Chinese EV startups spend more on research than Tesla

BEIJING — U.S.-listed Chinese electric vehicle makers spend a higher percentage of their sales on research than other companies. TeslaAccording to a CNBC analysis of first-quarter earnings from four automakers.

It’s a strategy to survive in China’s cutthroat auto market, the world’s largest, where new-energy vehicles, both battery-powered and hybrid, are growing rapidly and now account for more than 40% of sales.

Paul Gong, an auto analyst at UBS, told CNBC that many Chinese automakers are already spending as much or more on research and development as their global peers as a percentage of sales, up significantly from years ago. “In some cases, even in absolute terms, the difference is stark.”

Of the four Chinese electric vehicle manufacturers listed in the U.S., Nio The company ranked first, spending about 29% of its sales on research and development in the first three months of the year, well above Tesla’s ratios of 5.4% in the first quarter and 4.2% in the second quarter. Elon Musk’s company is known for its relatively low ratios.

Whether this increased spending translates into long-term competitiveness is unclear.

Nio has been operating at a loss for years and has only seen an uptick in deliveries of its premium vehicles in recent months. In addition to unveiling new vehicles, the company has held events in recent years to promote its battery servicing and other technologies, including one in late June focused on the “quality” of its vehicles.

“Now everyone is talking about ‘degeneration,'” Feng Shen, chairman of NIO’s quality control committee, said in Chinese at the event and translated by CNBC, referring to a term commonly used in China to describe fierce competition, particularly in the electric vehicle industry.

“What companies should do [compete] “The most important thing is quality,” Shen said, adding, “If we can’t control the quality, there’s nothing to say.” He revealed NIO’s broad plans to improve product quality, putting new technology and supply chain innovation first.

Shen, who is also Nio’s executive vice president, previously served as president of Chinese premium electric vehicle brand Polestar, where he was responsible for quality control. Ford Motor Company In the United States and China.

Nio opened a second factory in Hefei, a manufacturing hub for many auto companies, in September 2022. The factory has about 2,000 workers and 756 robots, automating much of the production.

“The key is to digitize every step of manufacturing,” NIO founder and CEO William Li told reporters in June, according to remarks translated from Chinese by CNBC. He said the company would be able to identify problems more easily if it could integrate digital systems into multiple levels of suppliers.

Asked about global production, Li said NIO would adhere to the same manufacturing standards but did not elaborate on its plans overseas.

Hefei is the capital of Anhui province, west of Shanghai. The region is known as the Yangtze River Delta, and China has many factories here, with new energy vehicle makers claiming they can find all the parts they need within a four-hour drive.

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

“A key competitive advantage for Chinese companies in China is actually a highly effective or efficient supply chain,” said Jing Yang, director of Asia Pacific corporate ratings at Fitch Ratings, who focuses on Chinese autos.

She noted that Chinese electric vehicle makers will be able to respond more quickly to customer and market needs than traditional automakers.

Another part of the region, Zhejiang province, is home to a major Hong Kong-listed automaker. Geely and a U.S.-listed electric vehicle subsidiary. Zeekle.

Geely Automobile Co. said it spent 13% of its sales on research and development in the company’s first quarterly results. Parent company Geely Automobile, which did not disclose figures in its first-quarter report, has spent at least 4% of its sales on research for each of the past four years, a big increase from the previous year.

Ren Xiangfei, Geely Auto’s vice president of automotive research and development, told CNBC late last month that the company aims to improve both its car hardware and software, but that the latter will allow it to offer greater differentiation.

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

In-vehicle software includes driver assistance functions, in-car entertainment functions, security functions, and more.

Ren noted that new energy vehicles have larger batteries than traditional fuel vehicles and can therefore support more functions.

“This introduces a new concept of software-defined automobiles,” he said.

Last month, Geely unveiled its Aegis short-blade battery, which the company said passed tests that exceeded industry standards without exploding.

This is a rival to the “blade battery” that has established BYD as an EV leader. Geely Automobile ranked second in new energy vehicle sales in the first half of this year, while Tesla came in third, according to the China Passenger Car Association.

Ren said the new batteries, which will be first installed in Geely cars, will add about 1,000 yuan ($137.69) to production costs compared with rivals’ vehicles.

Because the chemical formulas for battery manufacturing are relatively mature, it’s becoming more important to ensure consistency in manufacturing, he said. “To do that, we need the support of smart factories.”

Geely also unveiled an electric vehicle architecture called SEA, which it says will enable faster production of vehicles of a range of sizes.

“The vehicle platform is probably the most notable thing, then the consistency of approach,” said Taylor Organ, CEO of Shenzhen-based Snow Bull Capital.

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

UBS’s Gong cautioned that the ratio of research and development spending to sales, also known as R&D intensity, is not a conclusive measure of innovation.

“If they can sell more cars at a higher profitability, that basically means they’re probably right in the way they’re innovating. Some of it might not be the cool features,” Gong said, noting it could also involve systematic cost-cutting. “It’s not flashy, but it’s really powerful.”

Scheppen R&D intensity in the first quarter was 20%. Lee AutoWhile the company’s sales volume was just 11%, its range-extended vehicles far outnumbered sales of pure battery electric vehicles.

In terms of absolute US dollar, Hong Kong-listed BYD The company spent the equivalent of $1.47 billion, or 8.5% of its revenue, on research in the first quarter, more than the $1.15 billion that Tesla spent on research and development in the same period.

Looking to the future, electric vehicle manufacturers are looking to differentiate themselves in terms of batteries and software, two areas that Cattle Jin Liu, professor of accounting and finance and director of the Center for Investment Research at Cheung Kong Graduate School of Management, said the products are “Apple and Huawei,” respectively.

Liu said it was unlikely that one company could produce a better product than either supplier, but that ultimately meant it was harder for automakers to stand out in a market where consumers could easily switch brands.

Huawei prides itself on spending at least 10% of its revenue on research and development. CATL’s intensity ratio was 5.4% in the first quarter.

—CNBC’s Sonia Heng contributed to this report.