China – Automotive Industry 2019

China's Automotive Market Shrinks for the First Time in Decades

Published: 26 March 2019

 

1. General market trends

China’s automotive market is shrinking

A quota for electric vehicles from 2019 onwards, new investment requirements, the general economic downturn and the trade war with the USA – signs in China, the world’s largest motor vehicle market, are indicating trouble. For the first time since 1990, fewer vehicles were sold in 2018 than in the previous year in all segments except trucks. The decline was 2.8% year-over-year. The outlook for 2019 is rather bleak and could be further decline, stagnation or moderate growth. The China Association of Automobile Manufacturers (CAAM) does not expect a slight improvement of the market trend until the second half of 2019. Much depends on whether the Chinese government intervenes to stimulate demand.

Electric car quota valid for the first time in 2019

Uncertainty among car buyers and companies alike is great: the economic outlook for 2019 has weakened considerably, and the trade war with the USA is continuing. Adding to this is the implementation of the electric car quota. For the first time, all manufacturers and importers of more than 30,000 vehicles per year must achieve a certain number of points for electric car production. The points are awarded on the basis of various criteria and must amount to at least 10% of the volume of vehicles produced from 2019, increasing to 12% by 2020. To facilitate the transition, the quota requirements for 2019 and 2020 can be offset against each other. Additionally, fines will be imposed starting in 2020 if the average fleet-wide fuel consumption is greater than 5 liters per 100 kilometers.

Market liberalization continues until 2023

At the same time, China is gradually opening up its automotive market, thereby creating tougher competition. For example, restrictions for foreign investors on the production of vehicles with alternative drive systems (called New Energy Vehicles – NEV in China) and special vehicles have already been lifted. This will also apply to the commercial vehicle sector by 2020 and to the production of passenger cars with combustion engines by 2022. This means that the sector will be completely open to foreign investors by 2023. Previously, a maximum of 50% participation in a joint venture and a maximum of two joint ventures per manufacturer were permitted.

New investments are becoming more difficult in certain areas

As of 10 January 2019, the National Development and Reform Commission (NDRC) has significantly raised the bar for new projects: It prohibits new companies – as well as capacity expansions of existing companies – from producing vehicles with combustion engines. The approval requirements for new NEV manufacturers and for the expansion of existing NEV production capacities are also increasing. In fact, NDRC has temporarily stopped granting NEV production licenses. At the same time, companies that have old NEV licenses but have not produced any NEVs for more than a year are at risk of closing.

On 8 November 2018, the government also issued rules for the first time for the low-speed electric vehicle (LSEV) sector. The aim is to put the previously unregulated segment on a new footing, make it competitive and close down illegal producers. Starting February 2019, new technical specifications for LSEV will be issued.

According to the “Made in China 2025” industrial modernization program, NEVs have to account for 40% of automobile sales by 2030. But the expansion of 20 million charging stations, which is also planned by then, is lagging behind, despite both the government and the private sector investing heavily in it. The first 11 months of 2018 saw 282,000 new charging stations installed (+40.4%). According to the National Energy Administration, 600,000 were planned for the whole year.

Electromobility and Smart Mobility go hand in hand

Parallel to electric mobility, China is also making strong progress in autonomous driving and connected cars. The aim is to develop transportation options for the megacities of the future. This includes ride hailing and car sharing as well as autonomous electric buses and delivery vans. The first licenses for test drives of autonomous cars have already been awarded in various pilot regions, including Beijing and Shanghai.

Daimler and Geely are targeting the premium segment with their ride-hailing joint venture, founded in October 2018. Geely already operates the Chinese ride-hailing platform CaoCao, while Daimler offers Car2go and Car2Share services to some 470,000 customers in China. In September 2018, Ford founded the 50:50 joint venture Zotye Ford Smart Mobility Technology, which will provide China’s fleet operators with integrated services, a so-called “one-stop service”, in the growing ride-hailing market.

Manufacturers FAW and Volvo intend to launch the first pilot cars for autonomous driving (Level 4) on the market by the end of 2019, in cooperation with the Internet group Baidu. FZ Friedrichshafen is collaborating with Chery on autonomous driving (Level 3).

 

2. Market opportunities for automotive sales

Vehicle sales declined in almost all segments in 2018

Industry experts attribute the poor 2018 sales figures primarily to the expiry of tax breaks for small cars at the end of 2017. Car sales fell by 4.1% (in units) year-over-year in 2018 and – according to the China Passenger Car Association – fell monthly from June 2018 onwards. Sales of SUVs, previously the most successful segment, also slipped significantly into the red in the last quarter of 2018.

Price plays a major role, especially for the less affluent first-time buyers in China’s third- to sixth-row cities (in China the cities are divided into rows according to size and development status). These cities are particularly important for the standard car segment and recently accounted for over 60% of sales. Sales in the much less price-sensitive premium segment developed positively in 2018. According to the company, Daimler increased its sales (in units) by 11%.

The truck segment grew by 6.9% in 2018, mainly due to a significant increase in truck chassis sales. The used car market also defied the downward trend, with 12.6 million units sold, an increase of 12.8%. At the end of 2018, the total number of vehicles in the country was 240 million.

 

China: Sales of motor vehicles (in 1,000 units)

2017 Change 2017/16      (in %) 2018 Change 2018/17      (in %)
Passenger cars 24,718 1.4 23,710 -4.1
Trucks 3,633 16.9 3,886 6.9
Busses 527 -3.0 485 -8.0
Total 28,879 3.0 28,081 -2.8

Source: China Association of Automobile Manufacturers (CAAM)

 

The decline in sales in the standard and SUV segments was felt above all by Chinese carmakers. According to the China Automotive Review (CAR), their share of domestically produced passenger car models with internal combustion engines sold in the first three quarters of 2018 fell to approximately 40% (2017: 43.9%).

In the same period, models from German carmakers accounted for 23.1% (2017: 19.6%), which are mostly produced locally. Volkswagen continued to expand its leading position and achieved a market share of 18.5%. For the first time, Geely left other Chinese carmakers behind and, with a market share of 7.2%, took third place behind Volkswagen and General Motors.

 

China: Passenger car sales by manufacturer (January-September, in 1,000 units) 1)

Manufacturer 2018 Change 2018/17 (in %) Market share (in %) 3)
Volkswagen 2) 2,918 5.5 18.5
General Motors 1,371 2.9 8.7
Geely 1,137 37.8 7.2
SAIC-GM-Wuling 1,025 -1.9 6.5
Honda 1,017 -2.6 6.5
Nissan 900 5.2 5.7
Hyundai-Kia 775 -4.0 4.9
Chang´an 641 -14.9 4.1
Toyota 572 12.6 3.6

Notes: 1) including SUV and MPV (Multi-Purpose Vehicle), excluding crossovers 2) including Audi and Skoda 3) based on models produced in the country

Source: CAR

 

Vehicles with alternative drive systems sold more than one million units for the first time

While China’s market for vehicles with combustion engines is under pressure, 1.26 million NEVs (+61.7%) were sold, exceeding 1 million vehicles for the first time. Around 78% of these vehicles had a purely electric motor. However, plug-in hybrid sales grew by around 118%, more than twice as fast as pure electric.

Supported by the electric car quota, NEV sales could approach the 2 million mark as early as 2019. According to industry experts, around 3.8 million NEV passenger cars would have to be produced as early as 2020, if the country sticks to the scope and schedule of the electric car quota. In 2018, the NEV market share was around 4%. So far it is firmly in Chinese hands, which will likely change in 2019-20, as international automobile manufacturers have big NEV ambitions in the country.

China’s motor vehicle imports (0.86 million passenger cars in the first three quarters of 2018) hardly play a role in the overall market. The import tariff reduction to 15% as of July 1, 2018 did not change that. Passenger cars in the top premium segment are the main imports. The effects of punitive tariffs against the USA appear to be rather minor so far.

Overall, the value of imports of motor vehicles and motor vehicle parts in the first three quarters of 2018 rose by 9.2% year-over-year. Germany remained ahead of Japan, the USA and South Korea. The latter two lost large market shares. Since 1 July 2018, the tariff rate for 79 automotive parts items has been reduced to 6%. Passenger car models, whose domestic production depends on the import of CKD (completely knocked down) kits will benefit most from this.

 

3. Market opportunities in automotive and automotive parts production

Companies invest in electric car production

The trend towards electromobility is causing foreign carmakers to invest extensively. By 2025, Volkswagen intends to sell around 1.5 million electric cars (including pure electrics and hybrid vehicles) and offer 40 new, locally produced electric and hybrid models of its VW, Audi, Skoda and Seat brands. In the Shanghai district of Anting, Volkswagen is building its first Chinese factory based on the MEB platform. MEB stands for “Modular Electrical Fitting Kit”. The plant is expected to produce some 300,000 NEV per year by 2020. According to CAR, the investments amount to US$ 2.6 billion.

In October 2018, BMW was the first foreign carmaker to declare that it would increase its (maximum permitted) stake in the BMW Brilliance Automotive (BBA) joint venture from 50% to 75% – by paying US$ 4.2 billion. In addition, the carmaker intends to invest a further EUR 3.5 billion in China over the next three years to double its production capacity at its plant in Shenyang, in Liaoning Province. In its joint venture with Great Wall, created in July 2018, BMW intends to produce eMini cars in the future.

In January 2019, Tesla laid the foundation stone for its Gigafactory 3 in Shanghai – the first outside the USA. Following the elimination of the joint venture requirement, it is the first fully foreign-invested electric car factory in China. In a first phase, an annual capacity of 250,000 vehicles is planned, which according to CAR will then be doubled to 500,000 units.

In order to keep up with China’s rapid market pace, foreign automobile manufacturers are further expanding their research and development capacities in the country. Daimler is investing around US$ 170 million in a research and development center in Beijing.

Foreign carmakers and automotive suppliers participate in Apollo platform

Cooperation with Chinese internet and platform providers is expanding – for example with Apollo, an open development platform for autonomous driving from technology company Baidu. Currently 133 companies are participating, including OEMs such as Ford, Daimler, and BMW as well as automotive suppliers with ambitions in the field of autonomous driving.

 

China: Important investment projects in the automotive industry

Investment (in US$ billions) Status Comment
Wanxiang Group: lithium-ion battery factory (in Hangzhou, Zhejiang Province) 9.07 Not specified Capacity 80 GW
Tesla: Gigafactory (Shanghai) 7.55 (of which US$ 2.42 billion in phase 1) Laying of the foundation stone on 7 January 2019 Production of Model 3, planned capacity phase 1: 250,000, final capacity: 500,000
BMW-Brilliance: factory (Shenyang, Liaoning Province) 3.0 Start of construction in October 2018 Capacity: 400,000 passenger cars
VW-SAIC: factory (Shanghai) 2.57 Start of construction in October 2018 Capacity: 300,000 New Energy Vehicles (NEV)
Construction of an industrial park for fuel cells (Rugao, Jiangsu Province) 1.51 Start of construction in October 2018 Research and development center for fuel cells and their compressors

Note: Data in domestic currency converted using the annual 2018 average: 1 US$ = 6.6185 RMB

Source: press reports

 

The trend towards NEV and the new investment guidelines will mean the end for smaller Chinese carmakers in the medium term. There are still around 100 conventional car manufacturers on the market. According to China Automotive Review, there will be around 200 new companies producing electric vehicles. The provinces of Jilin, Jiangsu, Hubei, Guangdong as well as Shanghai and Beijing are strong centers of automotive and automotive parts production. Chongqing in western China is continuing its dynamic development.

Overall, vehicle production fell by 2.6% in 2018. By October 2018, the automotive industry had invested 3.3% more than in the same period of the previous year. In 2017, investment growth had reached 10.2%. In the first nine months of 2018, China exported 870,000 vehicles (+21.8%) and automotive parts worth US$ 41 billion (+12.6%).

 

China: Vehicle production

2017 2018 (January-November) Change 2018/17 (January- November, in %)
Passenger cars 24,807 21,474 -3.4
Trucks 3,683 3,416 2.9
Buses 526 435 -5.0
Total 29,015 25,325 -2.6

Source: CAAM

 

4. Business practice

The China Quality Certification Center (http://www.cqc.com.cn) publishes the production standards applicable to the industry. In addition, many automotive parts require certification with the China Compulsory Certificate (CCC). A list can be found on the website http://www.cccap.org.cn of the China Certification Center for Automotive Products. The CCC certification for parallel imported cars is being applied. Green Product Certification is also progressing in the automotive sector. Information on customs matters can be found on the website of the Chinese Customs Office http://www.customs.gov.cn.

 

5. Contacts
Name Website
Ministry of Industry and Information Technology (MIIT) http://www.miit.gov.cn
China Association of Automobile Manufacturers http://www.caam.org.cn
China Automotive News http://www.cnautonews.com
Auto China, International Automotive Industry Exhibition http://www.auto-fairs.com
Auto Shanghai, Shanghai International Automobile Industry Exhibition http://www.autoshanghai.org http://www.autoshanghai.auto-fairs.com
China Automobile Industry http://www.autoinfo.org.cn