China's EV start-ups put a dent in legacy automaker market share

China's EV start-ups put a dent in legacy automaker market share
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OSLO (Sept 7): For many years, China's electric vehicle (EV) market was primarily driven by policy. The combination of fuel economy regulations, a new-energy vehicle quota system, government fleet mandates, and direct purchase subsidies all added regulatory pressure and incentives for both automakers and consumers to go electric.

The policies still matter, but recent BloombergNEF analysis shows EV adoption is now running well ahead of what is required purely from national regulations and policy targets. City-level policies are still playing an important role because they make it difficult to get a new licence plate for internal combustion vehicles in China's major cities, but even that is not enough to explain why adoption is rising so quickly.

There are many factors at play when a consumer technology starts to take off. Technology maturity, cost competitiveness, and word of mouth all play a role. In China's EV market, there is another factor at play, namely that home-grown EV start-ups have helped transform perceptions of the vehicles there.

There was talk a few years ago about how many of these start-ups risked being wiped out by stricter technology standards. Lo and behold, some not only survived but are growing sales quite quickly. Xpeng, Hozon New Energy Automobile, Li Auto, Nio, Leap Motor, and WM Motor are now selling almost 150,000 EVs a quarter, about 7% of the global total and up more than 10-fold from the beginning of 2020.

These start-ups are less likely to be designing vehicles strictly to comply with regulations, as some Western, Japanese, and Chinese automakers with legacy businesses have done. They have no legacy business to protect, know subsidies will not last forever, and that their products need to stand on their own feet quickly.

China's EV start-ups also have made a combined push on digital services, in-car connectivity, and customer-service experience concurrently with their electrification efforts, which has helped shift the perception of EVs from one of compliance and regulation to one where you access the coolest tech, and get treated well in the process.

They are not alone, of course. Other dynamic auto companies are pursuing a similar strategy, and the start-ups' share of sales is still relatively small compared to the likes of Tesla and BYD, which sold 255,000 and 354,000 plug-in vehicles globally last quarter, respectively. But the start-up numbers are still significant. They are ramping up quickly and will probably top 250,000 a quarter next year.

The group getting squeezed by all this is established global automakers, many of which deliberately slow-rolled their EV programmes and are now scrambling to catch up with respect to their model line-ups and battery supply. As recently as 2020, international automakers had 61% of the total auto market in China. That has declined to 49% so far in 2022. Setbacks on software and disputes with local partners are not helping, and with China's EV sales rising fast, it is getting harder to see this market share trend reversing.

While Western automakers are seeing their share of the Chinese market shrink, China's EV start-ups are quickly expanding in Europe. MG Motor, owned by SAIC, sold 40,000 EVs in Europe last year, while groups like Nio, Xpeng, BYD, and others have been testing the waters with smaller numbers in countries such as Norway.

All of China's start-up automakers plan to significantly increase their international presence in the next few years and some of them are launching very cost-competitive EV models to further that goal. There is a window open for them in Europe right now, because the region's vehicle CO2 regulations do not tighten again until 2025. Many established automakers have slowed down their EV roll-out accordingly. With Tesla, BYD, and these EV start-ups all at the gate, this may not be a wise strategy.

There are probably still some bumps in the road ahead. Making cars is still difficult. But it is remarkable how fast perceptions of what is possible can shift. In 2019, China proposed what was then widely viewed as a stretch target of having new-energy vehicles represent 25% of passenger vehicle sales by 2025. That number now looks like it will be achieved this year, a full three years ahead of schedule. China's EV start-ups have played an important role in making that happen.