European automotive

Chinese BEV dominance – opportunity or threat?

19 December 2023

Summary

Introduction

The transition to BEVs comes at an interesting time when there are a lot of moving parts at play in the automotive industry – agency, changes in regulation, new mobility products such as subscription, and the advent of the connected car.

Much of the news we consume about electric cars is around how the vehicles perform on the road in real life situations. And the media is consistently negative about range and charging anxiety both in the UK and across Europe.

The transition to BEVs has also led to a very real challenge from Chinese EV manufacturers who are entering Europe and the UK with their low-cost, high-quality, technologically-enhanced electric vehicles.

There appears to be four main ways in which Chinese brands are going to try to become dominant in the West:

1) Firstly, through the acquisition of Western brands, giving Chinese car makers direct access to a legacy firm with an existing network and established overseas awareness amongst consumers. The big example in the UK would be MG.

2) The second route is the rebadging of cars with Western logos seen by the likes of Chevrolet in Latin America. This is becoming useful practice in developing markets where the Western brands are eager to offer cheaper cars in a competitive package.

3) The third and most challenging method is the direct introduction of the local brand and the current strategy being employed by Neo and BYD in Europe. In addition to the usual high cost of introduction, this approach requires significant investment in brand building and customer trust as many Chinese brands remain unknown in Western markets.

4) And finally, technological collaboration is a trend that started quite recently and has seen a cooperation between Chinese brands and Western brands. The development of new models and technologies can be seen in two examples of strategic partnerships e.g. between the Volkswagen Group and Xpeng to develop new Volkswagen branded EVs while Leapmotor recently signed a memorandum of understanding with Stellantis.

China: The Automotive Godzilla

Michael Dunne, CEO of Dunne Insights and an expert on Chinese cars and the evolution of the Chinese car industry, describes the Chinese EV sector as an ‘Automotive Godzilla’ with the size, strength and determination to win the global EV race.

Building more electric vehicles than the rest of the world combined (for example, in November 2023 China surpassed 1 million deliveries in one month), Michael Dunne believes that “China has accumulated overwhelming superiority when it comes to electrics.”

“China has accumulated overwhelming superiority when it comes to electrics”

Michael Dunne

Battery technology

The Chinese dominate LFP chemistries, and the advantage of LFP batteries is that they are the most affordable batteries. Everyone is racing to build a less expensive EV and LFP is essential to that, which is why the Chinese have an enormous advantage with their LFP battery technology.

China also has a monopoly on mining and processing battery resources, and cell manufacturing.

There is a fear in the West that more supply chains are needed for battery resources which they don’t have when compared with China’s resources.

“Cost is the number one driver for batteries”

Tony Whitehorn

However, according to Tony Whitehorn, consumers don’t care about the battery chemistry and how EV batteries are made: “people care about the longevity of it, they care about the range of it, and they care mostly about the cost of it.”

The Chinese threat?

Auto Trader’s Commercial Director, Ian Plummer, wouldn’t call the emergence of Chinese brands in Europe a threat; it is merely part of a broader context of what is happening in the EV market. Plummer is quick to point out that the influx of cars from China, including Western brands, has actually accelerated the growth of EV sales in Europe.

Plummer believes that the UK auto industry needs to be encouraging the EV transition with investment in UK EV manufacturing and UK gigafactories. More affordable EVs, whether Chinese or Western brands, are needed to encourage this transition.

Tony Whitehorn sees the UK market as an attractive and appealing option to worldwide manufacturers for a number of reasons:

1. UK does not have an indigenous manufacturer or specific national brands and are not so nationalistic about cars.

2. The UK is fundamentally a free market. Therefore, putting up barriers and introducing tariffs does not support the country’s ethos and help growth in a free market. The best cars should be accessible for the consumer.

Europe has two markets, according to Dunne:

1. France, Germany, Italy with set national car brands.

2. Spain, Sweden, UK where the Chinese are entering as there are fewer national brands.

In the longer term, Dunne sees the Chinese forming joint ventures in Europe in exchange for market access. China needs access to European and US markets in order to grow their profits.

‘Go-to-market’ strategy

China is historically good at copying Western technology, but Western car makers are finding it harder and harder to hold an advantage due to technological advances in China.

Ian Plummer, on the other hand, doesn’t think Western car makers have an advantage. He sees the Chinese having the advantage with some technologically advanced vehicles that are far ahead of Western manufacturers.

“China is leading the way right now”

Ian Plummer

Tony Whitehorn, who is currently working with a couple of Chinese car brands, has no issue with the Chinese EV product and exceptional quality. He is challenged, however, by the poor ‘go-to-market’ strategy of Chinese brands which is an issue across the whole of Europe. They don’t fully understand how the European model works and are not looking at the long-term strategy with after-sales care, according to Whitehorn.

Plummer sees this as a ‘learning curve’ for the Chinese, who will learn what it takes to improve the sales and marketing of their cars in Europe.

Michael Dunne believes that the Chinese ‘go-to-market’ strategy is spoilt by their experience in China.

Chinese brands entering Europe are focusing on the dealer network route rather than the direct sales approach, as they are familiar with the franchise strategy and just want the vehicles off their books, according to Whitehorn.

Residual values

Tony Whitehorn sees two determining factors of an RV: (1) the product itself; and (2) the brand. For Chinese EVs, while the product is strong, they need to build the brand in Europe and the UK. A strong and successful brand strategy will hold up the RVs along with good products.

Fleet vs retail

The fleet sector in the UK makes up approximately 50% of the market. The Chinese will therefore need to sell to fleet to get some real volume.

However, Chinese manufacturers have a lack of financial services expertise with no captive finance companies, as well as very little leasing background. There is also a scarcity of service points in the UK for Chinese cars which is an issue for fleets as they need to keep the cars on the road.

So, what do the Chinese brands need to do to enter the fleet market and stay in the fleet market in the UK? The fleet market is split into easily identifiable segments, e.g. PCP, BCH, and Whitehorn advises that the Chinese must look at each segment individually to make things easier and clearer. However, Whitehorn believes that the residual value of the vehicle and the cost of the vehicle outright will determine if the Chinese can actually enter the fleet market.

According to Plummer, the Chinese need to focus on: (1) finance capability with the right people on board who give that awareness and experience, (2) the same with fleet awareness, and (3) ensure they are backed up by good after-sales performance and service.

Concluding remarks

Michael Dunne believes that the Chinese Godzilla will do whatever it takes to win globally. They are a powerful force that holds all the chips: they have the capacity, they have the financing via state and local governments, and they have incentives. There’s no end to their appetite and their ambition to market with their electric vehicles. One way or another, they are going to figure things out and they will find a way to win.

In turn, Europe and the US need to find an urgency in this race, according to Dunne: “I think Europe and the United States have to race. We’re the underdogs. We have to race and be innovative and be urgent about this challenge.”

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Find out about how the Chinese BEV dominance may bring opportunities or threats to the western brands by reading our review of the Asset Finance Connect Webcast

Analysis from David Betteley Asset Finance Connect's head of content

This was a great session with Michael, Tony and Ian. It was a real privilege to moderate the conversation. In order to analyse the session, I’m minded to look at the possibility of Chinese dominance in the UK/ European/ US car markets through an old fashioned lens…the 4 Ps +S.

Product. There is no doubt that China has significant advantages in that the country controls the (current) lion’s share of the raw materials required to make the batteries; it has the gigafactories to make the cells and, as Michael advised, the Chinese production costs are in the region of 30% below those of the western manufacturers.

Tony and Ian pointed out that the quality of the cars coming out of China was excellent, the level of tech was, in most cases, higher and the industry had embraced them setting broadly similar RVs (possibly slightly lower) as the mainstream manufacturers.

A couple of questions remain: Can the Chinese brands build brand awareness and integrity and overcome “brand snobbery” quickly and affordably and, secondly, whilst the initial quality is excellent, will Chinese brands prove to be as durable as their Western counterparts?

Place. I was intrigued by Michael’s “one bed, two dreams” analogy. We see many Western manufacturers going down the agency route (although there is some evidence that this is, in some cases, being deferred) but Chinese brands are preferring the dealer route. One Chinese brand (Nio) tried the direct/Tesla route but this looks set to fail and become a dealer route also. Will it prove the case that the dealers get into bed with Chinese brands thinking that it will be a long-term relationship, only to find that once the brand has been established sufficiently, the brand leaves the dealer’s bed to go direct, agency or some other hybrid model?

Price. Despite the manufacturing price advantage, Chinese brands have not, as a rule, tried to compete exclusively on price. Some brands such as MG offer “excellent value” but not at bargain basement pricing. There is, therefore, considerable margin to be had for Chinese manufacturers in the UK and Europe and this margin could be used to counter the effect of tariffs that are beginning to materialise already in some European markets.

Promotion. It was agreed by Michael, Ian and Tony that “sales and marketing” was the Achilles heel for all the Chinese manufacturers at the moment. The learnings from the Chinese domestic market do not travel well to Europe where new cars are bought almost exclusively on a monthly payment and leasing, in particular, is popular amongst business users (and incidentally amongst private purchasers in some European markets). The lack of a captive finance arm for Chinese brands was discussed and it was agreed that this is a potential hurdle for these newcomers to navigate beyond. However, partnering with established dealers was seen as a shrewd way in which to overcome this initial disadvantage. However, investing in an adequate budget for sales and marketing was not presently well understood by most Chinese brands and this may yet have short to medium-term consequences for building brand reputations. It remains to be seen how the ‘one bed two dreams’ strategy develops in the medium term!

Service. This is the “S” of the 4Ps +S. Here, all three speakers agreed that there is a lot of work to do for the Chinese brands; building up sufficient service and repair points, ensuring that spare parts were always available and training enough technicians to fix things when they go wrong. Failure to ensure these three things at least will damage the reputation of Chinese brands very quickly and cause serious damage to their growth ambitions.

So, it’s not a slam dunk for Chinese brands, but the train has left the station and Western brands need to move the threat to the top of their inbox in the coming years and develop the countermeasure necessary to live and survive amongst this new national competitor.

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