- Chinese passenger EV sector is on a rebound after a prolonged period of low sales volume but volatility remains.
- With over 400 registered EV manufacturers In the country, some level of sector consolidation is expected.
- Leading EV companies such as BYD and NIO are innovating in customer service and charging infrastructure.
In the middle of this year, China’s market for passenger electric vehicles emerged from a yearlong downturn. After a sustained drop in vehicle sales brought on by a reduction of government subsidies and compounded by the effects of COVID-19, consumer confidence returned. The latest sales figures show that by August, total EV sales had risen year over year for a second consecutive month.
This growth has generally been consistent across all EV segments. In July, the Shenzhen, China-based BYD, which competes mostly in the small and midsize space, achieved its first 2020 year-over-year sales increase for its all-electric vehicles, ending a 10-month dip.
Similarly, NIO, a 6-year-old EV startup that focuses on the luxury segment, saw its sales begin to recover in early April and by June had set a new monthly sales record, delivering 3,740 vehicles.
Surpassing both of these companies was Tesla. At the start of this year, Tesla delivered its first China-made car to consumers, with its Model 3 sedan rolling off the production line of its Shanghai plant — Gigafactory 3, the first outside the US. By August, the company had sold over 65,000 vehicles for the year, establishing it as the leading EV manufacturer in the country.
The rebound is the latest twist for a sector that has experienced spectacular growth over the past decade. In 2011, China accounted for just over 5% of global EV sales. By the start of this year, even during a downturn, that share had jumped to over 50%, making China the single largest EV market.
But while the sales recovery is undoubtedly good news for EV manufacturers, it highlights the amount of volatility and uncertainty in the sector.
EV sector shake-up
China has over 400 registered EV companies. These include traditional domestic auto manufacturers such as Geely, Dongfeng, and Chery, and startups such as NIO and Xpeng. In between, there are those Chinese companies that have diversified recently into EV production — for instance, the property developer Evergrande Group, which unveiled its first EV models in August.
Beijing has invested heavily in the EV sector since 2009, effectively helping build an industry from scratch. Generous consumer subsidies from both central and local government helped stimulate the market but — as was shown by the fall in sales after subsidies were reduced — competing on price discounts alone will not be enough to sustain the market.
“The new energy vehicle industry is at a turning point,” William Li, the founder and CEO at NIO, said. “It used to be driven by favorable policies and sales, greatly boosted by the subsidies. As subsidies are reduced, EV companies now need to win over users’ hearts with products and services.”
Given the number of companies involved in the EV sector, some level of consolidation would appear to be inevitable. However, Ilaria Mazzocco, a senior research associate at MacroPolo, the China-focused think tank at Chicago’s Paulson Institute, says this doesn’t need to be too extensive.
“The market doesn’t look so crowded if you consider how young the sector is,” she said, adding that the “Big Three” auto firms in the US were the result of over a century of sector consolidation. “Plus, the Chinese automotive industry is quite crowded to begin with, so it’s not surprising that the EV industry should mirror the traditional automotive sector. We do see some consolidation taking place, but it will take time.”
More pressing will be how the sector matures and becomes less focused on manufacturing and puts more effort into customer experience. One of the key battlegrounds in this respect will be the ability to build and maintain a more extensive EV charging infrastructure.
“I think that charging remains a key area for business innovation,” Mazzocco said. “The charging network will have to continue to expand, but most importantly, we also need to see more options in terms of how, when, and where we charge our vehicles.”
Wang Chuanfu, the founder and CEO of BYD, agreed, adding that for passenger vehicles, the lack of charging infrastructure in China has been an obstacle to growth, leading to “range anxiety” on the part of consumers.
Wang said identifying and building EV charging stations would be a focal point for future development.
“Over the next five years, we expect the market to make massive leaps in technological advancements and overall maturation — a future that BYD is excited to help shape,” he said.
At NIO, Li has taken a different approach to charging, focusing on battery swaps rather than charging stations. It’s an interesting approach that very few EV manufacturers have adopted, but if it’s successful, it could transform the EV charging ecosystem. NIO has built a network of 150 battery-swap stations, and the company announced in October it had implemented 1 million battery exchanges.
In August, the company launched its Battery as a Service, which it describes as a both a technological and business-model breakthrough. Customers purchase vehicles without the battery and instead sign up for a monthly subscription service that gives them access to battery packs of varying capacity depending on their needs.
“I think auto products are not just about cars but also serving customers well,” Li said. “For families, cars are not a small expense, so we pay a lot of attention to service quality, which I believe will be the biggest challenge to all automakers undertaking rapid expansion.”
The future of driving
The good news is that despite the infrastructure challenges, China’s EV sector still has much room to grow. EVs make up roughly 5% of China’s total auto market. For comparison, the penetration in Norway, the leading EV market, is close to 75%.
“Even if one were to take government support out of the equation, the growth of foreign investment is a strong signal of the market’s rapid maturation,” Wang said, pointing to a recent deal between BYD and Toyota to develop EVs in China.
Ultimately, though, the direction of China’s EV market will depend heavily on the future of mobility itself. In particular, autonomous vehicles.
According to a report from McKinsey, China has the potential to become the largest market for autonomous vehicles, just as it did in the traditional auto sector in 2009.
Investors in the market agree. Alongside auto manufacturers such as Volkswagen, Tesla, and China’s largest car producer, SAIC Motor, a number of tech companies, including Alibaba, the search giant Baidu, and the ride-hailing company DiDi Chuxing, are developing autonomous-vehicle strategies.
“In my opinion, autonomous driving will speed up EV adoptions,” Li said. “The two are interdependent. If you believe that autonomous vehicles are the future, then you must also believe that EVs are the future.”