Author | You Li

For more financial information | BT Finance Data Hub

Total word count: 3,387, estimated reading time: 9 minutes

Among the competitors, BYD may have the most grievances against Geely.

At the recent 2024 China Automotive Forum, Yang Xueliang, Senior Vice President of Geely Group, and Li Yunfei, General Manager of BYD Brand and Public Relations, clashed over whether the industry should continue to engage in intense competition.

BYD believes that the more intense the competition in China's automotive industry, the better and stronger it becomes. In contrast, Geely argues that "internal competition disregards ethics and industry regulations, driven solely by selfish interests, and that peers should unite to maintain market order."

Fortunately, the ultimate rule in the business world is clear: Performance speaks louder than words in determining winners and losers.

Geely Auto's recent financial report revealed double-digit growth in both revenue and net profit for the first half of 2024. Notably, shareholders' profit increased by a staggering 574.7%, with the reported figure of RMB 10.598 billion exceeding the previous year's by RMB 9.027 billion.

In comparison, BYD's revenue and net profit growth were more modest, with revenue increasing by 15.76% year-on-year and net profit rising by 24.44% for the first half of the year.

Given Geely's sudden surge in performance, does this signal a potential shift in the new energy vehicle (NEV) industry landscape? At least within Geely, there is a strong sense of confidence.

Gui Shengyue, CEO and Executive Director of Geely Automobile Holdings Limited, stated, "We have seen the dawn of Geely Automobile's resurgence." It was only then that many realized that Geely's confidence in challenging BYD might stem from its robust financial performance.

1

Is Geely the Big Winner?

Amidst a globally contracting economy, the NEV sector remains one of the few exciting avenues. However, there is a clear divide between frontrunners and laggards in the industry.

According to sales data for the first half of the year released by the China Automobile Dealers Association, retail sales of NEVs reached 4.113 million units from January to June, a year-on-year increase of 33.2%. Notably, both Tesla China and GAC Aion experienced sales declines, with GAC Aion's sales dropping by a significant 22.9%, the steepest among the top 10 manufacturers.

Even Tesla, the long-time leader in the NEV market, saw a 5.4% decline in sales. Some analysts attribute this to market share erosion by Geely.

Geely's financial report revealed cumulative sales of 955,700 units for H1 2024, a year-on-year increase of 41%, setting a new record for the first half of the year. In July, sales continued to rise, exceeding 1.1 million units from January to July, up 36% year-on-year.

Geely's growth isn't limited to China; it is also making rapid progress in Europe and the United States. The NEV sales rankings for January to June showed that Geely's global sales continued to rise, with 35,347 units sold in June alone, an over 61% year-on-year increase. Overseas sales totaled 197,428 units, up over 67% year-on-year, surpassing Tesla's sales figures.

Internal combustion engine (ICE) vehicles remain Geely's flagship business, accounting for 66.5% of total sales with 635,500 units sold in the first half of the year.

Similar to most ICE era leaders, Geely's NEV series exhibits a small base but rapid growth trend. Together, Geely, Lynk & Co., and Zeekr sold 320,200 NEVs, up 116.9% year-on-year. Among them, plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs) sold 130,200 and 189,900 units, respectively, up 489% and 51% year-on-year.

Geely's simultaneous focus on ICE and NEVs has driven its performance skyward. Over six months, net profit increased by 715% year-on-year, translating to a daily profit of RMB 57 million.

After three consecutive years of declining net profit growth, Geely's market value plummeted by over HKD 50 billion within a year in 2021.

The trend of increasing revenue without corresponding profit growth persisted in 2022. Despite facing criticism over profitability, Geely managed to boost sales to 1.43 million units under pressure. However, with BYD selling 1.87 million units, Geely had to relinquish its position as the industry leader, a status it held for nearly two years.

Geely's ability to grow despite the overall decline in ICE sales, increasing its ICE sales by 20% to reclaim the top spot, has been a rare boost for the entire industry.

Based on its annual plan, Geely's original target was 1.9 million units, with half achieved in the first half. Considering the market trend of higher sales in the second half, Geely adjusted its expectations. During the July performance exchange meeting, executives announced an upward revision of the annual target to over 2 million units. That month, Geely sold 150,782 units, a 13% year-on-year increase.

2

What Sets Geely Apart from BYD?

BYD's current advantages lie in its early start in NEV research and development, as well as its leading edge in blade battery technology, which has earned it ample competitive space.

Despite nearly triple the revenue of Geely, BYD's cumulative net profit stands at RMB 13.631 billion, comparable to Geely's RMB 10.38 billion. Low gross margin has long been a pain point for BYD. After excluding BYD Electronics in the second quarter, BYD's automotive business gross margin fell by nearly 6 percentage points to 22.4%, lower than market expectations of 24%.

According to Dolphin Investment Research, BYD's in-house battery production could increase gross margin by approximately 4 percentage points. This suggests that BYD's actual vehicle sales gross margin in Q2 (April-June) may have dipped below 20%.

This decline could be attributed to lower unit prices. BYD's average car price in Q2 was roughly RMB 136,000, a decrease of RMB 5,000 from the previous quarter.

This pricing strategy may seem contradictory but aims to increase market share through temporary subsidies or losses. This tactic is prevalent in the industry as consumers, particularly NEV buyers, have yet to form strong brand preferences and prioritize price, performance, and after-sales service.

BYD, a seasoned player, understands the difficulty of raising prices once reduced. Dolphin Investment Research notes that while BYD's pure electric high-end models are yet to break through, its advantageous plug-in hybrids showed a decline in the latest quarter, highlighting an area for improvement.

Interestingly, like Geely, Seres also refuses to engage in a price war.

Seres Chairman Zhang Xinghai stated that the AITO Askev price has risen instead of fallen since its launch, accompanied by growing order volumes. "Many cars resort to price cuts to boost sales, but this doesn't always work. Seres focuses on brand building rather than price wars; a strong brand creates value," he said.

3

From Price War to Value War?

As Zhang Xinghai suggested, AITO Askev's average sales price of RMB 550,000 for 18,300 units in July was driven not by price but by value. Comparing Geely and BYD reveals that pure price competition is no longer a viable strategy for gaining a competitive edge.

One reason is the transition from ICE to NEVs, which entails fundamentally different R&D and marketing logics. While a single best-selling model could dominate in the ICE era, NEV manufacturers prefer product matrices and faster product launches, shortening development cycles to 12-15 months, or even twice a year for model updates.

ICE manufacturers entering the NEV market face choices between PHEVs, hybrid electric vehicles, extended-range electric vehicles, and BEVs, leading some players astray. These companies need more time and resources to catch up, as evidenced by the rise of NIO, Xpeng, and Li Auto during this phase. Geely's pent-up frustration likely stems from similar challenges.

The essence of the changing competitive landscape lies in understanding consumers, NEV production processes, and market trends. While value wars can apply to incremental markets, tactics may need to shift in mature markets.

Another factor is the changing economic landscape. Housing, once a rigid demand and significant expenditure, has become an optional, deferrable purchase. Lower-cost, faster-to-market NEVs have transitioned from durable luxuries to mass consumer goods, occupying a significant share of household spending.

This shift in consumer mindset is evident. A Beijing youth previously loyal to premium brands like BMW, Audi, and Mercedes-Benz changed his mind after test-driving an ideal car. "I used to buy cars for status, but driving an NEV taught me how important the driving experience is. The only car that lets me fully stretch my legs is the ideal one," he said.

Similarly, Geely attracts customers with spacious interiors and comfortable intelligent driving experiences.

The Geely Galaxy E5, supported by the GEA architecture and CTB battery-to-body integration, boasts a "space utilization rate" of 67.2%, offering "A-segment dimensions with B-segment space."

Geely's R&D expenditure increased from RMB 6.765 billion in 2022 to RMB 7.81 billion in 2023. In the first half of this year, R&D spending further rose by 52% year-on-year to RMB 4.553 billion.

Overall, Geely still has a long way to go in NEVs and must catch up in various aspects.

For comparison, NIO, Xpeng, and Li Auto spent RMB 2.864 billion, RMB 1.350 billion, and RMB 3.049 billion on R&D in Q1, respectively. Geely's 33.5% NEV penetration rate in the first half of the year still lags behind the market average.

As ICE vehicles become relics of the past, the "value war" will focus on new products, energy utilization capabilities, and corresponding execution and efficiency. Adapting to the new era while preserving existing advantages in product, marketing, and branding will be Geely's long-term challenge.

The article reflects the author's personal views. For any questions or feedback, please leave a comment below.