China’s Covid lockdown rules drive up prices
Freeman H. Shen, Founder, Chairman and CEO of WM Motor, speaks during a fireside chat on Day 2 of CNBC East Tech West at LN Garden Hotel Nansha Guangzhou on November 28, 2018 in Nansha, Guangzhou, China.
Dave Zhong/Getty Images for CNBC International
BEIJING — Covid-related restrictions have raised production costs for Chinese electric car start-up WM Motor, even as existing chip and battery shortages drive up costs, CEO Freeman Shen told CNBC.
“Adding all of these things together, this industry is a fast-growing industry, but the cost part of the equation is also going to be a challenge,” Shen, also founder and chairman of WM Motor, said Wednesday.
Sales of new energy vehicles – which include battery-only and hybrid-powered cars – more than doubled last year in China, the world’s biggest car market. The country has become a hotbed for electric car start-ups and a launching pad for many traditional auto giants going electric.
China quickly controlled the local spread of the coronavirus in 2020 by imposing rapid lockdowns on cities and neighborhoods. But after the highly transmissible variant of omicron emerged, some analysts began to question whether the costs of the zero-Covid policy now outweighed the benefits.
The impact is already being felt in the factories. A Chinese ministry overseeing manufacturing said this month that the shutdowns would be a drag on industrial production in the first quarter.
Shen explained the impact of the Covid restrictions on his start-up:
- A chipmaker in Malaysia had production problems and stopped shipping to Bosch China, which then stopped shipping to WM Motor.
- In China, after Covid cases emerged in Nanjing, one of WM Motor’s battery cell suppliers stopped deliveries.
- In recent months, similar disruptions have affected two of the company’s suppliers in the Shangyu district of Shaoxing city, near Hangzhou.
- Covid-related restrictions in the Ningbo port area have also halted delivery from three suppliers there.
“So all of those things were killing us,” Shen told CNBC.
Automakers around the world have cut production due to a shortage of semiconductors. Geopolitical tensions and overwhelming demand for chips in the wake of the pandemic have contributed to a supply shortfall that has lasted for more than a year.
Shen said he expects the chip shortage to improve in the second half of this year, based on conversations with his startup’s 11 chip vendors.
Electric car battery shortage
However, he pointed to another looming problem that could escalate: rising raw material costs for batteries.
Prices for battery-grade lithium carbonate rose more than 500% year-on-year earlier this month, according to S&P Global Platts. The company’s survey of industry insiders released this week found that 80% of respondents expect these lithium prices to remain high this year – about four times higher than at the start of this year. 2021.
The battery shortage is likely to worsen as demand for electric cars picks up in China in the second quarter, Shen said. For 2022, he expects electric car sales in the country to almost double from last year to about 5 million vehicles.
The surge in electric car sales comes despite an overall decline in passenger car sales in recent months, as consumer spending in China tumbled.
WM Motor said it delivered a quarterly record 15,114 vehicles in the last three months of 2021, bringing cumulative deliveries to 88,686 since the start-up handed its first car to a customer in 2018.
Reassessing a Japanese manufacturing model
One of the reasons the pandemic has disrupted the supply chain is that factories have historically used a long-standing Japanese model of “just-in-time” or lean manufacturing, in which factories only buy parts. necessary to reduce costs and increase efficiency, Shen pointed out. .
But now the strategy is changing.
“In order to make sure you can deliver your car, you’ll probably start thinking: we have to waste some of our money on holding stock,” he said. “For an automaker, the biggest loss would be losing sales to your customer.”
Part of WM Motor’s sales strategy is to work with real estate developers to open test-drive sites in more residential areas, while building the cars’ self-driving capabilities, such as in the parking lot, Shen said. .
He said the company will need to raise prices to meet rising costs, as others in the industry have already done.
For one, Tesla raised the price of its Model Y in China from 21,088 yuan ($3,300) in December to 301,840 yuan ($47,450), after subsidies. WM Motor cars are about half that price.
Travel restrictions affect business
Economists say Covid-related travel restrictions in China are hitting consumer spending more than factories.
Cities frequently change Covid testing requirements for travel, while flights and train tickets may be canceled depending on new reported Covid cases.
These restrictions have also affected WM Motor, Shen said. The company has research and development, a factory and other business operations in Shanghai, Chengdu, Zhejiang Province and Hubei Province, in addition to approximately 500 physical stores across the country.
He said the company had to use more technologies like virtual reality and augmented reality to help employees and customers communicate despite travel restrictions.
“We have to use this kind of technology because otherwise the user experience is going to be terrible and the efficiency is going to be very bad. And sometimes we can’t even get things done,” Shen said.
When asked if he had any plans for an IPO, Shen said there was no news to report on the listing front and cited pressing delivery issues.
“Obviously people had high expectations, our investor had high expectations, but we’re very busy these days delivering our product,” he said. “Hopefully we can get something to announce in the near future.”