Brace yourself for Chinese cars!
The title of my blog is not intended to suggest that there is anything about Chinese cars that you need to brace yourself for in terms of the driving or ownership experience. On the contrary the quality and general competitiveness of cars coming from the major Chinese manufacturers now appear to be on a par with European volume brands. Many people do not realise that their BMW, Polestar or Tesla has come from a Chinese factory. My point is that after over a decade of anticipating an onslaught from Chinese manufacturers, there is now good reason to assume that the next two to three years will see a massive push by Chinese domestic brands into European markets.
The reasons for this are related to how the domestic market in China has developed and the product offer that forms an increasingly large part of the Chinese brand portfolio. Over the last decade Chinese brands like Chery, Great Wall, JAC and others have exported widely, but the product they had at the time was ICE powertrain and the quality was not sufficient for mature markets. They did however make a lot of progress in the Middle East and Africa, Oceania and South America, all markets where they held 7%-8% market share last year. However, the Chinese government introduced policies in 2009 to encourage the development and sale of what they called new energy vehicles (NEVs), partly to address pollution issues in the major cities, but also as a leapfrog industrial strategy which has allowed Chinese manufacturers to develop a competitive edge over their slower moving western competition.
The Chinese domestic market was also growing strongly through most of the last decade and the NEV incentives were offered for domestic registrations, so there was little reason for the manufacturers to take on the additional investment and risk required to export when they could find customers closer to home. We then had the pandemic, enforced in China by the zero Covid policy, which dampened demand but also restricted supply. Whilst the market has recovered there is no expectation that it will return to the double digit growth that was seen in the past so the manufacturers are now looking to export as a way to support their growth. This can be seen in the relatively stable export volumes of under one million units annually from 2011 to 2020 with annual growth of just 2% compared to a doubling in volume in 2021 and a further 51% growth in 2022 to give a total of 3.2 million exports. A large part of this is ICE product to non-European markets, but the highest growth rate is in BEVs from Polestar, Tesla and also from Chinese domestic brands such as BYD and MG (SAIC).
Given that they now have competitive BEVs, not just in performance but it also appears in terms of product cost, then the only logical market for them to focus on is Europe where the pace of electrification is much greater than in the Americas, Africa or other parts of Asia, and the domestic manufacturers have only a limited offer at the more affordable end of the market. China dominates the battery supply chain having a global market share of between 65% and 100% on all the critical battery components. This is a driver of their cost competitiveness, but also ensures a more reliable supply than manufacturers in Europe who are dependent on the same Chinese sources.
Until now, the presence of Chinese brands like BYD, Great Wall, Nio and XPeng in Europe has been in relatively small volumes and initially focused on a few markets, primarily Norway for BEVs. The exception is MG who, once they switched to a pure export model approach, ramped up very quickly to achieve over 1% market share in Europe last year, ahead of brands like Land Rover. Independent importers and large dealer groups have been keen to get involved and a number have signed up either as distributors or as one of a very few dealer partners including Emil Frey, Hedin, Louwman and Pendragon. If we see these brands drive forward at the same pace we have seen in the last two years, then that could imply over 300,000 additional BEVs imported into Europe annually from Chinese brands within a couple years, representing around 2% combined market share.
The implications are significant. That sort of share is higher than some long established brands now hold and would represent something like 20% of the total BEV market forecast for 2024, mainly focused on lower and medium segments. As the established manufacturers struggle to hit their fleet emissions targets, they will be forced into either a price war or more self-registrations, either of which will be detrimental to residual values. I do not believe that protectionism is a useful lever in the long term in terms of protecting industry, so do not advocate that as an approach, though doubtless others will. From a European perspective, what needs to happen is for the established manufacturers to be ready to defend their positions from the beginning rather than to lose ground and be forced into trying to win back customers once it is lost. Let’s hope for a good, clean fight!
Some data used in the preparation of this blog is courtesy of Bernstein