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Glenn Profile picture
@GlennLuk
Nov 26 • 12 tweets • 4 min read • Read on X
Just so many inaccuracies here:

▪️ Sector-wide EV gross margins are up
▪️ Subsidies are down on a per-vehicle basis
▪️ No basis for speculating “most firms expected to bankrupt”
▪️ Private sector equity funding is the dominant form of EV sector funding, not credit
▪️ Sector-wide EV gross margins are up

+2% from ~21% in ‘23 to ~23% in ‘24E, mainly driven by higher volumes.

If we strip subsidies out, they are up from ~14% to ~16%
For the sake of comparison, the EV sector in the US runs at a gross margin of <2% (subsidized) and –22% (negative) accounting for estimated subsidies.
Battery gross margins and profitability are up from 2023 to 1H 2024. The sector ad a whole features high RoIC, mainly driven by CATL.

It makes a disproportionate share of EV sector gross profits.
▪️ Subsidies are down on a per-vehicle basis

China ended demand-side direct subsidies in 2022.

Its current sales tax exemption phases out over the next four years.

Overall subsidies are only up because of nearly 40% YoY domestic unit growth.
▪️ No basis for speculating “most firms expected to bankrupt”

There’s simply no basis for this. I’ve reviewed the financials of nearly two dozen carmakers in China.

My rough swag is carmakers representing ~75% of NEV sales are profitable.
Among pureplays, BYD, Li Auto, Seres and Tesla-China are profitable.

SOEs (Chang’an, Chery) and private incumbents (Geely, GWM) have profitable ICE businesses to support profitable EV divisions.
Lossmaking pureplays like Nio, XPeng, Leapmotor are trading at healthy valuations that do not indicate any sign of bankruptcy or financial distress.

Indeed, they have already proven to be targets for straetgic investment from foreign MNCs (VW/Xpeng, Stellantis/Leapmotor).
Xiaomi has a profitable consumer electronics business and is already generating 8-10% gross margins after only launching its car business less than a year ago.

Huawei’s auto division became profitable this year.
Hozon / Neta is probably the most prominent troubled one. Its EV sales representative less than 1% of total sector sales.

There will be consolidation coming but consolidation is fundamentally different from bankruptcy.
ICE incumbents both in China and outside that are struggling with NEVs may acquire smaller pureplays EV firms (e.g. Hozon).

Pureplays might merge or form partnerships. Some EV brands might thrive as R&D-light Huawei HIMA partners like Seres.
▪️ Private sector equity funding is the dominant form of EV sector funding, not credit

Vast majority of funding has come from private sector capital, and more equity than credit.

Most companies in the space have more cash than debt on their balance sheets.

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More from @GlennLuk

Glenn Profile picture
Nov 26
We’ve really lost the plot when the solution to “re-industrializing the economy for national security purposes” is reframed around the goal of trying to “rebalance China”.
Instead of focusing on trying to fix the domestic issues that lay at the heart of a decaying industrial base, policymakers seem to find it easier to point fingers at external targets as if the world’s greatest superpower has zero agency here.
And while ignoring our own agency, we seem to forget that China has its own agency as well.

What is Plan B when they say “nah … we good for now”
Read 30 tweets
Glenn Profile picture
Nov 21
This @WSJ article was a good reason to update a bunch of #HSR charts.

"giant money pit"? 😒

In 2024, China's HSR ridership surpassed all-time highs and China Railway is going to generate ¥1.3 trillion of revenue and ¥400 billion of EBITDA.

🧵

wsj.com/world/china/xi…
Since 2013, China's HSR network has expanded >4x from ~10k km to over 46k.

And traffic — measured both by number of trips and distance traveled — has more than kept pace, except during the pandemic period, rather understandably. Image
That means utilization has reached all-time highs.

In 2024, ~25.3 million riders will cross the average stretch of HSR track in China. Image
Read 12 tweets
Glenn Profile picture
Nov 18
There are two main data points that support the China “weak domestic demand” claim:

1️⃣ The trade surplus it runs, measured by Customs

2️⃣ Consumption as a % of GDP

These “kernels” of objective truth are then conflated with Bigger Ideas to support an ultimately flawed narrative. Image
1️⃣ Customs trade data doesn’t capture all holistic trade

The most commonly cited data showing persistent Chinese surpluses is customs data reported by GACC, China’s customs department.

Some live examples/references: Image
Image
Image
In some cases, “weak demand” proponents even focus only on the manufactured goods trade, which ignores the large structural deficit China has in primary goods trade like oil, natural resources and food products.
Read 21 tweets
Glenn Profile picture
Nov 14
IMO conflating mfg goods with holistic global trade here.

China runs a mfg. goods surplus of ~$1,763B.

But it runs a structural deficit in *every other key trade category.

(moreover, the mfg. goods figure itself is likely overstated relative to underlying fund flows)
This is what’s excluded from the above number:

1️⃣ $909B of primary goods imports (food, natural resources)
2️⃣ $241B services (mainly travel/tourism)
3️⃣ $386B profits of foreign firms operating in China

As well as a 4️⃣ $258B “factoryless manufacturing” adjustment. Image
1️⃣ China has a large structural deficit in natural resources (iron ore, petroleum) and food (soybeans, corn).

e.g. China imported $332B of petroleum and $272B of ore during the period.

This brings the net goods surplus to $854B for the 12 months ending 6/30/2024, per GACC.
Read 17 tweets
Glenn Profile picture
Nov 13
This resonated with me.

The concentration of gains from technology advances suggests that it needs to be packaged with well-thought-out distributional policy …
… lest the disruptive effects of tech gains lead even more disruptive and less optimal societal-level outcomes that can paradoxically torpedo ability to capture future tech progress.
This can also be generalized beyond tech to other complex trends like global outsourcing that come with similar negative externalities (disruptive effects on communities).
Read 9 tweets
Glenn Profile picture
Nov 12
There’s a shocking level of naivete embedded here (Rubio interview) when you walk through the practical & operational implications of trying to move this type of manufacturing.

Who is going to be responsible for setting up the factories in these locales? Image
First, remember these aren’t Gigafactories — the U.S. wants more of those, not less.

These are labor-intensive export processing factories: The ones that were offshored from this country over the last half-century, pre-dating China’s rise as a manufacturer.
Second, we are not talking about large-scale electronics factories like those run by Foxconn.

These countries are small and don’t have the scaled workforce that you need to make the unit economics work.

We are talking product categories like clothing and toys.
Read 19 tweets

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