SHANGHAI, JULY 2020 - All eyes are on China as governments and industry try to predict what an economic recovery will look like. As the epicentre of the novel coronavirus (COVID-19), China was hit first and could be the first to return to post-pandemic activity levels. But what will that new normal look like?
Volume growth potential
The country’s automotive industry was already starting to slow when the pandemic hit. Figures from the China Association of Automobile Manufacturers (CAAM) show that vehicle sales volumes totalled 28.08 million units in 2018, down by 2.7% from 2017 levels and marking the first decline since 2001. The trend carried over into 2019, which ended on an 8.2% drop year-on-year. Many industry watchers had expected the market to stabilise in 2020, but the current crisis has altered that timeline.
In February, at the height of the pandemic, production and sales plummeted about 80%. However, April and May data show higher than expected volumes and it looks like demand is quickly nearing pre-crisis levels. “We expect recovery to be quick, but slower than the growth of the past,” predicted Stefano Aversa, Chair–EMEA, Global Vice Chair–Revenue, at AlixPartners. “China is becoming a bit more of a normal, emerged market with some dynamic growth but not the explosive growth we’ve seen in the previous decade.”
The World Economic Forum (WEF) has been closely following developments in the market, which it believes still has considerable long-term potential. “Our confidence is based on two key metrics,” Peng He, China Lead of Automotive and Autonomous Mobility at the WEF, told Automotive World. “The first is the recovery pattern we’ve seen in April and May, with sales going almost back to the same level as last year. Then there is the rate of car ownership, which is very low.”
By WEF estimates, China has about 170 cars per 1,000 residents. That’s well below the sort of ownership rates seen in developed markets like the US or Japan. “This tells us that the potential for the Chinese market is still huge,” he emphasised.
Moody’s is optimistic for the same reasons, and expects the market to continue an upward trajectory for the rest of the year, barring any major unexpected return of the virus. Automotive World Ltd Company registered No: 04242884 Registered Office: 1-3 Washington Buildings, Stanwell Road, Penarth,CF64 2AD | Registered in England and Wales
Consultants at YCP Solidiance are similarly bullish. They expect total car ownership in the country to double from 200 million units in mid-2017 to more than 400 million units by 2023.
Smart, connected mobility
Such a huge market could provide a strong base for the adoption of connectivity, which many industry watchers expect to be a defining characteristic of China’s vehicle market. As the immediate pandemic concerns abate, the market should resume its pursuit of the Internet of Vehicle (IOV). “COVID-19 has accelerated the development of internet technology such as IoT, IOV, cloud computing, Big Data, industrial internet, and 5G, driven by the requirements of people affected by the epidemic,” observed Nicolas Pechet, Senior Partner and Head of Greater China at YCP Solidiance.
The consultancy believes China is squarely headed towards a future in which IOV allows for intelligent management and control among vehicles, passenger and traffic infrastructure. It expects the penetration rate of IOV to increase from 8.3% in 2017 to around 22% this year, which would equate to about 60 million units. In value terms, that market will jump 55% from Yuan 83bn (US$11.7bn) to about Yuan 312bn. “Although the IOV penetration is quite high at 22%, it is still a long way to go for vehicle-to-everything (V2X) tech to be fully realised,” Pechet told Automotive World. “V2X communication requires the involvement of everything to the internet, which covers a long industry chain such as the transformation infrastructure, gas station, parking lots, and more.”
Even so, IOV has proven extremely valuable during the pandemic, allowing car owners to stay updated on traffic conditions and avoid congested or closed roads. In the future, automakers could harness vehicle data to track suspected cases of the virus and ensure those affected are isolating. IOV could also help shape the repair industry. With many drivers still reluctant to visit garage workshops, the IOV cloud platform could help with vehicle diagnostics and online repair service. Pechet envisions an ecosystem in which platform franchises put forward bids for repair work on the cloud system, allowing owners to chose the best one.
It helps that the government has been lending its weight to the movement, setting a target on IOV and smart cars and encouraging enterprises and local governments to develop technology and infrastructure related to IOV. In February 2020, 11 national departments released the “Smart Car Innovation Development Strategy”, which aims to have certain related standards in place by 2025. By this time, it also aims to have large-scale production of self-driving cars, albeit in limited geographies.
Public transport will also benefit from the use of smart, connected technology. Since the outbreak, usage has plummeted due to traveller concerns about contagion when confined in close quarters. But in some city centres, there’s simply no other practical means of moving large numbers of people.
“To solve the congestion and emission problems in megacities like Beijing and Shanghai, shared mobility and public transportation are probably the only solution,” suggested WEF’s He. “Although people are scared to use them now, in the long term, we are still heading in this direction.”
Limiting the number of people using public transport at any one time could help build public confidence. Beijing, for example, introduced a trial reservation system on its Metro in March. During morning rush hour, travellers book a reservation via a smartphone app, selecting a time slot. At their allotted time they can enter the station through a special entrance. “This helps allow stations to control density,” noted He. The Beijing pilot started at two stations and has since been extended to five.
New energy vehicles
Despite China’s recent market slowdown, sales of new energy vehicles (NEVs) should power ahead in the wake of the pandemic. China has not set out any official timeline to phase out internal combustion engine (ICE) vehicles, but Corporate Average Fuel Consumption (CAFC) and NEV Credit policies are pushing automakers to develop NEVs. Those that fail to meet CAFC or NEV credit targets will be forced to halt traditional fuel vehicle production as a penalty.
Incentives should also help shift consumers towards cleaner vehicles. The government had previously planned to phase out NEV subsidies this year but in March it announced plans to extend them. While the amount of financial support available will decline, shoppers will still find discounts on electric vehicles (EVs), plug-in hybrids and hydrogen fuel cells. By 2025, China wants NEVs to account for about 20% of sales, up from 5% today. “Promoting NEVs combines economic recovery with climate change,” said He. “There’s a consensus from the automotive industry that NEVs are probably the only solution to tackle climate change, even with greater use of shared mobility or improved efficiency with public transport.”
Notably, local brands dominate the NEV, which is much more concentrated than the market for ICE vehicles. At the moment, the top five brands account for 60% of total NEV market share. However, new players could pile in down the line due to changes in government regulations around foreign companies.
Until recently, foreign companies faced tight restrictions on their activities in China. The only way they could set up locally was through a joint venture (JV) with a Chinese partner, in which the local player held at least 50%. In July 2018, that requirement was eased for NEV projects. Tesla moved quickly, starting construction on a plant in Shanghai six months later. The first locally built Model 3 arrived on the market within a year and a half. “It moved with light speed and demonstrates the open attitudes that the Chinese government is now taking towards foreign investors,” said He. The easing of restrictions on foreign companies is set to extend to ventures outside the NEV segment by 2022.