The rise of independence is unstoppable, and intelligence will become an important winner and loser

(1) Tesla, NIO, Xiaopeng, Ideal as the representative of a certain accumulation of new car-making forces, new forces rely on the high valuation of the capital market are constantly replenishment of capital ammunition, accelerate the iteration of intelligent driving and intelligent cockpit;

(2) Accelerated entry of technology giants, such as Xiaomi Group, Baidu, Huawei, Foxconn, DJI, Midea, and potential companies, such as Apple, technology giants rely on their strong software capabilities, supply chain integration capabilities and talent reserves are playing the role of "entrants", "enabters" or "core technology suppliers" in the industry; Enablers such as Huawei are greatly enhancing the competitiveness of some long-tail car companies in the traditional car era;

(3) After awakening, traditional car companies are accelerating investment and product delivery in the field of smart electric, and are more flexible to respond to ongoing challenges through organizational structure and capital structure adjustment. For example, Geely Automobile (spin-off of Krypton), Changan Automobile (Avita + Changan New Energy spin-off), SAIC Motor (spin-off of Zhiji Automobile, independent operation of R Automobile), etc., are continuing to add new brands and new capacity in the market.

Therefore, we expect the market concentration to remain highly fragmented in the next five years, with a large number of new brands and new players entering the market. After a round of product cycle delivery and consumer choice, the market is expected to usher in an inflection point of concentration in 2025. In 2025-2030, the market will enter a brutal reshuffle, and the market will re-enter the process of increasing concentration, and it is likely to be higher than the current concentration of the automotive industry.

In the era of smart cars, independent brands are expected to gain product premiums

Share reshuffle is only a representation, and the reshaping of profit distribution rules is the core logic of auto stock investment. Due to China's special automobile industry policy, joint venture brands are actually the reapers of the growth dividends of the Chinese passenger car market in the past 20 years. We have counted the top joint venture car enterprises that occupy the top 50% share in China's passenger car market. The market share of 12 joint venture car enterprises represented by Beijing Benz, BMW Brilliance and FAW-Volkswagen in 2016-2020 is 45%, 47%, 49%, 53% and 55% respectively. The total net profit has been stable for years at about 150 billion yuan. Considering that the profit source of overseas brands in China is not only the net profit of joint ventures, in fact, the profit source of overseas enterprises in China is better than the annual report disclosure data (for example, joint ventures such as BMW Brilliance and Beijing Benz will also pay technology licensing fees and purchase parts to BMW and Daimler).

Although the market share of the seven head independent brands in the past five years is also rising, the total net profit is actually far lower than that of the head joint ventures: in 2019 and 2020, the market share of the head independent brands reached 30% and 32%, but the total net profit is only 7 billion and 5.3 billion. The entire independent brand in the profit side, basically reflects the "head of private enterprises to make small money, other enterprises do not make money" pattern. If the future independent brands successfully achieve upward breakthrough, the profit margin left by the joint ventures they impact is huge, superimposed on the total growth of the passenger car market, we estimate that this profit margin is expected to be about 250 billion to 300 billion yuan.

For a long time, the capital market has not been optimistic about the electrification and intelligent transformation of many traditional car companies (especially joint ventures in China). On the one hand, traditional car companies have huge R&D investment and supply chain advantages, but on the other hand, they have been slow to launch products that can compete with Tesla in intelligent electric vehicles. Before last year, whether it was BMW's iX3 or Mercedes-Benz's EQC, most of the new energy vehicles built by traditional car companies were "oil to electricity" (compliance car) based on the fuel vehicle platform, and they could also find various reasons for their own sales. At that time, the market also has a voice that the traditional car companies with huge research and development investment have not yet fully entered the market, and they will not repeat the mistakes of mobile phone giants such as Nokia. But with the Volkswagen ID series, which has swept Europe in sales in the first half of this year, falling short of expectations in China, the "Nokia moment" for traditional joint venture car companies in the Chinese market seems to be approaching.

The product definition capability of traditional car companies is path dependent, which is difficult to support its product premium in the era of electric intelligent vehicles. In fact, although the new energy vehicles built by traditional joint venture car companies such as Volkswagen ID series and Audi e-tron are inferior to the leading independent brands in terms of three electric parameters and intelligent configuration, their competitiveness should not be so bad as sales and orders from the perspective of manufacturing process, chassis adjustment or brand and channel. However, they all showed a kind of "overconfidence" in the pricing side: the BMW iX3 was listed at a pre-sale price of 470,000 yuan, but only in half a year, the direct official price was reduced by 70,000 yuan; The Jaguar i-Pace is sold at the terminal at a 50% discount all year round; The Volkswagen ID4 began to appear widely discounted on the market three months after its launch. Such pricing misalignments occur so often that they actually suggest systematic errors in the product definition capabilities of traditional joint ventures in China. We believe that the traditional joint venture car companies in the product definition of fuel vehicles has produced path dependence, this path dependence and product positioning inertia thinking has restricted the innovation ability of traditional car companies. In particular, we note that this path dependence is not entirely due to the backwardness of technology, but a methodological error in product definition, which may make it difficult for them to maintain the past product premium and excess profits on the smart electric car circuit.