trajectory for electric vehicles.

  • The competitive dynamics within the EV market.

  • A side-by-side comparison of the two leading EV giants.

1. The driving forces behind the swift rise of electric vehicles.

The electric vehicle (EV) sector's astonishing growth in recent years can be attributed to a confluence of factors.

Firstly, policy incentives by governments have played a pivotal role. With an eye on reducing greenhouse gas emissions to curb global warming, numerous countries have set ambitious EV adoption targets. Take Europe, for instance, where legislation has been passed to halt the sale of gasoline and diesel vehicles from 2035, propelling a decisive pivot to electric mobility.

To achieve targets like this, governments often bolster the EV sector with business subsidies or tax breaks. In the nascent stages of industry growth, such support can be particularly vital for companies in capital-heavy fields like EVs, providing much-needed sustenance that lays the groundwork for future expansion.

Secondly, steep cost reductions have acted as a major propellant for the industry. For example, lithium-ion batteries, which comprise a significant chunk of EV costs, have witnessed a precipitous price fall. The U.S. Department of Energy reports that their costs have nosedived from $1,355 per kilowatt-hour in 2008 to a mere $153 per kilowatt-hour, a drop of around 90%.

Market Insights: EV makers have seen impressive growth. Will the trend persist? -2

Additionally, as the scale of EV production expands, we see economies of scale coming into effect, reducing manufacturing costs substantially. This decline in costs not only fattens profit margins but also allows for more competitive pricing, stimulating growth across the industry.

Thirdly, the issue of range anxiety is being progressively addressed. Historically, EVs' limited range posed a disadvantage compared to their gasoline counterparts. But innovations in battery technology have significantly extended EV ranges, some now exceeding 1,000 kilometers on a single charge. Simultaneously, the expansion of charging infrastructure and faster charging speeds are making it easier for drivers to power up, diminishing the dread of running out of juice.

Lastly, the expanding selection of EV companies, along with price reductions, has invigorated consumer interest and demand. With an ever-growing roster of models to choose from, consumers have been empowered with options, driving companies to compete more aggressively. This intense competition has prompted even top players like Tesla to reduce their prices repeatedly, stimulating a notable uptick in vehicle purchases.

2. The market potential and growth trajectory for electric vehicles.

Boosted by several positive factors, the electric vehicle (EV) industry has grown at an astonishing rate in recent years. From under a million units in 2016, global EV sales surged past 10 million in 2022, a twelvefold growth in six years with a compound annual growth rate (CAGR) of 54%, according to Statista Market Insights.

Market Insights: EV makers have seen impressive growth. Will the trend persist? -3

The sector's impact was particularly pronounced from 2020 to 2022, with its share of the total automotive market jumping from 4% to 14%, per the International Energy Agency (IEA).

Looking ahead, the global EV market size is projected to expand from $255.8 billion in 2022 to $1.76 trillion by 2032, with a CAGR of about 24%, positioning it as a trillion-dollar super sector, according to Precedence Research.

Regionally, China holds the crown as the largest EV market, with half of the world's 26 million EVs in 2022. Europe is next with 7.8 million EVs, about 30% of the global count, followed by the U.S. with 3 million, or 11%.

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China also leads in market penetration; in 2022, it saw 5.9 million EVs sold, making up 29% of its total car sales. Europe matched China in EV units sold but accounted for 21% of its car sales, while the U.S. reached sales of roughly 1 million EVs, just 8% of its total car sales.

3. The competitive dynamics within the EV market.

So, who stands out in this burgeoning market, currently worth hundreds of billions and expected to exceed a trillion dollars in the future?

Looking at global electric vehicle (EV) sales for the first half of 2023, about 6.2 million units were sold worldwide, a 49% increase year-over-year, according to Canalys statistics. Chinese EV titan BYD led with sales of 1.26 million units, grabbing a 21% market share. Tesla followed closely with approximately 15% of the market, and Volkswagen came in third with a 7% share.

Market Insights: EV makers have seen impressive growth. Will the trend persist? -5

The top ten players together held a commanding 76% of the market, with only BYD and Tesla focused exclusively on EV production. The other companies, traditionally associated with gasoline vehicles, have been compelled to introduce their own EV brands in response to the industry's shift.

Regionally, Chinese firms secured three spots in the top five and four in the top ten, while European companies claimed three places in the top ten, reflecting the pace of EV development in their respective countries.

4. A side-by-side comparison of the two leading EV giants.

In the electric vehicle (EV) market, Tesla and BYD, the industry's pure play EV companies, are clear leaders in sales. We can compare these two giants on financial fundamentals and market valuation.

Market Insights: EV makers have seen impressive growth. Will the trend persist? -6

Tesla edged out BYD in revenue and profits for the third quarter of 2023, albeit by a slim margin.

The difference in profitability between the two companies is slight. Tesla posted a lower gross margin than BYD for the same period but managed a marginally higher net profit margin.

Looking at growth, Tesla's revenue increase in 2022 and into the third quarter of 2023 didn't keep pace with BYD's more robust expansion.

Tesla presents a lower financial risk profile, with a debt-to-asset ratio significantly below BYD's, suggesting sturdier financial footing. Additionally, Tesla's liquidity ratio stands well above BYD's, pointing to a more fluid cash flow.

In terms of market capitalization and valuation, Tesla's market value surpasses $800 billion—nearly 11 times greater than BYD's. Its price-to-earnings ratio also quadruples that of BYD's. Despite both companies posting comparable net profits, Tesla's market valuation towers over BYD's. Reasons for this could include the more liquid American stock market, Tesla's formidable global branding, its advances in artificial intelligence and self-driving technology, and lower financial risk.

In summary, the EV industry has rapidly expanded in recent years.

Its growth may be fueled by supportive policies, decreasing costs, alleviating range anxiety, and falling prices.

The EV industry has a past growth rate of over 50% and a projected 24% annual growth for the next decade. China, Europe, and the U.S. are the biggest markets.

The top ten EV firms, with BYD, Tesla, and Volkswagen being the top three, command the lion's share of the market.

Comparing Tesla and BYD, Tesla leads in profitability and financial stability but lags in growth rate, yet it enjoys a valuation significantly higher than BYD's.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy.

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