31 Mar State of China’s Auto Market – March 2024

Hyper-competition Triggers Price War II

Comments from Bill Russo, Founder & CEO of Automobility Ltd.

As we have highlighted in our February newsletter, China’s automotive market is contending with a number of headwinds exiting 2023:

• Multi-year decline in sales volumes of Internal Combustion Engine (ICE) powered vehicles (down 11 million units from 2017 – 2023).
• A highly concentrated New Energy Vehicle (NEV) market (which grew by 8.3 million units from 2017 – 2023).
• High growth in the Plug-in Hybrid (PHEV) category, historically dominated by BYD.
• Structural overcapacity in a market where domestic sales are down (over 3 million units from 2017 – 2023), resulting in a push to export the excess capacity from China to overseas markets (with exports up by 3.8 million units from 2017 – 2023).

All of these conditions set the stage for the competitive landscape entering 2024.

Enter the (Year of the) Dragon

Through February, vehicle shipments reached 4.0 million units, an 11.1 percent increase from the prior year-to-date period. NEV shipments are up 29.4% and ICE shipments up 4.8%.

On the surface, this seems like a solid opening for the Year of the Dragon.

Digging a bit deeper, we see that while domestic sales were up over 200,000 units over this period while exports were up by a similar amount, and hit a record 23.8 percent of overall production in February.

Clearly, Made-in-China exports act as the safety valve to relieve oversupply pressure that persists within China’s automotive industry.

Exiting 2023, China stood as the leading automobile export nation in the world, surpassing Germany in 2022 and Japan in 2023. Given the continued demand weakness and hyper-competitive conditions that exist among the competitors in China, we can expect a continued rise in exports in 2024.

Made-in-China exports increased 30.2% in the first two months of 2024 versus last year. Interestingly, the NEV share of the exports actually declined from 24.5 to 22.1 percent, which we believe is because:

• Oversupply pressure is higher in China for ICE versus NEV
• Most overseas consumers are still not fully ready to embrace the EV
• Chinese brands are hungry to recapture growth and will accelerate their overseas move in a period of domestic weakness
• The Chinese value proposition of affordability is very exportable (For both ICE and NEV)

Growing Competition in the PHEV Category

We previously highlighted the popularity of the PHEV segment of the NEV market in China. NEV shipments through February were over 1.2 million units, of which 467,000 were of the PHEV variety. PHEV volumes increased 73% versus the same period last year. 

While BYD remains the dominant player in this high growth category, they are facing new competition as more Chinese brands including AITO, Chang’an and Geely gain traction with new product offerings. This places huge pressure on BYD and Li Auto, the perennial leaders in the PHEV category, to defend their share.

Sold alongside Huawei’s other smart consumer electronics devices, we believe this signals a wide acceptance in China of well known Chinese consumer electronics brands among NEV purchase intenders.

We will watch very closely as Xiaomi enters the market with their new SU7 offering this month. The entry of Chinese smart device makers into the automotive industry stands in sharp contrast to the recent cancellation of Apple’s “Project Titan” development effort.

An Altered Competitive Landscape

Foreign brand share of the China passenger vehicle market remains at an all-time low of 40%, with gains accruing to a small number of local players.

While this is by no means the end of foreign brand relevance in China, they clearly being punished by Chinese consumers for their collective failure to prioritize the NEV segment, or by approaching it in a “premium” and in a way that carries over too much of the ICE design, content and business model legacy. The impact of this is rather obvious when we look at the top 15 overall market leaders.

Chinese consumers are increasingly embracing NEVs produced by Chinese carmakers.  The problem is there are far too many Chinese companies chasing a market that is not able to absorb all of that they can produce – driving Chinese companies to go global even faster.