As the electric vehicle (EV) boom continues across the globe, European automakers are facing rising competition from Asia. Specifically, Chinese EV producers have made significant progress this year, ramping up production and expanding their reach into international markets. Further, the need to manufacture cheaper electric and hybrid vehicles at scale is growing and China wants to dominate this booming market.
As The Wall Street Journal reports, new EV makers are replacing tech companies as China’s primary growth drivers. This trend is likely helping to sway investors away from companies in the U.S. and Europe in favor of Chinese electric vehicle stocks with high growth potential.
One Wall Street firm definitely sees this as a winning strategy. UBS recently downgraded two major European automakers, citing them as being at significant risk from China’s EV expansion. According to UBS analysts, Germany’s Volkswagen (OTCMKTS:VWAGY) and France’s Renault (OTCMKTS:RNLSY) have the most to lose as the EV push continues.
Two EV Stocks at Risk
It certainly hasn’t been a good year so far for either of these European EV stocks. Volkswagen has been gradually trending downward for the past six months with no real growth. Renault’s trajectory over the same period is slightly better, although the stock is still in the red by 16%. Meanwhile, Chinese EV producer BYD (OTCMKTS:BYDDY) has reported impressive sales figures for August 2023, for example.
UBS feels that Volkswagen missed a key opportunity to gain a share of the EV market. Analyst Patrick Hummel provided further context in a note to clients:
“Against our initially positive view, we believe VW ceded its first-mover advantage in EVs with execution in key areas below our expectations […] Recent management changes & strategic action address the obvious challenges, but it we believe it unlikely VW can weather the upcoming Chinese advance without negative earnings impact.”
Accordingly, UBS has downgraded both VWAGY and RNLSY stock from “neutral” to “sell” ratings. A different UBS analyst team led by David Lesne issued a similar take on Renault, estimating that its market share is likely to fall by 3% by 2030. In both cases, high European exposure poses a significant threat to both EV stocks.
That said, investors should be worried about more than just European companies. The U.S. government is considering limiting investment in China’s tech sector. While this plan might sound good in theory, in practice it poses risks to several industries. EV production could be one of the most impacted, as it is heavily reliant upon Chinese imports. This could make it even harder for U.S. automakers to produce lower-cost EVs and batteries at scale, thereby allowing China to expand its reach even further.
Why It Matters
There’s no denying that the booming EV market offers investors significant opportunity to profit. But as the recent news from UBS demonstrates, some countries seem to have an edge over others when it comes to production. China has set itself up to crank out the new energy vehicles that consumers need at buyer-friendly prices. This is evidenced by the fact that many of its companies — including Li Auto (NASDAQ:LI) and Nio (NYSE:NIO) — have spent the past six months rising while many of their U.S. and European peers have struggled.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
