EV Battery Makers’ Euro Trip Could End in China
Shares of Korean battery makers are on a tear thanks to new rules to promote EVs in Europe. China could be a spoiler, however.
Shares of battery producers and electric-vehicle makers are getting a jolt from the Old World. Developments in the Middle Kingdom, however, are less positive: Investors planning to jump in now should take a second look.
With a market capitalization of $173 billion, Tesla isn’t far behind the world’s most-valuable car maker— Toyota, at $203 billion—and a surge last week had it briefly even closer. Electric-truck startup Nikola briefly became larger than Ford —despite having no revenue yet.
Unsurprisingly, companies supplying batteries to EVs have been powering up too. Shares of Korea’s Samsung SDI and China’s Contemporary Amperex Technology (CATL) have gained about 50% this year, while their Korean rival LG Chem is up 35%.
Regulations have been the major tailwind. Tougher carbon-emission standards in the European Union kicked in at the beginning of this year, meaning car makers have to sell more EVs to offset emissions from their gasoline models. EV sales in Europe in the first four months of 2020 jumped 56% from a year earlier, according to Nomura. Sales took a hit in April due to the Covid-19 pandemic, but outperformed the broader car market. Countries like France and Germany are raising their EV subsidies as part of their economic stimulus packages.
Things, however, aren’t as rosy in China, the largest EV market last year. EV sales in the first five months were down 39% year-over-year, worse than the 23% decline for the overall car market. Sales of EVs fell 24% last month, even though China’s auto sales managed to rise 15% with the coronavirus under control in most of the country. The impact of slashed EV subsidies last year continues to linger even though the government has held back on further drastic cuts for now. Any potential government stimulus may be steered toward boosting sales of gasoline cars, which still make up most of the market.
Korean battery makers currently dominate the European market so they could do better than their Chinese rivals. But competition could get stiffer, especially since Chinese manufacturers like CATL are already making inroads. That could dash hopes that higher revenue growth eventually lifts margins; LG Chem’s battery business, for example, lost money last year. Chinese producers have a long, storied history of disrupting the new energy space and dragging down margins: Look no further than the solar-power industry for the clearest example. In unit terms, CATL is already the world’s largest EV battery producer.
The overall demand of EVs still hinges on the path of the global economic recovery, which is highly uncertain. Given the fast and furious rise in battery shares, investors may want to slow down before climbing aboard.