The country is also the world’s biggest xEV market, with around 3 million of what the Chinese government calls ‘new energy vehicles’ (NEVs including BEVs, PHEVs and FCVs) sold in 2021. Will it retain this leading position over the next decade, as European and US carbon emissions commitments drive the xEV transition in those regions?
At the UN Climate Change Conference (COP26) in Glasgow in 2021, China committed to the 2015 Paris Climate Agreement to limit global warming by 1.5 °C, and the country (the world’s biggest greenhouse gas emitter) has set a goal of being carbon neutral by 2060. Around 10% of China’s emissions come from the transport sector, and one of the key milestones en route to 2060 is the Chinese Communist Party (CCP)’s target for NEVs to account for 40% of all new vehicle sales by 2030.
In this viewpoint, we will look at China’s plans for decarbonizing road transport and the threat to foreign OEMs from China’s successful NEV makers, in light of the following market dynamics:
China has had a systematic NEV strategy for decades: the target of reaching 40% of new vehicle sales from NEVs by 2030 is not a hurried concession to the growing international pressure to address climate change. Even before the turn of the millennium, the country had a goal to become the world’s leading automotive nation, and new electric drivetrains were a potential route to overtaking established leading markets such as Germany and the US.
NEV development was first funded in the CCP’s tenth Five-Year Plan in 2001, and up to 2008 the focus was on developing pilot vehicles with electric drivetrains. From 2009 to 2016, NEVs were sold to the local market with significant government subsidies and purchase incentives.
Since 2017, subsidies have been much more strictly linked to technical specifications such as range. The current funding program will finish at the end of 2022 which would immediately result in shrinking sales number for NEVs. However, as has happened in the past, subsidies may be extended, with stricter requirements for eligible EVs. The NEV market is also supported by the “dual credit policy”, a form of carbon market, where OEMs have to meet quotas for NEV production. For the upcoming years we expect the government to further move away from generous subsidies of the past – in favor of even stricter regulations urging manufacturers to move towards e-mobility which will once again spur NEVs transformation in China.
China’s long-term NEV strategy has put it far ahead of Europe and the US. As one building block of this strategy the CCP ensured the availability of charging points, key for the success of the e-mobility transformation. Government programs have subsidized the building of public charging stations since 2014, and approximately 1 million have now been installed.
The provinces in China with the highest number of charging stations are currently Guangdong, Jiangsu and Beijing, all located in the highly developed costal area pinpointing the Achilles heel of the Chinese charging infrastructure – the unevenly distributed charging infrastructure across the country.
China has by far the largest network of EV charging infrastructure worldwide, with a ratio of 8 BEVs to one charging station. That compares with a ratio of 20:1 in the EU, and sets the global benchmark. Progress is not stopping – as Figure 1 shows, the number of public charging points is expected to increase by 23% a year to reach 6.18 million by 2030.
BEV production is also ramping up – today the segment accounts for around 5% of vehicle production, and plug-in hybrids (PHEVs) for another 3%. However, we expect BEV production to accelerate significantly, growing by 32% a year to reach 13 million vehicles annually in 2029 – the equivalent of 40% of all car production (Figure 2). By comparison, we expect the US to produce 4 million BEVs a year in 2029, or 36% of total production volume.
China’s long-term strategy for NEVs also means it has built up a world-leading advantage in the critical area of battery supply.
At present, about 80% of the world’s EV batteries are made in China, and OEMs worldwide are heavily dependent on exports from the country: around 70% of the battery cells needed for cars manufactured in Europe, for example, come from China. China’s CATL is now the global market leader in lithium-ion EV batteries, along with LG Energy Solution (South Korea) and Panasonic (Japan).
Today’s installed production capacity in China is about 650 GWh/year; we expect capacity to increase more than three-fold to 2,260 GWh by 2030, equivalent to a compound annual growth rate (CAGR) of 16.5%. We expect domestic the demand in 2029 to be around 1,300 GWh a year based on NEV production in China – still enough for Chinese suppliers to have plenty of capacity to export battery cells to foreign manufacturers.
China’s advantage is not only in battery cell manufacturing, but in the raw materials needed to produce them. The country is one of the largest lithium producers in the world, with around 50% market share, as of 2018. The country also controls 80% of the world’s cobalt refining industry and more than 50% of nickel supply.
However, to counteract the risk of having one country dominate raw material supplies and production to such a degree, foreign OEMs are urged to establish their own battery supply chains as quickly as possible, to reduce their reliance on Chinese producers (read our detailed insight about China’s role in the race for raw materials here).
Highlighting the scale of China’s battery cell production advantage in comparison with other large automotive markets, there are already several dozen „gigafactories“ for Li-ion cells in the country, whereas in the US there are just five. By the end of this decade, there will be more than 100 gigafactories in China, while in the US, 17 have been announced (Figure 3).
Local production of battery cells is a key advantage for Chinese OEMs, and a vital enabling factor in making the country a leading automotive nation – not only in terms of quantity, but also in terms of battery technology.
Customers in China seem to have fully embraced electrification. Our analysis of customer sentiment in the country showed almost no differences between the various powertrain types (Figure 4).
Reasons for this include the fact that a high proportion of driving happens in urban areas in China (compared to the US for example) and BEVs and PHEVs have a clear advantage in that environment. Other advantages are being able to drive NEVs on days when ICE vehicles are banned due to high pollution levels, and government subsidies for NEVs. An appealing range of NEVs in the lower price segments made by Chinese OEMs also firmly established BEVs and PHEVs in the Chinese volume market at an early stage.
The driving range of NEVs has a big impact when it comes to negative sentiment, particularly any difference between real daily range and available range as displayed in the vehicle. Range anxiety is still an important issue for China’s NEV customers. However, the growing number of charging stations in China means drivers are less concerned about being unable to charge when they need to, or during a long journey.
Chinese OEMs also know their customers: the NIO ES 6 performs significantly better in customer sentiment scores than a Tesla Model 3, for example, and a BYD Tang PHEV ranks significantly higher than a BMW 5 Series PHEV (Figure 5). The less positive customer view of foreign brands when it comes to NEVs is borne out by vehicle sales: Chinese NEV models are outperforming their German competitors, as we analyze in our report, Alarming signs on the horizon – why German OEMS must do better in China.
Driving performance and technical details are not as relevant to NEV customers in China as in other markets, whereas cars with a modern look, spacious interior and connectivity win positive ratings. As a consequence, German OEMs including Mercedes, Audi and Volkswagen cannot keep up with the sales numbers of local NEV start-ups such as Nio, Xpeng or Li Auto. These “techy” start-ups are well liked by customers and can build upon own unique strengths, resulting in fast growth (for more details, please see our latest study, Quo Vadis, China 2022 – Who is under the gun?).
China has vital first-mover advantages in battery cell production and NEV charging infrastructure, as well as NEV production whereby all of this is grounded on a forward-looking e-mobility strategy. Customers accept EV engine technology and China’s “techy” OEMs are producing what customers want when it comes to e-mobility.
The expected fall in ICE sales in China this decade indicates the future of the country’s auto market will be in NEVs. However, if China is serious about decarbonizing road transport, it will not stop to actively support the e-mobility transformation. We expect government incentives to be extended beyond 2022 to encourage greater NEV adoption, although future subsidies are likely to be smaller and with more requirements for the vehicles they apply to. A more intensive dual credit policy for OEMs, with higher quotas for NEV production, would also drive the market forward – and thereby strengthen local OEMs.
For all these reasons, Chinese OEMs have a strong advantage over foreign rivals in the NEV market. We expect them to use the momentum of the e-mobility transformation to build upon local industry capabilities in the volume and premium segment. So, to be successful in China in the long-term, foreign OEMs can’t rely on their previous success with ICE vehicles. They need to react fast to compete with China’s NEV start-ups, and work to win customer approval for their electric models.
Dr. Jan Burgard (1973) is CEO of Berylls Group, an international group of companies providing professional services to the automotive industry.
His responsibilities include accelerating the transformation of luxury and premium OEMs, with a particular focus on digitalization, big data, connectivity and artificial intelligence. Dr. Jan Burgard is also responsible for the implementation of digital products at Berylls and is a proven expert for the Chinese market.
Dr. Jan Burgard started his career at the investment bank MAN GROUP in New York. He developed a passion for the automotive industry during stopovers at an American consultancy and as manager at a German premium manufacturer.
In October 2011, he became a founding partners of Berylls Strategy Advisors. The top management consultancy was the origin of today’s Group and continues to be the professional nucleus of the Group.
After studying business administration and economics, he earned his doctorate with a thesis on virtual product development in the automotive industry.