electric vehicle market in China

The electric vehicle market in China, a rising global leader in EV technology

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With government support and new sustainable initiatives such as the 2060 carbon neutrality plan, the Electric vehicle market in China is an emerging and promising market. The Chinese EV market was growing by leaps from 2015 to 2018. However, it is facing the deceleration of growth from 2019, which was the first year that the Chinese auto market declined.

Chinese EV production and sales, electric vehicle market in China

Source: Prospective Industry Research Institute, EV production and sales, the electric vehicle market in China

This report analyzes the current trends of Chinese electric vehicle industry and introduces the characteristics of its consumers. Also, there is a case study about one of the most successful Chinese electric vehicle brand NIO, to see how it keeps exploring in this emerging industry.

The electric vehicle market in China is facing the deceleration of growth

Although the new energy vehicle market in China has the biggest market size globally with 1.206 million sales in 2019 and 1.3 million predicted sales in 2020, it is facing the deceleration of growth. In 2019, the decline in the light-vehicle market and significant cuts in EV subsidies of Chinese central government made the growth rate decrease from 79% to 3%. And in first-quarter 2020, Electric vehicle market in China was heavily affected by the COVID-19 pandemic. Sales dropped by 57 percent from the fourth quarter of 2019 as consumer demand declined sharply.

The market size and growth rate of the Chinese EV industry

Source: McKinsey Company, The market size and growth rate of the Chinese EV industry

The development of electric vehicle market in China is inevitable

Despite facing a recession in last two years, the Chinese EV market is one of the most promising industries in China. Including having the largest market size in the world, there are six reasons in different aspects for why the development of Chinese electric vehicle market is inevitable.

Chinese economic development is a certainty

Firstly, the Chinese government vigorously supports the development of the EV industry through car purchase subsidies and other means. For instance, before 2019, the Chinese central government provided purchase subsidies for battery electric vehicles (BEVs) and vehicles with any electric ranges (e-ranges). And to help the electric vehicle sales rebound in 2020, though at reduced rates, the central government extended through 2022 monetary incentives that were about to expire.

The government also prolonged the purchase-tax exemptions of NEVs through 2022. These industrial policies are for the rise of China’s auto industry and to occupy a more favorable position in international division of labor.

Secondly, the development of Chinese EV industry can drive the growth of related industrial chains and bring enormous economic benefits. For example, the Chinese battery industry is growing rapidly partly because of the development of the new energy vehicle industry. In 2019, the installed capacity of batteries reached 62.2GWh, a year-on-year increase of 9.2%. In addition, the vehicle efficiency of EV is 81% which is significantly higher than the Tank-to-Wheel, whose vehicle efficiency is only 16%. The greater vehicle efficiency of electric vehicle leads to more efficient use of energy which can reduce the car costs for Chinese people.

The industrial Chains of EV in China

Source: Sohu, designed by daxue consulting, The industrial Chains of EV in China

Other aspects: Chinese national security & environmental protection

EV replaces the needs for petroleum with electricity. As China has always been a country with less oil and more coal, this can enhance the energy security for China.

As for environmental protection, EV itself does not produce any harmful gas directly. Even for manufacturing electricity that it uses, the whole process is getting much less environmentally hazardous. After signing the China-U.S. Joint Statement on Climate Change in 2013 and the Paris Agreement in 2015, the Chinese government made various policies to reduce emissions, especially focusing on the ultra-low emission and energy-saving transformation of coal-fired powerplants.

China is going from underdog to global leader in the EV industry

China has a strong position in the battery industry

Batteries are one of the most important components of electric vehicles. They account for 40% of the EV’s total cost and have a stronginfluence on the quality.

China possesses abundant rare earth materials for batteries. The country had 3.2 million tons of Lithium reserves , accounting for 22.1% in the world in 2016. Although the world’s largest lithium mines are mainly concentrated in South America and Australia, not in China, Chinese companies hold a great number of shares of those lithium mining companies.  For instance, Tianqi Lithium Corporation, a Chinese company, holds 51% of shares of Terryson who owns the largest and best quality spodumene mine in Western Australia.

In addition, China has a great market size of batteries. The global battery market has been monopolized by leading manufacturers in China, Japan and South Korea, and China has the strongest development momentum. In 2015, China caught up with Japan and became the world’s largest battery producer. Come 2019, China’s battery shipments were 71GWh, accounting for 61.7% of the world. In terms of Chinese battery companies, CATL had been ranked No. 1 in the world from 2017 to 2019. Among the top ten companies in the world, Chinese companies also account for more than half.

Global battery market share, electric vehicle market in China

Source: PEdaily.cn, designed by daxue consulting, Global battery market share

The technologies used and the quality of Chinese batteries are not inferior to developed countries. In fact, numerous internationally renowned car brands choose Chinese companies as their battery suppliers. CATL, for example, became the battery supplier for Volkswagen MEB in March 2018 and received a 1 billion euro order from BMW three months later. Then, in February 2020, CATL become one of the battery suppliers for Tesla.

The electric vehicle industry gives China a new start

Engines, gearboxes and chassis are three key components for fuel vehicles. But the first two of them are not important for EVs so decades of accumulation of gearboxes and engines in developed countries have become useless in the field of electric vehicles. This helps China compete on the same starting line with foreign countries in the EV industry.

Also, technological innovation in other fields promotes the development of the new energy vehicles in China. For instance, in Huawei’s automotive digital solution, it plans to base on Information and Communication Technology and to use innovative technologies like 5G, Clouds and big data to help Chinese car companies build better cars.

Huawei’s automotive digital solutions
electric vehicle market in China

Source: PhoenixNet, designed by daxue consulting, Huawei’s automotive digital solutions

Chinese EV consumers have an increasing recognition of high-end models but doubts remain

First time vs repeat EV consumers in China

First time electric vehicles buyers are mainly white-collar workers in the first-tier cities and wage-earners in the second-tier and third-tier cities. The former buy EV mostly because they are affected by restricted licenses or traffic restrictions, while the latter is to save car costs. Both of them tend to prefer small and medium SUVs. The main repeat EV consumers are mainly middle and senior managers in first-tier cities. They have high requirements for the quality of life and are sensitive to new technologies. The preferred car models for them are medium and large SUVs.

Forces like NIO and Tesla in Chinese EV market accelerate the upward shift of the mainstream purchase price range, and lead to an increasing consumer recognition of high-end car models. In 2018-2019, the sales volume accounted for the highest proportion of models with a price of ¥60,000 to ¥100,000.

In 2019, it reached ¥100,000 to ¥150,000. During 2020, the localization of Tesla drove the price range of EV in China to further increase. In the first half of 2020, the price range of EV above ¥300,000 accounted for 25%, an increase of 22.5% from 2019.

Influencing factors of EV purchase intention

Source: Zhihu, Influencing factors of EV purchase intention

However, despite Chinese consumers’ increasing acceptance of electric vehicles, the doubts surrounding EVs remain. Quality is the primary concern. In the past six months, the Model 3 of Tesla has had 12 suspected “loss of control” cases. According to the owners, their vehicles suddenly accelerated out of control and the brakes failed. These accidents were suspected to be related to the software upgrade.

In addition, electric vehicle consumers in China are worried about value preservation. Because China’s electric vehicle industry is fast growing, its technology is changing rapidly. The endurance mileage and the battery life increased significantly within years. This is perfect for the industry development, but will cause astonishing devaluation of purchased ones. For example, a Tesla’s Model S costed ¥860,000 in 2014. But six years later, it valued at less than ¥250,000.

Case Study of NIO, a leading Chinese electric vehicle brand reaching global fame

domestic brand on the electric vehicle market in China

Source: NIO, a domestic brand on the electric vehicle market in China

NIO is a Chinese smart electric vehicle company established in November 2014. Only six years later, NIO is now the undisputed leader of China’s new energy forces. It had the second large sales share in the first half of 2020, accounting for 15.5%. However, its development path is not without challenges.

Sales share of Chinese EV new forces in the first half of 2020
electric vehicle market in China

Source: GF Securities, Sales share of Chinese EV new forces in the first half of 2020

Change in NIO’s financial management

From 2014 to 2018, NIO had not been profitable, and its losses continued to rise. During this time, NIO had raised approximately $2.4 billion in total. However, it spent money inappropriately and without hesitation. For example, the brand poached employees with extremely high salaries, spent too much on its NIO DAY and did not allocate enough R&D funding.

The exaggerated spending speed in the early stage made NIO suffer in 2019 and 2020. In 2019, it had to cut costs in various ways which violated its brand promise of “User first”, which led to a negative effect on public opinion. In 2020, it didn’t have sufficient cash flow to cope with the unexpected Covid-19. After two rough years, NIO almost delisted and went bankrupt in the first several months of 2020.

Luckily, NIO survived, for the founder Libin had great financing ability. He managed to obtained ¥200 million convertible bonds for NIO and cooperated with the Hefei government to get capital support. After Tesla skyrocketed in early 2020 in the US stock markets, the following revaluation of new energy vehicle companies in China gave NIO one more chance to develop. This time it valued the exploration of innovative mode, but saved the unnecessary costs and had an appropriate labor cost.

Forward-looking strategies of NIO’s “battery replacement mode ”

One of the essential reasons for NIO’s success is its “battery replacement mode”. This mode means the battery for EV of NIO is changeable. The battery can be replaced once it is out of electricity in the charging stations, not to mention at the end of its service life. In addition, owners of NIO can upgrade their batteries according to their own demands and enjoy the dividends of battery technology development. This product foundation of “battery replacement mode”gives NIO a completely different development space.

a feature of electric vehicles manufactured in China

Source: NIO, “Battery replacement mode” a feature of electric vehicles manufactured in China

The cooperation with Chinese local governments

At the beginning of the brand’s founding, NIO didn’t plan to cooperate with any Chinese local governments as it wanted to have independent rights. But in 2018, it changed its mind, seeking to cooperate with Shanghai government. Around its project of building a factory in Shanghai Jiading, NIO negotiated a ¥4.6 billion investment support with Shanghai government. Unfortunately, the announcement of “Regulations on the Administration of Investment in the Automobile Industry” and the arrival of Tesla’s Shanghai factory became the reasons for the failure of NIO’s Shanghai self-built factory project.

In the end, NIO announced the signing of a cooperation framework agreement with the Hefei government on February 25, 2020. NIO’s China headquarter project would be located in Hefei and the Hefei government will invest more than ¥10 billion in NIO through designated investment companies and joint market investors. For NIO, this cooperation can attract investors and implement its RMB financing strategy. For the government, it would bring economic synergies such as promoting employment and developing industrial chain. It can drive the growth of the new energy automotive industry in Hefei and even Anhui province.

NIO cooperated with the Hefei government
electric vehicle market in China

Source: SinacaijingNIO cooperated with the Hefei government

The combination of conventional mode and the internet thinking

Like Luckin Coffee and Genki Forest, NIO was also considered an internet brand. At the beginning, it was said to “use the internet to make cars”. NIO not only has product-level iterative update thinking, but also learns from Tesla’s intelligent innovation, and more importantly, holds the “user first” thinking.

All these ideas are great, but NIO valued them too much and completely denied the advantages of the conventional model in the automotive industry in the first several years. In terms of sales, NIO even rejected traditional auto industry insiders, requiring employees to come from the Internet and digital industries.

This dominance of the internet thinking hurt the Chinese electric vehicle maker. It decided to combine the conventional mode with the internet thinking. It restarted marketing, replacing supervisors and lower-level employees by people in the automotive industry. Also, NIO learned marketing and pricing strategies from global leading brands like Benz, BMW and Audio. This combination avoided the drawbacks in the traditional vehicle mode and met the current preferences of Chinese consumers.

NIO combined the conventional model with internet thinking

Source: NIONIO combined the conventional model with internet thinking

The future of the Chinese electric vehicle market is still waiting to be explored

Despite the decreasing growth rate, from the aspects of Chinese economic development, national security and environmental protection, it is certain that Electric vehicle market in China has a bright future. Although Tesla is overwhelming the sector currently, with the rise of Chinese EV brands like NIO and Byton, it is still unknown which country and which brands can make a profit in this largest new energy automotive industry.

Author: Xinyue (Felicia) Cheng

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