Xiaomi's Success Means More Trouble for Battered China Electric Car Stocks

(Bloomberg) - Xiaomi Corp.'s big push into the electric-car market is dimming the prospects for a comeback for China's battered auto startups.

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The hype around the SU7 launch and better-than-expected initial orders have helped Xiaomi's stock rebound. At the same time, investors increased their bets on further declines in electric car maker NIO and Sunpac, whose US-listed shares were shorted by about 86% and 36% of total outstanding shares, respectively.

In stark contrast to Apple's failed automotive dream, Xiaomi and Huawei Technology Co. have transferred their smartphone strengths to the crowded electric car market, and have achieved initial success.

"The entry of Xiaomi and Huabei is a major disruption, especially by leveraging their expertise in consumer technology and supply chain management," said Yuan Bing, fund manager at Edmond de Rothschild Asset Management. " Their focus on smart features sets the bar high for consumer expectations of automotive functionality."

In addition to new competition, the electric vehicle industry as a whole is suffering from shifting consumer preferences, a slowing Chinese economy and concerns about rising interest rates in the U.S. and elsewhere.

So far this year, Tesla shares are down 35%, while Nio and Sunpac shares are down half that in U.S. trading.

These money-spinning Chinese startups are more susceptible to industry-wide price cuts than more established traditional automakers like BYD Co. They may also need to make major adjustments to compete with new entrants in the smartphone industry.

"Disruption transcends the product itself-it stems from the proven carriers of successful marketing, branding, and, to a greater extent, mature ecosystems," Morgan Stanley analyst Tim Hsiao and others wrote in a report. " For automakers, competing with tech veterans seems like an uphill but inevitable battle."

Xiaomi's marketing prowess and strong appeal to young consumers is being put to good use in its EV business. Driven by the company's billionaire co-founder Lei Jun, who has 23 million fans on Weibo, the SU7 has become a hot topic on Chinese social media.

Xiaomi says it's aiming especially at the High B耑 market. the SU7 series, with a base price of 215,900 yuan (about $30,000), comes in nine different colors, with an interconnected entertainment system and self-driving features.

The market's enthusiasm for Xiaomi has pushed its Hong Kong-listed shares up 36% from February's lows, but the company still has a lot to prove in terms of customer satisfaction and delivery capabilities. The company's overall performance will likely continue to depend on a slow resurgence in demand for smartphones, which account for about 60% of its sales.

With the macro outlook still uncertain, cost is not only key to the success of individual EV models, but also the ultimate determinant of automakers' own financial health. BYD has managed to remain profitable thanks to its broader product range and strong exports, while smaller China-focused EV makers Nio and Sunpac have posted losses.

Promotional spending to boost sales will magnify the bottom-line pressure from price cuts, as both Neo and Sunpac have recently launched new promotions. Both companies produce cars in direct competition with Xiaomi's products.

"Citigroup Inc., which includes Jeff Chung, has been a major player in the market for over a decade.

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