Chinese EV startups spend more on research than Tesla

BEIJING – U.S.-listed Chinese electric car companies spend more on research than research relative to revenue Teslaaccording to CNBC analysis of the four automakers’ first-quarter earnings.

It’s a strategy for survival in China’s cutthroat auto market, the largest in the world. New energy vehicles, including both battery and hybrid cars, have grown rapidly to more than 40% of sales.

Many Chinese automakers are already spending as much or more on R&D as a percentage of their sales than their global peers, a significant increase from many years ago, Paul Gong, an auto analyst at UBS, told CNBC. “In certain cases it has even been circumvented in terms of absolute dollars.”

Of the four US-listed Chinese electric car companies Nio is in first place and spends almost 29% of turnover on research and development in the first three months of the year. That’s much higher than Tesla’s ratio of 5.4% in the first quarter and 4.2% in the second. Elon Musk’s company is known for its relatively low ratio.

It is less clear whether that higher spending can translate into long-term competitiveness.

Nio has been operating at a loss for years and has only seen deliveries of its more expensive cars increase in recent months. In addition to car launches, the company has held events in recent years to promote its battery services and other technology, including an event on car “quality” in late June.

“Everyone is talking about involution right now,” Feng Shen, chairman of Nio’s quality management committee, said in Mandarin at the event, as translated by CNBC. He was referring to a popular term in China to describe the fierce competition, especially in the electric car industry.

‘What companies should do [compete] “It’s about quality,” Shen said, adding that “if you can’t do a good job on quality, you can’t say anything.” He outlined Nio’s comprehensive plan to improve product quality, starting primarily with new technology and offerings. chain innovation.

Shen, who is also executive vice president of Nio, was previously president of luxury EV brand Polestar in China and worked in quality management at Ford engine in the US and China.

Nio opened its second factory in September 2022 in the city of Hefei, a production center for many car companies. The factory has approximately 2,000 human workers and 756 robots, which automate much of the production.

“The key is to digitalize every stage of production,” Nio founder and CEO William Li told reporters in June, according to a CNBC translation of the Chinese comments. He said if the digital system can be integrated across multiple levels of suppliers, the company can easily identify problems.

When asked about global production, Li said Nio would adhere to the same production standard, but did not provide details on overseas plans.

Hefei is the capital of Anhui province, west of Shanghai. The region is called the Yangtze River Delta, where China claims there are so many factories that a new energy vehicle manufacturer can find all the parts it needs within four hours’ drive.

China’s Ministry of Industry and Information Technology told CNBC in a statement that it has worked with automakers and suppliers to create hundreds of best practice cases and application benchmarks for smart manufacturing in the industry.

“A key competitive advantage for Chinese companies in China is actually the very effective or efficient supply chain,” said Jing Yang, director of Fitch Ratings’ corporate ratings division in Asia Pacific, with a focus on Chinese cars.

She noted that this could help Chinese electric car companies respond more quickly to customers and market needs than traditional carmakers.

Another part of the region, Zhejiang province, is home to the Hong Kong-listed auto giant Geely and its US-listed electric vehicle subsidiary Zeekr.

Zeekr’s first quarter results show that the company spent 13% of revenue on research and development. Parent company Geely, which did not disclose this figure in its first-quarter report, has spent at least 4% of revenue on research over the past four years, significantly more than previous years.

Geely’s vice president of automotive R&D, Ren Xiangfei, told CNBC late last month that while the company wants to improve both its automotive hardware and software, the latter can provide more differentiation.

“From the user’s perspective, the features that bring more surprises should be implemented through software,” Ren said in Mandarin, as translated by CNBC.

Car software includes driver assistance, in-car entertainment and security features.

Ren noted that new energy vehicles can support more of these functions because they have a larger battery than traditional fuel-powered cars.

“This introduces a new concept: the software-defined car,” he said.

Geely last month launched its ‘Aegis Short Blade Battery’, which the automaker says has passed tests above industry standards without exploding.

It is a rival to BYD’s ‘blade battery’ that has arguably put the company in its position as an EV leader. Geely ranked second in new energy vehicle sales in the first half of the year, edging Tesla into third place, according to the China Passenger Car Association.

Ren said the new battery, which will be deployed in Geely cars for the first time, will increase production costs by about 1,000 yuan (about $137.69) over competitor vehicles.

Because the chemical formula for making batteries is relatively mature, it is now more important to ensure consistency in production, he said. “This requires the support of a smart factory.”

Geely has also released an electric car architecture called SEA, which it says will enable faster production vehicles of different sizes.

“The vehicle platform is probably the most important thing to look at, and then the consistency with their approach,” said Taylor Ogan, CEO of Snow Bull Capital in Shenzhen.

He said it’s important to see a company deliver something fairly quickly after the announcement, and that there are already separate teams working on future product releases. “I think that’s the clear distinction,” he said.

UBS’s Gong cautioned that the ratio of research spending to revenue, also known as R&D intensity, is not a definitive measure of technological innovation.

“If they can sell more cars with better profitability, that basically means their innovative ways are probably right. Some of it may not be in cool features,” Gong said, noting that this could mean systematic cost savings. “Less luxury, but really powerful.”

Xpeng had an R&D intensity of 20% in the first quarter. Li AutoThat was just 11%, but the company’s range-extender cars have sold far more than pure battery-electric vehicles.

When it comes to absolute US dollars, it is quoted in Hong Kong BYD spent the equivalent of $1.47 billion on research in the first quarter, or 8.5% of revenue. That’s more than the $1.15 billion Tesla spent on research and development at the time.

Looking ahead, electric car companies are trying to differentiate themselves in the areas of battery and software – two categories that are dominated by CAT and Huawei respectively, said Jing Liu, professor of accounting and finance, and director of the investment research center at the Cheung Kong Graduate School of Business.

Liu said it’s unlikely that any one company can produce a better product than any supplier, but that ultimately means it’s difficult for automakers to stand out in a market where consumers can easily switch between brands.

Huawei has touted that it spends at least 10% of its revenue on R&D. CATL’s intensity ratio was 5.4% in the first quarter.

— CNBC’s Sonia Heng contributed to this report.