By Andy Turton, Founder Insight Blueprints, California, USA
And Klaus Paur, Head of Automotive and New Mobility at MaLogic, Shanghai, China
Electric vehicle technology is the lifeblood of the global new mobility revolution and its promise of easier and cheaper transportation, less pollution, fewer road accidents and economic transformation through cost and time savings. This vision of the future is driving the auto industry to pivot away from traditional Internal Combustion Engines (ICE) to Electric Vehicles, and the United States of America and the People’s Republic of China both claim leadership roles in shaping its outcome. The race for vehicle electrification is on. In this article we explore the factors driving EV sales growth in each market and offer a perspective on which country will prevail, and why.
US-China relations have evolved since 1949 (when Mao Zedong declared the creation of the People’s Republic of China) from a stand-off to a complex intertwined economic dependency, spiked with rivalry and diplomatic tension, and punctuated by disputes over intellectual property rights, access to and control of new technologies and trade relations.
In this context, for many years the US proudly held the crown as the largest auto market in the world and it was to the US that China looked for leadership as their own auto market took shape.
But in 2010 China became the world’s largest auto sales market and since then it has been uncatchable: 2021 US new light vehicle sales are projected to reach 16 million, China’s will comfortably beat that with new passenger vehicle sales of 21.6 million. And while the average US household owns 2 vehicles, and the market reached maturity long ago, vehicle ownership in China is still only 43 per 100 households; cities like Beijing and Shanghai may soon reach saturation, but there is significant untapped vehicle sales potential in the lower tier cities.
The advent of Electric Vehicles offers a new battleground, though; both countries are on the road to vehicle electrification, and while China appears to have an early lead it is not yet clear who will ultimately win the race.
The United States – accelerating after a slow start
If the US can no longer lay claim to being the world’s largest auto sales market it will forever hold the distinction of producing the first ever electric vehicle, the 1889 creation of William Morrison of Des Moines, Iowa. After that initial foray, mass produced ICE vehicles held sway and EV sales were consigned to a rounding error until the 1990s when Federal and State emission targets gave auto brands, and consumers, a reason to think again. Even so, progress has been slow - EVs still account for only just under 2% of annual US new vehicle sales and of the 278 million registered passenger vehicles on US roads, just 1.5 million are EVs.
Bloomberg estimates that by 2030 there will be 26 million EVs on America’s roads while Deloitte expects more than 31 million, but if either projection is to become a reality then consumer attitudes towards EV ownership must dramatically change - surveys consistently show that EVs will become a serious option for most US consumers only when a much wider charging infrastructure exists, many more models are available, and the cost of buying an EV drops considerably.
If the new Biden administration has its way, the first consumer objection to EV ownership (charging infrastructure) will soon be dealt with. The new administration intends to spend $2 trillion on America’s infrastructure in its first term and much of that will go to the automotive and transportation sectors.
The Biden plan prioritizes internet connected electric and autonomous vehicles, “smart” highways, and “smart” cities, all of which depend on a specialist infrastructure to match. Currently there are only 26,000 EV charging stations in operation across the US and a third of them are in California. Biden’s goal is 500,000 charging stations by 2030 with a network spread across all 50 contiguous states.
Automakers are waking up to an EV future too and will soon provide the range of options that might entice more consumers into serious EV consideration. GM will invest $20 billion to deliver to the US market 20 new EVs by 2023, including an all-electric Hummer! In December 2020, the Ford Mustang became available with an electric drivetrain, as part of the brand’s $11 billion commitment to an EV future, and the iconic car appears to have already taken a bite out of Tesla’s market share.
Also, in 2020, Volkswagen announced plans to invest a colossal $91 billion in the EV cause, with deliveries of the all-electric ID4 SUV now underway. In fact, every major auto brand is now on the path plowed by Tesla, and many new EV specialist brands are vying for attention, too. US consumers may soon be spoilt for choice rather than bemoaning their limited options.
If we believe that Biden’s vehicle charging plan will succeed, and if we accept that the vehicle makers will produce a wide enough range of enticing EV products, that leaves just the pricing objection to manage, probably the most significant consumer reservation to EV ownership and the most challenging to deal with.
Automakers are extremely good at price positioning to maximize sales volume, so ordinarily this challenge would be one they would confidently take on, but in fact the industry believes they will need help to open the flood gates to EV adoption. A March 30th, 2021 letter to President Biden from the UAW and two auto trade groups made clear that government policy interventions will be needed to galvanize EV sales.
The administration has yet to respond, but if they agree then inspiration can be found in the policies adopted by other countries on the path to vehicle electrification. For example, Norway boosted EV sales by exempting Electric Vehicles from two onerous taxes, providing road toll exemptions, free parking, free car ferry travel and other measures. EV sales grew by 33% as a result.
With governments around the world intensifying efforts to reverse climate change and the need to do the same apparent to the Biden administration, their commitment to the challenge should not be doubted. But with businesses and consumers unwilling to fund infrastructure change through increased taxes, slim majorities in both legislative houses and extreme antipathy between the two political parties, serious progress on the green agenda will be slow and challenging. In that case, if auto buyers continue to need coaxing into an EV, progress will remain slow. And every passing day without central government policy intervention will leave the auto community’s massive EV investment looking more and more risky.
China – cruising in the EV fast lane
Despite its rapid rise to the position of the world’s largest auto sales market, China’s ambitions for the automotive industry remained unfulfilled. The original goal was for Chinese auto makers to rapidly grow their vehicle design and manufacturing expertise to compete on a level playing field with the auto triad of the US, Japan, and Europe. To further that goal, Joint Venture (JV) regulations were established for foreign entrants to the Chinese market requiring them to share vehicle blueprints and manufacturing expertise with local vehicle makers. But over decades, the international auto community skillfully met the terms of their JV agreements while also protecting their technological and know-how advantages. Chinese brands continued to lag as a result.
The emergence of Electric Vehicles offers a new playing field though, and the Central Government understood early that China had a strategic opportunity to become the world leader in New Energy Vehicles (NEV), and they acted fast.
Using a complex set of regulations, subsidies, and restrictions that cover production, purchase, and usage of NEVs, China’s Central Government has driven the EV market to become the single largest NEV market in the world. Forecasts from tech market analyst Canalys predict potential sales of 1.9 million NEVs in 2021, a 50% increase year-on year and more than the next five largest countries combined. And the ambition does not stop there; electrification is a stepping-stone to the ultimate prize: leadership in autonomous driving technology.
The road to global EV leadership started humbly though, with local Chinese internal combustion engine (ICE) models being refitted with electric motors and sold into ride-hailing fleets, including ride-share leader DiDi Chuxing’s. New, specialist EV designs were not initially available and when finally, the first EV start-ups arrived they fell-short of expectations. For example, Byton’s bid to provide increasingly internet-savvy consumers with a new generation of EVs enhanced with IoT related services ended in furloughs, idled factories and a small residual operation being folded into FAW, China’s original state-owned vehicle maker.
But the Central Government had learned the lessons of the ICE JV experience - it is no coincidence that Tesla is the first wholly foreign owned car company allowed to operate in China, or that the company received preferential terms in its Shanghai Giga factory deal. Without question, the Central Government intends to leverage the EV pioneer’s technological strength and brand power to the advantage of its own EV industry.
Indeed, in Tesla’s slipstream, local start-ups like Nio, Xpeng, Aiways, and others are succeeding where Byton failed; each has rolled out new, specialist EV models that attract growing numbers of new car buyers, and collectively they represent a home-grown and credible EV challenge to upmarket Tesla.
Consumer acceptance of EVs is also growing, even as the Central Government gradually reduces purchase subsidies. Two critical factors are at play here: the gradual expansion of a nationwide charging network has addressed one of the main concerns of potential EV buyers the world over, i.e., certainty that they will be able to keep their vehicle adequately charged. To date, some 800,000 public charging points are available across China, in addition to roughly the same number of private charging stations.
In addition, a wider range of EVs is emerging that caters to diverse consumer needs. The luxury end of the market has always been well served but recently small, low-cost players have emerged selling vehicles such as the Wuling Hongguang Mini EV, the Ora R1, and others. The pandemic certainly created the opportunity for these entrants (the pandemic led many to avoid public transportation) but low-cost EVs have proven themselves to be an attractive, affordable alternative mobility choice that has enduring relevance.
More broadly, the economy segments of China’s EV market have been fed by a growing number of single people combined with greater openness to Chinese vehicle brands. It seems clear now that China’s EV market is not just the largest in the world, it is the broadest and looks set to stay that way.
Reflecting the low priority given to EVs by International JV car brands, EVs from these brands have been slow to appear, and in their absence local brands have taken full advantage. This will change now that the world’s traditional auto brands have fully woken up to the Chinese EV opportunity. Indeed, Volkswagen recently launched the ID.4X and ID.4 CROZZ in China and plan consecutive EV model launches based on their MEB platform. In addition, GM announced an acceleration of its Chinese EV plans while many other international car brands have and will soon follow suit.
Foreign car makers will not find it easy to catch up and they may find themselves squeezed between low-price no-frills EV vehicles from traditional Chinese vehicle manufacturers, and more sophisticated propositions from new, specialist EV start-ups which put connectivity and the user experience at the forefront of their vehicle offer.
In this context, it is important to note that the leading new EV players in the market are all backed by Chinese internet giants including Alibaba, Tencent and Baidu (the latter has even announced that it will enter the EV market under its own name). These new players have developed approaches which dovetail perfectly with modern Chinese buying preferences, such as vehicle showrooms in shopping malls, and smooth online purchase processes.
New service concepts are also perfectly in synch with consumer needs - battery swapping stations (as introduced by Nio, and currently piloted by Geely) tackle the concern of battery degradation and, more importantly, reduce vehicle purchase prices by removing battery costs
It remains to be seen just how sustainable the success brought by widened consumer choice and innovations in sales and service models will be, but we should expect them to flourish if these brands continue to pay close attention to Chinese consumer wants and needs, and tailor their offers accordingly.
The Chinese consumer will be the near-term winner
China’s rapid acceleration into the fast lane of the EV highway is powerful and it is now clear that absence from the race to electrification is no longer an option for any vehicle maker intent on taking a share of China’s large and still growing auto market. Given its size and dominant position, it could even be argued that the long-term survival of many foreign brands depends on how well and how quickly they catch up in China’s EV race.
There are reasons for the International auto community to take heart as they prepare to fight for EV market share in China, though. First, it is likely that there will be consolidation among China’s home-grown EV brands, clearing the field for foreign entrants. Secondly, new start-ups and especially new entrants to the industry (e.g., smartphone manufacturer Xiaomi, or real-estate developer Evergrande) must master the significant challenges of vehicle production while also creating a credible, recognized EV brand.
Thirdly, we can assume that even if China remains the world’s largest EV market, the US will become a sizeable EV market in the near-term, too. And if US and other international brands adapt their growing EV product expertise sufficiently to pursue a Chinese-centric strategy, they will be rewarded. After all, Chinese auto buyers appreciated ICE vehicles from these brands, so it is reasonable to suppose that they will accept their EVs too, especially if focused on the enhanced connectivity, IoT expertise and advanced new mobility solutions that motivate Chinese consumers.
As new Chinese entrants emerge, and hungry foreign brands develop their offers, much remains unclear and the race for dominance is far from done. Even so, it is certain that the one clear short-term winner will be the Chinese consumer. They will have the widest choice of differentiated EV models anywhere in the world, at price points to match every pocket and in ways that dovetail well with their lifestyles, and with no infrastructure concerns to limit them.
The long and winding road
What remains to be seen, however, is whether the innovations that enable Chinese EVs to succeed in their home market can open the gates to the US, Europe, and other foreign markets.
There are certainly promising early signs in Europe: Aiways is exporting their U5 model to Belgium, France, Germany, and the Netherlands while Lynk&Co has begun to offer their 01 model (HEV and PHEV) in Europe using a subscription model.
A foothold in the US remains elusive though, but if Chinese brands can ultimately find their way into the US then China will finally satisfy the ambition that led them to open their borders to foreign car makers more than forty years ago. With four-thousand-years of history behind them, China is used to playing the long game and patiently plotting its course - do not bet against Chinese EVs becoming part of the US auto landscape, no matter how long it takes.
About Insight Blueprints
Insights Blueprints LLC specializes in the automotive and mobility sectors and utilizes best in class research tools to provide its clients with business improvement and growth guidance. Its founder, Andy Turton, has more than 25 years-experience of the automotive and mobility category, gained in Europe, Asia (China, where he lived for a period) and North America (where he now lives, in California). Andy’s focus is always on the application of insights to maximize business impact.
About MaLogic
With dual headquarters in both Shanghai and Hong Kong, MaLogic is a technology-enabled marketing group that provides innovative business solutions by integrating research insights, brand strategy, big data analytics and proprietary precision marketing platforms to various industry sectors across Asia. Klaus Paur has more than 25 years-experience in automotive market research and consultancy. Since 2003 he has been working in China and advising numerous clients on growing business opportunities in this rapidly evolving market.