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China accelerates on the automotive highway

China is taking the fast lane to challenge international players in the automotive industry whereas emerging car manufacturers from China are on a global rise.

This post was originally posted on Medium, and can be found here.

The automotive market in China has been the world’s largest since 2008. In 2009 already, annual automobile production in China exceeded the production of the European Union or of the United States and Japan combined. For this reason, German car manufacturers have also been very active in this market for quite some time.

China is aware of its market standing and opportunities. In particular, the awareness of climate change and the associated reaction of car manufacturers to switch to renewable energies allows China to take advantage of innovation in this area. Already in the last 5-year plan (“Made in China 2025”), China announced that Chinese car brands should be world-famous by 2020. By 2025, the country aims to be one of the global top-10 automobile manufacturers in terms of sales and production.

The fact that this goal is close to being achieved can be demonstrated by current figures: As early as 2019, 486 NEV (new energy vehicle) manufacturers were registered in China. Compared to 2017, figures have tripled since then. Among others, some of the currently most well-known NEV manufacturers are domestic state-owned companies such as SAIC, private car manufacturers such as Geely and BYD, and start-ups such as NIO.

Foreign companies have also been active in the Chinese automotive market and have invested in the opportunistic NEV market of China. Established car manufacturers such as Volkswagen, Audi, Ford, General Motors and Renault are partnering up with Chinese players to produce battery-powered cars. One of the most recent examples, is the development of the Chinese automotive brand “Jetta”, which is a joint venture of Volkswagen and FAW Group Corporation, a Chinese state-owned automotive manufacturing company. Stephan Wöllenstein, CEO of Volkswagen China, said: “With JETTA, the company is opening the Volkswagen world to first-time Chinese customers. {…}, it will provide consumers with advanced technology that meets their needs and fits their lifestyles.”

But what exactly is it that makes China so successful in the revolution of mobility?

First of all, the state subsidies play a crucial role in reducing the customers initial costs for a new vehicle, as the government grants incentives up to US$13,000 for a NEV. In addition, the extension of the free charging station infrastructure promotes the attraction of electric cars. China will invest RMB10 billion (US$1.42 billion) to expand the country’s charging network by 50% to 600,000 charging stations by the end of 2020. Massive potential of the Chinese NEV market cities like Shenzhen are converting their transport systems to electric buses. Furthermore, taxi fleets are becoming increasingly environmentally friendly as well. China expects NEVs to account for 20 percent of all car sales by 2025, with the goal of selling 7 million NEVs annually by then. In 2018, more than one million NEVs were sold in China, about three times as many as in the United States at the same time. Lastly, Chinese car manufacturers are obliged to build vehicles with alternative drive systems such as electric, hybrid or hydrogen.

At the same time, the government is working on an aid program for car manufacturers to increase alternative drive systems. Due to sales slump as a result of the corona pandemic, car sales are expected to fall by ten percent in Q1 and Q2 of 2020. Since 2019, the minimum quota of electric and hybrid cars sold for Chinese car manufacturers was ten percent. This quota is expected to rise to twelve percent in 2020. This quota applies to car manufacturers who import to or produce more than 30,000 conventional vehicles in China annually.

The boom of emerging car manufacturers is driving innovation and simultaneously enables the customer to access more connectivity. Car manufacturers are upgrading their models ahead of the world’s other major car markets and offer opportunities for suppliers in the industrial chain of Intelligent Connected Vehicles (ICV). Consequently, China became the country with the most start-ups in the ICV sector and with the fastest rate of innovation. Sensors, software and algorithms, communication systems, controllers, chips, connectivity systems and system integration, mobility services, entertainment services, parking services and charging systems are just a few key aspects that emerged throughout the last years. Interesting to know: 12 of 39 mobility & travel unicorns come from China.

Mobility-as-a-service is also enjoying enormous popularity as China’s young urban dwellers lead the ranking in car sharing and carpooling usage. The most popular application is called DiDi, which is comparable to Uber, and has close to 600 million registered users. A study by the international auditor PwC predicts that the market of shared vehicles is very much likely to rise even faster in China than in Europe and the US. By 2030, more than 45% of all personal journeys in China are forecasted to be made in shared vehicles.

Due to the worldwide pandemic, the automotive industry worldwide has faced difficulties from dropping sales’ numbers to closed fabrication locations. China’s NEV sales fell for the eighth consecutive month in February, and the gap rose 54.4% in year-on-year comparison. Sales declined due to an announced subsidy cut in June 2019. However, for 2020, subsidies have been reinstated. The contingency of the NEV subsidies plan is driving the attractiveness of new companies and their products. For 2020 though, the national industry association expects a 25% decline in the first half of the year due to the Covid 19 outbreak. Nevertheless, there are examples of companies which have been able to brave the difficult times by promoting their products through government subsidies and market edge. Nio, for example, increased sales by 11% within the first quarter.

The Chinese government has aimed to increase domestic production with the previous 5-year-plan with the name “made in China 2025” which resulted in an increase of 500 NEV companies. This impressively illustrates how guiding the government’s plan for the development of new technologies is. With the announced confirmation that the subsidies will be in place until at least the end of 2020, and with the extension of the infrastructure, the NEV industry in China will continue its growth and find its way to foreign markets.

Whether these new energy vehicle players can succeed in foreign markets is yet to be seen. Previously, Chinese NEV manufacturers were known to have inferior quality. With increasing sensitivity for such matters among large parts of the Chinese society though, improvements could be observed lately. The quality those NEV manufacturers provide, gets better and better. European and American car manufacturers alike should keep an eye on Chinese rising stars like Nio, WM Motor and Xpeng.