China’s automotive industry, for so long a follower of the established global manufacturers, is now pulling alongside and preparing to overtake. Such is their rate of progress it might not be long until they are looking at the more famous auto brands in their rear-view mirror. It’s a situation we predicted three years ago in a blog about innovation driving growth, the upsurge in local car brands and their creative approach to financing options. China’s auto market has moved on at pace since then. If you are unfamiliar with brands such as Lynk & Co and WEY, it won’t be for much longer. Their relentless ambition and agile business models illustrate how domestic players will inspire and shape the future of the automotive industry. Watching this fascinating scenario develop first hand, we’ve identified five reasons why we believe China is emerging as a genuine global industry leader.
1) Quality in quantity
Firstly, they’ve really got to grips with creating better looking, more robustly built vehicles. As recently as ten years ago, the Chinese car-buying public had to endure heavy-handed design, clunky mechanicals and fragile build. But now, exposed to consumer goods (not just cars) that developed nations take for granted, the Chinese public are much more discerning and demanding. And the car manufacturers have risen to the challenge. By acquiring better technology and aesthetic insight through joint ventures with established car brands, and adding their agile and high-tech touch, Chinese manufacturers have almost closed the quality gap. Crucially though, the price differential between their better-built cars and those from established markets remains just as wide. This is partly why Chinese domestic brands’ market share has grown 10% in the past three years.
2) Built-in value
It’s also contributed to the second trend we’ve noticed. Better quality new cars means second-hand values do not suffer from the cliff-edge plummet they used to. Residual equity is firmer due to better reliability and increased desirability. This supports buyer confidence as they now don’t face crippling depreciation. The cars don’t just hold the road better, they hold their value better too.
3) Rethinking ownership
With better cars and a stronger resale market, Chinese manufacturers have grown in confidence and as a result, grown their distribution footprint in smaller, lower tier cities. Overall, they have a more agile approach, harnessing the power of e-commerce and actively promoting car sharing. Manufacturers such as Lynk & Co are reimagining the buying process with purchasing and servicing collection now delivered by their online platform. They are disrupting traditional usage models with subscription packages (akin to mobile phone contracts) and communal ownership options. The effect is clear, simply by looking at the sales figures for the first two months after the launch of Lynk & Co. Owned by Geely who also own Volvo, they out-sold the competitors in their sector from a standing start. They left Jaguar, Infiniti and Tesla in their wake, with only Porsche outperforming them. They will not be in second place for long, especially if they follow the trend set by another Chinese premium brand WEY. They entered the SUV market in mid-2017 and by January of this year had already established themselves among the top five premium brands selling an incredible 20,300 units in that month compared to Jeep’s 15,000 and Volvo’s 12,600.
4) Growing reputation
Our fourth observation is linked to an increase in the Chinese people’s appreciation of quality and design, as it has also improved the credibility of Chinese manufacturing across the board. The worldwide success of consumer electronics brands such as Huawei, OPPO, Vivo, Xiaomi and home appliance giant Haier, contributes to domestic car-buyer brand esteem, but we also see it helping to augment the domestic car manufacturer’s international reputation. Although created exclusively for the home market, Nio’s ES8 SUV is now touted as a credible rival to Tesla, not least because of its clever three-minute battery-swap refuelling feature, stunning exterior design and in-car AI system. The brand’s participation with Nio 003 in the Formula E world racing series doesn’t hurt either, it enhances their international reputation in this disruptive and innovative racing category.
5) Sustainability powers availability
Appreciating their role and responsibility in the global car market, not just a racing series, leads us to our final observation about China’s new approach. By supporting the manufacture of more environmentally sustainable cars, the Chinese state has positioned itself ahead of most other countries. Where Western markets wrestle with how to wean people off diesel power, China takes a more positive approach – actively subsidising manufacturers who show zero emission innovation. They grant ownership licences freely to electric car buyers, in contrast to combustion powered drivers who either have to enter a lottery or pay sky-high prices for registration plates. And crucially, they insisted that 10% of manufacturers’ annual sales by 2019 must be ‘new energy vehicles’ (NEV), rising to 12% by 2020. Despite pushback on this, regulation is clearly positively powering the development and uptake of hybrid and fully electrified cars, with their ultimate ambition of a total eradication of combustion engines arriving in the not-too-distant future.
Rather than resisting a move away from petrol and diesel-powered vehicles, China is openly embracing it as a new opportunity. Along with their advances in car connectivity and build quality, they are using it as a spring board to overtake established manufacturers. Without a hundred years of car making heritage and legacy hanging heavy round its neck, or a population brought up knowing only combustion and therefore sceptical of NEV, China’s nimble approach signifies a crucial moment in the global development of the automobile. A transition from copycat to follower to ground-breaking, dynamic leader.
Following the recent news of the Chinese government’s intention to relax the foreign ownership cap regulation - currently limited to 50% ownership of domestic car manufacturing companies – we might even see a new dynamic in the competition for connected and new energy vehicles between foreign and domestic brands with major global players setting up autonomous R&D and manufacturing hubs in China. After all, the momentum is definitely there, as is support at senior government level. It’s not stretching credibility to imagine this moment influencing and changing the global auto sector for good and forever.