BEIJING – The year 2018 was a transformative year for the Chinese auto industry, to say the least. Auto sales dropped for the first time in nearly three decades, the industry opened wider both within and to outsiders Chinese or foreign, new and more liberal industry policies were released, new energy vehicle sales continued to skyrocket driven by subsidies, Chinese smart EV startups began delivering vehicles in large quantities, “coopetition” intensified, M&As picked up pace and brands both entered and exited the market. It was difficult to pinpoint individual events that would make our annual list of top 10 news events because so many were worthy of being on the list. The editorial board at CBU/CAR has thus come up with a list of not necessarily individual events but key phenomenon that shaped the industry in 2018. – Editor
1. Auto sales fall for first time in 28 years, NEV sales rise as expected, heavy-duty truck sales surprise
The negative growth for the market as a whole was due, getting pushed back thanks to the previous round of purchase tax incentives put in place from 2015 to 2017. The “pull forward” effect, combined with weak consumption confidence especially in third- and fourth-tier cities where consumers’ pockets were tied-up with housing purchases were the major reasons behind the downfall. The biggest surprise, however, came in the commercial vehicle sector, especially the heavy-duty truck segment buoyed by growth of natural gas heavy-duty trucks and replacement demand due to phase out of China 3 emissions standard trucks. NEV sales, without a surprise, topped 1.25 million units driven primarily by subsidies, which are rumored to fall steeply in 2019 as they phase out in 2020.
2. Geely acquires stake in Daimler in key move to expand global empire
The surprise move by Geely was just a small part of its efforts to become a global automotive powerhouse. The significance of the move was how it acquired the 9.69 percent stake in Daimler via a so-called “collar option” transaction and the paradox was acquiring a stake in the parent company of the world’s oldest car brand that Geely tried to copycat 20 years earlier. Geely has already benefited immensely from the move, not from a technology perspective but in terms of pulling off another “David against the Goliath” acquisition after its purchase of Volvo Cars nearly a decade earlier.
3. Foreign equity cap in vehicle JVs lifted, BMW and Tesla quick to benefit
After years of debate, China finally said goodbye to the 50:50 equity requirement on vehicle joint ventures where foreign automakers could not hold more than half the shares, something that had remained a constant over the past 25 years since the Auto Industry Policy (AIP) came out in 1994. BMW and Tesla moved swiftly, with the former becoming the first foreign automaker to increase its stake in its JV with Brilliance and the latter getting the greenlight to build the first wholly foreign owned vehicle manufacturing plant in Shanghai – the Gigafactory 3.
4. New investment and product entry rules released, contract manufacturing gains popularity
Like the elimination of the 50 percent equity cap on foreign investment in auto manufacturing, the Administrative Rules on Auto Industry Investment (ARAII) and Administrative Regulations on the Entry of Motor Vehicle Manufacturers and Their Products released in December completely change the application and approval process for vehicle manufacturing from new entrants and incumbents, and how existing capacity can be utilized across the industry and among different players. In particular, the policies encouraged contract manufacturing, resulting in a slew of deals: such as BAIC BJEV’s JV with Magna to contract manufacture third-party brands, UCAR’s acquisition of Borgward, CHJ Automotive’s acquisition of Lifan Auto and Renault’s acquisition of a significant stake in JMEV.
5. First wave of smart EV startups start quantity production and delivery, face growing pains
NIO delivered more than 11,000 ES8s in 2018. Pretty significant considering that’s accomplished in only half a year’s time and with sticker prices of nearly ¥500,000 a piece in an overall weak market. That volume alone accounts for nearly 1 percent of the more than 1.25 million NEVs sold in China during the year. Others like WM Motor, Xpeng Motors, SITECH, DearCC and Yudu have also started quantity production and deliveries, but not without product quality and delivery issues. It’s all part of the growing pains: making a vehicle is hard, but consistently making quality vehicles in large volumes and serving your customers appropriately is even harder.
6. Roller coaster tariffs on imported cars amid China-U.S. trade tensions
The up and down tariffs on imported cars from the U.S. affected the German premium carmakers like BMW and Mercedes-Benz more than others since they ship a significant amount of cars made in the U.S. to China such as the popular X5 and GLE. The tariff and trade disputes however had less of an effect on the overall market as it was mostly due to the weakening economy and falling consumption confidence. They will have even lesser of effect as foreign automakers continue to localize production of more models: Lincoln will begin local production this year and the local production of the X5 is expected to start in the early part of the next decade.
7. “In China, for the world:” Volkswagen Group CEO Dr. Diess takes responsibility for China
This is unprecedented in the industry as this is the first case where the global CEO of a foreign automaker is also responsible for the business in China. With China accounting for nearly 40 percent of Volkswagen Group’s global sales and many innovations in the connected, autonomous, shared mobility and electrification originating out of the country, Volkswagen Group is ushering an era of “in China for the world,” where things will first develop out of China and applied elsewhere in the world, even in developed markets. That’s rapidly happening at other foreign automakers and suppliers as well.
8. Autonomous driving and ride-hailing rapidly progressing
Autonomous driving and shared mobility are two fronts where China is rapidly deploying efforts on the ground. Beijing, Shanghai, Guangzhou, Chongqing and other major cities have handed out numerous licenses to OEMs, suppliers, tech startups to test autonomous driving on public roads, while OEMs and independent entities have made moves into the ride-hailing, car sharing and time-share rental businesses. Examples: BMW’s ReachNow in Chengdu, Geely’s tie-up with Daimler on a mobility JV and SAIC Motor’s introduction of its Xiangdao ride-hailing platform. Several autonomous driving startups received new financings.
9. Suzuki exits China, more could follow
Suzuki will not be the first nor the last foreign automaker, or any automaker for that matter, to exit the Chinese market. If you don’t have the right products, especially locally developed products that tailor to the fast changing Chinese consumer tastes, and a fast response time and turnaround process for getting those products to market, you are doomed. Ford and PSA Groupe with their Citroën and Peugeot brands were the most notable foreign automakers that faced this crisis in 2018. If they don’t turn it around quickly, they will be in danger of ending up with the same fate as Suzuki.
10. China says “no” to low speed EVs, with a caveat
The axe has fallen on one of the most ubiquitous mobility tools that Chinese people in the big cities and small towns use to move around: low speed electric vehicles (LSEV). Several ministries and commissions jointly announced in November a process to clean up the LSEV sector, strictly forbid companies from increasing output capacity and establish a long-term administration and supervision mechanism for these vehicles. But considering their uniqueness on the market and popularity for mobility in the countryside, and the fact that they are not part of the auto industry as far as supervision and administration is concerned, it will take some time for the “cleanup” process as manufacturers jostle with the authorities to continue to make and sell them.