electric vehicle market in China

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

With the rising concerns of climate change, the case for electrification of consumer transport is undeniable since it accounts for 17% of global greenhouse gas emissions. In China, consumers are showing a faster pace to adopt electric vehicles (EV) compared to other countries globally. In 2021, the sales of electric vehicles in China reached 2.92 million and dominated more than half (53%) of the global market share. The commitment to the 2060 carbon neutrality plan and government subsidies are strong factors in stimulating EV purchase. To capture the ongoing trend of EV adoption, this article will analyze the development of the EV industry and introduce the characteristics of its consumers, including a case study on one of China’s most successful electric vehicle brands, NIO, to see how it continues exploring this emerging industry.

The development of China’s EV market is inevitable

Despite a deceleration in growth rate between 2019 and 2020 caused by the Covid-19 pandemic, the EV market is one of the most promising industries in China, with a forecast penetration rate of 60% by 2030. There are two major factors to explain the reasons behind this fast growth of the market.

The Chinese government is heavily investing in EV technology

Firstly, the Chinese government vigorously supports the development of the EV industry through car purchase subsidies and other means. Since 2009, USD 14.8 billion (100 billion RMB) in subsidies were provided to EV consumers but direct state aid was supposed to end in 2020. However, to help the electric vehicle sales rebound in 2020, though at reduced rates, the central government has extended monetary incentives as well as prolonged the purchase-tax exemptions of EVs throughout 2022. These brand-new incentives, together with billions of investments in charging stations, are accelerating the demand for EVs, leading to an expected growth rate of 30.82% and an estimated sales volume of 3.82 million cars in 2022.

Source: China Association of Automobile Manufacturers, designed by Daxue Consulting, Annual sales volume of EVs in China

Moreover, the development of the EV market is driving the growth of related value chains. For example, the battery industry, which is located at the upstream of the EV value chain, is benefiting from the current tailwind. In 2021, the installed capacity of batteries reached 220GWh with a year-on-year increase of 175%. However, the profitability of a single battery is reduced due to the rising price of raw materials.

Source: Sohu, designed by daxue consulting, The industrial Chain of the EV market in China

Other aspects: environmental protection & Chinese national security

As for environmental concerns, EVs themselves do not produce any harmful gas directly. Even for the manufacturing process, it is getting more environmentally friendly. After the signing of the China-US Joint Statement on Climate Change in 2013, the Paris Agreement in 2015, and the issue of the 14th 5-year plan in 2021, the central government launched various policies to control and reduce emissions from the manufacturing process, especially focusing on the shift from coal-fired powerplants to more environmental-friendly choices such as solar power.

Regarding the main players in this sector, leading domestic brands are going greener, from manufacturing to production to the transportation of vehicles. Geely, for example, used 15% of recycled steel plate material and 25% of recycled aluminum in the car model ZEEKR 001. Similarly, XPeng developed and utilized green technology such as photovoltaic panels in the manufacturing process, thereby converting solar energy into electricity without pollution.

Apart from environmental benefits, the growth of the EV industry is a way to cut dependence on oil. In 2021, China ranked 4th globally in terms of oil production per day, whereas it ranked 2nd in terms of consumption. Thus, China is highly dependent on imports, which could be costly and limited, especially under trade restrictions. The transformation toward electric cars can enhance energy security as the oil consumption from citizens could be possibly reduced.

China has a strong position in the battery industry

Batteries are one of the core components of electric vehicles and account for 40% of the EV’s total cost. China possesses abundant rare earth materials for batteries. In 2021, China counts with 1.5 million tons of lithium, accounting for 6.8% of the market size globally. Although the world’s largest lithium mines are mainly concentrated in South America and Australia, Chinese companies hold a great number of shares of them. For instance, China’s Tianqi Lithium Corporation holds 51% shares of Terryson, which owns the largest and best quality spodumene mine in Western Australia.

Currently, China is the world’s largest supplier of the battery industry, boasting a market size of 324GWh, accounting for 59.4% of the global market. In addition, the Chinese battery market is expected to record an astonishing CAGR of 7.5% during the forecast period from 2022 to 2027.

For what regards Chinese homegrown battery companies, Contemporary Amperex Technology Co. Limited (CATL) boasted a market share of 32.5% in 2021 and ranked first in the world for the past five years. In 2021, among the top ten companies in the world, six of them were Chinese companies, demonstrating China’s strong position and capacity in operating domestic production.

Source: SNE research, designed by daxue consulting, market share of EV battery markers in H1 2022.

Beyond the production volume, the technologies used and the quality of Chinese batteries are not inferior to developed countries. 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 USD 1.02 billion (RMB 6.9 billion) order from BMW three months later. Then, in February 2020, CATL became one of the battery suppliers for Tesla.

The electric vehicle industry gives China a fresh start

Engines, gearboxes, and chassis are three key components for fuel vehicles. However, the first two of them are no longer used in EVs. Therefore, the competitive advantage of foreign automakers has become less useful in the EV market. This helps China to compete on a level playing field with foreign countries.

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

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

From the perspective of city classification, the EVs buyers are concentrated in the first-tier cities, accounting for 50% of total sales in 2021. However, the trend of expanding the market to less developed areas is accelerating. The percentage of EV sales in the second-tier cities to the overall sales increased from 14% in 2020 to 19% in 2021. A similar trend appeared for the third-tier to fourth-tier cities, also due to government support.

Leading automakers like NIO and Tesla, who target high-end customers, continue to break the price ceiling of EVs. Both brands charge between USD 66,543 and USD 150,000 (RMB 450,000 – RMB 1 million) for their latest models. With more advanced technology involved in their EVs, these two brands increase consumer recognition of high-end car models. In 2020, the launch of Tesla’s first China-made car drove the price ceiling of EVs in China to further increase.

Source: Zhihu, Influencing factors of EV purchase intentions

Despite Chinese consumers are gradually accepting high-end EVs, doubts remain. Quality is a primary concern. In the first half of 2021, the Model 3 from 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, consumers are worried about the value preservation of EVs. In “2022 EVs owners research”, 35% of them think the value is decreasing at a faster pace compared to fuel cars. One possible reason is due to the fast-changing technology that is used in the latest models, while the old models show a trend of being outdated. The shortage of basic infrastructure such as charging stations could be another factor. In 2021, the ratio between charging stations and EVs is 3:1. In addition to that, the charging time of EVs is usually longer than refueling gasoline cars. Combine this all, the value preservation of EVs may not be as desirable from the perspectives of owners.

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

NIO 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. Eight years later, NIO is now a main market player targeting high-end customers in China. It had the eighth largest sales volume in 2021, accounting for 90,870 cars sold in China. However, its rise encountered challenges.

Change in NIO’s financial management

From 2014 until now, NIO has not been profitable. In 2021, NIO had a revenue of 5.3 billion dollars (RMB 36.1 billion), but a deflect profit of 595 million dollars (RMB 4.02 billion). One major reason is its conspicuous investment in technology development, production equipment, and service networks. These account for 12.5% of revenue.

This investment strategy and exaggerated spending in the early stage made NIO suffer financially in 2020. It didn’t have enough cash flow to cope with the unexpected outbreak of Covid-19. After two rough years, NIO almost delisted and went bankrupt in the first several months of 2020.

Luckily, the Shanghai-based EV automaker survived. The founder Li Bin managed to obtain USD 200 million (RMB 1.4 billion) in convertible bonds for NIO and cooperated with the Hefei government to get capital support. After Tesla skyrocketed in early 2020 in the US stock market, the following revaluation of new energy vehicle companies in China gave NIO one more chance to develop. This time it decided to experiment with new business models, while saving unnecessary costs.

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

One of the essential drivers of NIO’s success is its “battery replacement model” that enables NIO’s electric vehicles to use changeable batteries. The battery can be replaced once it is out of electricity in the charging stations, as well as at the end of its service life. In addition, owners of NIO’s EVs can upgrade their batteries according to their needs and enjoy the dividends of battery technology development.

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

The cooperation with Chinese local governments

NIO is also actively seeking to cooperate with local governments to build up needed infrastructures and new factory plants. In 2018, NIO attempted to cooperate with the Shanghai government on the project of building a factory in Shanghai Jiading. The Chinese automaker negotiated a $681-million-worth (¥4.6 billion) investment support from the Shanghai government. Unfortunately, the announcement of “Regulations on the Administration of Investment in the Automobile Industry” and the arrival of Tesla’s Shanghai gigafactory made NIO’s project go up in smoke.

After putting aside the agreement with the Shanghai municipality, NIO signed a cooperation framework agreement with the Hefei government on February 25, 2020. NIO’s China headquarters would be relocated in Hefei and the Hefei government would invest more than $1.48 billion (¥10 billion) in NIO through designated investment companies and joint market investors. The support backed up the financial power of NIO and enabled it to invest more in the technology and EVs development. For the government, it would bring economic synergies such as promoting employment and developing the industrial chain. It could drive the growth of the new energy automotive industry in Hefei and even foster the economic development of Anhui province.

NIO cooperated with the Hefei government
Source: Sinacaijing, NIO established ties with the Hefei government

Combining the traditional business model with digital innovation management

NIO has always considered itself as a tech company. That’s why it relied on a business model aimed at creating the “Next Generation Smart Electric Vehicles”. NIO not only pursued an iterative and incremental product development approach, but it also learnt from and adopted Tesla’s disruptive innovation.

All these ideas are forward-looking, 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 recruitment, NIO even rejected traditional auto industry insiders, requiring employees to come from the Internet and digital industries.

The lack of balance between innovative and conventional development hurt the Chinese brand. Therefore, it then decided to combine the conventional model with digital innovation. It reorganized the employment structure by replacing supervisors and lower-level employees with people in the automotive industry. NIO also learned marketing and pricing strategies from global high-end brands like Mercedes-Benz, BMW and Audio to build the image of the high-tech and premium autos. The new transformation enabled NIO to meet the current preferences of Chinese consumers, who are keen on high-tech vehicles.

Source: NIO, NIO combined the conventional model with internet thinking

The future of China’s EV market: growing competition among domestic brands

From the aspects of Chinese economic development, national security, and environmental protection, it is certain that China’s electric vehicle market will be a core sector of the automotive industry.

In addition, as emerging brands like NIO, Xpeng, and Li Auto, and traditional brands such as BYD grow fast, competition in the domestic market competition is bound to get intense, thereby further boosting innovation in the EV market.

However, it is important to recognize some of the ongoing risks such as the unbalance between supply and demand, the effects of the global pandemic, and reduced government supports. All these factors may decelerate the growth of the overall market in the longer-term.

Key takeaways from China’s electric vehicle market

  • In 2021, China’s EV sales reached 2.92 million and held 53% of the global market share.
  • The development of the EV market in China is incentivized by the government subsidy, demand for high-tech vehicles, and the close collaboration with companies along the value chain.
  • China’s EV automaker NIO became an influential player by developing “the internet of vehicles” as well as thanks to its changeable batteries.
  • The future competition in China’s EV market will be intensive around younger brands, such as Xpeng, NIO and older brands like BYD.

Learn more about Chinese attitudes towards green consumption