China’s Xpeng anticipates earnings development from expense cuts, Volkswagen offer

Xpeng anticipates expense cuts and its Volkswagen collaboration to narrow the company’s losses, the Chinese EV maker informed CNBC in an unique interview on Monday.

On Friday, the company logged its greatest quarterly loss given that its U.S. listing in August 2020. Its second-quarter bottom line was 2.8 billion yuan, bigger than the 2.13 billion yuan loss anticipated according to a Refinitiv agreement price quote. Its U.S.-noted shares closed 4.28% lower on Friday. On Monday afternoon, Xpeng’s Hong Kong-listed shares were trading more than 2% greater.

Xpeng’s second-quarter shipments amounted to 23,205, a 32.58% drop from 34,422 shipments in the exact same duration a year earlier.

On Friday, CEO He Xiaopeng stated the business is cutting expenses throughout business which ought to “substantially drive gross margin improvement in 2024.”

In April, Bloomberg reported the business was preparing to cut production expenses, consisting of conserving 50% on smart driving functions by the end of 2024.

“From an expense perspective, we went through a very significant business reorganization as well as changes that we have made. We start to see the regaining of the growth momentum that we have in our business,” Brian Gu, vice chairman and co-president of Xpeng, informed CNBC’s “Street Signs Asia” on Monday.

Xpeng is trying to restore its organization this year, after its share rate sank by more than 80% in 2022. The company fought with a hard macroeconomic environment in China and a rate war amongst domestic competitors and Tesla, which slashed the rates of its Model S and Model X recently.

“The demand side actually remains pretty robust. I think it continues to grow despite the economic backdrop. But the same time, the competition has intensified in the first half, with more players launching more new models and being very aggressive on price competition,” stated Gu.

“In order to gain better profitability, we also have endeavor to spend a lot of time on cost cutting. Later next year, we expect our total vehicle BOM [bill of materials] costs to be reduced by up to 25%. That will give us a big tool to increase profitability as well,” stated Gu.

In automobile production, BOMs note all the parts needed to construct a lorry, such as an engine, brakes, seats and control panels.

BofA Securities stated in a report Monday that it anticipates Xpeng’s cooperation with Volkswagen to “improve its financial position and likely enhance its supply chain management.”

BofA updated Xpeng from “neutral” to “buy” at $22 per share, up from its previous rate target of $16.30 per share.

In late July, Germany’s Volkswagen Group stated it is injecting about $700 million in Xpeng and taking a 4.99% stake in the business.

The collaboration will see both business co-developing 2 brand-new EVs that will integrate Xpeng’s advanced driver-assist software application for the Chinese market with a rollout target for 2026.

Global and regional car manufacturers are promoting sophisticated tech to complete in China — the world’s biggest EV market. BofA Securities in a May report stated it anticipates China to hold 40%-45% market share in 2025.

“With the Volkswagen agreement, we also anticipate meaningful contribution to our bottom line starting next year. So that’s also another tool we can use to increase our profitability,” stated Gu.

In addition to prepared brand-new designs, Xpeng has “updated versions of current models” set to be released next year, stated Gu.

“We anticipate those new models will carry more favorable gross margins which also will help our profitability and product mix,” stated Gu.

The company anticipates its most current design — the G6 Ultra Smart Coupe SUV, which was gone for completion of the 2nd quarter — to improve margins.

“We see an improving product mix and a stronger cost control improving its gross profit margin in 2024-2025E. We expect its new model pipeline in second half of 2023 to 2025 to improve its sales volume growth,” stated BofA Securities.

— CNBC’s Michael Bloom added to this report.