QUO VADIS, CHINA 2023?

EXECUTIVE SUMMARY

China’s automotive market once again displayed great resilience in 2022, despite severe??challenges. In total, 23.6 million passenger cars were sold, a year-on-year increase of 9.5 percent. This included the record-breaking figure of 6.5 million new energy vehicles (NEVs), a year-on-year rise of 94.3 percent, reinforcing China’s critical role in the worldwide shift to electric mobility.?

Repeating their success in 2021, Chinese players proved the big winners in the NEV market, accounting for more than 80 percent of total NEV sales. Meanwhile, established foreign OEMs lagged behind.??Even premium brands which in the past could depend on success in China struggled to cope with intensifying competition from domestic manufacturers as the transition to e-mobility accelerated.?

The next international phase of this battle has now begun in earnest, with Chinese automotive companies taking on major global markets, focusing especially on western Europe. In 2022, China’s total vehicle exports reached another record high of 2.5 million passenger cars, a year-on-year increase of 56.7 percent.?

Looking forward, market conditions in China will remain challenging for foreign OEMs, as more new Chinese players ramp up production and sales amid rapidly changing customer tastes and shifting government priorities. Nonetheless, there are still areas such as sustainability and the metaverse where foreign players can gain a competitive advantage, as we explain in this report.?

A LOOK BACK ON 2022

During 2022, China’s economy continued to be affected by restrictive COVID-19 suppression measures while in October, the 20th?National Congress of the Chinese Communist Party (CCP) set the country’s direction for the next five years. In addition, Chinese manufacturers, like their international peers,?were severely affected by the global chip shortage and rising raw material prices.?Against this background, China’s automotive industry experienced a turbulent twelve months.?

Yet amid this industry-wide disruption, the performance of different players varied greatly.?

Established and new Chinese NEV players had a great year, spearheaded by OEMs and brands such as?BYD,?GAC Aion,?NIO?and?Tesla. But apart from Tesla, foreign volume and premium players often struggled last year in China, especially with their NEV portfolios.?

To make matters worse for foreign OEMs, the influx of Chinese players into Europe gathered pace in 2022, led by i.a. NIO and BYD.?

Market overview

Total passenger car sales reached 23.6 million vehicles, a year-on-year increase of 9.5 percent compared with 2021. As noted above, COVID-19 restrictions disrupted the market, but China’s government at both national and local level introduced numerous counter measures to promote growth and encourage vehicle sales. These included reductions in car purchase taxes and consumer subsidies which helped stimulate demand and ensure the market achieved a positive annual result.

NEVs were undoubtedly the outstanding market segment, with 6.5 million passenger cars sold in 2022, representing year-on-year growth of 94.3 percent. Overall, NEVs accounted for 27.8 percent of new cars sales in China’s total passenger car market.

Foreign volume and premium brands – an uneven performance

Despite the market’s solid recovery, the performance of foreign brands was mixed. Among volume players,?Volkswagen?(including?Jetta) sold 2.4 million vehicles in China in 2022, a year-on-year decline of 1.3 percent, while?Toyota?sold 1.94 million vehicles, a slight fall of 0.2 percent compared with 2021.?

Premium international brands, which have long been accustomed to success in China, also suffered a disappointing year in 2022 as seen in the example of the major German premium brands.?BMW’s China sales fell 6.4 percent year-on-year, while?Audi?fared even worse, falling 8.4 percent. Only?Mercedes-Benz?managed to avoid a steep sales drop, declining 1 percent year-on-year.?

The difficulties faced by these premium players in China’s NEV market has not been for lack of effort. Audi, for example, introduced several new e-tron electric models in China last year, yet sales of this range only grew year-on-year by 9.8 percent. Price cuts seem to be the only quick fix at this stage to help boost the total China sales of Audi and other German premium brands. For example, Mercedes-Benz has reduced the manufacturers’ suggested retail price (MSRP) for its EQ line-up by up to around 200,000 RMB (~27,000 EUR).???

Chinese NEVs are dominant, widening the gap between domestic and foreign brands

While foreign NEV brands struggled, Chinese?NEV players reinforced their dominance of the domestic market, building on their success the previous year. For instance, China’s three leading NEV manufacturers, NIO, XPENG and Li Auto, all registered strong results in 2022.??XPENG sold 120,757 cars, representing year-on-year growth of 23 percent. NIO sold 122,486 vehicles, 34 percent more than in 2021, and Li Auto’s sales rose 47.2 percent to 133,246 units.?

These sales growth figures are all the more striking because Chinese NEV players are starting to move upmarket into the price range of premium?brands.?For instance, the starting price of the NIO ES8 premium SUV is close to 500,000 RMB (~67,700 EUR) , while the second L9 SUV launched by Li Auto has entered the premium segment at more than 450,000 RMB (~61,000 EUR).

Ambitious Chinese NEV manufacturers are moving into the premium segment because they increasingly offer an user experience which is at least as good and often better than major foreign brands. In 2023, the threat posed to foreign OEMs by Chinese NEV players is bound to intensify, as they continue to leverage state-of-the-art technology and provide a superior customer interface.??

Meanwhile, the boundary between carmakers and tech companies in China is becoming ever more blurred, in line with the global trend. In 2022,?Huawei?launched its smart NEV brand AITO, as well as AVATR, a collaboration with?Chang’An?and the battery manufacturer?CATL. Competitors underestimate these new market entrants at their peril. For example, AITO only began delivering vehicles in March 2022 but had already reached 76,180 units by the end of the year. That is a considerable achievement for a start-up.?

Established domestic players also fared well in the NEV market.?BYD’s NEV sales grew 208.6 percent to 1,863,494 units, including 911,140 battery electric vehicles (BEVs), 184 percent more than in 2021.??Another strong performer was?GAC AION, whose year-on-year sales rose 126 percent to 271,156 units.??Overall,?Chinese brands accounted for approximately 80 percent of all NEV sales, while domestic brands made up 50 percent of the total passenger car market.?

The growing dominance of Chinese players is also hastening the retreat of some traditional foreign OEMs from the highly competitive NEV battlefield.??Peugeot,?Citroёn,?Renault, and?KIA?are among the foreign brands which are gradually disappearing from China.?

The increasing appeal of NEVs: Berylls’ survey of potential and current Chinese car owners?

These record sales by new Chinese NEV players are not surprising, based on the results of a survey we conducted in Q3 of?urban white collar consumers in Beijing who were born in the 1980s and 1990s. This group represents the main market for auto manufacturers and the answers they gave us provide an insight into why Chinese NEV companies are enjoying such success.?

Our key findings were:?

• 91 percent of respondents who were car owners still have an ICE (fossil fuel) vehicle, but when considering a change of car, 22 percent said they would choose an NEV. Of this group, 25 percent would choose one of the new Chinese NEV players such as XPENG or NIO.???
• 28 percent of potential new customers who did not yet own a car said they would choose an NEV, of whom 30 percent said they would choose one of the new players.?
• 36 percent of potential new customers and car owners who wanted to change vehicles did not have a clear preference for ICEs or NEVs, but 20 percent of this group said they would consider the new Chinese NEV players.
• More than 65 percent of existing NEV owners prioritized digital functions when considering changing cars, while almost 50 percent of potential NEV buyers would put digital functions over traditional values such as driving performance?

Our survey suggests that new Chinese NEV brands are becoming the default choice for a significant number of existing and potential new customers. A further headache for established OEMs is that once Chinese car users experience NEVs they tend to attach more value to “smart cockpit” functions than to traditional automotive virtues.??This represents a market opportunity for new Chinese NEV players, which can fully exploit their strengths in digital functions to boost sales, even though their vehicles can be less good in “traditional” areas.

Luxury brands - not as marketable as they used to be?

In 2020 and 2021, luxury brands registered strong sales in China, despite the severe market challenges. However, 2022 was a tougher year, with luxury car brands running into the same headwinds as the volume and premium sectors.?

Although?Ferrari?and?Lamborghini?registered fairly strong sales, growth slowed sharply for both these brands. For example, Lamborghini?recorded year-on-year growth of 8.9 percent, compared with 54.8 percent in 2021.?Bentley?and?Porsche?fared even worse, with their year-on-year sales falling by 9.4 percent and 2.5 percent, respectively. Most surprisingly,?Rolls-Royce’s?China sales also contracted after many years of continued success.?

Used cars

In 2022, sales of used cars fell year-on-year by 8 percent to 12.7 million units under the impact of COVID-19 restrictions. In response,?the Chinese government introduced a series of policies and measures to support and stimulate the used car market. They included the removal of registration restrictions which hindered sales between different cities for used cars and simplifying ownership transfer rules. These two issues were the main cause of supply and demand mismatches which made used car transactions unnecessarily difficult.?

The hope is that more investment will enter the used car market now that regulatory conditions are easier for potential buyers and dealers alike. Encouragingly, tech players such as?Alibaba,?JD.com,?Tencent?andByteDance?have begun to invest in the market, joining other online players such as?Youxin?and?Guazi. New Chinese NEV companies have also realized the potential of used cars, with NIO and XPENG operating their own trading platforms since 2021.

Car exports continue to increase??

In 2022, China exported 3.1 million cars, a year-on-year increase of 54.4 percent, overtaking Germany to become the world’s second largest exporter. This total included 2.5 million passenger cars, 56.7 percent more than in 2021. NEVs drove China’s foreign sales, with 690,000 units exported, a year-on-year rise of 120 percent.?

Most Chinese cars are still exported to southeast Asia, Africa, the Middle East and Latin America. However, Europe is becoming a target market for Chinese OEMs, led by NEVs, with Belgium, Slovenia and the UK featuring as key export destinations.

Customers in Europe seem to be embracing Chinese NEVs. Berylls’ November 2022 study?“German (premium) customer acceptance of Chinese OEMs” ?found a high degree of willingness among German consumers in this market segment to try Chinese NEVs.

The road ahead – what to expect

1. Traditional western OEMs will be increasingly under pressure?It’s obvious that NEV has become the main driver for the Chinese market. This trend will continue with local players pumping out new brands and products continuously, putting foreign players in the volume and premium segments under even more pressure.?
2. New economic priorities We expect to see further financial support for NEVs (via tax breaks rather than direct purchase subsidies). In addition, the government will continue to promote sustainability focusing on carbon reduction/neutrality through, e.g.,?decentralized energy storage, vehicle-to-everything (V2X) technology, continued push on double quota, circularity in the product lifecycle, standards and reporting rules, just to name a few.?

However, apart from NEVs, China’s government has shifted its priorities, with less focus on brute-force, top-down measures to support growth at any cost (e.g., financial stimulus) and more policies designed to open up the automotive market, as seen in the case of used cars.?

How traditional OEMs can overcome their difficulties and win again in China

It is crucial that long-established foreign OEMs to adjust to the reality that China’s automotive market is becoming saturated, while seeking out opportunities in potential growth segments – above all, NEVs.?

The key issue is how to react to changing customer sentiment. We believe that foreign OEMs will need to invest heavily to change customer perceptions - with the eventual aim of leapfrogging Chinese competitors. Their focus should be in the following areas:

Catching up

1. New business models OEMs must develop new business models, with subscription offers and used cars appearing to be the best way to expand their market reach in China. Traditional OEMs undoubtedly have the resources to develop great customer offerings by leveraging their financial services arms and numerous sales outlets, while benefitting from the improved regulatory environment for used cars.??
2. Larger and more competitive product portfolios OEMs need to expand and upgrade their NEV product portfolio, with particular attention paid to high-tech features such as the “smart cockpit,” AD/ADAS and immersive in-car experiences.??

Agent model and digitalization

OEMs need to consider a “bigger marketplace”. Besides agent model, they need centralized and transparent stock inventories. This will also require a completely different incentivization system and comprehensive digitalization of the sales process, with seamless connections between online and real-world sales channels.?

Better marketing

As our survey shows, traditional OEMs are still strong in China, but they lack effective communication channels with their customers. They need to improve their marketing in all the areas that matter to Chinese customers, from digital functions to sustainability.?

Leapfrogging

1. Metaverse is a key lever OEMs should engage Chinese customers in the metaverse. It is important to understand that virtual worlds are about more than creating an immersive in-car experience. OEMs should go beyond simple metaverse applications with limited uses, to create a fully-fledged offering where products and services fit seamlessly into customers’ real-world lives. The good news for OEMs is that so far Chinese players’ metaverse and Web 3.0 activities have been limited, providing an opportunity to gain an early lead.?
2. Decentralization and sustainability initiatives?Traditional foreign OEMs must not believe that sustainability in China is all about slogans. They need to take issues such as decentralization, sustainability and circularity seriously, taking advantage of the fact that they have more experience than Chinese players in these areas.?

Activities in Europe

Protect your home turf Although Chinese players will encounter initial difficulties entering Europe, the threat they pose should not be underestimated. Premium players have “natural protection” in Europe due to their heritage and brand loyalty, but volume and entry level players will come under increasing pressure. They must leverage their customer base, dealer networks, and B2B business know-how to counter the Chinese players’ expansion.

And returning to China…

Accept the point of no return with losing brands and focus on the potential winners??

Chinese customers are teaching OEMs the bruising lesson that their brand loyalty cannot be taken for granted. If enough of them cease to favor a particular brand, it will eventually disappear from the market. OEMs need to learn rapidly that it is a waste of resources to keep as many brands as possible in China. Instead, they should close down or phase out failing brands once they reach the point of no return and focus all their considerable energies and expertise on the potential winners.?

ENDS