Where Shanghai goes, the rest of China follows.

Editor's note: This is a guest post from Rafi Khan, an investor, and does not represent the views of CnEVPost.

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Before we get started, take a look at some numbers:

  • China November auto retail sales were 1.65 million (YoY minus 9.5 percent).
  • November NEV retail sales were 598,000 (YoY up 58.2 percent) with record 36.3 percent penetration.
  • Pure BEVs sold were 434,000 or 72.6 percent.
  • Hybrid PHEVs sold were 164,000 or 27.6 percent.
  • January to November NEV sales were 5.03 million (YoY up 100.1 percent).

Shanghai numbers for October 2022:

  • Total car sales 62,238.
  • NEVs sold 30,751 penetration rate of 49.4 percent much higher than the national penetration rate of 36.3 percent.

Where Shanghai goes, the rest of China follows!

Often policies are implemented in Shanghai, before adoption in other parts of China.

Approx 300 million passenger cars in China. Car ratio per population of 0.24 is far below the 0.89 ratio in the US, hence the potential for greater sales growth.

1. New ICE sales are dying carcass though ICE 90 percent current vehicle parc.

  • 10 percent vehicle purchase tax (โ€œVPTโ€) on ICE (reduced by half to 5 percent in the second half of 2022) is exempt for NEVs. Changing the existing ICE for another ICE vehicle still mandates VPT fee.
  • Lotteries / bid auction / quotas in major cities on new ICE sales.
  • Auto makers mandated to increase EV production to 40 percent goal set by the government in 2030 or pay penalties.
  • The 36.3 percent penetration suggests 40 percent penetration will arrive 7 years earlier than government envisioned.

Add it all up & ICE sales will go to zero faster than anyone predicted.

2. PHEV sales may now face policymakers' wrath.

China NEV sales at 786,000 units in Nov, a new record, CAAM data show

Say what good you will about PHEVs, but PHEVs will never have zero emissions.

No going to any climate conference for any leader & saying you are committed to zero emissions when you are also encouraging sale of PHEVs.

Zero emissions on all vehicles in major polluted Chinese cities must logically be a policy goal โ€“ PHEVs are not synchronous with that goal.

As range anxiety diminishes with:

  • More chargers
  • Faster chargers
  • More battery swap stations
  • Higher capacity batteries

The attraction of PHEVs diminishes. CAAM wholesale sales numbers for November 2022 (link above)

  • NEV sales 786,000 (YoY up 72.3 percent)
  • BEV sales 615,000 (YoY up 67.4 percent)
  • PHEV sales 171,000 (YoY up 92.6 percent)

PHEV percentage increase was 25 percent more than even BEV increase.

$64 Question

Are regulators content PHEVs sales growing faster than BEV?

Very little in China happens randomly โ€“ typically cohorts of Ivy League Post Graduate PhDs behind major new policy moves.

The answer perhaps lies in the new Shanghai PHEV policy with effect in January 2023.

Despite the article headline, this affects Li sales & image as well.

From January 1, 2023, consumers who buy plug-in hybrid vehicles (including extended-range models) will no longer be issued special license quotas.

This means that consumers will no longer enjoy the benefits of free license plates, and will instead need to participate in fierce license plate bidding alongside fuel-based vehicle buyers.

Shanghai has always been an important market for plug-in hybrid cars and extended-range cars.

Data show that the sales volume of plug-in hybrid cars in the city accounts for more than 30 percent of China's entire sales volume in the sector.

In addition, since Shanghai is now taking the lead in eliminating plug-in hybrids' and extended-range models' access to free electric vehicle license plates, there may be other regions in China to follow up with similar moves.

Other cities recognize from where new PHEV restrictions emanate.

So whilst ICE sales may resemble dying carcass, PHEV sales may suffer from premature, aborted growth syndrome starting January 2023.

Next Gen ES8, to be unveiled on Nio Day, will take some market share from especially in Shanghai.

3. Shanghai numbers show us where BEVs sales are going

NEVs account for 45.1 percent of new vehicles registered in Shanghai in H1.

NEVs account for 45.1% of new vehicles registered in Shanghai in H1

China's NEV penetration rate was 24 percent in 1H 2022 compared to Shanghai 45.1 percent

The number of NEVs in Shanghai reached 710,000 at the end of June, accounting for 15.74 percent of all vehicles.

By the end of June, Shanghai's battery electric vehicle ownership was 380,000, accounting for 53.52 percent of the total number of NEVs.

PHEV 46 percent Shanghai percentage seems destined to fall from Jan 2023.

In summary:

  • ICE is on a well-established death spiral in sales
  • PHEVs face aborted growth courtesy of Shanghai government policy probably followed by other cities.
  • BEV will win the battle for market share in China at a faster rate than anyone predicted.

Why the need for Nio Sub-brands?

Of 300 million passenger vehicles in China, approx. 10 percent may be premium luxury. Nio will target those 30 million premium luxury ICE owners changing their ICE vehicles.

From January to November, Nio's share of the high-end pure electric vehicle market with an average transaction price of more than RMB 400,000 ($57,320) was over 70 percent.

In China's high-end electric vehicle market priced above RMB 400,000, Nio had a market share of 77.6 percent in November.

Jan to November 70 percent; In November 77.6 percent. So Nio premium luxury dominance is growing!

Stigma amongst Chinese consumers surrounding BBA EVs certainly helps Nio.

ET5 plus next-gen EC6, ES6, ES8 should consolidate that trend as BBA seemingly has no viable current competing EV product nor any in the pipeline.

Nio outsells BBA (Mercedes, BMW, Audi) EVs combined in China by a large factor.

Such dominance in premium luxury is not enough for Nio. Nio will expand age range attraction plus price range attraction.

Nio is committed to ALPS (RMB 100 to 250k) & Firefly (up to RMB100k) projects whose segments contain China's future new premium luxury buyers.

35 percent of EV buyers may be in up to RMB 100,000 segment but the big profits are in the premium luxury space. Good luck to GM Wuling making $100 on a Mini but the real action is where Mercedes, BMW & Audi have ruled for the past many decades.

Makes ultimate sense to garner goodwill with this group as they also move up vehicle purchasing ranks by offering lower-priced sub-brand EVs.

Consistent with MIC 2025, ET7 may be an obvious mass purchase choice for government departments replacing aging black limo Audi A6 fleet deemed, for years, the semi-official car of the Chinese government. No more so with MIC 2025 & Nio ET7.

Even the current delay in ET7 sales to replace Audi A6 Fleet may be whilst Nio optimizes mass production.

Why the need for Nio smartphone?

One billion smartphone users in China with approx. 20 percent having iPhones. 75 percent of the market is Android phones.

iPhone users will be skewed to the premium luxury vehicle segment. iPhone market share of new phones has risen over past decade from 13 percent to 25 percent.

Nio sees its future main EV challenger as AAPL. The game is already pretty much over for BBA to challenge Nio in the premium luxury segment.

Hence launch of the Nio smartphone in 1H 2022.

William Li Factor โ€“ From undercapitalized IPO to skirting bankruptcy few months later to potentially dismantling the Mercedes, BMW, Audi juggernauts in China.

Only time will tell whether William Li has some of the Steve Jobs DNA but for sure the current AAPL crowd doesn't (JMHO).

Most likely Nio community, for whom William Li has rock star status, will be open-minded on the Nio smartphone.

Every reason to believe William Li will have something special to show with Nio smartphone launch in 1H 2022.

Logic points to BEV dominating Chinese retail passenger vehicle sales for next decade at expense of both ICE & PHEV.

Logic points to Nio being a dominant force in premium luxury.

Nio Sub-brands & smartphone introduction may usher in a new generational EV-related tech stock plus extend dominance tenure for Nio in premium luxury.

Not an Auto Analyst Nor Financial Advisor JMHO DYODD

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