China is tirelessly acting to DRIVE the nation forward. Be it through integrating advanced technology, improvements in the business environment, or updates to economic policies aimed at boosting consumption. The selection of the word DRIVE in the opening sentence is deliberate, as one area that has seen meteoric growth over the last several years is the automotive market, emerging as one of the driving forces behind China’s economic engine.
China’s modern automotive industry not only stands shoulder-to-shoulder with its counterparts in developed Western nations, but in some aspects, it has overtaken them.
What does China’s automotive landscape look like today, and more importantly, what opportunities does it offer for international companies interested in entering the Chinese market?
This comprehensive article delves into the dynamics of this thriving market, shedding light on the following aspects:
- Overview of China’s Automotive Market
- Primary Growth Drivers & Trends
- Most Prominent Sub-Markets in the Chinese Automotive Industry
- Supportive Government Measures
- Opportunities for International Companies in the Automotive Ecosystem
- Opportunities for Third-Party Industries
Overview of China’s Automotive Market
China’s automotive market is as a global powerhouse, dominating both in terms of production and consumption. As the world’s largest automobile market, China recorded approximately 25.8 million new vehicle registrations in 2023, reflecting an 11% increase from 2022. In March 2024 alone, Chinese car sales accounted for 33% of the world’s monthly 8.15 million vehicle sales.
This dominance is primarily evident in the electric vehicle sub-sector, where the Chinese brand BYD emerged as the world’s largest electric car company in the last quarter of 2023, surpassing Tesla’s sales for the first time in its history. China has a burgeoning used car market as well, with the trade value of used vehicles reaching nearly 1.1 billion Chinese RMB in 2022.
The Chinese car industry’s superiority extends far beyond its borders. In 2023, China was confirmed as the world’s largest auto exporter, overtaking Japan by almost 500,000 units. This leadership is also evident in smaller niches, like electric vehicle battery production, where China holds over 75% of the world’s battery production capacity.
source: bloomberg.com
Primary Growth Drivers & Trends
China’s automotive industry is undergoing significant growth and transformation, propelled by several key factors.
Growing Environmental Awareness
China is grappling with a severe air pollution crisis, with transportation being the primary cause. In 2022, cars were responsible for over 90% of carbon monoxide, nitrogen oxides, and particulate matter emissions. This air pollution emergency is a major catalyst for the growth of the electric vehicle (EV) and new energy vehicle (NEV) sectors.
The increasing focus on reducing carbon emissions has led to the implementation of government policies promoting greener mobility, driving both consumer interest and industrial growth in these niches. Additionally, the transition towards sustainable transportation is not only transforming the industry but is also creating significant investment opportunities and generating new jobs across the EV and NEV value chain.
Abundance of Natural Resources
China’s automotive industry benefits significantly from the country’s rich natural resources. For instance, aluminum and nickel are crucial for making efficient electric cars and batteries, with China being a top exporter of both. Also, China houses over half of the world’s processing and refining capacity for key battery raw materials like lithium, cobalt, and graphite. Notably, China accounts for an impressive 75% of the worldwide lithium-ion battery production.
This inherent supply chain advantage allows Chinese automakers to achieve up to 20% cost reduction in logistics, labor, and land management, further enhancing their competitive edge in the local market.
Adoption of Advanced Technology
The Chinese government’s ambition to enhance the nation’s technological capabilities has accelerated the incorporation of cutting-edge technologies in auto manufacturing in China. What we see in reality is Chinese automakers revolutionizing vehicle manufacturing processes by integrating innovation, automated manufacturing, and AI-based systems into the production process, resulting in increasingly sophisticated Chinese-made vehicles and a significant boost in production capacity and quality.
A Fierce Price War
The competitive landscape in China’s automotive market has led to a fierce price war among auto manufacturers. Domestic brands and foreign competitors are continually lowering prices to capture market share, driving down costs and making vehicles more affordable for consumers. This intense competition not only benefits consumers but also pushes manufacturers to innovate and improve efficiency, further advancing the industry.
Most Prominent Sub-Markets in the Chinese Automotive Industry
- Passenger Vehicles (PV)
The passenger vehicle (PV) market stands out as a dominant sub-market in China’s automotive sector, especially compared to the commercial vehicle sub-market. To put it into perspective, in 2022, PV sales accounted for 23.6 million units out of the total 26.9 million vehicles sold in China. Notably, Chinese automakers have established a strong foothold in this market, capturing a 44% share in 2021. After domestic auto manufacturers, German (Volkswagen) and Japanese PVs are the most popular car brands among Chinese consumers, each capturing about one-fifth market share.
Zooming in further on the PV segment, we find two rapidly growing and increasingly important sub-categories: electric vehicles (EVs) and new energy vehicles (NEVs). These categories represent the cutting edge of automotive technology and are at the forefront of China’s automotive market.
- Electric Vehicles (EV)
As mentioned, China’s dominance in the global automotive industry is most evident in its local EV market. The International Energy Agency reports that over half of the world’s electric cars are driven on Chinese roads, with Chinese brand BYD now recognized as the world’s largest EV manufacturer, solidifying the country’s position as a global EV market leader.
In terms of market size, China’s EV sector is projected to generate revenue of US$319 billion in 2024. The market is expected to grow at a CAGR of 5.69% from 2024 to 2028, potentially reaching US$398.0 billion by 2028. Unit sales are forecasted to hit 8.77 million vehicles by 2028, underscoring China’s rapid adoption of EVs.
However, despite and maybe because of the rapid growth in EV sales, a notable gap exists between the number of charging stations available and the market demand, indicating substantial room for further development in charging infrastructure.
- New Energy Vehicles (NEV)
China boasts the world’s largest NEV market, and it represents the main growth segment in the local automotive industry. According to the Ministry of Public Security, NEV ownership in China reached an impressive 13.1 million in 2022 —a remarkable growth rate of 67.13% compared to 2021 (an increase of 5.26 million vehicles). This upward trajectory has continued into 2024, with NEV sales accounting for over one-third of total car sales in China. Specifically, 2.09 million NEVs were produced in the first quarter of 2024, marking a 6.7% increase over the same period in the prior year.
The hype around NEV is seen not only in consumer adoption, but also in how it impacts the business landscape. Enterprise Search Data reveals that China is home to over 600,000 NEV-related enterprises. In 2022 alone, 239,400 new related businesses were established, representing an annual increase of 40.34%. This surge in NEV-related enterprises reinforces the sector’s economic importance and potential for future growth.
The Chinese NEV market is predominantly led by Chinese brands, with only two foreign car makers, Tesla and Volkswagen, making it to China’s top 10 NEV brands. This positioning highlights the strength and competitiveness of Chinese manufacturers in this rapidly evolving market segment.
Supportive Government Measures
As part of the national effort to combat and slash pollution rates, the Chinese government has been acting on multiple fronts to encourage the production and consumption of EVs and NEVs in the country. Particularly, China has adopted a two-pronged approach, aiming to create favorable conditions for automakers while enhancing consumers’ purchasing power, simultaneously increasing vehicle production and widespread adoption.
For manufacturers, the government launched the “New Energy Vehicle Industry Development Plan (2021-2035)” in 2020, outlining a national strategy for a sustainable, low-emission automotive future. This is complemented by preferential financial policies, financial incentives, and investment in technological innovation.
Federal supportive plans are reinforced by regional policies. For example, Shenzhen introduced the “Guidelines for Financial Support to the High-Quality Development of New Energy Vehicle Industry Supply Chain” in 2023, focusing on enhancing cross-border financial services for NEV enterprises. Similarly, Shanghai implemented the “Implementation Plan for Accelerating the Development of New Energy Vehicle Industry (2021-2025)” to boost local NEV industry growth.
On the consumer side, the government has extended its EV subsidy plan for an additional four years (a tax incentive package worth US$72.3 billion). This package includes tax breaks for EVs and other environmentally friendly vehicles, providing a complete exemption from purchase tax for EVs purchased in 2024 and 2025, followed by a 50% exemption in 2026 and 2027. This initiative is designed to stimulate growth in the automotive sector by making EVs more financially accessible to a broader range of consumers.
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Opportunities for International Companies in the Automotive Ecosystem
While China’s automotive market appears to be largely dominated by domestic players, international companies should not be discouraged from entering this vast and diverse landscape.
For example, a key opportunity exists in addressing the gap between the number of available charging stations and market demand. International companies with innovative charging solutions or efficient manufacturing capabilities for charging equipment can capitalize on this need. Similarly, firms offering cutting-edge technologies that make vehicles production greener can leverage China’s pursuit of improving air quality to their advantage.
It’s noteworthy that China’s current Negative Lists for Foreign Investment Access do not impose specific restrictions on foreign investors in the EV industry. This provides foreign investors with relative flexibility to set up a company in China focusing on specific areas such as EV auto parts manufacturing, battery production, charging infrastructure, and other related industries.
With that in mind, international companies bringing expertise and unique innovations that meet China’s development goals, may find a receptive market in China. Therefore, international companies are encouraged to research available financial incentives and supportive policies that could facilitate their China market entry and help position them advantageously.
Opportunities for Third-Party Industries
The booming Chinese automotive market brings significant opportunities to third-party allied industries as well. Key beneficiaries include China’s industrial machinery and tool industry, computer numerical control (CNC), and companies providing advanced technology and automation for Assembly & Manufacturing lines in China. These sectors stand to gain from the burgeoning local automotive market by enhancing the production capabilities of automakers.
China’s machine tool industry is the world’s largest, boasting a market value exceeding RMB 200 billion (approximately US$27.86 billion), representing 32% of the global market share. That said, the local machine tool industry is led by a small group of less than 20 high-end manufacturers. Despite the strong government support, the supply of advanced technology and specialized equipment falls short of the demand, keeping China highly reliant on imported high-end CNC machine tools.
This supply-demand imbalance creates a favorable environment for foreign manufacturers and suppliers, and the contrast in import-export dynamics echoes this opportunity: in 2021, the average price of machine tools exported from China was merely US$300 per unit, while imported units commanded an average price of US$76,700. This disparity highlights the ongoing need for foreign collaboration and the high value placed on advanced imported technologies.
So, What Does the Chinese Automotive Market Have to Offer?
International companies with relevant, innovative solutions can benefit from advantageous market conditions:
- Immense size
- Access to a vast consumer base
- Optimistic market and sub-markets growth forecast
- Favorable government policies
In summary, the Chinese automotive market presents a rich landscape of opportunities for businesses seeking growth and profitability. International companies can choose between various business models, such as leveraging import or establishing a WFOE (Wholly Foreign-Owned Entity), depending on their specific goals and resources.
Despite the market’s competitive nature, its sheer size and diversity create niches for a wide range of players. Success in this dynamic market can be achievable through multiple operational strategies, provided they are planned and managed thoughtfully.
At PTL Group, we are here to help. With over 20 years of experience assisting global firms in establishing presence in China, and empowered by professional global and China-based teams, we have the resources to support your business endeavors in the country. Get in touch today to explore how we can facilitate your entry and growth in the prosperous Chinese automotive market.
