Introduction

Chinese electric car companies are receiving significant investments from foreign automakers, driven by the need for market access and technological advancements. One such example is Xpeng, a Chinese EV startup that recently secured a $700 million stake from Volkswagen. This collaboration aims to develop two cars specifically for the Chinese market, which is the largest auto market globally.

Stock Performance

Xpeng’s stock has experienced a remarkable surge, with U.S.-traded shares increasing by 135% year to date. Just a few months ago, the stock was in negative territory for 2023. Everbright Securities upgraded Xpeng’s stock to a “buy” rating, predicting it will outperform the broader market by at least 15% in the next six to 12 months.

Profit Potential through Technological Licensing

A report from Everbright Securities highlights the profit potential of technological licensing for both established automakers and new domestic Chinese brands. While large brands like Volkswagen possess supply chain control and cash flow, their tech abilities lag behind. On the other hand, new Chinese brands have strong technological capabilities but struggle with production management and cash flow.

Xpeng’s Unique Offering

Xpeng stands out among Chinese electric car brands as it offers an equivalent software to Tesla’s Full Self Driving (FSD) that helps drivers navigate city streets. However, Xpeng’s cash and cash equivalents have significantly decreased in the first quarter, indicating potential financial challenges. Additionally, the approval of Xpeng’s FSD software in China is limited to a few cities.

Volkswagen’s Challenges

Volkswagen, despite being an established global giant, has also faced difficulties in China’s electric car market. Its average monthly vehicle deliveries in the first half of the year were just over 10,000. Although Volkswagen’s cash position is stronger than Xpeng’s, the company has more at stake due to its significant presence in China.

Competition and Market Growth

Competition in China’s electric car market is intensifying, with homegrown brands like BYD and Zeekr entering the scene. Tesla, although commanding a significant market share, faces increasing competition. Bank of America Securities predicts that China’s electric car market will grow by 27% this year, reaching 8.7 million units and remaining the largest in the world.

Investment Opportunities

While investing in automakers themselves may not be the most lucrative option, Nomura suggests considering component manufacturers for electric cars with assisted driving capabilities. This includes companies like CATL, a battery giant, and Inovance, a motor controller supplier.