Samsung's Hungary Gigafactory, A Sign That The EU EV Market Is About To Get Brutal

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Includes: AUDVF, DDAIF, GM, RNSDF, SSNLF, TSLA
by: Zoltan Ban

Summary

Samsung is building a gigafactory in Hungary in anticipation to what will likely be an increase in EV production by cart companies already producing cars in Central Europe.

Signs of a pivot in EV production in Central Europe may be a signal that major car manufacturers are gearing up for a brutal EV market share battle.

In this battle, Tesla is likely to end up the loser, because of its pure EV business model. Competitors have deeper pockets and continue to profit from ICE sales.

Samsung (OTC:SSNLF) announced it wants to build a gigafactory in Hungary, meant to produce 50,000 full EV batteries per year. I personally do not believe that this will be the only gigafactory to be announced in the Central Europe region in coming years. I fully expected this to be the case, as I pointed out on numerous occasions in my coverage of Tesla. Most Tesla watchers, especially the Tesla bulls assumed for a long time that the EV battle will be won on range, and in the case of Tesla, on luxury and high-tech. But in reality the EV battle, just like any car battle will be won on the quality/price ratio that can be provided to the customer. Preferably, this best quality for the money offer can be offered by the producer at a net profit. That will be the endgame for EVs, but we will not get there for a while. The fact that EV production in Europe shows signs of pivoting towards lower cost Central Europe, may signal that we are gearing up for the beginning of the real competition for the growing EV market, which will involve sacrificing profit for market share.

From this perspective Samsung's decision to build the gigafactory in Hungary makes perfect sense. After all, this battle to provide the best quality for the money cars has led to the Central European region becoming one of the world's main car producing region per capita. Poland, Czech Republic, Slovakia and Hungary collectively produce about 3.5 million cars, with a collective population of about 63 million people. Only Germany beats this region in car production per capita in Europe, but we should keep in mind that even many of the German factories source their parts from the same region. To put the growth of car manufacturing in this region into perspective, back in 2000, these four countries were collectively producing only 1.3 million cars.

To understand the reason why car production is moving into that region, we should consider Daimler's (OTCPK:DDAIF) decision to offer more affordable cars to consumers. Part of its strategy was to maintain some of its luxury, while dropping prices. To do that, it decided to move some production to Hungary in 2008, where it found that it was able to save about $1,500 per car in labor costs. In other words, Daimler can offer $1,500 worth of savings on a car of the same quality, or it can book the savings as profit, either way making its business more successful.

Samsung chose to build its plant in Hungary, not only due to the same considerations as car producers, but also because it correctly anticipates that EV production is set to also pivot to the Central European region, therefore it is seeking to produce close to future customers. I do not expect Mercedes will be one of the early customers of Samsung in the region, because signs are that it is currently more interested in challenging the likes of Tesla (NASDAQ:TSLA) in the high-end luxury sector, with perhaps a new Mercedes EV SUV, said to have a 310 mile range in the product pipeline. I expect such a car will also come with a high-end luxury price tag, where saving a few thousand dollars per unit, will not concern Daimler as much. But a recently announced plan to build a second Mercedes plant in Hungary is said to be built as a flexible production line, which will likely be capable of also handling the production of EVs.

Aside from Daimler, there is a long list of European and US car producers present in the region. Most of these companies are devising an EV strategy, with most of them already on the EV market, and looking to make it a prominent part of their business. As such, they are now starting to look not so much at EVs as a profitable business in the present, but rather a potentially profitable business perhaps decades from now, which if it will become so, no one can afford to be on the sidelines. Until we reach the hypothetical point where EVs will become a prominent and increasing part of the global car market, firms will work on product development and EV credibility with the consumer, which includes fighting for market share.

Until recently, Tesla was the leader on both counts. Being a pure EV company, it had the ultimate credibility. With market share being on top in the US and visible, near the top in Europe and a few other places, it became the early unquestioned leader. On product development, which is what everyone focused on when assuming that Tesla will be the undisputed EV leader for the foreseeable future, Tesla also had a lead. That lead is no longer as clear now, with the likes of Audi (OTCPK:AUDVF) and Mercedes building a strong challenge to Tesla's luxury lineup, on range & quality offered at a comparable price. GM (NYSE:GM) is in the meantime is cutting in ahead of Tesla's Model 3 release with its Bolt, offered at a similar price for a similar range in the US.

Product development was never something that Tesla had a real advantage on. It was in fact only the appearance of it, due to the fact that the major car manufacturers took a wait-and-see approach to the EV market. We see now, given the EV lineup coming from other firms that there is not much that Tesla can offer that the more powerful carmakers cannot also offer. Now that the EV market is starting to be taken more seriously, the likes of Daimler and others are gearing up for the first real phase of the competition, which is likely to start in a few years - namely, the struggle to capture market share.

Capturing market share will mainly be a game of taking acceptable losses, while increasing sales. Daimler, as well as many other carmakers are able to take those acceptable losses. Renault (OTC:RNSDF) is for instance a leader in the lower price European EV market with its Zoe model. With a range of 130 miles, and a price of 14,000 pounds ($19,000) in the UK after the usual subsidies, there is no way that any company can sell a competing model at a profit at the moment. But Renault can afford to continue selling these cars for years to come, even if it is taking some slight losses at the moment. It is staking its claim to the low end of the price range in EVs and thus carving out a secure place on the European EV market. In the meantime, it can continue developing the model. If need be, it can offer a significant range upgrade without raising the price, by simply moving production to Romania. The only thing standing in its way currently is the fact that Renault already has some outstanding issues with Romania, due to poor transport infrastructure issues.

There is no way that the likes of Tesla are ready to compete on price with Renault. Its model 3 is said to be priced at about $42,000 after the government rebate in the UK, when including the cost of access to the charging network. By the time Tesla's model 3 enters the market in Europe, it is possible that the Zoe, which is currently Europe's best selling EV might already be offering a driving range comparable or higher to the model 3's range. So, potentially, Tesla could be looking at a competitor offering similar range in Europe for perhaps half the price. That's not to mention that the Zoe is priced in a range that offers real competition to the ICE car market.

Daimler will also most likely compete with Tesla's mass-market model 3, most likely by producing in Hungary. It will be able to save on batteries produced there by the likes of Samsung and others who will move into the region with battery manufacturing operations. It will also be able to save on car assembly and take advantage of its current delivery infrastructure. My guess is that we will see cars that will be similar in terms of performance, luxury and comfort, which will be priced slightly lower. The lower labor costs, supply chain, production volume flexibility and competitive battery costs, combined with much deeper pockets, means that Daimler and others will be able to easily provide consumers with an EV that can perform similar to Tesla's model 3, for a much better price.

Samsung's bet in Hungary is that by the end of the decade EVs in Europe will be produced increasingly in Central Europe, where companies will go in order to squeeze out any price advantage that they can on their competitors. It will be a cutthroat period, which will only become obvious by the end of the decade and it will likely last until the EV gets out of its niche market status and enters the mainstream.

What this means for companies involved in EV.

For major car manufacturers the period of cutthroat market share competition will not have significant consequences, aside from perhaps some of them losing the battle by not keeping up. For companies like Samsung, this means a huge opportunity, for which as we can see, it is gearing up. For Tesla, it means that even as it continues to increase sales, there will be tough times ahead. Unlike the major car producers, it cannot afford to sell its EVs below profit indefinitely, because it is only selling EVs. It will have a very tough time expanding its market share in Europe, from its current under 7% level. The only place where Tesla can realistically compete is in North America and a few other relatively marginal markets. Even here, there is a very strong possibility of Asian and European carmakers bringing the competition to Tesla's home turf, in addition to North American carmakers, which are already gearing up to compete. With their ability to sustain a relatively small loss per unit, on what will be a relatively small portion of their total sales, it is easy to see how they will be able to undermine Tesla for many years to come.

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