Shares of Chinese electric car company XPeng (NYSE: XPEV) jumped 8% through 10:25 a.m. ET on Thursday after the company announced it has entered into a "Master Agreement on Strategic Technical Collaboration and Joint Sourcing" with German car giant Volkswagen.
The tie-up allies a struggling Chinese electric vehicle (EV) specialist with the world's biggest car company (by sales), and has the potential to boost both companies' fortunes in China and around the world.
XPeng + Volkswagen
Volkswagen bought a 5% stake in XPeng back in July, and the two companies announced plans to jointly build two new battery electric vehicles (BEVs). The agreement will also allow XPeng to ride Volkswagen's coattails and participate in joint purchasing of "common parts of vehicles and platform," accessing Volkswagen's deep supply chain to score discounts on needed car parts. According to the press release, this joint purchasing program relates to "the B-class BEVs being jointly developed." But if it turns out to be broader than that, this could give XPeng access to discounted car parts that will lower its cost of production more generally, and bring the company closer to profitability.
Similarly, the press release has XPeng CEO Xiaopeng He saying this relationship will help it to "deliver the best smart EV products to Chinese consumers" (emphasis added). For both companies' products in China, this should be a boon. But Volkswagen will presumably benefit as well from access to XPeng's EV technology, which it can incorporate in its own electric vehicles, helping both companies grow their business outside of China as well.
What this means for XPeng
XPeng has struggled to keep pace in a Chinese EV market characterized by weakening demand and furious price wars, hurting revenue at the company. Through the first three reported quarters of 2023, XPeng's revenue declined more than 20% against the similar 2022 period, after rising more than 58% the previous year. Worse, losses at the Chinese company surged 30% as the cost of goods sold failed to fall as fast as retail prices.
The biggest short-term benefit XPeng can probably hope for, from this relationship, is for its access to the VW supply chain to reduce its own cost of production. Longer-term, investors may also hope that VW's decision to buy a 5% stake in XPeng might develop into greater interest in taking an even bigger stake in the company down the road.
To my mind, it's that hope -- that VW might be mulling a wholesale acquisition -- that's most likely driving XPeng stock higher today.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Volkswagen Ag. The Motley Fool has a disclosure policy.
