China Poised to Become E-Car Juggernaut

Chinese automakers have emerged as formidable players in the global electric vehicle (EV) industry thanks to rapid expansion of the domestic market. In time, they could become the go-to market for EVs.

China’s BYD Co., Ltd. bypassed US-based Tesla, Inc. as the world’s largest E-car maker by sales volume two years ago. Additionally, nine Chinese E-car brands ranked among the world’s top-20 last year.

As much progress as it has made thus far, the E-car revolution may be only in first gear

Domestic factors are driving the E-car revolution in China. Similar to most markets globally, E-car production and sales have become a must-have strategy in China to help meet regulators’ ever more stringent fuel economy targets. In addition, massive public sector deployment and generous government stimulus policies are the other catalysts spurring demand. Purchase incentives for battery-electric vehicles (BEV) and plug-in hybrid electric vehicles (PHEV) on the mainland were the second highest in world after Norway and the Netherlands respectively, before a recent subsidy cut to combat subsidy frauds.

E-car revolution may just be getting started

As much progress as it has made thus far, the E-car revolution may be only in first gear as EVs (including E-buses and E-trucks) remain a small fraction of China’s automotive market, representing a 1.8% market share in 2016. Authorities have set aggressive targets to increase annual EV sales to two million units and cumulative deployment to five million units by 2020. China’s 13th Five-Year Plan aims for EVs to hold a domestic automotive market share of 5% in 2020 and 20% in 2025. The continuous decline of battery cost will further support the adoption of EVs through lower production cost compensating for the likely gradual removal of incentives in several markets.

By 2025, Renault/Nissan, BMW, Daimler and Volkswagen aims for EVs to make up around 20–25% of their sales

However, the development of charging infrastructure in line with the offering of vehicles will remain a critical challenge to avoid hindering the rapid development of electric mobility, as the more limited range — and parallel range anxiety — of full EVs remains lower than traditional internal combustion engines (ICE). The lack of a widespread charging network could ultimately challenge the government’s targets in EVs sales if the latter are not accompanied by a solid infrastructure.

Are global automakers up to the challenge?

Chinese automakers have become important participants in the global EV industry thanks to rapid expansion of the domestic E-car market. It coincides with a worldwide push to move away from the traditional ICE and develop alternative powertrains, including hybrid, PHEV and fully electric engines. France and the UK made public their goals of banning the sale of gas and diesel cars by 2040. Volvo was the first major automaker to announce this initiative as their relative smaller size and financial power lead them to focus their investments.

That said, global automakers have a formidable challenge ahead of them in trying to keep up with China’s EV manufacturers. They face various challenges (supply chain, infrastructure development, encouraging public buy-in and regulation) in contrast to the more government-influenced economic model that may enable China to actually put EVs on the road in meaningful numbers much faster than consumer led western economies.

US, Japanese and European manufacturers will be able to catch up on latest entrants such as Tesla and other Chinese newcomers

Nonetheless, global manufacturers have already started to dedicate major funds to accelerate the development, and increase their offering, of hybrid and EVs. They also benefit from their recognised technological know-how, steady positions in the global supply chain and overall scale advantages.

By 2025, Renault/Nissan, BMW, Daimler and Volkswagen aims for EVs to make up around 20–25% of their sales, with the latter expecting 30 new EV models across its range of brands. PSA expects to offer an electrified version for 80% of its models by 2023. While we believe that these targets may be exceeded or, conversely, may be reached a few years later than the targeted date, they illustrate the aggressive strategies of traditional manufacturers into new powertrains and their acknowledgment that EV penetration rates will increase significantly in the medium term.

There will also be new BEV-dedicated JVs in China, like the one formed by Volkswagen and JAC Motor, which are waived from the previous restrictions on a maximum of two JV per foreign carmaker. This provides an alternative approach for global manufacturers to quickly ramp up EV sales volume in China, in particular at the low-end EV market, by leveraging existing resources of their local partners.

Some groups have recently also announced plans to secure their positions in the battery supply chain, including Volkswagen with CATL and Daimler with BAIC, and we expect further similar moves by other manufacturers in the foreseeable future.

Therefore, we believe that historical US, Japanese and European manufacturers will be able to catch up on latest entrants such as Tesla and other Chinese newcomers.

Conclusion

China will be the E-car market to watch in the next two to three years, in particular the competitive landscape as local brands compete as well as cooperate with international rivals. While the market has been dominated by local manufacturers, global automakers will soon follow suit with China-produced models at their local joint ventures (JVs). The host of new models planned and under development in Europe and the US can be easily produced and sold in China, benefiting from the brand strength of global carmakers, as long as they are priced competitively relative to the traditional ICEs.

By Jing Yang and Emmanuel Bulle

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