In the year 2000, there were only 16 million cars on China's roads. That's one vehicle for every 79 people in its 1.2 billion population. Today, the country's vehicle parc (number of vehicles in use) is more than 10 times larger at more than 190 million. Most of that growth has taken place within the last nine years, driven in part by economic stimulus efforts introduced after the global financial crisis of 2007-2008.

There's plenty of further sales potential. Vehicle ownership in China now stands at 140 per 1,000 people, compared to around 250 per thousand in Brazil and almost 800 in the U.S. China has a billion people of driving age, and while car ownership is still out of reach for many, the fast-growing economy makes it a possibility for many more each year. The country's wealthier urban population is growing at almost 20 percent a year: by 2020, for example, more than 60 percent of the population will live in cities.

China's economic liberalization has made plenty of people rich by global standards. The country is on track to become the world's largest luxury car market by 2020, and the premium vehicle segment is forecast to grow at twice the overall market rate. Global automotive executives now see China as the best place to launch new products and services, ahead of the U.S. and Germany.

POWERED UP: A car being tested at the country’s largest electric carmaker, BYD. China aims to become the leading global producer of electric vehicle technologies.

Production ramps up

China isn't just buying cars, it's making them too. In 2010, the country overtook the U.S. to become the world's largest car producer. By 2015, China's annual output of 24.5 million vehicles accounted for 27 percent of global vehicle production. Most of those cars, trucks and buses were destined for its domestic market, but exports are forecast to reach 3.7 million units a year by 2020. In 2016 the U.S. was the largest market for Chinese-made vehicles, followed by Iran, Germany and the Russian Federation.

While Chinese-branded vehicles are still a rarity on European roads, the country's industry has truly global markets in its sights. Chinese automaker Geely bought Sweden's Volvo in 2010, for example, and Dongfeng Motors invested EUR800 million ($920 million) in PSA Peugeot Citroen in 2014 as part of a rescue deal involving a similar investment from the French Government. The country is also the world's fourth-largest exporter of automotive components, after Germany, the U.S. and Japan. China's government is actively encouraging its automotive players to pursue further foreign acquisitions, seeing the deals as a way to access technology and design capabilities, as well as open new export markets.

From low cost to high tech

Government action is encouraging China’s automotive players to move up the technology curve. A key element in the country’s long-term economic plan is a shift away from the labor-intensive low-value manufacturing that powered the country’s economy in the past. Automotive technology, specifically in fuel-efficient, environmentally friendly vehicles, is one of 10 sectors targeted under the China Manufacturing 2025 plan, which is intended to transform the country’s innovation and productivity. The automotive sector also stands to benefit from other target areas in the plan, including industrial IT and robotics.

China aims to become the leading global producer of electric vehicle (EV) technologies. The country’s largest electric carmaker, BYD, started out as a battery manufacturer, moving into the automotive space in 2002 with the purchase of Tsinchuan Automobile Co. With strong encouragement from the government, Chinese companies are investing heavily in lithium battery production, both at home and overseas. If all the current plans are realized, Chinese companies will be able to manufacture more than 120 gigawatt hours of battery storage per year by 2020. Forty percent of that capacity will come from a single plant: Contemporary Amperex Technology Limited (CATL), a new factory under construction in Ningde on the northeastern coast of Fujian province, which will be around 50 percent bigger than Tesla’s rival Gigafactory 1 in the U.S. state of Nevada.

On a charge

China’s policy push toward environmentally friendly vehicles is already having an effect. The government has introduced incentives for producers, including corporate average fuel consumption targets and tax credits for companies that produce a minimum percentage of new energy vehicles (NEVs). Currently set at 8 percent, that target is set to rise to 12 percent by 2020. For customers, the registration fee payable on a new vehicle at the time of purchase is waived for NEVs, an incentive that can be worth almost $29,000 to the buyer of a high-end car.

NEVs are now seen as the key competitive battleground in the Chinese automotive market, with both foreign and domestic manufacturers fighting hard to develop appealing products for every sector of the market, from luxury vehicles to mass-produced models. In 2015, a year in which global production of NEVs reached 500,000 units, sales in China were 330,000 – two-thirds of the total. For the Chinese market, that figure represented annual growth of 180 percent on the previous year. Around 75 EV models are on sale in China, the widest range of any market. Government targets call for annual production of 5 million NEVs by 2020, although it remains to be seen if the country can install and operate the millions of charging stations required to support that level of growth.

Buyers switch on

New automotive technology isn’t just being pushed by the government, however, it is also demanded by customers. Research by consultancy McKinsey & Company suggests young Chinese customers are embracing new mobility services like car sharing and ride hailing just as fast as their peers in the West. And a PwC survey found that 40 percent of Chinese consumers would be willing to switch brands if the alternative offered better in-car connectivity features. They are savvy shoppers too, using online tools to find information on new vehicle options and seek out the best deals. Intense competition has been driving new car prices down by an average of 4 percent a year over the past 10 years.

Keeping the industry flowing

The dynamic nature of China’s automotive market is having a knock-on effect on demand for logistics services. Some of that demand is simply a function of market growth. The dozen or so new vehicle assembly facilities currently under development across the country will need just-in-time delivery of parts or modules from suppliers. The industry’s foreign investments are accelerating the development of global supply chains, which will require the management of complex flows of parts and materials between local manufacturing sites and operations overseas. And China’s growing importance as an exporter of finished vehicles will require suitable sea and rail capacity. Within the country, new regulations designed to improve the safety and efficiency of road transport activities are creating demand for specialized vehicle transporters.

Other challenges are new for the country. China’s vehicle market is maturing after years of frenetic growth, ramping up competitive pressure on manufacturers. In an increasingly crowded marketplace, carmakers must work harder to secure customer loyalty, and that calls for efficient sales and service networks as well as appealing products. In 2018, the average age of a Chinese car will reach five years, the same as in the U.S. And higher-quality vehicles mean customers now expect a lifespan of a decade or so. The second-hand car market, which didn’t really exist in the country 10 years ago, is now a significant route to car ownership for many people. Ensuring parts are available for those older cars, especially in the country’s hundreds of second- and third-tier cities, will require the development of entirely new service and logistics networks. 

Then there are challenges that are new to the world. Nobody has experience of the large-scale export of electric vehicles or automotive lithium-ion batteries, for example. But building such capabilities will be essential if the country is to achieve its goal of becoming a global leader in the sector. —  Jonathan Ward

Published: November 2017

Images: An xin/Imaginechina/laif; Qilai Shen/Bloomberg/Getty Images