China’s EV manufacturers still reliant on dominant domestic market

Despite solid growth and exciting potential, overseas markets still only account for a small portion of Chinese electric vehicle makers’ revenues.

China’s premier Li Qiang, who took the role around a year ago, delivered his first work report during China’s annual ‘two sessions’ on March 5. One of the most prominent figures is the 2024 growth target of gross domestic product (GDP) set at 5%, after the country achieved 5.2% growth in 2023.

During Li’s one-hour speech, he referred to the “new three” growth drivers, which includes the manufacturing of electric vehicles (EVs), lithium-ion batteries and solar cells as examples of China’s improving export trade.

Total export volume from the three sectors has grown by almost 30% in the past year, he revealed.

Statistics from China’s General Administration of Customs, cited by the national media, said that the country exported EVs, lithium-ion batteries and solar cells worth around Rmb1.06 trillion ($147.3 billion) in 2023. One out of three vehicles exported is electric, with a total number of 1.773 million units.

The upbeat note in the EV sector started when the authorities sought to move away from the over-reliance on the “old three” growth drivers, namely household appliances, furniture and clothing, which are closely tied to the property sector.

Strong domestic market 

Domestically, China’s state-owned news agency Xinhua, the country’s total wholesale new energy vehicles (NEVs) sales reached 8.88 million units last year, up 38% year-on-year compared to 2022.

Xue Deng, managing director, principal analyst of auto and auto parts sector at CICC Research, told FinanceAsia that his team expects that overall NEV penetration, as a percentage of overall cars in China, is expected to rise to more than 45% in 2024.

“Taking 2023 as an example, the improved competitiveness of products and falling prices have increased consumer benefits, leading to accelerated vehicle replacement. We think this trend is likely to continue through 2024,” he explained. Others agree. Vincent Sun, equity analyst at Morningstar, told FA that he expects the growth of penetration of EVs against total vehicle sales to continue domestically.

“There is a very apparent shift from traditional autos to new energy vehicles,” he said.

In Morningstar’s industry pulse report on China’s EV sector for 2024 Q1, the team predicts that, despite a seasonal drop in the penetration rate in January, domestic sales in 2024 will remain solid.

Against a relatively weak domestic economy last year, the auto sector is “one of the very few sectors the authorities were looking at to stimulate the overall growth”, Sun said.

Subsidies from local governments to EV buyers, which used to offer discounts as high as Rmb12,600 per unit, ended in early 2023. The government has meanwhile extended the tax exemption scheme for EV buyers towards the end of 2027, offering an exemption rate capped at Rmb30,000 for those purchasing before end-2025 and Rmb15,000 before the end of 2027.

Sumit Agarwal, economics professor at the National University of Singapore (NUS), said that discounts have played a role in driving the early-stage adoption of EVs. One of the ways for China to continue its dominating position in the industry is to continue “flooding the market” with the help of subsidies, he said.

Meanwhile, segments across the value chain, including charging station construction and batteries the manufacturing of batteries, are other factors to be carefully considered to ensure greatest innovation and avoid over-capacity, Agarwal added.

Export ambitions grow 

In early February, the country’s Commerce Ministry published a list of 18 supportive measures to help domestic NEV makers venture overseas. The measures encompass areas including management, logistics, financing, cross-border trade and risk prevention to support foreign growth in the sector.

“A healthy development in NEV overseas trade is helpful for both the sector itself to upgrade, and for the country’s foreign trade to stabilise and optimise its structure,” the announcement reads.

Ming Lee, director, head of greater China Auto research at Bank of America (BofA) Securities, said, in an outlook briefing late January, that the team is expecting a 32% year-on-year growth of NEV exports in 2024, reaching 1.8 million units.

Russia, Mexico, Australia and Saudi Arabia topped the list of export destinations for Chinese auto makers in 2023, he said. Thailand has also become an important territory with 80% of EV sales in the market supplied by Chinese original equipment manufacturers (OEMs). Chinese firms have also been establishing manufacturing hubs in Eastern Europe in order to tap the EU market.

Estimation from the CICC Research team suggests that China has exported 1.1 million units of NEVs in 2023, of which 690,000 units were from Chinese EV brands, accounting for only around 9% of their total wholesale sales. Morningstar’s Sun also agreed that the car manufacturers’ revenue stream in 2024 would still be domestic driven.

“Export businesses could be an additional growth driver looking at 2024, but still does not constitute a big chunk of their overall revenues,” Sun said.

While predicting eventually slower sales in the home market, Deng and Sun agreed that overseas markets can be a potential growth driver.

However, NUS’s Agarwal said that while the export business is “good-to-have” for Chinese auto makers, a big export push might not be needed at this point as the domestic market is big enough to generate revenues over the next few years.

“Local demand is still high, and as long as Chinese car makers manage to grab and expand their domestic market, the export market will naturally benefit from it in years to come,” Agarwal said.

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