Analysis
10 Apr 19

“Made in China 2025”, an update

The news that hits the European or America reader, keen to learn more about the Chinese automotive and mobility ecosystem, is pretty bleak. Dropping sales figures and reduced subsidies for electric vehicles seem to make for better headlines than the good stuff that’s happening in the second global economy.

Nevertheless, and undeniably, exciting things are happening in China. GlobalFleet has been keeping you updated about the many initiatives in electrification, mobility and technology that are part of the daily lives of Chinese consumers. But this is only the tip of the iceberg.

Car sales

First, let’s deal with the headlines. Yes, car sales are dropping and yes, the subventions for electric vehicles are dropping. Obviously, the waste of time that’s called Trade War has hit China’s optimism, resulting in a change in spending behaviour of the consumer. Many families have postponed buying or renewing cars, resulting in massive overstocks at dealers, resulting in an increase of bankruptcies in the car distribution networks.

But it’s not all Trade War. Consumer behaviour in China is a lot less predictable than in other countries. One day, they like sedans, the next day everyone needs SUVs. Carmakers need at least 5 years to develop new models and the Chinese consumer is impatient.

Furthermore, public transport is improving and mobility solutions are popping up everywhere across the country. Why would anyone buy a car if it’s just a comfortable and a lot easier to be driven around?

Also, the second hand market is developing well, supported by a new-found risk awareness of the consumer. Until recently, the Chinese client (private or corporate) could not be charmed by the high residual value of – say – a Mercedes. Any product was treated as a consumable. Now, however, reselling value has become a conversation topic, and so is risk leverage (leasing companies, your time has come!). The result is that more people buy second hand rather than new.

These are just a few components of the new vehicle sales drop and we’re not even talking about tax shifts for small engine cars, vehicle saturation in bigger cities and the (un)availability of license plates in Tier 1 cities.

EV subventions

China is indeed scaling back its generous subsidies on EVs. Pure battery electric cars with a range of less than 150 kilometres lose subsidies altogether, and cars with a range of 400 kilometres or more see their subsidies halved. Does it mean that the economy is not doing well? No, it means that the OEMs’ are being kicked where it hurts, because all of this was foreseeable.

The reason why high subsidies were put in place initially was to compensate for the high cost of an immature product. A couple of years ago, the price delta between an ICE car and an EV was too big to convince consumers to buy electric cars with a limited range and long charging times. The Government had announced loud and clear that, once both product and market gain maturity, the subsidies would scale down as vehicles were supposed to become cheaper and better – and therefore don’t need the subsidies anymore.

The OEMs could have anticipated, but they’re also victims of increasing pressure from shareholders and competition with shiny new brands to perform at their best at all times. China’s been described as a cash cow for global brands and way too many PowerPoints made by European and American expats in the Chinese automotive industry have landed the idea that there’s no end to China’s appetite for cars. Well, it’s not and there is.

Made in China

Which brings us seamlessly to “Made in China 2025”, China’s plan to stop producing fake Louis Vuitton handbags and become a prime technology country. MiC 2025 is heavily influenced by “Industry 4.0”, the German strategy to modernise industry. 4.0 refers to the forth industrial “revolution”, after steam, electricity and automation: Internet of Things.

In a previous article article we have described what MiC 2025 means for the automotive industry. Let’s summarize:

  1. Energy-saving vehicles (HVs and internal combustion engine vehicles): by 2030, 50% of all vehicles need to be EVs or PHVs
  2. Fuel cell vehicles (FCVs): by 2030, 1 million FCVs need to be deployed for public transit and heavy transport
  3. Intelligent and connected cars: by 2030, 100% of the vehicles need to be at level 3 autonomous and 10% on level 5
  4. Drive battery technology: pure electric vehicles need to achieve a minimum range of 500km per charge by 2030
  5. Lightweight technology & Automobile manufacturing technology: the overall weight of a vehicle needs to decrease with 40% by 2030 and the car manufacturing process needs to become faster and leaner.

Where are we today?

MiC 2025 has certainly alarmed some people, especially the US president. Its focus on independence from import in combination with a state-controlled-and-subsidised industry make it pretty tough for foreign economic powers to ensure a future-proof benefit from China’s growing economy.

But today, China is still in a transition phase, with one foot in the old economy and one foot in industry 4.0. This means that the country is at its weakest and it’s a good timing to try and destabilise its economy – hence the Trade War. The question is hypothetical, but wouldn’t any US president seize the opportunity?

Revamp

China hasn’t referred to MiC 2025 for a while now. Its representatives at Davos, for instance, didn’t even pronounce the words. This has led some analysts to say that China’s no longer focused on its ambitious plans. It is, however, much more likely that the project is being revamped.

China has started to become more receptive to foreign investments; for some industries, it’s no longer required to enter the market through joint-ventures with local companies. The conditions of a joint-venture setup as well have become more flexible. This change in strategy might look like a concession to the Western economic powers, but at the same time, China has carefully selected the industries that fall under these more lenient regulations: high-tech, aviation, batteries, to name some.

In parallel, the mega-city cluster plan, aiming to streamline urbanisation and local economic development, is creating country-like structures within China. It’s a fact that the revamped MiC 2025 will include region-specific initiatives.

From consumer sales to asset providers

All in all, China is not abandoning its ambitions to become a global high-tech player, but it’s getting there by opening some doors and restructuring the way the country is managed, with more power for regional structures. The 2018 car sales figures might be disappointing for the market, but it’s perhaps a sign of an ecosystem that’s correcting itself and will be stronger moving forward. Finally, the penetration of new energy vehicles will continue to increase, if not by subsidies, then via taxation of ICE cars. Taking into account the popularity of mobility solutions however, the OEM models will have to shift from consumer sales to asset providers for mobility.

Image: Geely Automobile Manufacturing Plant, Linhai, Zhejiang, China.

Authored by: Yves Helven
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