Looking into the future
C.A.S.E (Connected, Automated, Shared & Serviced, Electric) continues to be the focus for global automakers, and will remain that way for at least the next decade. For the past six years, the Chinese automotive market has shown great enthusiasm for electric vehicles (EVs) with an average annual sales growth of 80%, reaching 50% of global EV sales. This enthusiasm is fueled by governmental incentives in the pursuit of carbon neutrality by 2060 and technological superiority.
Chinese ICE vehicles have never been outstanding, key ICE technologies for local brands are decades behind other leading global OEMs. The government in China has subsidized the sales of all EVs (including foreign models like Tesla’s Model 3) under 300,000 RMB (about $43,000) with the hope to nurture a thriving EV ecosystem. In April this year, the Chinese government announced that it will extend its subsidization of EVs until 2022.
Currently, the main players in the Chinese EV market are still local, with 85% of the total EV sales. While Tesla targets well-off customers in big cities like Beijing and Shanghai, the local OEMs in China appeal to customers that are more price-sensitive by offering better range-to-price ratios. This market combination leaves additional room for OEMs overseas to fill in the middle and premium EV market. The brand recognition and images that have been cultivated by OEMs for decades are well respected in the Chinese market.
Expanding opportunities for global automakers are on the horizon as a result of China lifting ownership restrictions in the auto sector. Now, foreign OEMs can operate fully independently as a standalone entity. As announced in 2018, the restriction will be lifted for commercial vehicle production in 2020 and for passenger vehicle production in 2022. Before this, international OEMs were required to form a joint venture with local OEMs to operate in the Chinese market. This lift of restriction could mean greater opportunities for some OEMs overseas because they will have autonomy in operation, fewer technology transfer risks, and potentially larger profits.
From “Made in China for the world” to “Made in China for China (and the surrounding area)”
For decades, the incentive for manufacturing globalization was cost-cutting. However, from trade tensions to the covid-19 pandemic, the recent black swan events are challenging people’s belief in the global supply chain, manufacturers around the world start to realize that regionalizing their supply chain and mitigating overall risks should be prioritized over cost-cutting. This is especially true for the automakers, since Wuhan, the epicenter for Covid-19, is the home to hundreds of auto suppliers and more than a dozen of OEMs including Honda and Peugeot. Besides the black swan events, the rising labor cost in China in the past few years has also been a brewing cause for suppliers and OEMs to relocate to other places.
Therefore, it is likely that we will observe auto manufactures with end-customers in western markets to relocate production lines out of China in the next few years. Higher regional value content requirements in the USMCA reinforces this rationale.
While suppliers will leave China for cost and risk control, many will stay to serve the growing Chinese market and nearby regions. For example, Tesla’s Shanghai Gigafactory and BMW’s new EV factory in northeastern China supply the South Korean and Japanese markets. China’s growth as a regional automotive exporter will continue with the RCEP free trade agreement signed on Dec 15th, 2020. The RCEP is now the largest Free Trade agreement in the world by combined GDP, encompassing 30% of the global population.
Switching to a lower gear
For the past thirty years, the Chinese economy has grown at impressive rates. Recently the growth rate has shown obvious signs of slowing down. One of the reasons for this slowdown is that China adopted an export-oriented economy. With a large number of exports, a big part of the Chinese economy is created by manufacturing and processing. As the supply chain relocates, the Chinese economy faces a pressure test.
As export growth decreases, the economy will grow more reliant on internal demand. Specifically, the automotive industry’s prosperity in Greater China will depend on whether the Chinese economy will be able to gradually shift from an export-oriented economy to a consumption powered economy. In achieving this critical transition, there are many challenges in the way.
According to a study in 2017, about 70% of the Chinese household wealth is stored in the form of real estate and a lot of families have a mortgage to fund the ownership of their real estate. This form of wealth distribution makes the transition to a consumption powered economy especially hard since people have to pay a good portion of their income into their monthly payment and thus have to suppress their spending desire. This model of spending makes it hard for people to make big purchasing decision like buying a vehicle.
Also, a lot of young people working in big cities have to work on a “996” schedule meaning starting at 9 a.m. and ending at 9 p.m. for 6 days a week. This work schedule leaves young people, the supposedly main consumption force, without time to enjoy services and make purchases. Over crowdedness in tier 1 & 2 cities makes a car license plate quota a reality and reduces the chance for young people to own cars. EVs are not controlled by the license plate quota, for now, hence why a micro electric vehicle (EV) by General Motors’ local Chinese joint venture becomes the most sold EV model in China. Yet, crowdedness remains a factor for some consumers to switch from car ownership to public transportation.
However, with all the challenges, the sheer size of the Chinese market is still the one that many OEMs want to compete for. 2021 will be a critical year of competition and innovation for OEMs in the Chinese market.
About Seraph:
Seraph’s team of operational managers and senior consultants intercede on our client’s’ behalf to fix crises putting businesses at immediate risk, turnaround situations damaging the bottom line, and restructure operations to improve the balance sheet. Seraph has successfully delivered projects in the Americas, Europe, China, and India. Seraph’s industry expertise includes Aerospace, Automotive, Energy Infrastructure, Healthcare, and Medical Devices. Through our other operating companies, we are continually looking for distressed situations where we can put our expertise and capital to work to create value.
