Could EV Makers Navigate Through Cost Inflation?

Stock Market

The EV industry is facing the pressure of cost increases. Semiconductor chip shortages, supply-chain volatility, and the pandemic are driving raw material costs higher, posing challenges for EV makers. 

While chip shortages are a bigger problem, battery cost inflation remains a drag. A Wall Street Journal report recently highlighted how the world’s largest battery maker, Contemporary Amperex Technology or CATL, is scrambling to stay afloat amid higher cost pressure. Though higher demand continued to support its top line, increasing raw material costs weighed on CATL’s margins and dragged its stock lower. 

As raw material costs increase across the industry, let’s look at what the future holds for top EV makers. 

During the last quarter’s conference call, Nio’s CEO, William Li, acknowledged that the company witnessed higher raw material cost pressure. He added that “raw material cost increase is not just about the battery but also other commodities like copper and aluminum.” 

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While these are affecting the company’s vehicle gross margin, Nio is benefitting from the launch of its new 75kWh LFP (lithium, iron, phosphate) and NCM (nickel, cobalt, and manganese) hybrid battery and cost optimization. Li reiterated his vehicle gross margin target of 18-20% in 2022 despite the raw material cost pressure. 

Further, Nio remains well-positioned to cope with higher raw material costs. Moreover, if required, the company could evaluate its pricing strategy to confront higher costs. 

Recently Nio delivered impressive May delivery numbers. Further, NIO stock sports a Strong Buy consensus rating on TipRanks based on 13 unanimous Buy recommendations. The average price target of $41.48 implies 120.1% upside.

Tesla has been navigating the supply-chain volatility and raw material cost headwinds well. It continues to deliver stellar financials aided by increased deliveries and higher average selling prices. It’s worth mentioning that Tesla’s automotive margins have consistently increased over the past four consecutive quarters, which is encouraging amid the inflationary cost environment. 

Highlighting cost pressure, Tesla CEO Elon Musk said during the last quarter’s conference call that the company’s “suppliers are under severe cost pressure.” He added that some suppliers are requesting “20% to 30% cost increases for parts from last year to the end of this year.”

To confront inflationary pressure, Tesla raised prices. Its CFO, Zachary Kirkhorn, added that we “have higher ASPs [average selling price] in our backlog,” which will offset some of the cost headwinds.

Tesla stock has a Moderate Buy consensus rating on TipRanks based on 14 Buy, 10 Hold, and six Sell recommendations. Meanwhile, the average Tesla price target of $923.66 represents 19.2% upside.

Bottom Line

Undeniably, battery cost inflation and higher other raw material prices will likely drive the per-unit vehicle cost for EV makers. However, the EV demand trajectory remains robust. Moreover, cost optimization and their ability to increase the average selling price will likely help these companies offset the inflationary pressures. 

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