Team China is being formed, without BYD - CEOs of GWM, Nio, XPeng, and Li Auto attended Xiaomi SU7's launch

Earlier this week, Xiaomi launched its first car, the fully electric Xiaomi SU7. Chatter on the Internet were mostly focused on how the Xiaomi looks like a shameless copy of a Porsche Taycan, followed by videos of crashes by Xiaomi’s influencers who were given early access to the SU7.

The biggest highlight of the Xiaomi SU7’s launch is not about it copying a Porsche, or how poor its stability control is. By the way, a good driver will never blame the car for losing control.

More important than the Xiaomi SU7's launch is the presence founders of rival electric vehicle companies - Nio’s William Li (Li Bin), XPeng’s He Xiaopeng, and Li Auto’s Li Xiang. All these fierce rivals made a surprise appearance at the launch as Xiaomi’s guests of honour.

Xiaomi's founder, chairman and CEO Lei Jun called his competitors “Heroes of our time,” and without missing a beat, took a swipe at Apple.

“I realized that it’s so hard to make a car. It’s so hard that I didn’t expect Apple to quit. And that is why those who are still working in the automotive industry today, they are all heroes of our time,” he said.

Introducing the founders Nio, XPeng, and Li Auto, Lei described them as friends, thanking them by saying “They have given us many suggestions over the years, which helped us to avoid many pitfalls.”

Also present were Chinese ‘legacy automakers,’ GWM’s Chairman Wei Jianjun and BAIC’s new Chairman Zhang Jianyong.

BAIC, the Chinese local partner for Hyundai and Mercedes-Benz, is Xiaomi's contract manufacturer for the SU7. 

It’s vogue for startup electric car companies to fashion themselves as the young know-it-all disruptor, painting their ‘legacy’ combustion engine rivals as outdated ‘boomers’ of the auto industry.

Not this time. Lei welcomed GWM’s Chairman Wei as an industry elder who deserves respect, calling him a “pioneer of our industry, a 30-year veteran. I admire him so much.”

CarNewsChina also pointed out that the bosses of Xiaomi and GWM exchanged gifts of cars, an elaborate public relations stunt played out on Weibo, China’s equivalent to X.

GWM’s Wei Jiajun released a video of him inspecting the Xiaomi SU7 with his team, praising the car’s tech. Meanwhile, Xiaomi’s CEO Lei Jun took delivery of a Tank 700 plug-in hybrid from GWM boss Wei.

It's very good optics. Having videos of GWM's boss inspecting the Xiaomi gave the smartphone maker an image of authenticity, that it's being taken very seriously by a respected elder, who is one of China's biggest car exporter. GWM on the otherhand, rode on the strong interest in Xiaomi to showcase the Tank 700.

All these rival Chinese brands have one common bond – they are all trapped in a money-losing price war in China triggered by BYD (and Tesla). On their own, none of them can survive BYD’s repeated price cuts, which is akin to the ancient Chinese slow-death torture method ‘Death by a thousand cuts.’

XPeng is still bleeding cash, with losses widening 14% from the previous financial year. Last calendar year, XPeng sold just 141,601 units. For context, even Proton operating in tiny Malaysia managed to deliver 154,611 units last year.

Nio lost USD 2.9 billion last year. Li Auto is the only profitable Chinese EV startup that is not BYD, mainly because unlike Nio and XPeng, Li Auto’s core models are extended range electric vehicles (E-REVs) – a sub-group of plug-in hybrids, but with engines used solely as a generator. By hedging away from BEVs, Li Auto was able to better insulate itself from the price war. Interestingly, Li Auto’s playbook mirrors BYD, which still relies on PHEVs for half of its sales.

Commoditization of EVs – ‘Not only does water float a boat, it can sink it too’

Combustion engine cars have strong identities. Like people, they each have their own personalities. Audi is known for their aluminium space frame bodies and quattro all-wheel drive, Subaru for their iconic ‘boxer’ engine rumble and symmetrical all-wheel drive, BMW for their straight-six engines and slick ZF 8-speed transmission, Mercedes-AMG for their one-man-one-engine V8s, Lexus for their quality. You get the idea.

When a car manufacturer pivots to electric drivetrains, especially with self-driving cars as the final goal, all these identities are erased. The car is reduced to a lounge on wheels, where occupants play games, make instant noodles, sing karaoke. The last thing these group customers want to do in a car is to drive.

To a regular person, a car's performance 'strength' is judged by how fast it accelerates. A 0-100 km/h time measured in seconds is an easy an understand concept, and it's easy to demonstrate too. Many regular battery EVs can now achieve hot hatch-level sub-7 seconds acceleration.

What is handling? What's this talk about seats that keep your spine in an S shape? What is ergonomics? Who is Naruse? Is he Naruto's brother? Saying the latter is a massive insult to those who know, but this is the reality for car manufacturers today if they want Douyin-scrolling Chinese Gen-Zs who only know 0-100 km/h time, charging speed, and screen sizes as their customers.

There is a Chinese proverb, ‘Not only does water float a boat, it can sink it too.’ It’s a Chinese way of describing a sword that cuts both ways.

Software-defined electric vehicles have allowed Chinese carmakers to leapfrog their Western and Japanese rivals, often by riding on the climate change agenda.

What Chinese carmakers are not admitting (yet) is that the same rising tide that elevated them so quickly, is also the very thing that is drowning them now.

When a car is reduced to just software, battery, big touch screens, and motors with silly high ‘90s F1-level torque, the car quickly becomes a commodity.

When a business becomes a commodity, the one with the highest volume will have the lowest cost (Exhibit A: BYD and Tesla). All is good when the economy is booming. but once demand slows, which it certainly will, a price war is inevitable.

How else are you going to move more cars out of the showroom when everyone is selling the same commodity, differentiated only by size and body type, wearing brands that are equally young?

Adding gimmicky features like having more ambient light colours than the customer’s eyes can see, in-car karaoke, in-car video games, self-parking capabilities, will extend the car’s competitive edge, but none of these are exactly unique. Competitors, especially Chinese ones, can easily copy the same and what was previously a unique selling point, will soon be par.

In combustion engine cars, model lifecycles are around 5 to 7 years long. Progress is slow, but interest is sustained. With EV commodities, customers lose interest in just 6 to 9 months, because that's how long it takes for competitors to code the software to deliver the same function as their rivals.

Changan: 60% - 70% of Chinese brands won't survive until 2030

Despite the price war and rising inventory count, every Chinese EV manufacturer needs to keep their factories running because the only way to win a commodity goods race is to scale up faster than the next guy.

Yet, no one knows what the market’s genuine demand level for electric cars is because sales have been artificially inflated by subsidies. Yes, the Chinese central government has phased out subsidies for battery EVs and plug-in hybrids (collectively known as New Energy Vehicles, or NEVs) but subsidies by provincial governments have been ramped up. Provincial governments often have vested interest in their local joint ventures. Shanghai for example, owns SAIC (MG), while Guangzhou owns GAC (Aion), Anhui owns Chery. So even if the central goverment eases off subsidies, manufacturers and their local government shareholders will have to pump in more money to keep the lights on.

Also, the past 5 years or so saw many manufacturers adding production capacity to benefit from EV-related subsidies. Meanwhile, provincial governments are trying to outdo neighbouring cities to generate more growth, which often means putting money on electric car projects. China's automotive industry now has an installed production capacity of around 49 million units, up from 43 million in 2022.

Last year's total output was 31.56 million units, the highest since 2017, thanks to a 58% surge in exports, mostly to due to Japanese, Korean, and Western brands exiting Russia, and Chinese brands rushing in to fill the gap.

The figure also means that nearly 40% of China's automotive manufacturing capacity are now sitting idle, and this is despite 2023's output hit a 7-year high.

Plants have to keep running. The cars will keep coming off the line. So, the Chinese car market is now a duel to see who can afford to lose more money.

All the above are the makings of the painful 2023 price war in China. Every Chinese automaker was pulled into a money-losing race to the bottom.

China has 150 automotive brands, including commercial vehicles, two- and three-wheelers. Of these, 97 are independent brands, 43 are joint ventures with foreign brands.

Even China is not big enough to support this many brands.

Last year, Zhu Huarong, chairman of Changan Automobile said, “In the next 2-3 years, it is conservatively estimated that 60%-70% of Chinese brands will face closure or mergers."

Xiaomi's coming together with Nio, XPeng, Li Auto, GWM, and BAIC can be interpreted as a preemptive step. It's like a football game played in school. Better to choose your own teammates than to have someone (the government) choose for you, or worse, be slow and risk having have the strongest players courted first by the rival team's skipper.

If you thought price wars must be great for customers, then you haven’t hear the grouses of Chinese buyers crying over the diminishing value of their cars, while others are unsure if their car’s manufacturer will still be around to provide support in years to come (remember that these are software-defined cars).

In January, Bloomberg reported that multi-brand car dealer giant Guangdong Yongao Investment Group, which has 80 stores across the southern province of Guangdong, filed for bankruptcy. State-owned news channel CCTV reported that the government is stepping in, as many customers are left in limbo due to incomplete paperwork for their cars and unfulfilled deliveries.

Chinese media say since 2022 – the year Tesla triggered the price war - five other multi-brand dealer groups have filed for bankruptcy.

It’s quite naïve to think that there will be a peaceful outcome of this intense price war, which is already spilling over to Southeast Asia. BYD has since slashed prices in Thailand, so is GWM’s Ora in Malaysia.

Locked out of USA, which despite the spicy political rhetoric by China, is still the proverbial Promised Land for any Chinese car maker looking to escape bloodbath in their domestic market, the next best choice is to export to Southeast Asia.

Expect to see more Chinese brands launching in Malaysia this year. Chinese brands have only two choices – cut prices and still die; or cut prices and export, and maybe survive.

In the meantime, Chinese brands will eventually organize themselves into clusters. Established 'legacy' brands will offer their manufacturing expertise to the likes of Huawei and Xiaomi, and vice-versa for software and connectivity hardware.

Japan has already consolidated under Toyota, with Mazda, Suzuki, Subaru, Yamaha, Kawasaki, now orbiting around Toyota’s sphere of influence. Japan already had one round of consolidation in the late '70s. Prince went under Nissan. Hino exited passenger cars to join Toyota, so did Daihatsu. Isuzu stopped making passenger cars.

Also read: 50 years of dating: How Japan's oldest car company came under Toyota's wings

But the dynamics for Xi's-era China in 2024 is very different from Showa-era '70s Japan. Like many things in China, everything is amped up to an otherworldly scale, and becomes unncessarily complicated because of China's geo-politics.

Regardless, the Chinese are a very resilient bunch. They will work this through. Whether their price wars decimate our local or ASEAN region value chains or not, that's another topic altogether.