The market is too pessimistic! Morgan Stanley is bullish on the Chinese electric vehicle industry, stating that the second quarter may usher in an important turning point.

In recent years, Chinese new energy vehicles have performed remarkably well overseas. In the fourth quarter of last year, BYD's electric vehicle sales surpassed Tesla, claiming the global electric vehicle throne. Looking ahead to 2024, as the halo temporarily fades, competition remains fierce. Can the Chinese electric vehicle industry continue its high performance?

On March 10th, Morgan Stanley released a report titled "China EV – Time to Pivot," providing a comprehensive analysis of the Chinese electric vehicle industry. The report mentioned that due to seasonal factors at the beginning of the year and inventory backlog from the previous year, the Chinese electric vehicle industry had a slow start and faced intensified competition. However, the report remains optimistic about the industry's prospects, noting positive signs emerging, with the second quarter potentially marking a significant turning point.

Morgan Stanley pointed out that factors such as new product releases, cost reductions, and favorable policy environments are key drivers for the future growth of electric vehicles. It is projected that in 2024, China's wholesale volume of electric vehicles will reach 10.7 million units, a 21% year-on-year increase, with a penetration rate of 42%.

Specifically, in the second quarter, several positive signals have emerged in the Chinese electric vehicle industry: passenger flow/order volume is recovering, new product releases and car shows are expected to bring tailwinds, sales and profit margin expectations are gradually improving, and a favorable policy environment prevails.

Key Findings

Looking ahead, Morgan Stanley believes that battery costs in the Chinese electric vehicle industry are expected to decline. Price wars will continue, new products will be continuously launched, while facing intense industry competition and challenges from a macro perspective.

In terms of products, this year will see a richer variety of new products, possibly reaching a new high in the number of categories. The report predicts that there may be 120-140 electric vehicle models launched this year, a 20-25% year-on-year increase. With the development of autonomous driving technology, Advanced Driver Assistance Systems (ADAS) in urban areas are gradually becoming the "standard configuration" for mainstream electric vehicle models.

Regarding prices, price wars are likely to persist. Since the beginning of the year, brands such as Li Auto, XPeng, and Audi have launched promotional activities. Morgan Stanley predicts that before the Beijing Auto Show in April, promotions and discounts will remain significant. Factors such as declining battery costs, improved economies of scale, and increased profit margins in overseas markets may support price reduction activities, leading to more intense competition in the 100,000-200,000 yuan price range. In terms of batteries, there is an upgrade in quality and a reduction in costs. The 4C/5C fast-charging battery technology has become a trend. Although lithium prices have rebounded, the impact on battery contract prices lags behind. Goldman Sachs predicts that battery prices will remain low for a long time until the second quarter.

In the market aspect, overseas remains the main driving force for growth. Goldman Sachs points out that although the EU will impose retrospective tariffs on Chinese electric vehicles, extremely high tariffs would be needed to prevent Chinese electric vehicles from entering the global market. Before any specific measures are implemented, Chinese electric vehicle manufacturers will continue to vigorously expand overseas.