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China’s automakers must adapt quickly or lose out on the EV boom

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Chinese new energy vehicle giant shows off the latest version of its Han electric sedan at the Beijing auto show on April 26, 2024.

CNBC | Evelyn Cheng

BEIJING — Chinese automakers, including state-owned auto giant GAC Group, can’t afford to take it easy in the country’s electric car boom if they want to survive.

Adoption of battery and hybrid-powered cars has surged in China, but an onslaught of new models has fueled a price war that’s forced Tesla to also cut its prices. While Chinese automakers also look overseas for growth, other countries are increasingly wary of the impact of the cars on domestic auto industries, requiring investment in local production. It’s now survival of the fittest in China’s already competitive EV market.

“The speed of elimination will only pick up,” Feng Xingya, general manager at GAC, told reporters on the sidelines of the Beijing auto show in late April. That’s according to a CNBC translation of his Mandarin-language remarks.

GAC slashed prices on its cars one week before the May 1 Labor Day holiday in China, Feng said, noting the price war contributed to its first-quarter sales slump. The automaker’s operating revenue fell year-on-year in the first quarter for the first time since 2020, according to Wind Information.

To stay competitive, Feng said GAC is partnering with tech companies such as Huawei, while working on in-house research and development. The automaker is the joint venture partner of Honda and Toyota in China, and has an electric car brand called Aion.

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“In the short term, if your product isn’t good, then consumers won’t buy it,” Feng said. “You need to use the best tech and the best products to satisfy consumer needs. In the long term, you must have a core competitive edge.”

Expanding outside China

Factories go global

Part of GAC’s international strategy is to localize production, Wei said, noting the company is using a variety of approaches such as joint ventures and technology partnerships. He said GAC opened a factory in Malaysia in April and plans to open another in Thailand in June, with Egypt, Brazil and Turkey also under consideration.

GAC plans to establish eight subsidiaries this year, including in Amsterdam, Wei said. But the U.S. isn’t part of the company’s near-term overseas expansion plans, he said.

The difference today is that the overcapacity now has come together with vehicles that are very competitive

Stephen Dyer

AlixPartners, co-leader of the Greater China Business

U.S. and European officials have in recent months emphasized the need to address China’s “overcapacity,” which can be loosely defined as state-supported production of goods that exceeds demand. China has pushed back on such concerns and its Ministry of Commerce claimed that, from a global perspective, new energy faces a capacity shortage.

“There’s always been overcapacity in the Chinese auto industry,” said Stephen Dyer, co-leader of the Greater China business at consulting firm AlixPartners, and Asia leader for its automotive and industrials practice.

“The difference today is that the overcapacity now has come together with vehicles that are very competitive,” he told CNBC on the sidelines of the auto show. “So in our EV survey I was surprised to find that about 73% of U.S. consumers could recognize at least one Chinese EV brand. And Europe was close behind.”

Dyer expects that to drive overseas demand for Chinese electric cars. AlixPartners’ survey found that BYD had the highest brand recognition across the U.S. and major European countries, followed by Nio and Leap Motor.

BYD exported 242,000 cars last year and is also building factories overseas. The company’s sales are roughly split between hybrid and battery-powered vehicles. BYD no longer sells traditional fuel-powered passenger cars.

Tech competition

In addition to price, this year’s auto show in Beijing reflected how companies — Chinese and foreign — are competing on tech such as driver-assist software.

Chinese consumers placed almost twice as much importance on tech features compared with U.S. consumers, Dyer said, citing AlixPartners’ survey.

He noted how Chinese startups are so aggressive that a car may be sold with new tech, even if the software still has problems. “They know they can use over-the-air updates to rapidly fix bugs or add features as needed,” Dyer said.

Interest in tech doesn’t mean consumers are sold on battery-only cars. Dyer said that in the short term, consumers are still worried about driving range — meaning that hybrids are not only in demand, but often used without charging the battery.

Elon Musk meets with China's Premier Li Qiang to discuss Tesla, full-self driving and restrictions

Even Volkswagen is getting in on the “smart tech” race. The German auto giant revealed at the auto show its joint venture with Shanghai’s state-owned SAIC Motor teamed up with Chinese drone company DJI’s automotive unit to create a driver-assist system for the newly launched Tiguan L Pro.

The initial version of the SUV is fuel-powered, for which the company’s tagline is: “oil or electric, both are smart,” according to a CNBC translation of the Chinese.

Battery manufacturer CATL had a more prominent exhibition booth this year, likely in the hope of encouraging consumers to buy cars with its batteries, as competitors’ market share grows, said Zhong Shi, an analyst with the China Automobile Dealers Association.

Automotive chip companies Black Sesame and Horizon Robotics also had booths inside the main exhibition hall.

What customers want

Lotus Technology, a high-end U.K. car brand acquired by Geely, found in a survey of its customers their top requests were for automatic parking and battery charging, which would allow drivers to stay in the car.

That’s according to CFO Alexious Kuen Long Lee, who spoke with CNBC on the sidelines of the Beijing auto show. He noted the company now has robotic battery chargers in Shanghai.

Lotus and Nio last week also announced a strategic partnership on battery swapping and charging.

“I think there is a handing over of the baton where the Chinese brands are becoming much bigger and much stronger, and the foreign brands are still trying to decide what’s the best energy route,” said Lee, who’s worked in China since 1998. “Are they still deciding on the PHEV, are they still thinking about BEVs, are they still thinking about the internal combustion cars? The entire decision-making process becomes so complex, with so much resistance internally, that I think they’re just not being productive.”

But he thinks Lotus has found the right strategy by expanding its product line, and going straight to battery-powered cars. “Lotus today,” he said, “is similar to what international brands’ position [was] in China, probably back in 2000.”

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India may have fastest growing e-commerce sector

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India: the "perfect" emerging market

Investors may want to consider adding exposure to the world’s second-largest emerging market.

According to EMQQ Global founder Kevin Carter, India’s technology sector is extremely attractive right now.

“It’s the tip of the spear of growth [in e-commerce] … not just in emerging markets, but on the planet,” Carter told CNBC’s “ETF Edge” this week. 

His firm is behind the INQQ The India Internet ETF, which was launched in 2022. The India Internet ETF is up almost 21% so far this year, as of Friday’s close.

‘DoorDash of India’

One of Carter’s top plays is Zomato, which he calls “the DoorDash of India.” Zomato stock is up 128% this year.

“One of the reasons Zomato has done so well this year is because the quick commerce business blanket has exceeded expectations,” Carter said. “It now looks like it’s going to be the biggest business at Zomato.”

Carter noted his bullishness comes from a population that is just starting to go online.

“They’re getting their first-ever computer today basically,” he said, “You’re giving billions of people super computers in their pocket internet access.”

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How the Federal Reserve’s rate policy affects mortgages

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The Federal Reserve lowered its interest rate target three times in 2024.

This has many Americans waiting for mortgage rates to fall. But that may not happen for some time.

“I think the best case scenario is we’re going to continue to see mortgage rates hover around six and a half to 7%,” said Jordan Jackson, a global market strategist at J.P. Morgan Asset Management. “So unfortunately for those homeowners who are looking for a bit of a reprieve on the mortgage rate side, that may not come to fruition,” Jordan said in an interview with CNBC.

Mortgage rates can be influenced by Fed policy. But the rates are more closely tied to long-term borrowing rates for government debt. The 10-year Treasury note yield has been increasing in recent months as investors consider more expansionary fiscal policies that may come from Washington in 2025. This, combined with signals sent from the market for mortgage-backed securities, determine the rates issued within new mortgages.

Economists at Fannie Mae say the Fed’s management of its mortgage-backed securities portfolio may contribute to today’s mortgage rates.

In the pandemic, the Fed bought huge amounts of assets, including mortgage-backed securities, to adjust demand and supply dynamics within the bond market. Economists also refer to the technique as “quantitative easing.”

Quantitative easing can reduce the spread between mortgage rates and Treasury yields, which leads to cheaper loan terms for home buyers. It can also provide opportunities for owners looking to refinance their mortgages. The Fed’s use of this technique in the pandemic brought mortgages rates to record lows in 2021.

“They were extra aggressive in 2021 with buying mortgage-backed securities. So, the [quantitative easing] was probably ill-advised at the time.” said Matthew Graham, COO of Mortgage News Daily.

In 2022, the Federal Reserve kicked off plans to reduce the balance of its holdings, primarily by allowing those assets to mature and “roll-off” of its balance sheet. This process is known as “quantitative tightening,” and it may add upward pressure on the spread between mortgage rates and Treasury yields.

“I think that’s one of the reasons the mortgage rates are still going in the wrong direction from the Federal Reserve’s standpoint,” said George Calhoun, director of the Hanlon Financial Systems Center at Stevens Institute of Technology.

Watch the video above to learn how the Fed’s decisions affect mortgage rates.

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Fintechs are 2024’s biggest gainers among financials

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Jason Wilk

Source: Jason Wilk

Jason Wilk, the CEO of digital banking service Dave, remembers the absolute low point in his brief career as head of a publicly-traded firm.

It was June 2023, and shares of his company had recently dipped below $5 apiece. Desperate to keep Dave afloat, Wilk found himself at a Los Angeles conference for micro-cap stocks, where he pitched investors on tiny $5,000 stakes in his firm.

“I’m not going to lie, this was probably the hardest time of my life,” Wilk told CNBC. “To go from being a $5 billion company to $50 million in 12 months, it was so freaking hard.”

But in the months that followed, Dave turned profitable and consistently topped Wall Street analyst expectations for revenue and profit. Now, Wilk’s company is the top gainer for 2024 among U.S. financial stocks, with a 934% year-to-date surge through Thursday.

The fintech firm, which makes money by extending small loans to cash-strapped Americans, is emblematic of a larger shift that’s still in its early stages, according to JMP Securities analyst Devin Ryan.

Investors had dumped high-flying fintech companies in 2022 as a wave of unprofitable firms like Dave went public via special purpose acquisition companies. The environment turned suddenly, from rewarding growth at any cost to deep skepticism of how money-losing firms would navigate rising interest rates as the Federal Reserve battled inflation.

Now, with the Fed easing rates, investors have rushed back into financial firms of all sizes, including alternative asset managers like KKR and credit card companies like American Express, the top performers among financial stocks this year with market caps of at least $100 billion and $200 billion, respectively.

Big investment banks including Goldman Sachs, the top gainer among the six largest U.S. banks, have also surged this year on hope for a rebound in Wall Street deals activity.

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Dave, a fintech firm taking on big banks like JPMorgan Chase, is a standout stock this year.

But it’s fintech firms like Dave and Robinhood, the commission-free trading app, that are the most promising heading into next year, Ryan said.

Robinhood, whose shares have surged 190% this year, is the top gainer among financial firms with a market cap of at least $10 billion.

“Both Dave and Robinhood went from losing money to being incredibly profitable firms,” Ryan said. “They’ve gotten their house in order by growing their revenues at an accelerating rate while managing expenses at the same time.”

While Ryan views valuations for investment banks and alternative asset manages as approaching “stretched” levels, he said that “fintechs still have a long way to run; they are early in their journey.”

Financials broadly had already begun benefitting from the Fed easing cycle when the election victory of Donald Trump last month intensified interest in the sector. Investors expect Trump will ease regulation and allow for more innovation with government appointments including ex-PayPal executive and Silicon Valley investor David Sacks as AI and crypto czar.

Those expectations have boosted the shares of entrenched players like JPMorgan Chase and Citigroup, but have had a greater impact on potential disruptors like Dave that could see even more upside from a looser regulatory environment.

Gas & groceries

Dave has built a niche among Americans underserved by traditional banks by offering fee-free checking and savings accounts.

It makes money mostly by extending small loans of around $180 each to help users “pay for gas and groceries” until their next paycheck, according to Wilk; Dave makes roughly $9 per loan on average.

Customers come out ahead by avoiding more expensive forms of credit from other institutions, including $35 overdraft fees charged by banks, he said. Dave, which is not a bank, but partners with one, does not charge late fees or interest on cash advances.

The company also offers a debit card, and interchange fees from transactions made by Dave customers will make up an increasing share of revenue, Wilk said.

While the fintech firm faces far less skepticism now than it did in mid-2023— of the seven analysts who track it, all rate the stock a “buy,” according to Factset — Wilk said the company still has more to prove.

“Our business is so much better now than we went public, but it’s still priced 60% below the IPO price,” he said. “Hopefully we can claw our way back.”

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