Citic Securities: intelligent electric vehicles will become the main battlefield of automotive product competition in 2025. Who will win?

Intelligent electric vehicle will not only become the main battlefield of automobile product competition, but also the most important product platform of the next generation mobile Internet AIoT. Based on conservative assumptions, we expect China to sell more than 7 million electric vehicles (CAGR 39 per cent) by 2025, the vast majority of which have smart configurations. The new car-building forces represented by Tesla redefine smart car products and complete consumer education and investor education. We judge that more technology companies will join the competition for "software-defined cars" in the future. At the same time, the awakening of traditional automobile companies represented by Volkswagen has significantly increased investment in the field of smart electric power. Market competition is expected to become fiercer than ever in 2023-2025. In our opinion, the key factors that determine the market position of smart electric vehicles are: 1) full stack product definition, R & D and landing capabilities including software, hardware and mechanical parts; 2) the ability to continuously reduce costs to gain a larger share and accumulate more data to optimize algorithms.

Bigger market: we expect electric vehicle sales in China and the world to reach 7 million and 15 million respectively in 2025, with CAGR of 39% and 36%, respectively. At that time, the vast majority of electric vehicles will have intelligent configuration.

The main results are as follows: 1) Electric vehicles gradually enter the mature stage, and the battery cost continues to decline and accelerate the popularity. The average price of power batteries in Ningde era fell by about 70 per cent from 2014 to 2020. Tesla predicts that battery costs are still expected to fall by more than 50 per cent in the next five years, accelerating the popularity of electric vehicles.

2) the electric vehicle simplifies the body structure and reduces the difficulty of manufacture. The number of electric vehicle parts is about 40% less than that of traditional gasoline vehicles, and modular production helps new car-building forces make use of third-party rich or new production capacity at the initial stage of development to achieve OEM production and speed up the industrialization process.

3) Intelligence and software level to improve user experience. Smart cockpits and self-driving will be the main factors bridging the gap in the user experience, with 100m lines of code for high-end cars, more complex than PC and smartphones, and expected to grow rapidly.

Software-defined cars: smart cockpits improve the user experience, and ownership and mileage affect self-driving algorithms.

1) Core competence: the intelligent level of software definition, including intelligent cockpit and autopilot. The structure of electric vehicle is relatively simple and there is little difference in power, so the powertrain (engine, gearbox, etc.) is no longer the key competitiveness. Software capabilities support the level of intelligence.

2) Intelligent cockpit: similar to the migration of mobile phones from "functional phones" to "smart phones", cars are undergoing the process of intelligence.

3) Autopilot algorithm: research and development intensity and autopilot mileage are the key. Tesla continues to optimize the algorithm with a mileage of more than 4.8 billion kilometers (2020.4).

4) larger holdings: means more data. Tesla, the leader, continues to launch more cost-effective products, with the average price of products falling from $113000 at the beginning of 2013 to $50000 at the end of 2020, a decrease of 55.7%, driving cumulative sales of more than 1.4 million vehicles (2020.12).

5) the smart car business model may evolve from "buying products" to "subscription services" in the future. Tesla FSD (Full Self-Driving) prices have risen from $3000 at the beginning of 2019 to $10, 000 by the end of 2020, and a monthly pay package is expected to be launched in 2021.

More fierce competition: more technology companies join the awakening of traditional VS car companies.

1) Tesla's sales are rising rapidly, and the new forces of car-building in China are trying to catch up. In 2020, Tesla sold 499600 vehicles (+ 35.8%), and the market value increased 7.8 times. Ultimate, ideal and Xiaopeng sold 43000, 33000 and 26000 vehicles respectively, which increased by 16.7 times. After the IPO, the market value of ideal and Xiaopeng rose sharply. Driven by IPO and refinancing, the R & D investment of China Investment Automobile New Power Company continues to increase.

2) more technology companies: Xiaomi announced that it will enter the field of smart electric vehicles as wholly-owned subsidiaries, with plans to invest US $10 billion over the next 10 years; it is reported that Apple may release Apple's smart cars in 2024; Huawei will enter the field of smart cars with the role of Tier 1; and Baidu has partnered with Geely Holdings to set up Jidu Automobile to enter the field of vehicle manufacturing.

3) traditional car companies awaken to speed up the launching process of intelligent electric vehicles. Volkswagen said in 2021 Power day that it aims to become the global market leader in electric vehicles by 2025 at the latest. Great Wall and BYD have both accelerated their investment and product launch in the field of smart electric vehicles.

4) We judge that more technology companies will be involved in the automotive field from 2021 to 2023, and the transformation of traditional car companies will be accelerated, and the period from 2023 to 2025 may become the most competitive stage for electric vehicle products.

Who can win: companies with full stack R & D and product capabilities & companies that continue to reduce costs are expected to get more share.

1) full stack R & D capability: intelligent electric vehicle redefines automobile products, which is a challenge to the original R & D organization form of traditional automobile companies, which requires the close cooperation of software, hardware and mechanical engineers to complete product definition and R & D design. Companies with strong full-stack R & D capability and more flexible R & D organization are expected to define better products.

2) the ability to continue to reduce costs: at present, the main price range of intelligent electric vehicles is 20-400000 yuan, and further large-scale popularization of products needs to be accompanied by a continuous decline in the price segment. Larger car sales and longer mileage will also produce more data feedback to optimize self-driving algorithms. Companies with the ability to continuously optimize their product and cost structure have the opportunity to gain more market share.

"risk factors:

The risk of aggravating international trade frictions; the risk that the cost of power battery falls less than expected; the risk of insufficient production capacity of power battery; the risk of serious safety accidents in self-driving cars affecting the progress of the industry; the risk of policy restrictions on self-driving; the risk of inadequate data privacy management of smart cars; the risk of insufficient financing capacity of new car-building forces caused by large fluctuations in the securities market; The risk that the progress of intelligent transformation of traditional enterprises is not as expected, the risk of slow decline in the cost of computing units such as automotive chips, and so on.

"Investment strategy:

Automobile electrification is gradually mature, intelligence has entered the acceleration period, and the market scale of intelligent electric vehicles is expected to continue to grow at a high speed. We expect that by 2025, the sales of smart cars in China will reach 7 million (with a penetration rate of 20.4%), more technology companies will enter the auto market, and traditional car companies will awaken to accelerate the intelligent process. We focus on the opportunities brought by the total growth of smart electric vehicles and the opportunities for superior vehicle and parts companies to gain market share and high growth. Related companies include: Tesla, Xiaomi Group, ideal Automobile, Xiaopeng Automobile, Xilai Automobile, Baidu, BYD (AYD), Great Wall Automobile, Ningde Times and so on.