Why Nio, XPeng, Li Auto Are Likely Beneficiaries Of This Latest Chinese Regulatory Crackdown

After coming down heavily on fintechs, tech conglomerates, education and gaming companies, regulators in China are now targeting companies supplying chips to automakers.

What Happened: China's State Administration of Market Regulation announced Tuesday it intends to "severely" crack down on illegal price gouging by distributors of automobile chips.

The firms were suspected of driving up prices, based on price monitoring and reporting clues, SAMR said. The agency said it will investigate and punish illegal acts such as hoarding, price-gouging and collusion.

The government action may have been precipitated by the acute chip shortage that is hurting automotive production. 

Chinese auto sales began declining in May after a strong jump in April, according to estimates by the China Association of Automobile Manufacturers.

In June, auto sales fell 12.4% year-over-year to 2.02 million units. A chip shortage that impacted production was blamed for the weakness.

Related Link: Why This Nio Analyst Is Raising His Price Target For The EV Maker

Takeaways For Nio, XPeng, Li Auto: Semiconductors are intensively used in EVs for advanced driver assistance systems. Autonomous vehicles come equipped with thousands of dollars of semiconductors, mostly high-end chips, including processors and application-specific integrated circuits.

The Chinese government's effort to mitigate the auto chip shortage will benefit EV makers more than traditional automakers, which use chips for vehicle electronic systems. 

Nio, Inc.'s NIO July sales fell month-over-month, dragged by chip shortage. Peers XPeng, Inc. XPEV and Li Auto Inc. LI have also sounded out impact from the chip crunch.

There has been a structural mismatch between the auto industry's "just-in-time" inventory system and the long manufacturing cycle times for the chip industry, Wccftech said, citing management consultancy firm Roland Berger.

With supply chain lead times increasing, automakers are left with no option but to cut down on production. Nio was forced to halt production for five working days starting March 29 due to the chip shortage.

Automakers will take a double hit when chip distributors, taking advantage of the shortage, raise prices exorbitantly.

The regulator's warning, therefore, bodes well for chip-intensive EV companies such as Nio.

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Photo: courtesy of Nio.