Profit growth expected for China’s Xpeng through cost reductions and partnership with Volkswagen

Xpeng expects cost cuts and its Volkswagen partnership to narrow the firm’s losses, the Chinese EV maker told CNBC in an exclusive interview on Monday.

On Friday, the firm logged its biggest quarterly loss since its U.S. listing in August 2020. Its second-quarter net loss was 2.8 billion yuan, larger than the 2.13 billion yuan loss expected according to a Refinitiv consensus estimate. Its U.S.-listed shares closed 4.28% lower on Friday. On Monday afternoon, Xpeng’s Hong Kong-listed shares were trading more than 2% higher.

Xpeng’s second-quarter deliveries totaled 23,205, a 32.58% drop from 34,422 deliveries in the same period a year ago.

On Friday, CEO He Xiaopeng said the company is cutting costs across the business and that should “substantially drive gross margin improvement in 2024.”

In April, Bloomberg reported the company was planning to trim manufacturing costs, including saving 50% on intelligent driving features 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, told CNBC’s “Street Signs Asia” on Monday.

Xpeng is implementing cost-cutting measures and leveraging its partnership with Volkswagen to mitigate losses, according to an exclusive interview with the Chinese EV maker on CNBC.

Last Friday, Xpeng experienced its largest quarterly loss since its U.S. listing in August 2020, with a second-quarter net loss of 2.8 billion yuan, surpassing the estimated loss of 2.13 billion yuan. As a result, its U.S.-listed shares declined by 4.28% on Friday. However, on Monday afternoon, Xpeng’s Hong Kong-listed shares surged by over 2%.

In the second quarter, Xpeng delivered a total of 23,205 vehicles, indicating a 32.58% decline compared to the same period last year.

Xpeng’s CEO, He Xiaopeng, announced on Friday that the company is implementing cost reduction strategies across the organization, which are expected to significantly improve gross margins by 2024. In April, Bloomberg reported Xpeng’s plans to reduce manufacturing costs, including a goal of saving 50% on intelligent driving features by the end of 2024.

“We have undergone a substantial business reorganization and implemented changes that are driving growth momentum in our business,” stated Brian Gu, vice chairman and co-president of Xpeng, in an interview with CNBC’s “Street Signs Asia” on Monday.

BofA Securities predicts that Xpeng’s collaboration with Volkswagen will improve its financial position and enhance its supply chain management. As a result, BofA upgraded Xpeng’s rating from “neutral” to “buy,” with a new price target of $22 per share, up from the previous target of $16.30 per share.

In late July, Germany’s Volkswagen Group announced a $700 million investment in Xpeng, acquiring a 4.99% stake in the company. This partnership involves the co-development of two new EVs for the Chinese market, integrating Xpeng’s advanced driver-assist software, with plans for a release in 2026.

Both global and local automakers are vying for market share in China, the world’s largest EV market. BofA Securities forecasts that China will hold 40%-45% of the market by 2025.

In addition to the introduction of new models, Xpeng plans to launch updated versions of its current models next year, which are expected to have more favorable gross margins and boost profitability.

“We anticipate these new models will contribute to improving our gross profit margin in 2024-2025, as well as enhancing our sales volume growth from the second half of 2023 to 2025,” stated BofA Securities.

The recently launched G6 Ultra Smart Coupe SUV is expected to play a significant role in improving margins for Xpeng.

— CNBC’s Michael Bloom contributed to this report.