Elon Musk said Chinese electric car makers will find “significant” success outside of China. And the numbers do not lie. In 2023, China achieved the position of having the world’s largest automotive production sector, with a total output of 30 million vehicles, including global leadership in the manufacture of new energy vehicles (NEVs), producing nearly nine million units during the year, representing almost two in every three NEVs produced globally.
Back in 1985, China had produced just over 5,000 passenger vehicles, as its population had just breached the one billion barriers. Four decades on, the country can look back on the progressive development of an automotive manufacturing sector that is seen by the government as strategically important, and which is a key contributor to the national economy.
How has China’s automotive sector made the journey to where it is today? What has driven this focus and dynamic growth and what are its prospects?
A number of developments in the 1970’s and 1980s contributed to the expansion and success of the sector via the creation of joint venture companies. Indeed, many top-selling manufacturers in China today, including SAIC-GM-Wuling, Dongfeng Nissan, FAW-Volkswagen, FAW Toyota, etc., are joint ventures between Chinese auto manufacturers and those from abroad. While certainly boosting production, the intention to also transfer critical internal combustion engine (ICE) capability to Chinese partners largely failed.
The prevalence of joint ventures as a way of developing leading automotive companies in the country has its roots in the history of automakers in China.
During the initial 30 years of China’s socialist economy, the production of passenger cars played a relatively small role; by 1985, China had only manufactured about 5,200 passenger cars. Given this limited domestic production, the country saw a significant increase in car imports, even with a substantial 260% import duty imposed on foreign vehicles. In an effort to boost the auto sector, China introduced its inaugural Law on Joint Venture Using Chinese and Foreign Investment in July 1979. This legislation was instrumental in attracting and integrating foreign technology and capital from more developed nations.
In the mid-1980s, China quickly attracted both US and European automakers to invest in JVs in China, including:
In 1989, the Chinese government decided on a “three large, three small, two mini” policy, calling for the country’s auto industry to be consolidated into three full-line manufacturers and three middle-tier manufacturers. The “three large” companies are today known as First Automobile Works (FAW) Group, Dongfeng Motor, and Shanghai Automotive Industry Corporation (SAIC) Motor.
In 1994, China unveiled its Automobile Industry Policy, which codified the “three large, three small, two mini” policy and formalized the requirement for foreign automakers to reach joint venture agreements with Chinese partners as a condition of doing business in the country. Foreign companies were limited to no more than 50% ownership in these agreements and were also limited to no more than two joint ventures for any single vehicle type produced in China. This policy was designed to protect and develop the domestic auto industry, ensuring that local firms benefitted from technology transfer and gained substantial managerial expertise.
The JV requirement eventually came to an end in the past five years, and in 2018, China’s National Development and Reform Commission (NDRC) announced a timeline for phasing out foreign ownership restrictions on automakers. The caps were lifted for special purpose vehicles and new energy vehicles (NEVs) in 2020, and for passenger vehicles in 2022.
This move indicates that foreign automakers could eventually own 100% of their operations in China and several foreign automakers, including Tesla, have already taken steps to establish wholly owned operations in China following these regulatory changes. In 2019, Tesla began producing vehicles at its Shanghai Gigafactory, which is the first wholly foreign-owned car plant in China. It pushes China’s auto market to become more market-oriented, and the intensified competition within the NEV industry is the best testimonial.
Once a niche industry, and previously termed “ppt造车” (referring to companies that had grand visions and presentations but were far from mass production), EVs have now reached mass adoption, especially in China. Their meteoric rise in the Chinese market was catalyzed by the “Made in China 2025” strategy, which pinpointed key sectors upon which China aimed to expand its industrial base. Since 2009, the Chinese government has heavily subsidized the NEV sector, with support nearing an unprecedented 150 billion yuan by 2022, which has significantly accelerated the growth trajectory of China’s NEVs.
Growth has been rapid and intense. By 2022, global NEV sales soared to 10.824 million units, marking a 61.6% year-on-year increase. In turn, China dominated this market, with its NEV sales reaching 6.884 million units, capturing a staggering 63.6% of global share.
For the traditional auto industry, the mantra is clear: those who master EVs will master the future.
IMD’s China Company Transformation Indicators, a pioneering research project, delves deep into the innovation and competitiveness of Chinese enterprises. One of its recent studies on the auto industry offers a comprehensive breakdown of the top 50 EV companies in China by sales numbers. The findings are both intriguing and indicative of the current market dynamics. The top 50 EV companies by sales volume in 2022 in China can be categorized into three distinct groups:
Internally incubated EV subsidiaries by Chinese automotive incumbents (42%): Companies like GAC Aion fall into this category. Traditional Chinese automotive giants like GAC, SAIC, and Geely have incubated these entities as separate EV subsidiaries. This strategic move allows them to operate with agility in the fast-paced EV market, while still leveraging the strengths of their parent companies, such as significant capital support and brand endorsement.
New EV companies (32%): These companies, often referred to by consumers as “EV natives”, are unique in that they were born in the era of electric vehicles, much like Tesla in the US. Their strength doesn’t just lie in branding and marketing. Starting from a clean slate, they don’t carry the ‘baggage’ of legacy systems and approaches. This allows them to be nimble, innovate without constraints, and be entirely customer-centric. They are able to develop superior auto software and introduce features that resonate with the modern consumer. Examples include Li Auto’s in-car fridge and NIO’s in-car chatbot, Nomi. Of these EV natives, only six have been listed so far, while others, like Neta Auto, have announced their intentions for IPOs in the near future. A large number – some observers count over 500 – of these new ventures are competing relentlessly; ultimately only a few will survive. A case in point is Byton – once raising around $700m in funding from prominent investors such as FAW Group, Qidian Holdings, and CATL – which entered bankruptcy in 2020.
Joint ventures (28%): These are collaborations between Chinese and foreign automakers. A prime example is FAW-Volkswagen, which not only sells EVs under the VW brand but also continues to market VW’s combustion engine cars. Essentially, these JVs represent the efforts of incumbent foreign brands trying to transition into the evolving market. They predominantly sell EVs under the foreign brand, indicating the transformation attempts of these established players. The emergence of “reverse joint ventures,” like Volkswagen’s investment in XPeng Motors, indicates foreign firms’ growing interest in Chinese EV technology.
Tech players: A very recent addition to the landscape is the Tech player. Xiaomi has launched its first EV, an SUV, boasting super acceleration faster than Tesla and Porsche. If you walk into a Huawei flagship store these days, you do not see phones, but cars as well – the telecom giant launched its rival to Tesla’s Model S in 2023. Although it remains to be seen how fast these companies can scale up production of EVs, they certainly have the deep pockets to persist for a while.
From 2015 to 2022, sales data shows that independent domestic NEV brands carved out a significant advantage. They rapidly captured market share, with joint venture brands seeing a decline of 17%. Additionally, the demographic of automobile consumers is becoming younger. These younger consumers prioritize advanced features like assisted autonomous driving, comfort, and vehicle appearance over basic functionalities.
Despite the stellar past performance of the auto sector, the road ahead is not without its challenges.
One universal concern is how companies can navigate the S-curve of adoption. While vertically integrated companies like BYD and Tesla have managed to meet surging consumer demand during the initial growth phase, the question remains: how will others fare?
Another looming challenge is the impending industry convergence. Within the next two to three years, winners will solidify their positions while others may find themselves sidelined. This brings us to the strategic crossroads faced by foreign brands in the Chinese market. Do they carve their own path or continue with the established joint venture (JV) structure for their EV ventures? Volkswagen’s recent endeavors in Hefei might offer some insights into this dilemma.
Concurrently, Chinese brands are grappling with the challenge of global expansion. Their strategies and responses to these challenges offer a fascinating glimpse into the industry’s evolution. For instance, NIO, once primarily seen as an automaker, is building a whole ecosystem around its vision of “a sustainable joyful life for consumers”, venturing into sectors ranging from mobile phones to adjacencies such as charging stations and insurance. Their strategic partnership with the United Arab Emirates, securing an investment of more than $1bn, underscores their ambitious vision.
Another significant player, Li Auto, has also been making waves in the industry. Since 2023, it has consistently led the top-selling EVs in China. With sales breaking the 30,000 mark over four consecutive months, it boasts numbers that are almost double those of its competitors. This meteoric rise underscores the brand’s market dominance, largely due to its sophisticated digital marketing, as well as its deep understanding of Chinese consumers.
The concept of “reverse joint ventures” is also reshaping the industry’s landscape. Foreign companies, recognizing the technological prowess of Chinese EV firms, are increasingly looking to invest or form partnerships. Volkswagen’s 5-billion-yuan investment in XPeng Motors and Stellantis’s landmark deal with Leapmotor are a testament to this trend. The latter, a “reverse joint venture,” will see Stellantis harnessing Leapmotor’s technology for global production and sales. The proactive involvement of Stellantis’ CEO Carlos Tavares in these collaborations further emphasizes the urgency and intensity with which foreign brands are seeking collaborations in the Chinese EV space.
The Chinese EV landscape is in flux, with companies navigating intricate challenges, forging strategic alliances, and innovating relentlessly to ensure a sustainable and competitive future. China’s automotive landscape, and particularly its emphasis on EVs, stands as a testament to its adaptability, foresight, and commitment to sustainable growth. These developments have been delivered within the context of a strategic, government-supported emphasis on the auto sector as a key element of the country’s industrial strategy.
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