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Practical Guide to the Automotive Industry in China

Major trends, such as autonomous driving, connectivity, electrification, and shared mobility, are reshaping the automotive industry in China. As the world’s largest vehicle market and manufacturer, China’s domestic production is expected to reach 35 million cars by 2025.

In the first five months of 2023, China’s automotive industry stepped up its global expansion, with exports surging by over 81% year-on-year to 1.76 million vehicles, according to data published by the China Association of Automobile Manufacturers (CAAM).

The auto industry passed a major milestone earlier this year when it overtook Japan as the world’s largest vehicle exporter, thanks in large part to strong growth in overseas demand for its new energy vehicles (NEV), a segment which mainly comprises electric and plug-in hybrid vehicles.

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NEV exports surged by 163% to 457,000 vehicles in the five-month period, according to the association, with significant growth coming from Europe. The European Automobile Manufacturers’ Association (ACEA) informed that China was the largest exporter of vehicles to the EU last year, ahead of Turkey and the UK, and shipments have continued to strongly grow this year.

The Chinese automotive industry has been working hard to change its long-held image as a supplier of low-tech, low-cost vehicles with low residual values, helped in large part by the significant progress its domestic brands have made in the connected EV segment. High-profile start-up brands such as Nio, XPeng and Li Auto, which are challenging Tesla in several markets, have played a significant part in lifting the Chinese automotive image around the world and at home.

A decade ago, China started to implement serious policies to take a lead in the global EV segment, initially with generous purchase incentives for customers and high domestic sales targets. The country now has the largest EV market and industry in the world, with the strongest EV supply chain and significant R&D activity and innovation.

NEV sales in China almost doubled to 6.9 million units last year, with EVs surging by 84% to 5.4 million units. In the first five months of 2023, NEV sales were up by a further 47% at 2.9 million units – in a still sluggish economic environment.

The Chinese government also announced it is extending NEV purchasing incentives, which were due to expire at the end of this year, until 2027 to ensure that its growth targets are met.

Domestic brands now account for close to 50% of total vehicle sales in China, up from 35%-40% just a few years ago. Local automakers have taken the lead in fulfilling fast-growing domestic demand for connected EVs and plug-in hybrids, with other brands also gaining ground.

China’s automotive industry is seriously focused on overseas expansion, with leading brands such as BYD strengthening their sales and distribution networks in all regions of the world, including Asia-Pacific, Africa, Middle East, Russia, and Latin America – markets from which many western brands have retreated in the last decade. Chinese brands have now set their sights on challenging the Japanese dominance in many of these regions.

SAIC Motor, China’s largest vehicle manufacturing group with significant joint ventures with GM and Volkswagen, is also the country’s largest exporter. It reported a 48% rise in overseas sales to 438,455 units in the first five months of the year, including some 59,000 vehicles produced overseas and close to 380,000 CBU exports.

China’s other key domestic exporters include Chery Auto, which sold an estimated 300,000 vehicles overseas in the five-month period – many of which were assembled overseas; similarly Changan Auto with 150,000; Geely with 90,000; Great Wall Motors with 88,000; and Dongfeng with 80,000 units.

Foreign brands are also expected to play a major part in the surge in China’s automotive exports over the next decade. Already Tesla is the country’s second largest CBU exporter, having increased overseas shipments from its Shanghai facility by 69% to 163,000 vehicles year-to-date. German automakers have indicated that they will use their significant joint venture operations in China to target overseas markets, including Europe, particularly EVs – making the most of China’s strong, low-cost supply chains.

Japan’s Honda also began exporting vehicles from China for the first time in May, EVs and hybrid models to the rest of the world – harnessing the country’s strong EV supply chain.

Chinese carmakers produced 27.02 million units in 2022, up by 3.4% year on year, while sales rose by 2.1% to 26.86 million units, as per data from the China Association of Automobile Manufacturers (CAAM).

Based on numbers from the Ministry of Industry and Information Technology, over 26 million vehicles were sold in China in 2021, including 21.48 million passenger vehicles, an increase of 7.1% from 2020. Commercial vehicle sales reached 4.79 million units, down 6.6% from 2020.

The passenger vehicle segment includes sedans, sport-utility vehicles (SUVs), and multi-purpose vehicles (MPVs). SUV sales reached over 10 million in 2021, overtaking sedans being the most popular passenger car type in China for the consecutive two years.

Although mainstream ventures maintain the largest percentage of market share, China's own design brands increased their market share to 41.2 percent in that year. The leading automobile manufacturer in China was SAIC Motor Corporation, with around 2.76 million units sold in 2021.

Changan Automobile and Dongfeng Motor Corporation came in second and third place, with about 1.76 million and 1.33 million units sold that year. After domestic auto manufacturers, German and Japanese passenger cars are the most popular car brands among Chinese consumers, each with about one-fifth of the market share.

Since 2009, China remains the world’s largest automotive manufacturing country and market. As of 2022, China accounted for 32.5% of global vehicle production (global production circa 80 million), which exceeds that of the European Union, or the United States and Japan combined.

The latest trends in the industry (NEV and EV) are having a dramatic impact on consumer preferences for vehicles, which will reshape the country’s automotive market over the next five to ten years, according to the McKinsey China Auto Consumer Insights 2023 survey.

A few decades ago, China’s automobile production was focused on commercial vehicles for industry and military purposes, and it did not gain momentum until the beginning of the 1990s. The rapid growth of the domestic market accelerated changes in the industry, reaching its peak in 2017.

Vehicle sales have declined since 2018, with the COVID-19 pandemic accelerating this trend. Only in 2021 did the growth rate start to pick up slightly to 3.8%.

Well-established foreign brands have invested in automobile production in the country, attracted by its large market size. However, most foreign brands were only allowed to produce their vehicles by establishing joint ventures with domestic manufacturers, something the government plans to loosen gradually.

Thanks to technical development and lower production costs, several local brands have become more popular in the automobile market. Most vehicles manufactured in China are sold within the country, while manufactured vehicles for exports only contributed approximately 7.7% to China’s overall auto production volume in 2021.

Chinese auto brands are on track to account for just over 50% of the cars sold in their home market this year thanks to a growing dominance in electric vehicles, according to consultancy AlixPartners. It would represent the first time Chinese automakers have controlled a majority share of China's car market.

For the past four decades, China's auto market has been dominated by established global brands such as VW and Toyota operating in joint ventures with Chinese partners.

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In the past few years, the Chinese government has been promoting new energy vehicle (NEV) sales, through tax exemptions, subsidies for car purchases and a requirement for government departments to buy more new energy cars, to save energy and reduce air pollution.

NEV manufacturers also received financial support from the government to reduce their R&D and production costs. China’s production of NEVs grew from about 17,500 units in 2013 to over 3.5 million units in 2021. The growth and emphasis on NEVs are not only a measure to reduce urban air pollution but can also be seen as a way for Chinese automakers to become globally competitive against traditional manufacturers specializing in vehicles with internal combustion engines.

US-made vehicles exported to China face the same 15% tariff China applied to most major trading partners. Vehicles were included in the US-China Phase One Trade Agreement, offering tariff exceptions and opening potential opportunities for U.S. exporters.

In the wake of the COVID-19 pandemic, the Chinese government has taken steps to reinforce automobile consumption. These steps include allowing vehicles that meet China 5 Emission Standard to sell without restrictions, supporting electric vehicle consumption, reduction of car sales tax, and improving parallel import policies for autos. These changes are estimated to increase consumption by approximately US$30 billion per year.

Changing consumer preferences have also had a significant impact in the industry. Trading up continues to be popular, but some consumers are making more rational choices about their next car purchase, seeking cost-effective models with high-quality features, according to the 2023 McKinsey consumer report.

Multinational brands no longer command premium prices, and changes in the overall brand landscape are accelerating. Chinese consumers have long been willing to pay a premium for foreign brands, but this attitude is shifting as changes within China’s brand landscape accelerate.

The report pointed out that brand awareness differs for electric vehicles (EVs) and traditional internal-combustion-engine (ICE) vehicles. Four of the five most recognizable EV brands are Chinese, while the most recognizable ICE brands are still foreign brands.

Customer loyalty to EVs is emerging. EV customers are more inclined to consider vehicle performance, rather than regulatory incentives such as free license plates, when purchasing a vehicle. Also, EV owners are highly satisfied with the overall performance of their vehicles, which demonstrates great growth potential for EV penetration.

Consumers have shown significant enthusiasm for online car sales, but offline touchpoints remain indispensable. EV disruptors have achieved high customer satisfaction through omnichannel direct-to-consumer (DTC) models, but they still need to improve their after-sales services.

The concept of low-carbon cars is emerging, and consumers have shown willingness to pay extra. Low-carbon cars can help reduce greenhouse gas (GHG) emissions during all phases of the vehicle life cycle, beginning with the procurement of raw materials for manufacturing and extending through day-to-day operations. Consumers are increasingly aware of the concept of low-carbon cars and some customer segments, such as those who have high incomes and are environmentally conscious, show a greater willingness to pay for them.

Together, these trends will help promote even greater technological advances and encourage the development of new business models. Automotive companies can take advantage of these shifts and build strategies that position them for success in the Chinese market.

The shift to electrification in the Chinese market is ongoing and permanent and brand strategies are evolving. For many years, Chinese consumers were willing to pay premium prices for multinational brands, but today, foreign car makers may need to adjust their pricing strategies as their brand shares decrease and Chinese consumers become increasingly reluctant to pay a premium for their vehicles.

Three accelerating shifts will have a clear impact in the medium-to-long term:

  1. Value creation over the full vehicle life cycle is becoming more critical (Software subscriptions, DTC models, and other innovative solutions).

  2. Acceptance of low-carbon cars is growing. Chinese consumers are gradually becoming more likely to consider such vehicles and are demonstrating a higher willingness to pay for them.

  3. Smart features are becoming major differentiators for EVs. When purchasing premium EVs, Chinese consumers are increasingly likely to make smart features, such as ADAS, connectivity, and voice control, a core consideration.

The age of ICE vehicles in China is fading, and the era of smart EVs has arrived. As consumer mindsets change and new technologies advance, many of the so-called golden rules are being subverted and reshaped.

Facing such drastic changes, some companies have already left the market and others may follow. Simultaneously, new players will emerge, potentially increasing competition. The companies most likely to succeed are those that are willing to fully transform their products, brands, operations, organizational structures, and more.

One of the key factors in the growth of the Chinese automotive industry has been the unwavering support and encouragement from the government. Beijing has implemented various policies and initiatives aimed at fostering innovation and development in the automotive sector.

Between 2015 and 2020, China's investment in automotive manufacturing increased by 30%, reaching US$58.4 billion in 2020. These measures have not only stimulated domestic production but have also attracted global automakers to establish joint ventures and partnerships with local Chinese companies.

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Chinese automakers have been investing heavily in research and development, which has led to significant advancements in automotive technologies. In 2020, China spent over US$370 billion on R&D, accounting for 2.4% of its GDP. This commitment to R&D has not only boosted the reputation of Chinese automakers but has also positioned them as major players in the global market.

Chinese EV manufacturers, such as NIO, BYD, and XPeng, have made significant strides in battery technology, improving both energy density and charging speed.

Chinese companies have also made progress in the field of autonomous driving and vehicle connectivity. Companies like Baidu, Tencent, and Alibaba have been investing in the development of advanced driver assistance systems (ADAS) and autonomous driving technologies.

By 2020, China had already tested autonomous vehicles on over 1.2 million kilometers of public roads. On August 1, 2022, Shenzhen permitted self-driving cars on the road, a milestone in the development of autonomous-driving technology.

The Chinese government's encouragement of innovation in the automotive industry has helped propel these companies to the forefront of the global race for self-driving cars. The Chinese autonomous vehicles market is projected to reach US$ 98.89 billion by 2030.

China's rapid growth in the automotive sector has been facilitated by its willingness to collaborate with international partners. Chinese automakers have entered joint ventures with established global manufacturers, gaining access to advanced technologies and expertise in vehicle production.

For example, SAIC Motor partnered with Volkswagen and General Motors, while Geely acquired Volvo. These partnerships have enabled Chinese companies to improve the quality and reliability of their vehicles, which has, in turn, boosted their reputation and global market share.

Several Chinese brands have achieved international safety and quality certifications, such as Euro NCAP and the IIHS, which have contributed to their growing reputation.

The Chinese automotive industry's growth trajectory is expected to continue in the coming years, driven by strong domestic demand, technological advancements, and expanding global market share.

According to the China Association of Automobile Manufacturers (CAAM), vehicle sales in China are projected to cross 30 million units by 2025, with new energy vehicles (NEVs) accounting for 25% of total sales, or approximately 8 million units. This growth will be fueled by the government's commitment to promoting green transportation, with plans to install over 1.2 million public charging stations by 2025, up from approximately 800,000 in 2021.

As Chinese automakers continue to invest in research and development, their global competitiveness is expected to increase further. China's R&D spending is projected to reach 2.8% of its GDP by 2025, with a significant portion directed towards the automotive industry. This investment will likely result in continued advancements in electric vehicle and autonomous driving technologies, further solidifying China's position as a global leader in these areas.

In a post-COVID world, car brands are understanding the importance of merging offline and online marketing and sales channels. Online marketing has become increasingly important for auto brands, including livestreaming by influencers (or Key Opinion Leaders (KOLs).

Research about automotive influencers in China shows that customers would prefer to have online engagement with auto industry KOLs instead of being educated by brands about specific cars. Chinese microblogging site Weibo attracts the younger generation as it provides better engagement and interaction functionality for users.

According to experts, car owners and potential customers born in the 1970s and 1980s prefer to search for product information on social media platform WeChat, while those born in the 1990s prefer Weibo. The biggest difference between WeChat and Weibo is that WeChat only allows the brand to respond to consumer comments/questions, while Weibo allows brands and all followers to interact with each other.

For auto brands, online interaction offers a new way for customers and prospects to understand their products; remove potential barriers for viewing the car and interacting with a brand, compared to visiting a confusing retailer website or traveling to a dealership in person.

Delivering the right content in an interesting way and offering opportunities for interaction are key to successfully attract consumers in China.

The future of the Chinese automotive industry looks promising, driven by strong domestic and international demand, commitment to innovation, and a focus on sustainable transportation solutions.


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