The gold rush triggered by the Chinese government's embrace of electric cars will lead to an industry shakeout that could see many of the market's current leaders left behind.
Of the industry's current leaders by sales, only Shenzhen's BYD features among the most favored electric car brands among consumers, according to an FT Confidential Research survey. Instead, respondents showed an overwhelming preference for electric cars made by the global auto giants, even though many are still developing their technologies and most are yet to begin selling in China (our survey excludes high concept, tech-funded start-ups such as Nio, Byton and Xpeng).
Foreign automakers are announcing big investments in electric cars in the world's biggest auto market ahead of production quotas which are due to be imposed from next year. Manufacturers above a certain size will be required to produce a certain number of electric vehicles, starting at 10% of their total production. Foreign firms are partnering with local electric car producers to help meet these quotas, but are also mapping out longer-term investments in electric car production based on existing joint ventures.
As their factories start humming in the coming years, and as the government recalibrates its subsidy program to encourage higher-quality vehicle production, we believe market brand leaders will struggle to maintain their grip.
Handouts drive sales
This is a small but rapidly growing market. Sales of pure battery-powered vehicles or hybrid plug-in electric cars in China rose 69.2% last year to 556,000, accounting for about half of total global sales.
At 24.7 million in 2017, sales of conventional engine passenger cars will continue to dwarf those carrying newer technologies for now. However, the government is moving against the internal combustion engine -- it is considering outlawing sales of conventional fuel vehicles altogether. Determined to clean up pollution as well as to get a head start in a greenfield industry, the Chinese government has been supporting the domestic market since 2013 with subsidies at the central and local levels.
For example, BAIC's EC180, China's best-selling electric car last year, could be had for less than a third of the list price once government incentives and manufacturer discounts were priced in. Buyers are also exempt from a purchase tax equivalent to 10% of the final price.
Among respondents to our survey, more than 90% of those buying a car in the coming 12 months said they would consider an electric car, while 55% said the most important consideration in doing so would be to help the environment. Despite their self-proclaimed environmental consciousness, we suspect that consumers are enticed more by government largesse -- the real test of demand may come in 2020 when direct consumer subsidies are meant to be phased out entirely.
In third-tier cities, 9.4% of respondents cited the availability of subsidies as their second most important consideration in buying new energy vehicles. For first-tier city residents, the ease of obtaining a license plate (10.4%) was a big factor, reflecting restrictions on driving conventional vehicles in congested big cities such as Beijing and Shanghai.
Sales of electric cars in smaller cities rose 124.1% last year, even though they do not have these restrictions. Instead, consumers are attracted to low prices and low running costs, as well as practical considerations such as short commuting distances. In third-tier cities, 40.5% of potential buyers said they would like to buy a small-sized electric car compared with 27.6% in first-tier cities.
However, demand for these small, short-distance cars will suffer as subsidies are cut in favor of longer-range vehicles. The EC180, for example, will cost nearly twice as much this year because its limited range means government handouts will be cut by nearly 60%. On the other hand, battery-powered cars with ranges of more than 400km will see their effective prices fall thanks to increased subsidies. Buyers of the Emgrand EV450, newly launched by Geely, receive subsidies this year of as much as 60,500 yuan ($9,570).
BAIC is rolling out vehicles capable of travelling more than the 300km threshold where subsidies increase, but it has a reputational problem among consumers. Although it sold 18.8% of new energy vehicles in China last year, it was chosen by just 1.8% of respondents in our brand popularity survey.
BYD, a pioneer in the electric vehicle industry, was the only domestic name to make our list of the most popular electric car brands. We expect BYD to maintain its market position for now, helped by smaller than expected cuts to subsidies for its plug-in hybrids.
This is an industry in its infancy, explaining why new entrants are proliferating. Some may prove viable competitors. However, our survey results suggest foreign car companies -- whose brands account for 55% of sales of conventional fuel passenger cars in China -- will come to dominate when they ramp up production. They bring more than economies of scale; brand trust will be important in deciding market leaders because so much of the technology that underpins this industry is still developing.
Longer term, foreign brands will rely on their longstanding and still-compulsory domestic joint ventures. Volkswagen, for example, was named the number one new energy vehicle brand among consumers. It imports a few thousand electric cars and has partnered Anhui Jianghuai Automobile Group to begin production of cheap electric cars next year. The focus of its efforts, however, will be on its longstanding ventures with local state-owned partners FAW Group and SAIC Motor.
This article was first published by FT Confidential Research.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insights into China and Southeast Asia. A team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.