Drive I/O | Will China regain leadership in the world EV race?

China was once unrivaled in electric vehicle (EV) sales. Now, Europe threatens its dominance.
 
It has been five years since China surpassed the US to become the world’s biggest EV market. Growth in China’s EV market was swift thanks to heavy government support in the form of subsidies. But this year Europe is set to dethrone China as the global EV sales leader, picking up critical momentum despite widespread disruption from the global Covid-19 pandemic.

China, a global manufacturing hub for automobiles, has historically produced entry level, low-priced cars, lagging behind the West in cutting-edge vehicle technologies. Now, facing a battle on two fronts, Chinese EV makers are attempting to shake this image as they gear up to expand abroad. There’s a lot at stake. They’ve already been beaten by overseas auto giants in their home market—or joined forces with them, casting a shadow on Beijing’s ambitions to create homegrown EV leaders.

Analysts expect growth in China’s EV market to recover in the next few years, although only marginally—high price tags and a lack of charging facilities remain key roadblocks to EV adoption. Still, as Europe collectively accelerates its transition towards low-carbon transport, it raises a number of questions. What do China and Europe’s EV markets look like? Will China’s head start in EV technology give it an edge? Can China really fulfill its goal of developing its own EV leaders?

EV sales forecast

In a big hit to Beijing’s EV ambitions, Europe overtook China as the world’s largest EV market earlier this year. Bolstered by generous cash incentives, Europe reported a massive surge in EV sales in the first half of 2020. Meanwhile, China was trapped in a downward spiral thanks to Beijing’s EV subsidy cuts last year and the economic fallout from Covid-19.

The sudden increase in European EV sales has triggered general unease among some of the biggest companies in China’s EV industry. One of the most outspoken figures is Zeng Yuqun, chairman of battery giant CATL.

Zeng said recently that China could lose its leading position if Europe continues beating China in EV investments over the next several years. Beijing’s investment into its own EV industry was about 30% of that of the EU last year, Chinese media reported (in Chinese) citing Zeng.

The EU’s lead is likely only temporary, say veteran industry observers. “Whatever short term sales advantage might take place in Europe, I don’t see that persisting. I expect China to gain the lead in terms of EV sales over the long run,” Stephen Dyer, managing director of global consultancy AlixPartners said last month during TechNode’s Emerge 2020 conference.

Although EVs only made up 3% of total car sales last year, the continent has aimed high and is forecast to increase that number to 20% by 2030 by German automotive research center, the Chemnitz Automotive Institute (CATI).

Experts see tremendous growth potential in China not only because it remains the world’s biggest auto market, but also because EV adoption is still in the early stages. Last year, only 1.2 million EVs were sold in China compared with the 25.8 million total vehicles sold—still lower than the penetration rate of EVs in Europe. The country also has a far wider offering of EV models ranging from entry level to luxury.

While experts forecast China will regain its position as the world’s largest EV market, sales could be headed for a prolonged period of slow growth until battery technology matures. One of the most obvious signs of a slowdown is that Beijing recently lowered its NEV sales goal to 20% from 25% of total car sales by 2025, as Reuters reported. 

Internal fight

After a prolonged market slump which lasted an entire year, China’s NEV sector has managed a U-shaped recovery, reporting double-digit growth since July. Now, the market is dominated by two US automakers: Tesla and General Motors (GM).

Tesla’s locally-built Model 3 and GM’s Wuling-branded mini-EV recently became China’s best-selling EVs, outperforming a slew of China’s biggest automakers. Each dominated one end of the market: the post-subsidy price of standard-range Model 3 starts at RMB 271,550 ($41,195), while a tiny Wuling EV costs only a tenth of a Tesla.

Meanwhile, young, China-founded EV makers such as Nio and Li Auto reported better-than-average deliveries, outperforming traditional auto companies, although their sales made up only a fraction of the total EVs sold.
 
That’s not what China wants. In an industry development plan released last week, Beijing promised to become a global auto powerhouse, with Chinese car brands becoming “a major competitive force worldwide” in the next 15 years (our translation).

“There’s no way that the Chinese government is going to let foreign automakers lead the EV sector for a long period of time,” said Tu Le, founder and managing director of business intelligence firm Sino Auto Insights in an interview with S&P Global.

Chinese EV makers

Despite Tesla’s lead, China’s young EV makers are becoming an important emerging power. Nio, a major challenger to Tesla in China, this month surpassed GM in market capitalization as the world’s 7th most valuable automaker. Chinese original equipment manufacturers (OEMs)—companies that make cars or car parts for other brands—are now preparing for a big electric push, while more international carmakers are jumping into the fray.

• SAIC, China’s biggest automaker, is reportedly planning to launch a new brand to compete with Tesla. Codenamed “L,” the secretive project is poised to establish a benchmark for the next generation of smart cars. Sources boasted to Chinese media that the way SAIC will use artificial intelligence technologies in these vehicles will be far ahead of its rivals. Rumors claim the project is led by the company’s top brass and an independent subsidiary will be formed to drive innovation.
• Meanwhile, Peugeot Société Anonyme’s (PSA) Chinese manufacturing partner Dongfeng, in July launched a new high-end brand called Voyah. The company said it will begin mass producing its first EV under the new brand next year. The Hong Kong-listed automaker is currently seeking to raise a RMB 21 billion ($3.2 billion) war chest in a secondary listing on the Shenzhen stock market to ramp up vehicle development and production, reported Chinese media.
• GAC is reportedly following suit, with rumors spreading that Toyota’s Chinese partner intends to spin off its EV unit for an IPO on China’s Nasdaq-style STAR market later this month.

German auto giants

Chinese automakers excel at making entry level vehicles, but competition for the lower tier market is heating up as German car manufacturers—known for leading engineering and technical innovations—begin experimenting with small, affordable EVs. Local manufacturing partners are gearing them up for entry into China’s low-cost EV segment.

• A joint facility run by BMW and Great Wall Motors broke ground in China’s eastern Jiangsu province in June. Work on the factory comes two years after the companies laid out plans to launch an EV brand called “Spotlight” in 2023. Analysts expect the sub-RMB 100,000 model to share its components and manufacturing platform with Great Wall’s Ora-branded mini-EVs.
• Mercedes-Benz early this year forged an alliance with Chinese auto giant Geely, planning to produce tiny, two-person mini-EVs in China under the Smart brand. The China-made Smart EVs are scheduled to go on sale worldwide in 2022.
• Volkswagen has promised to invest €15 billion ($17.8 billion) to fund its ambitious plan to produce 15 new EV models with Chinese partners in the next five years, as it seeks to dominate EV sales in China. The German automaker earlier this month launched its made-in-China ID.4 crossover. The vehicle is the company’s first China-made EV based on its mass-produced modular electric vehicle platform The ID.4 starts at around RMB 250,000 after subsidies, according to a Reuters report.

Despite an early lead by Tesla and its Chinese peers, experts caution that it is too early to predict whether a domestic or foreign automaker will take pole position next year, given the complexity of the landscape. Still, as the market splits between growth in the entry-level and premium EV markets, whoever wins the customer experience will have a leg up over all the other players, Dyer added.

Global dominance?

With only a few thousand vehicles sold each month, Chinese EV makers like Nio, Xpeng, and Li Auto have yet to carve out a solid position in their home markets, but they’re looking to drive sales by expanding around the world. Some companies are shifting their initial plans to launch in America, opting for Europe instead given the escalating tensions between China and the US.

• A culturally and politically diverse environment also means their domestic business models might not work in the new markets, and entering too many markets could divert management’s attention and resources, experts said.
• “Europe… is very diverse, and therefore a marketing strategy in Germany might not work in France and Italy,” said Sino Auto Insights’ Le.

Lagging in EV tech

Chinese EV makers’ recent push to extend their presence overseas echoes Beijing’s ambition to build a world-class auto industry. However, what matters even more than explosive growth is China’s tech development, and its ability to sustain quality growth. China still needs to do a lot of heavy lifting to become the undisputed leader in EVs.

Despite being home to some of the world’s biggest battery makers, China still lags far behind Western countries in manufacturing crucial EV components such as electric engines and motor controllers.

For example, more than 90% of China’s IGBT modules, a key component in the motor controller for EVs, are sourced from overseas suppliers, as few domestic parts makers have the capability to manufacture them, industry insiders recently told China Automotive News (in Chinese). IGBT devices make up 10% of the production cost of an EV, French market researcher Reportlinker said in a report.

Chinese authorities are aware of the urgency of self-reliance for core technologies from a long-term perspective, with an official at the Ministry of Finance late last year raising the alarm over its reliance on overseas EV technologies during an industry conference. So far, China’s imports of key EV components are mostly from Europe and the raw materials used in manufacturing EV batteries are sourced in Africa, and therefore industry insiders believe the risk of a cut-off is limited.

After 10 years and more than RMB 1 trillion in government incentives, China has finally become a forerunner in the global EV race, but as it grows bigger, the problems it faces in its quest to regain its position as a global leader are increasingly apparent. In its latest industry development plan, Beijing has set the goal to join the global top league in the advancement of core EV technologies by 2035. The question is: can China make another leap this time?