Motley Fool Hidden Gems Investing - Assessing the Rise of Chinese EV Manufacturers

Starting point is 00:00:00 We're deep diving into automotives and the Chinese EV market. This is Motley Fool Money. Welcome to Motley Fool Money with the Hidden Gems team. I'm Tyler Crowe. Today, I'm joined by longtime Fool contributors, Lou Whiteman and Jason Hall, who's pulling in some spot duty for us. this is kind of a wonky week for us several of us are going to be attending a special motley pool member event and involve some travel so we're going to do a special deep dive into the

Starting point is 00:00:39 chinese electric vehicle market we got a listener question related to this and we thought it would be a great time to kind of dive into this so our question came in from frederick may and the question is i hope you're all doing well i'm really intrigued by the developments we're seeing in the chinese electric vehicle sector lately and i would love to hear your thoughts on a few things in the next podcast. I'm curious about your perspectives on Chinese EVs with pricing pressure in China, Europe still having tariffs on Chinese EVs, etc. Chinese EV companies have become a real boogeyman for the industry. The U.S. and Europe have put up barriers for Chinese auto manufacturers in the form of tariffs, outright bans. Both BYD and Geely have overtaken

Starting point is 00:01:18 Tesla in terms of global EV sales, while companies like SAIC, Chang'an, and Cherry have all vaulted in the top 10 and are really growing quite fast. So, I want to start with this question for both of you guys. What's in the sauce with Chinese EV companies where they're having so much success? I mean, the easy answer is Chinese customers buying Chinese goods. But something's happening here where countries around the world are putting up trade barriers when it comes to Chinese-made EVs. So, Lou, what are you seeing here? Yes, there's trade barriers, but I think it's important to look at the direction of travel here because we are moving towards more acceptance of the Chinese companies. The trends are for Europe, Canada, other parts of the world to be

Starting point is 00:01:57 more receptive to these EVs. Canada just switched from 100% tariff to 6.1%. They did keep a cap in place on imports, so it's not a free market, but even if the cap remains in place, it's supposed to raise over time. That is a thawing, that is an opening of the market. In Europe, you have a similar story. They are moving away from tariffs and towards price minimums. Just make sure you don't undercut our industry. If you can do that, sell as many as you want. It's hard to predict the future, guys, but the more of these vehicles that are on the road in these regions, the more consumers in these regions will get to know them. If the quality holds up, there will be a lot of pressure on governments to open up the market more. We've seen this before. There's a lot of

Starting point is 00:02:42 geopolitics maybe assisting in this, but I do think the trend is in the right direction for Chinese automakers. And I don't think that's going to reverse anytime soon. Lou, I don't think you're old enough to really remember when Japanese cars hit U.S. markets. We were all kids. Tyler didn't exist back then. The idea of Tyler may have existed, but we kind of saw this happen when Japanese cars hit U.S. markets. They were panned as small, cheap, unreliable. But it turns out they were exactly the sort of disruption that Western automakers needed to get their act together because they were making big, unreliable garbage cars. The result was consumers absolutely won. We've seen Korean automakers over the past 15

Starting point is 00:03:26 years, 20 years really, kind of do some of the same thing and disrupt. Cars are far more reliable, they're more fuel efficient, they're safer, just plain better than ever. And I think that really started with Japan entering Western markets with cars. I think China is going to do the same thing with the EV market. Frankly, Western countries have been extremely protectionist of their domestic auto markets, while at the same time, trying to have their cake and eat it too, while trying to take share in the explosive growth of the Chinese market. Now, there is a legitimate argument that modern cars, with all the connected technology, could present a security risk. That's one of the things that's been used as the reason for a lot of these trade walls that have been put in place.

Starting point is 00:04:15 But look, that's largely just been cover to lock Chinese automakers out of the West and to prop up domestic automakers. I firmly believe that what Lou said is right. As these Chinese EVs get access to big Western markets, it's going to disrupt things in ways that are positive for consumers in the long run. And in part, because of something that Japan had 40 years ago, Korea, South Korea had 20 years ago, it's labor arbitrage, plus the government playing a bigger role in the industry. These Chinese companies also have something that Japan and South Korea never did. Massive natural resources and the world's biggest steel and electronics components manufacturing infrastructure. That's where the real silver bullet is for China when

Starting point is 00:05:01 it comes to EVs. Yeah. It almost seems like there was a little bit of writing on the wall with Chinese EV manufacturing where, you know, supply chains were keeping push components and like parts of automotives and doing like to the point starting making assemblies. And it was almost like a matter of time before it's like, Hey, you know, if we take these five assembly pieces and put them together, all of a sudden we've got a vehicle and now we're cooking here. So there was a little bit of that sort of involvement, but I do want to give two anecdotes, I think, is a good example of this story that we're talking about. You said, I'm too young to remember Japanese cars taking the market. But I do remember that, I think it was

Starting point is 00:05:39 an early or mid-'80s automotive magazine where they lined up a Buick, an Oldsmobile, a Pontiac, and a Chevrolet right next to each other. They were the exact same color. They were the exact same body, build, make. They looked exactly the same. And it was kind of like an indictment of the American auto industry getting very complacent with what they were doing and being like, look, you almost deserve to get your hat handed to you because this is what you're putting out. And one might argue a little bit of that is happening today. The other anecdote, and this is a little bit behind the curtain here. I live overseas, a little bit of personal disclosure here. And I do live in a country where Chinese EVs are popping up everywhere. This was a place that

Starting point is 00:06:22 It would see a lot of like, you know, imported cars from Japan, United States that were probably used cars or something like that. And a lot of that is getting displaced by Chinese electric vehicles. Almost all of the taxis these days are being quickly moved over to like BYDs or something like that in the electric vehicle space. So it is interesting to see it on an anecdotal basis really happening. After the break, we're going to go from the business of making Chinese EVs to the actual investability of the Chinese EV market. at A&W. You gotta try breakfast at A&W. And what better way than with a delicious Pret Organic Coffee, starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario.

Starting point is 00:07:18 There's a little bit of irony in the emergence of new EV companies, both in China and to the lesser degree, United States. It seems like the legacy automotive industry spent the prior couple of decades on this massive consolidation streak. We saw mergers or the hollowing out or discontinuation of various brands that people knew for decades and similar moves because there was this acknowledgement that the industry was probably too fragmented for anyone to really make any money. And fast forward to where they thought they were in a good place. And now all of a sudden we have all these new EV companies popping up and making their mark to varying degrees of success. And also financially, it's starting to get a little strenuous as well.

Starting point is 00:08:00 Even this most recent quarter, BYD announced that it has saw a 19% decline in profits, in part because other EV companies are clawing to take share. BYD in 2025 was the largest producer are in China. And in the first quarter of 2026, it's the fourth largest. So it's really changing quite fast. And this leads to a little bit of a question. Setting aside any thoughts on whether you can buy stocks on the Chinese mainland versus Hong Kong and some of the challenges that come with trying to acquire Chinese stocks, do you see Chinese EV companies as good investments right now? Because I see a fiercely competitive industry that's going to price itself out of profits for probably several years. Yeah. Let's back up because let's talk about autos before we get into

Starting point is 00:08:46 Chinese specifically, because I think it matters. Auto, as you say, is a brutal industry, perhaps the most brutal industry. In my past life, I had experience with automotive restructurings about 15 years ago. The rule of thumb back then was $10 billion in the bank was breakeven just because of the complexity of the accounts receivable down the supply chain. It's a nasty, hard business. And I think that explains that first wave of consolidation over the last 100 years. Scale matters. EVs are different. The supply chains are a little different. But I think that all of this suggests that there will be consolidations. These standalones will end up as part of some new General Motors, if not the existing General Motors. The difference this time is it won't

Starting point is 00:09:33 necessarily be Detroit leading the way. Detroit led the way in the last century because we had the biggest, most dominant companies that were doing the best in extending their reach across the globe. Arguably, China this time, because of the trends we mentioned earlier, has a big say in this, if nothing else. I do think it's probably safe to invest in Chinese market leaders. BYD, I think, is a good one. And Geely, you mentioned them at the top. They own a ton of Western brands. They own Volvo. They own Aston Martin. They own Polestar. That's a huge, huge leg up already in this consolidation process and in getting your brands across the world. The challenges are real. I see better opportunities out there, be it Chinese or U.S. automakers. So, a very lukewarm

Starting point is 00:10:20 endorsement. But yeah, I do think that there are Chinese companies that will be among the winners. Yeah. For the most part, directionally, for certain, I agree with Lou. I think Chinese EVs are going to take share and challenge Western automakers, force them to innovate and improve. but I'm just less concerned that investors in those Chinese EV companies are going to be big winners. Look, the CCP doesn't really care about the share price being a big winner. It cares about building a durable industry that will employ large numbers of Chinese and generate lots of revenue that it can take its share of. We should be honest too, Lou, you hinted at it, but I want to be very clear about it. Automaker stocks that beat the market, writ large, their rarity is to the point

Starting point is 00:11:09 of possibly being extinct. Instead of looking for the next Tesla, we should either be looking for pockets where there's predictable profitability, and we'll talk about that next, or disruption that's happening somewhere else. Jason stole my line here. Coming up for after the break, we are going to take a broader look at not just Chinese EV companies, but the automotive market writ large and look for opportunities. locations in Ontario. I think another ironic twist in the EV story is just how a few months ago we started to see big automotive makers in the United States pull back from EV manufacturing and took some considerable write-downs as they tried to reshuffle or redo their portfolios. Some of them

Starting point is 00:12:18 are saying, hey, we just needed to redo it and require write-downs as a result. But that probably meant there was a little bit of a misstep here. Now, I'm not going to say this was the sole reason and there but the decisions did line up quite nicely with the end of the ev tax credit in the united states which i think ended in i believe in october of last year so just a little bit of a timing seems very serendipitous here at the same time recording this the financial times put out a story on the surge of used evs in the united states as the price of gasoline or petrol if i'm being specific to the financial times here and because people are opting for evs again because of high prices. Now, I don't think I'm being controversial here when I say that a lot of

Starting point is 00:13:02 automotive companies have shot themselves in the foot a few times. And I feel like this EV reversal at a time when everyone wants EVs again is just another example of that. I'm going to hold my nose and defend Detroit here, because I actually think what GM and Ford made sense, and I don't think they shot themselves in the foot. We've already said this is a brittle industry, investment takes years to pay off. Yes, EV sales are rebounding now, but let's see where they are in six months. And Tyler, remember, even if it holds, what are we talking, 6%, 7% of the total market? We're not talking about a huge part of the market in EV relative to the rest of the industry. Ford and GM are big enough to walk and chew gum at the same time. They took those charges

Starting point is 00:13:47 to focus on their current production of hybrids and other products that are in demand. Their job is to both generate cash today and invest in the future. They didn't end their EV R&D. They are in a position to consolidate, say, the Rivians of the world, even if the time comes. I think they made the right move. I think they're fine. And yeah, it is a little ironic that things have changed, but I'm not going to blame them for not predicting or seeing what's going on with oil markets coming. I would be far more terrified if the CEO of any of these large automakers was making product decisions about what they were predicting the oil markets were going to do in the short term, even over a two- or three- or five-year period. If I'm running a

Starting point is 00:14:31 big legacy automaker, I'm just trying to get it directionally right, not perfect. I want to push back on that a little bit, because I feel like a lot of these companies do make those decisions on three- to five-year windows. Let's wind the clock back 10, 12 years ago, where when the advent of shale oil in the United States plummeted the price of oil, it took like two, three years. All of a sudden, everyone was buying SUVs. And before you know it, the modern American sedan from Ford and Chevrolet was gone, and all they made was trucks and SUVs. We can say that they don't make the decisions on these relatively short timelines, but history suggests that they do. Okay. But what about today? I mean,

Starting point is 00:15:13 GM is still going to spend billions on EV research today. What they did was say that these vehicles aren't selling the way we want to right now, so we need to retool our factories to provide the products that people are buying now. That's what generates the cash to invest in the future. Again, at its peak, EVs represented barely 10% of total U.S. sales. The revolution didn't come as fast as they thought a few years ago. I don't think that what they were doing was adjusting to the near term. They were admitting that they made a mistake five years ago or so in saying, yes, is this going to happen all night? They were acknowledging that the timeline was going to be much slower than that. And again, I do think that makes sense.

Starting point is 00:15:57 I think we should acknowledge, too, that something else that's happened over the past 15 years, certainly over the past 25 years, is these larger vehicles that are still such an important part of the profit for these companies. Also, they're far more fuel efficient. They're more reliable. Maintenance costs have come down. Even though fuel costs a lot more in terms of how much it hits your wallet is less when you're getting 50% higher fuel economy on a large SUV today than you would have if you bought it back in 2005. I think that's part of the calculus too. If we were to do a straw poll real quick, we think we know who is the most negative when it comes to automotive manufacturers here, which actually brings up, again, widening the lens

Starting point is 00:16:36 even further. Obviously, I think everyone's pretty clear on my opinion on automotive or at least opportunities in the automotive industry, spiking about the OEMs and the manufacturers, but putting it to you guys, and I'll give my thoughts at the end, where do you actually see opportunities in automotive? Is it in these players or are there other places where you can go? Even in the best of times, the OEMs, these big automakers, are low-margin companies. All this talk of tech-based innovation and subscription models in the future, balderdash. Consumers are used to new tech becoming standard. I just bought a car, and everything that I would have had to pay up for is now standard as far as safety features. There isn't a way to make this a high-margin tech

Starting point is 00:17:24 business, period. I don't want to invest in them. The real place to be for me is the well-run suppliers, an emphasis on well-run because until recently, those were hard to find. There was a really, really brutal restructuring of the, especially tier one and tier two suppliers. The net-net is we do have a bunch of strong companies. Garrett Motion, ticker GTX, is the one I've done well in, but there are others out there. That's the only part of this puzzle that I really want to look at. Yeah. And as much as there's growth in markets like China, globally, the auto industry is pretty mature. So as a result, you know, capture it's, it's, it's kind of zero sum to some degree. And if there's anything that we didn't learn from Japan,

Starting point is 00:18:12 if we didn't learn from South Korea, we better learn here with the Chinese EV story. Most automakers are price takers. Uh, if you're, and if you're not the low cost leader, you have nowhere to go when things are bad. Because of that, if nothing else, this industry is in the too hard pile for me. It's just putting in the effort to try to find a little bit of alpha is just not worth the time, frankly, to me. Because as Lou said, there's other places to invest where there's better opportunities and the lift is a lot lighter. With that said, I do think there's some exceptions. Ferrari is a good one. Ticker race, R-A-C-E. Yes, it builds cars, but this is an elite luxury scarcity business. The cars that it builds are some of the most

Starting point is 00:19:02 desirable vehicles on earth. And then it makes sure to undersupply the market. That's such an important part of the formula. Stock trades for about 32 times earnings. I mean, that sounds expensive, but you look at the margins and the cash flows, and it's actually pretty attractive. It's actually a level, if you go back to 2020, the stock has only traded out for a few months in the past six years. Another area of the auto industry that I think is compelling is you find really good operators, like Lou was talking about, and you can look at retail auto parts. O'Reilly Automotive, for example, ticker O-R-L-Y. It's getting interesting again. Its earnings multiples near the high end of its range over the past decade, but its cash conversion

Starting point is 00:19:44 cycle is the thing of legends. Its business is a little countercyclical, too. It does well when the economy is strong. When automakers are struggling and discounting the hell out of everything because people aren't buying new cars, you know what people are doing? They're spending more money to maintain their older cars. Well, I said I was going to give my opinion in my stock, but unfortunately, Jason stole it with O'Reilly. He gave two anyways. You know what? I'm going to have to leave it at that. I'll just double upvote O'Reilly Automotive in terms of the great companies in the ancillary parts of the automotive market that do incredibly well, despite the brutal, brutal industry that is the automotive makers. That is all the time we have

Starting point is 00:20:28 for today. Hey, if you like these deep dives that we do that's a little bit different than our traditional story, let us know. Again, go to podcastsatfool.com, podcastsatfool.com. Shoot us an email. Let us know what you think. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provide for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to producer Dan Boyd and the rest of

Starting point is 00:21:02 the Motley Fool team. For Jason, Lou, and myself, thanks for listening, and we'll chat again soon.

Motley Fool Hidden Gems Investing - Assessing the Rise of Chinese EV Manufacturers

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