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

The share of independent brands is likely to increase to more than 60% by 2025

From the perspective of market share, the share of independent brands has fluctuated between 30% and 45%, and has basically stabilized at about 40% in the last three years. In 2020, the market share of independent brands in the Chinese market will be 38.4%, the market share of German brands will be 23.8%, the market share of Japanese brands will be 23.4%, the market share of American brands will be 9.4%, the market share of Korean brands will be 3.5%, and the market share of French brands will be 0.3%. From the perspective of long-term data, the share growth of independent brands often occurs in the upward cycle of automobile sales growth, while the share decline of independent brands generally occurs in the downward cycle of automobiles. This and the overall price of the independent brand is low, and the audience is mainly related to the low and middle income people: for the low and middle income people, the "electability" of automobile consumption is stronger, so the share of the independent brand is more than usual reflected in the amplifier of the prosperity of the automobile industry. However, in the next five years, independent brands may open the trend of unilateral increase in share.

In the field of intelligent electric vehicles, Chinese companies with the leading product layout are already achieving corner overtaking at the share end. Taking the data of June this year as an example, the independent brand accounted for 60.8% in the pure electricity market and 60.3% in the PHEV market, but the current share in the HEV market is 9.7%.

In 2025, the total share of independent brands in the passenger car market is expected to reach 60%. We have calculated the pattern according to the model planning of various car companies, and it is expected that in the sales volume of 30 million vehicles in 2025, the market share of independent brands is expected to increase to 60%, of which Weilai Ideal Xiaopeng is expected to account for 6.1% of the share, and other independent brands are expected to account for 54.9%. Overseas brands will have a market share decline, but Tesla's share increased to 4.6%. Combined with our forecast of 9 million new energy vehicles in 2025, Tesla and the three new forces of NIO, Ideo and Xiaopeng are expected to occupy 36% of the new energy passenger car market share.

The meaning of consumption upgrading is about to change, and intelligence will become synonymous with high-end

After experiencing a relatively long period of hesitation from 2011 to 2019, the average price of passenger vehicles has entered a period of fluctuation and rise since the second half of 2019. In 2021, the price of passenger cars in China stabilized at more than 150,000 yuan (based on MSRP), with the highest monthly average price reaching 163,000 yuan. We expect that due to the changes in the core competitiveness of automobile enterprises and the driving force of the development of the industry, the unit price of passenger cars will benefit from the trend of consumption upgrading and automobile intelligence and electrification in the future, and the average price of passenger cars will enter the stage of continuous rise in the next 5-10 years.

Since 2016, although the total volume of the automotive industry continues to be under pressure, luxury brands rely on their own strong product cycle and the ability to explore products to maintain hot sales and increasing penetration, but also indirectly help to improve the average level of passenger car prices. We expect that in 2025 as a whole, the proportion of high-priced cars of 300,000 yuan and above will increase, which is expected to increase from the current 9.9% to 14.1% in 2025, and the share of low-priced cars of 80,000 yuan and below will be significantly reduced to less than 5%. While the waist market remains largely unchanged, the price belt segment will have the opportunity to shift upward as a whole.

"Science and technology configuration" and "intelligent driving" have become synonymous with "high-end" in the era of intelligent electric vehicles. We summarize the selling points of the high-end C-class cars sold in the market in 2005, 2010, 2015 and 2020, and we can see that the definition of high-end demand is constantly shifting. The 2005 model focused on space, interior and exterior luxury and ride comfort, while the luxury car of the year, the benchmark Audi A6 technology configuration is limited to a set of difficult to use MMI multi-function control system. Since 2010, consumers' demand for exterior interior has further increased, and the black technology of powertrain has also begun to be applied on a large scale (electronic throttle, direct injection in cylinder, dual vortex tube and other technologies), while the car has begun to load a variety of optional driving modes, and the sense of science and technology has also improved; 2015 BBA in luxury comfort and power train these two items have been difficult to open the gap, in addition to competing in the appearance of the primary function of auxiliary driving, the cabin sense of science and technology and interactive interface has become the main points of BBA differentiation competition. The high-end models launched in 2020, such as Xiaopeng P7, NIO EC6, and Ideal ONE, have transferred the core definition of "high-end demand" from the past interior appearance, powertrain, chassis adjustment, etc., to "intelligent driving", "intelligent network connection", "intelligent cockpit", "OTA upgrade" and other fields that Chinese car companies are good at.

High-end models have begun an intelligent arms race, and intelligent acceleration is also expected to shorten the vehicle replacement cycle. With the continuous improvement of the level of autonomous driving, the requirements for AI chip computing power of cars are also getting higher and higher. According to the analysis of automatic driving computing power demand proposed by NVIDIA, the chip computing power demand of L0-L2 level automatic driving is below 10 TOPS, and the chip computing power demand of L3 level automatic driving is between 30 and 100 TOPS. L4/L5 level automatic driving requires chip computing power requirements above 100/1000 TOPS, respectively. On the one hand, with the improvement of automatic driving level, the number of sensors (such as cameras, millimeter-wave radar and lidar) is more and more, and AI chips need to process more and more data; On the other hand, the number of scenarios and decisions processed by AI chips have increased geometrically. According to the cost of the automated driving system (including sensors and domain controllers), the cost of the L0/L1 level assisted driving system is between $275 and $325, and the cost of the L2/L2+ level automated driving system is between $450 and $550 and $750 and $1,200. The cost of an autonomous driving system at level 3 is more than $4,000.

Will the replacement logic of smart phones play out in the era of smart cars? We may have underestimated the demand for car swaps. Compared to the development of the smartphone era in the past 10 years, the iPhone will have a new hardware upgrade after the new flagship phone is launched every year, and the latest iOS system is often not all forward compatible due to high requirements for hardware configuration. To some extent, this also leads to the phenomenon that the replacement cycle of smart phones will be shortened when the technology has made significant progress (for example, 5G has shortened the replacement cycle of smart phones). With the improvement of smart car configuration and computing power, as well as the gradual evolution of intelligent driving and intelligent cockpit, we expect that smart cars are also expected to usher in a shorter replacement cycle in the future.

The importance of "intelligence" on the demand side is increasing, and it will eventually usher in "jump". A car is a product with many needs. Traditional needs include handling, power, price, appearance, space, ride comfort, etc. In the age of intelligence, people's energy invested in "driving" is released, the need for control, power decline, and the requirements for assisted driving/autonomous driving and cockpit intelligence rise. Although the functions of L2.5+ assisted driving products provided by manufacturers are mainly concentrated in high-speed closed roads and automatic parking scenes, so it is not "just needed" for consumers, but we believe that with the development and maturity of this technology, reliability and safety improvement will bring qualitative changes to the car experience. The importance of autonomous driving on the demand side will "jump." Once the functions of autonomous driving and smart cabins are greatly improved, consumer demand is also expected to jump. The current average replacement cycle for passenger cars in China is 14 years, and intelligence may shorten this replacement cycle at some point in the future.

Why will the smart car pattern appear first decentralized and then centralized trend? The redefinition of automotive products by intelligent electric vehicles is a challenge to the original R&D organization form of traditional automobile companies, which requires close cooperation between software, hardware, mechanical engineers and product planning to jointly complete product definition and R&D design. Companies with stronger full-stack R&D capabilities and more flexible R&D organizational forms are expected to define better products and achieve higher sales and market share. Larger vehicle sales and longer driving range will also generate more data to optimize autonomous driving algorithms, helping Oems achieve a better experience on autonomous driving. Therefore, from the perspective of the final idea, the concentration of intelligent electric vehicles must ultimately be higher than that of traditional fuel vehicles.

However, at present, it is still in the "early spring and Autumn" of intelligent electric vehicles, and there are a large number of people who have not entered the game. In addition, the production capacity investment, production, and production models in the automotive industry exit cycle is much longer than consumer electronics, in recent years, Changan Peugeot Citroen (DS), Dongfeng Renault and Borgward Automobile, for example, production capacity and brand exit cycle is about 6-8 years. Under the wave of smart electrification, we see three forces converging in the automotive industry, which is expected to usher in a period of intensive new brands and new capacity increase in the next five years, and there may be a crowded scene in 2021-2025:

(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.