Bulls, Bitcoin, and Beyond

It wasn’t Porsche or Tesla or BMW that got everyone talking at the auto show in Munich this year. It was BYD.

And the fast-growing Chinese electric carmaker didn’t just steal the limelight: it had its American and German competition shaking in their boots.

That’s because BYD and other Chinese manufacturers are now setting global standards for EVs and laying down a challenge for automakers across Europe, Asia, and the US.

So, with the industry, well, shifting gears, let’s take a look at where the opportunities might be…

What makes BYD such a showstopper?

A big part of the answer here is price. The all-electric brand, which recently overtook Volkswagen as the most-sold vehicle in China, has consumers giving the side-eye to the premium prices that typically come with EV models.

And that’s forcing some steep sticker-price cuts over at Tesla.

Analysts at Swiss bank UBS recently published a “tear-down” research report of BYD’s midsize sedan – basically breaking the car apart to have a closer look at its components and their costs.

They calculated that the Seal has a 35% manufacturing price advantage (think: the cost to make it) over European EVs and a 25% cost advantage when you factor in all the shipping and import tax expenses.

The Seal had a 15% price advantage versus Tesla’s similar-looking Model 3, they found.

And it’s not hard to figure out why BYD is winning on price: 75% of the Seal’s components, including the battery, are made in-house. That’s about double the industry average.

Prioritizing in-house parts suppliers – or what’s called “vertical integration” – isn’t the usual approach for this industry, which tends to rely on a vast, complex supply chain with prices that can fluctuate for all manner of reasons.

BYD’s broken that mold: it’s even buying auto transport ships to help control shipping costs.

Mind you, it’s not completely insular: BYD does rely on other parts from external suppliers, with around 10% coming from outside China (including Qualcomm chips). BYD has 600,000 employees, five times larger than Tesla’s, including 90,000 engineers, which helps give it a technological edge.

Now, BYD is hardly a new kid on the block: it’s got a $94 billion market cap, and Warren Buffett’s Berkshire Hathaway is still in for 8.8% of the company. (Buffett’s conglomerate company bought a massive stake in 2008 but has been shrinking its holding from a peak of around 19%.)

So, are China’s automakers set for world EV domination, then?

Well, that certainly was the buzz last month at the I.A.A. Mobility auto show in Munich. And, look, China itself is by far the biggest market for EVs, accounting for 60% of new vehicle registrations last year and 40% of the global electric car stock.

Most of the EVs that are sold in China are made at home. The country builds about 40 million cars per year but buys only about 20 million of them, which leaves it with enough supply to fill consumers’ needs overseas.

And since automakers in Europe, the US, and other parts of Asia are still slow to roll out EVs – and even slower to roll out affordable ones – China’s manufacturers have spotted an opening.

As of last year, 20% of electric car models on offer in China were priced at less than $15,000. Compare that to the US and Europe, where there were no electric models on sale for less than $20,000.

Here’s what UBS expects by 2030:

👉 Chinese automakers will have a 33% share of the EV market, up from 17% in 2022

👉 BYD is likely to be the market leader for Chinese EVs

👉 Market share of Western companies will drop to 58% from 81%

👉 Europe will primarily lead market share gains, followed by the U.S., Japan, South Korea and India

What’s the opportunity here?

There are already a number of winners from the EV revolution, and as this long-term megatrend is just getting started, you can safely bet that more will appear.

BYD and Tesla look set to be two EV winners, but whether a good company is a good investment depends on the price you pay.

Right now, BYD looks more reasonably priced, with expected profit growth of more than 30% over the next two years and with its shares currently trading at a 20x forward price-to-earnings (P/E) ratio.

But, remember, Buffett recently sold down some of his stake, plus there’s a fair bit of ongoing geopolitical uncertainty, so it’s worth bearing in mind that investments with China come with added risk.

Tesla, meanwhile, is expected to grow its profit by 45% over the next two years, but you’ll pay more for its shares, which are trading near a 50x forward P/E ratio.

Legacy automakers like Mercedez-Benz and BMW trade for much cheaper, around a 5x P/E ratio, but there’s no profit growth forecasted for either as the combustion engine slowdown slams the brakes on any forward movement from their EV launches.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell assets or make financial decisions. Please be careful and do your own research.