X-Peng (HKG: 9868) (NYSE: XPEV) shares are down 7% in Hong Kong today. The XPEV fall was 4% in New York yesterday. The concern seems to be over rising competition in the Chinese EV market. There's a slowdown in sales even as everyone's ramping up their production. Given the fixed costs in car manufacturing this will mean price reductions to get the marginal production off the lot and into consumer hands. That's just the way the industry economics works.
But isn't there supposed to be some cartel, some agreement, in China between the car manufacturers? Well, yes, there is: Tesla (NASDAQ: TSLA) has agreed, with all the other EV manufacturers in China, not to engage in price competition. They all are, instead, to engage in socialist competition. The supposed meaning of this is that they compete by quality, by service to the consumer and so on. The actual meaning is more often not to compete at all. “Tesla Inc. and China's top automakers pledged to maintain fair competition and avoid “abnormal pricing” in the world's biggest EV market, signalling a possible end to a price war that's rattled the industry this year.” Those competitors might include Nio (NASDAQ: NIO) Xpeng (NYSE: XPEV) and so on. But we'll concentrate upon Tesla here simply because we've got to choose the one.”
The problem with cartels is that the temptation to cheat is very, very, strong. If everyone else maintains their prices and you don't then you scoop the market. Therefore you do lower your prices, a bit, but then so does everyone else. Opec has found it very difficult indeed to stop people selling oil below the reference price - or conforming to production limits either.
X-Peng share price from Hong Kong Stock Exchange
We are indeed already seeing the cartel cracking: “The group representing China's auto manufacturers has retracted a pledge to avoid "abnormal pricing" that it had brokered between 16 automakers, including Tesla (TSLA.O), breaking off a truce in a brutal price war over electric vehicles. The China Association of Auto Manufacturers (CAAM) said in a statement on Saturday it recognised the agreement had violated China's antitrust law and would retract it.” Well, yes, this is China. An official announcement isn't quite the thing. Rather more important will be actual economics. Meaning that a cartel with 16 members - each with vast fixed costs and low marginal ones - just isn't going to survive in an oversupplied market.
And thus, we think, the fall in the X-Peng share price. This will also, we expect, affect Nio and the others. Price wars do happen and we expect this one to be fierce.