Affordable and advanced: The secret to China’s EV success
For years, conventional automakers clung to the notion that electric vehicles (EV) were just a flash in the pan. Nowadays the rise of EVs is inevitable and, seemingly, irreversible. Electric car sales reached almost 14 million in 2023, 3.5 million higher than the previous year. However, their prominence continues to be concentrated in a few geographic regions, with 95% of EV sales occurring in China, Europe and the United States. Almost 60% of 2023 electric vehicle registrations were in China, according to the International Energy Agency’s (IEA) Global EV Outlook 2024.
In a recent opinion piece on new energy vehicle (NEV) trends in China, Reggie Zhan, principal at Emissions Consulting Services Ltd, emphasised that, early on, the Chinese government decided not to expand the capacity for internal combustion engines (ICE). Instead, they tightened regulations on new vehicle production permits, forcing newcomers to focus on the development and advancement of NEV technology. This was part of a broader strategy to reduce pollution, lower fossil fuel imports, enhance energy security, and establish China as a leader in the NEV market.
NEVs include battery electric vehicles (BEV), plug-in hybrid electric vehicles (PHEV), range-extended electric vehicles (REEV) and fuel cell electric vehicles (FCEV). Both PHEV and REEV are categorised as PHEV in China for statistical purposes.
According to Zhan, all alternative fuels are encouraged in China, such as compressed natural gas (CNG), liquefied natural gas (LNG), hydrogen (H2), ammonia (NH3), renewable or biofuels, dimethyl ether (DME) and methanol–as long as their greenhouse gas emissions are lower than those of gasoline and diesel. He suggested that, despite speculation, an extreme measure such as an outright ICE ban is unlikely in the Chinese automotive industry.
Nevertheless, Zhan believes it will be difficult for conventional ICE vehicles to survive in China’s passenger car segment. Hybrid electric vehicles (HEVs), PHEVs and BEVs are the most obvious choices to align with the upcoming China 7 and fuel consumption standards, he says.
China’s strategic shift to NEV technology
China is tightening its grip on the NEV market, with rapid growth continually exceeding expectations. More than one in three new car registrations in China was electric in 2023. The market share of NEVs for all commercial and passenger vehicles in the first seven months of 2024 was 36.4%, with BEVs and PHEVs holding 21.9% and 14.5% market share, respectively. In July, the NEV market share for passenger vehicles reached a new high of 51.1%, which exceeded the 45% market share target in the passenger vehicle segment for 2027 set by the government early this year. New electric car registrations reached 8.1 million units in 2023, according to the IEA, an increase of 35% year-on-year, despite the withdrawal of subsidies that had been in place for many years. By way of comparison, the penetration of EVs in the U.S. was 7.6%, with fewer than 1.19 million units sold.
A document from the State Council, China’s cabinet, in January 2024, announced new targets, requiring that 45% of new vehicles be NEVs by 2027. This is a significant rise from the previous requirement set in October 2020 which aimed for 20% of total vehicle sales by 2025 and 50% by 2035.
The growing influence of NEVs in China
The popularity of electric cars in China continues to grow, and many analysts believe that 45% NEV market penetration by 2027 is easily achievable. Young Chinese consumers see pure electric cars or plug-in hybrids as environmentally friendly and fashionable choices. According to an EV Consumer Sentiment Survey by global business advisory firm, AlixPartners, 97% of China-based respondents stated that their next vehicle purchase is likely to be an EV, compared to 43% in Europe and 35% in the U.S. An Automotive Industry Green and Low-Carbon Development Roadmap developed in conjunction with China’s Ministry of Industry and Information Technology suggests China could achieve a 50% share of NEV sales as soon as 2025.
The replacement of traditional fuel vehicles is taking shape. In 2023, the conventional ICE volumes contracted by 8%, despite 5% growth of the overall market. In this article, we will reflect on some of the key trends within the NEV market in China.
Plug-in hybrid electric cars grew faster than pure BEVs in 2023. According to the Global EV Outlook, there was a 75% year-on-year increase in PHEV sales in the first quarter of 2024, compared to just a 15% increase in BEV sales–although PHEVs started from a lower base.
Zhan notes that the influence of NEVs is expanding beyond major centres to smaller cities and rural areas where charging infrastructure has not been fully established. This reduces range anxiety for consumers in these areas.
A preference for domestic brands
China has spent years accumulating technological knowledge, drafting policy support and developing its NEV industry. The country is undergoing a dramatic shift in the automotive market, with Chinese automakers leapfrogging established overseas brands that have had a long-standing presence in China. According to the China Association of Automotive Manufacturers (CAAM), the market share of China’s independent brands has grown from 35.8% in 2020 to 57.0% in the first seven months of 2024, and reached a record high of 61.8% in July. Tesla is the only foreign brand among the top performers in China’s EV market.
Government support is no longer the primary driver of EV sales in China since purchase subsidies were phased out in 2023. The market is shifting from a period of significant investment to a more mature phase. Despite this transition, sales remain robust.
Competition has intensified among both international and local brands, driving down prices. Some commentators suggest that shrinking margins could push the least profitable companies out of the race. Cui Dongshu, secretary-general of the China Passenger Car Association, noted that the number of car models with price cuts in the first quarter of 2024 exceeded 60% of the 2023 full-year volume. Companies are also releasing new models to acquire market share, with declining raw material costs and economies of scale supporting rapid market development.
Cost is the key to success
In Europe and the U.S. electric cars are, in some cases, 10% to 50% more expensive than their combustion counterparts. This is not the case in China, where an estimated 60% of electric cars sold in 2023 were cheaper than their equivalent ICE vehicles. The sales-weighted average price of electric cars (before purchase subsidies) is lower than that of ICE vehicles, according to the IEA. This makes EVs increasingly affordable for middle-class Chinese households.
While the EV/ICE price parity is encouraging for other countries, who could soon reap the scale advantages enjoyed by China, many governments fear that China’s EV brands might flood the global market—and perhaps with good reason.
Amid intense domestic competition, Chinese OEMs are turning their attention to international growth. In 2023, China became the largest auto exporter in the world, surpassing Japan, with 4 million car exports, including 1.2 million EVs. Leading Chinese manufacturer BYD’s overseas sales more than tripled in the second half of 2023 compared to the previous year.
The European Union’s 2035 ban on ICE vehicle sales makes it a prime candidate for Chinese EV exports–where vehicles are often twice the price of their home market. Approximately one-third of China’s EV exports currently go to Europe. Asia is the second-largest export market, with China’s “small and cheap” strategy promoting affordable EVs in fast-growing economies such as Thailand, Vietnam and Indonesia. While political intervention could slow China’s overseas dominance, it is unlikely to stop it altogether.
More advanced technology
Chinese EVs are becoming increasingly appealing due to their advanced technological features, alongside competitive price tags. Automakers are reshaping the landscape with modern designs, improved connectivity, assisted driving capabilities and enhanced in-car entertainment. The demand for intelligent vehicles, particularly among younger consumers, is driving innovation and accelerating adoption in the market.
China has led the way in researching and patenting technologies for batteries, becoming the world-leading manufacturer. Chinese automakers prioritised cheaper and more reliable lithium iron phosphate (LFP) technology, while Western automakers initially favoured lithium nickel manganese cobalt (NMC) batteries. Over the past five years, LFP technology has been rising in prominence. Production is primarily in China, where LFP accounts for two-thirds of EV sales in the country, according to the Global EV Outlook 2024. China has been mass-producing LFP batteries since the 2010s. This focus on affordable technology is paying major dividends. In contrast, the share of LFP batteries in Europe and the U.S. remains below 10%.
China is accelerating its plans for more affordable battery chemistries and novel designs. Zhan highlighted the emergence of sodium-ion batteries, which have lower energy density, but superior safety compared to traditional batteries. Sodium-ion batteries do not require lithium and could cost up to 20% less than incumbent technologies-presenting an opportunity for further declines in battery costs and reduced reliance on critical minerals.
Despite originally being developed in the U.S. and Europe, China is the only country mass-producing low-cost sodium-ion batteries. Capacity outside China remains at the pilot or laboratory scale, says Zhan. He also mentioned that, at the higher end, solid-state batteries are expected to enter the market in 2026. Solid state batteries offer higher energy density, meaning they can store more energy for a given size or weight, and are generally considered safer than current technologies.
Battery prices around the world are converging, making them a globalised product. However, battery manufacturing in Europe and the United States remains more expensive than in China. China’s strength in battery production is supported by unparalleled access to raw materials and strategic control over key mining locations, refining capacities and critical components.
