Chinese automotive market: Growth opportunity or competitive threat?

Posted on 26 Aug 2022 by Tim Brown

Like an electric car with its pedal to the floor, the Chinese automotive industry has taken off. However, Chinese-made automobiles are still viewed by many western consumers with a certain stigma of inferiority. But in the immortal words of Bob Dylan: ‘the times they are a changing’.

It wasn’t long ago that no matter what the product, Chinese-made goods were generally considered cheap and inferior. Indeed, many western manufacturers rued the day they chose to offshore their supply chain to the People’s Republic of China, as they were often stung by long lead times and low quality. The adage ‘buy cheap, buy twice’ springs to mind.

Over the last three decades however, China’s economic growth has brought with it a significant improvement in the country’s collective manufacturing quality.

In the automotive sector, this improvement in industrial capabilities has been particularly accelerated through numerous joint ventures between often state-owned Chinese organisations and US, Japanese, South Korean and German brands. Companies such as VW, Honda, GM, Buick, Toyota, Nissan, Hyundai, Kia, Daimler-Benz and Ford all manufacture locally in China in conjunction with a local partner.

With the growth of local manufacturing capabilities and know-how, home-grown Chinese brands emerged, some of which have already making in-roads into the global export market. Fast forward to the present day and it is the next generation of electric car makers in China that are set to make the biggest impact on the global automotive market.

Growth of the Chinese automotive market

Fuelling the growth in local Chinese automotive manufacturing has been the huge increase in the average income of the Chinese population. The resulting improvement in personal prosperity has led to an increase in automotive ownership.

Since 1980, the average Chinese income has increased roughly 100 times, moving from just over 1,000 Yuan in 1980 to about 106,000 Yuan (approx. £13,000) in 2021. In just the last decade, the take home pay of Chinese workers has more than doubled. At the same time, the number of cars on Chinese roads has increased by a whopping 187% – from around 104.9 million in 2011 to about 302 million in 2021. And this doesn’t even include motorbikes, scooters or trucks.

Some 40-odd years ago, Volkswagen AG was the first automotive company to take advantage of the forecast Chinese economic growth. In 1984, VW, alongside SAIC Motor, established the first joint venture in the Chinese automotive industry. In the early 1990s, many international automotive OEMs followed suit and established manufacturing capabilities through joint ventures with local Chinese companies.

Foreign investment limitations now in the rear view

As a result of the sudden influx of international investment, in 1994, the Chinese government introduced a 50% limit on foreign ownership of businesses, including all international automotive groups investing in China.

This protectionist policy continued until the new People’s Republic of China Foreign Investment Law (‘FIL’), as well as its ‘Implementing Regulations’, took effect on January 1, 2020. This lifting of investment restrictions by Beijing was initially only applied to certain industries, including some elements of the financial sector.

Then on 1 January 2022, China announced it had lifted ownership limits on automotive enterprises, allowing foreign investors to establish wholly foreign-owned enterprises (WFOEs) in the industry. Restrictions on a foreign investor establishing more than two joint ventures in China to produce the same vehicle product were also removed.

In addition to the FIL, there are still some industries that will remain protected. These are detailed in what is known as the ‘Negative List’. Conversely, there are also a number of specially supported industries that can be found in the ‘Catalogue of Encouraged Industries for Foreign Investment’. Both lists took effect on July 30, 2019.

The automotive industry falls within the latter ‘encouraged’ group where foreign investors can receive benefits including:

  • Customs duty exemptions on equipment imported for self-use
  • A preferential enterprise income tax rate of 15% for foreign investment enterprises in certain encouraged sectors and regions
  • Qualified investments will enjoy land supply on a priority basis, plus a discount of up to 30% below the mandatory minimum price for granted land use rights

With these improvements to investment rules, Beijing hopes to boost exports of Chinese-made foreign-branded vehicles, and manufacturers like Ford Motors, GM, BMW, Honda and even Tesla have all expanded to have operations in China.

The Chinese government’s previous strategy to assert some control on foreign owned manufacturers is giving way to a new approach of allowing overseas firms to own factories in China that will serve as production bases for supply locally and to the rest of the world.

While the vision has yet to be fully realised, there are already indications that the policy is working. From 2018 to 2020, China’s annual automobile exports were approximately one million units per annum. That figure then soared to 2,015,000 in 2021. Compare that to the UK which, according to the SMMT, exported 705,826 vehicles last year – almost half the number exported in 2016 (1,349,433).

Truly electrifying acceleration of local capabilities

While the overall growth of the automotive market in China is quite astounding, it is in the electric vehicle (EV) arena where the biggest changes are set to take place as local Chinese companies stake their claim in the domestic automotive market.

VW, as an example, sold over 3.1 million vehicles in China in 2019, then 2.6 million in 2020 and only about 2.16 million in 2021. While some of that reduction can certainly be attributed to the impact of COVID-19, the microchip shortage, and disruption to the global automotive supply chain, it is also clear that local Chinese manufacturers are starting to emerge as true competitors, particularly in the electric car sector.

Of the top selling electric vehicles in China last year, aside from Tesla (which has a Chinese manufacturing plant), the vast majority of sales came from Chinese brands. In November 2020, the Tesla Model 3 was bumped from its top spot as China’s most popular EV by the diminutive Wuling Hong Guang Mini EV, which sold 33,094 vehicles in that month alone.

The Mini EV is a mass market electric car, priced at just 28,800 Yuan ($4,400). It is the brainchild of SAIC, the name behind the revival of British brand MG, along with its American partner, General Motors. The two-door car has a top speed of 100km/h (62mph) and an estimated range of 170km (106 miles) per charge.

Top 10 best-selling ‘new energy’ passenger cars in China for 2021

1. Hongguan Mini (SAIC-GM-Wuling)

2. Qin (BYD)

3. Model Y (Tesla)

4. Model 3 (Tesla)

5. Han (BYD)

6. Song (BYD)

7. Li One (Li Auto)

8. eQ (Chery)

9. Benben EV(Changan)

10. Aion S (GAC Motor spin-off)

In 2021, the top selling EVs were all Chinese made, including two Tesla models that are now made locally at its Shanghai plant. See below list of the top 10 best-selling ‘new energy’ passenger cars in China for 2021, according to the China Passenger Car Association.

On April 26, 2022, NIO's 200,000th mass-produced vehicle rolled off the production line at the JAC-NIO Advanced Manufacturing Center in Hefei - image courtesy of Nio.
On April 26, 2022, NIO’s 200,000th mass-produced vehicle rolled off the production line at the JAC-NIO Advanced Manufacturing Center in Hefei – image courtesy of Nio.

And it isn’t just established players with foreign partners (eg. BYD-Toyota or Chery-Jaguar Land Rover) that are making inroads either. Smaller Chinese electric car companies, such as NIO, Li Auto and Xpeng, have all seen deliveries surge over the last two years. NIO delivered 12,961 vehicles in June 2022, representing a strong increase of 60.3% year-over-year.

From local suppliers to global exporters

There is no shortage of companies in China vying for a slice of the EV car market. According to HT Auto, China made up almost 60% of global exports of electric vehicles in 2021, a trend that has continued in 2022.

Due to the strong levels of foreign and local investment in the Chinese automotive sector, there are at present more than 500 companies with licences just to produce electric vehicles and, according to some reports, as many as 200 Chinese auto manufactures have already produced electric vehicles.

It is generally accepted that there will be a significant consolidation in the Chinese automotive sector, particularly in the EV market, in the coming years. However, if the current scale is anything to go by, Chinese made EVs may soon look to take a serious stake of the total global automotive market.

With growing local demand and foreign investment limitations diminishing, it is expected that Chinese automotive manufacturers will continue to prosper. And if the growth in Chinese automotive exports in the last 18 months is anything to go by, global competition from Chinese car makers is only set to intensify. So don’t be surprised if you start to see more and more cars on the road that started their life in a Chinese factory.

Key Takeaways
  • The automotive sector in China has been accelerated by joint ventures between state-owned Chinese organisations and international brands
  • The number of cars of China’s roads increased from 104.9 million in 2011 to approximately 302 million in 2021
  • Limitations around foreign investment in the Chinese market have, for the most part, been removed
  • China made up almost 60% of global exports of electric vehicles in 2021