China’s Xpeng expects profit growth from cost cuts, Volkswagen deal

Xpeng The Chinese electric car maker said in an exclusive interview with CNBC on Monday that it expects cost cuts and its tie-up with Volkswagen to narrow the company’s losses.

On Friday, the company posted its biggest quarterly loss since it went public in the U.S. in August 2020. The second-quarter net loss was 2.8 billion yuan, higher than the 2.13 billion yuan loss expected by Refinitiv consensus. Its U.S.-listed shares closed down 4.28 percent on Friday. Shares in Xpeng Motors’ Hong Kong-listed stock rose more than 2% on Monday afternoon.

Xpeng’s Q2 deliveries total 23,205 vehiclesCompared with 34,422 units in the same period last year, it has dropped by 32.58%.

On Friday, Chief Executive He Xiaopeng said the company was cutting costs across its business, which would “significantly drive gross margin improvement in 2024”.

In April, Bloomberg reported that the company planned to cut manufacturing costsincluding a 50% savings on smart driving features by the end of 2024.

“From an expense standpoint, we’ve gone through a very significant restructuring of our business and the changes we’ve made. We’re starting to see our business gaining momentum,” said Vice Chairman and Co-President Brian Gu The head of Xpeng Motors told CNBC’s “Street Signs Asia” on Monday.

Xpeng Motors is trying to revive its business this year after its stock price fell more than 80% in 2022. The company is struggling with a tough macroeconomic environment in China and a price war between domestic rivals and Tesla, which slashed prices on its Model S and Model X last week.

“The demand side is actually still quite strong. I think despite the economic backdrop, demand continues to grow. But at the same time, competition has increased in the first half, with more new models from more manufacturers and very competitive prices.” Gu said.

“We are also trying to spend a lot of time cutting costs in order to achieve better profitability. Later next year, we expect to reduce our vehicle BOM (bill of materials) cost by as much as 25%. This will give us improved profitability as well. an important tool,” Gu said.

In automobile manufacturing, a bill of materials lists all the parts needed to build a vehicle, such as the engine, brakes, seats, and dashboard.

Bank of America Securities said in a report on Monday that it is expected that Xpeng Motors and Volkswagen “Improving its financial position and possibly strengthening its supply chain management.”

Bank of America upgraded Xpeng Motors’ rating to “buy” from “neutral” with a price of $22 per share, higher than its previous target price of $16.30 per share.

In late July, the German Volkswagen Group stated that Injected approximately US$700 million into Xpeng Motors And holds a 4.99% stake in the company.

Through the partnership, the two companies will jointly develop two new electric vehicles that will feature Xpeng Motors’ advanced driver assistance software for the Chinese market Scheduled to launch in 2026.

Global and local automakers are rolling out advanced technologies to compete in China, the world’s largest electric vehicle market. BofA Securities said in a May report that China is expected to account for 40%-45% of the market in 2025.

“Through the agreement with Volkswagen, we expect to make a meaningful contribution to our bottom line starting next year. So it is also another tool that we can use to improve our profitability,” Gu said.

In addition to the planned new models, Xpeng also plans to launch “updated versions of existing models” next year, Gu said.

“We expect these new models to result in more favorable gross margins, which will also contribute to our profitability and product mix,” Gu said.

The company expects its latest model — the G6 Ultra Smart Coupe SUV launched late in the second quarter — to boost profit margins.

BofA Securities said: “We believe that improved product mix and enhanced cost control will improve its gross margin in 2024-2025. We expect the new model pipeline from 2H23 to 2025 to improve its volume growth.”

— CNBC’s Michael Bloom contributed to this report.