Background to the success of Chinese manufacturers

023 was a successful year for the Chinese car market. A total of 21.9 million passenger cars were sold in 2023 (domestic sales only, excluding exports), an increase of 4.3% compared to 2022.

As in recent years, EVs (referred to as NEVs in China, equivalent to xEVs) displaced ICEs – and their share continued to grow to around 36% of the total market, an increase of 33% year on year (see figure 1).

Figure 1: NEVs have been on the rise for quite some time

Source: Berylls by AlixPartners, CAAM, CPCA

Looking at the domestic market, it is clear that Chinese players continue to dominate, as they have done in recent years. Especially for battery electric vehicles (BEVs), the following companies stand out: BYD (2.7 million units sold), GAC Aion (483,000 units sold), Geely (469,000 units sold), Chang’An (385,000 units sold), Li Auto (376,000 units sold), and NIO (160,000 units sold). Only Chinese manufacturers are among the top 10 best-selling BEV brands, with one exception: Tesla with 604,000 units sold in 2023 (see figure 2).

Figure 2: The Chinese NEV market is dominated by mostly local players

Source: Berylls by AlixPartners, CPCA

At the same time, the success of Chinese OEMs can also be seen on foreign markets. The export volumes of Chinese OEMs have increased massively in recent years for both types of drivetrain. The total export volume has increased by >400% since 2020 and grew very strongly by 65.3% year on year in 2023. While the trend can be seen in both segments, the export volume for EVs has grown even more strongly than for conventional ICEs – for example, sales of electric vehicles in China have increased more than tenfold since 2018 (2018: 140,000, 2023: 1.68 million units sold). Although Chinese OEMs have not yet made their mark in established Western markets such as Western Europe, they are determined to do so. We can therefore expect to see more activity by Chinese OEMs in such markets in the future (see figure 3).

Figure 3: At the same time, overseas activities have massively increased

Source: Berylls by AlixPartners, CPCA, Press

How did this development come about? There are a number of reasons for this, the first being the acceptance of EVs among Chinese consumers. Despite the absence of buyer incentives or “money in the trunk” from the state, the majority of Chinese consumers are turning to EVs. A Berylls study with over 1,000 respondents shows that 56% of vehicle owners and 42% of first-time buyers would opt for a EV when choosing their next car. At the same time, Chinese brands are predominantly being chosen (in terms of EVs), with 46% of all car owners and 61% among first-time buyers. In a direct comparison, only 32% (car owners) and 23% (first-time buyers) would opt for EVs from German brands!

This finding is related to reason 2: The number of Chinese brands has increased significantly in recent years and at the same time Chinese brands are comparatively “better” than their foreign JV competitors. “Better” means in this case: the customer gets more (functions and technology) for less money.

And a lower price is the third reason. An unprecedented discount battle took place in 2024. Driven by Tesla’s price cuts for the Model 3 and Model Y, Chinese OEMs lowered their prices significantly. Foreign OEMs/JVs also followed suit, as can be clearly seen from the example of the ID.3 made by SAIC-VW. ICEs are also affected by this, with the FAW-Audi A4L starting at less than EUR 30,000.

Figure 4: Price erosions will remain the dominant issue in 2024

Source: Berylls by AlixPartners

The key insight here is that prices have shifted massively downwards, but there will be no recovery in price reductions and cars will not suddenly become more expensive just because they are better equipped.

On the contrary, a “tech overload” is taking place – equipment that is only found in the premium segment in Germany is either becoming or is already standard equipment in volume vehicles in China. This applies in particular to Smart Cockpit (a collective term for connectivity or infotainment) and AD/ADAS. It’s a race for KPIs, with OEMs outbidding one another on things such as: e-range, charging time, number and resolution of cameras (keyword: LiDAR, millimeter-wave cameras), computing performance (“TOPS”), chips (e.g., Nvidia Orin X, Qualcomm Snapdragon 8295), ADAS functions (keyword: NOA, NGP), and much more. However, Chinese OEMs are not stopping at “functions”, but now also focusing on driving characteristics. In order to offer customers added value for their money, features such as CDC and Rear Wheel Steering are also slowly finding their way into standard vehicles.

Figure 5: The baseline has been shifted considerably

Source: Berylls by AlixPartners

While prices have never been lower, premium has been turned into a race for functions (combined with buzz words)
Chinese OEMs are loading up their models heavily on HW and SW side and compete on “KPIs”

Typical dimensions and “KPIs” incl.:

Smart cockpit – number and setup of screens, smartness of AI assistants (e.g., 4 zone voice control), OTA
E-powertrain – electric range (going towards >1,000 km), (fast) charging speed, size of battery pack
AD/ADAS – AD level, ADAS functions (driving pilot, NOA, NGP etc.), types, numbers and spec of cameras (LiDAR, milimeter wave radar, 360 camera, # of MP), computation power (measured in TOPS)
Interior and comfort – “zero-gravity” leather seats, “living room” elements, chassis system (e.g., CDC)

To summarize: cars in China are being equipped with an increasing number of functions while becoming cheaper and cheaper. More functions and lower prices – two developments that go hand in hand in China.

Outlook

In 2024, the pricing battle will continue with undiminished ferocity. With very few exceptions, no OEM is likely to be profitable in 2024. We can assume that some domestic OEMs will “disappear” this year, and even the current market leaders are not immune to this danger. However, this is no reason for foreign JVs or OEMs to cheer. Volumes that disappear with one local OEM are likely to reappear with another local OEM. At the same time, local OEMs are gradually gaining market share from foreign JVs and OEMs, a trend that can be observed in nearly all segments.

Implications for German suppliers

In order to deduce these, we first need to understand the strategies of the manufacturers. They will pay much stricter attention to costs, much to the detriment of suppliers, although the rigor of the foreign JVs and OEMs certainly cannot be compared with that of the local Chinese OEMs. Moreover, foreign JVs and OEMs will increasingly relocate their development activities to China. At the same time, a large Chinese supplier landscape is currently emerging, particularly in the areas of e-powertrain, smart cockpit, and AD/ADAS.

For German suppliers, this means:

1. Pressure on profitability and cash flow, because all OEMs will optimize their own costs, i.e., all OEMs, regardless of their origin, will successively onboard more purely Chinese suppliers. To compare: some local players are using 80% to 90% of purely Chinese components.

2. Investment pressure, as the relocation of OEM development activities (Western OEMs and JVs) to China means a move to China on the supplier side. Local capacities and skills need to be built up.

3. Market share pressure, as Chinese suppliers already dominate various domains, including smart cockpit, batteries, and AD/ADAS, and are expanding rapidly in other areas. As already indicated in a), very few domains are still dominated by German suppliers, just think of chassis. Chinese suppliers are also attacking in these domains, for example through aggressive pricing, but with comparable quality and functions.

Strategic guidelines for German suppliers

The core activity of German suppliers must be cost control. The aim is to reduce your own supply chain costs (including material costs) and overhead costs proportionately because suppliers have to invest in order to meet increased local customer requirements. This includes things such as: strict cost and especially cash discipline, the selection of new subcontractors and, above all, cost control in the product development process.

At the same time, it is important to remain innovative, i.e., to offer products at lower prices. Without innovations and the resulting differentiating advantages (at a similar pricing level of course), OEMs are turning directly to Chinese suppliers. As previously mentioned, OEMs have to outdo each other in terms of technology in order to survive on the market – so all suppliers will have to follow suit.

However, it should be noted that suppliers must remain agile, especially due to changing OEM requirements. This is illustrated by an example: XPeng P5 was the starting signal for LiDAR at its launch in 2021. So far, all Chinese OEMs have followed suit with LiDAR, including NIO, Li Auto, AITO, Luxeed, AVATR, etc. – the LiDAR “knob” above the windshield is now standard. A very rigid technology roadmap would not allow such rapid changes, because this agility on the OEM side must be able to be mirrored by suppliers.

Finally, Western suppliers should consider M&A and also partial sales. In particular, it is important to eliminate areas that are less competitive or where competition is so intense that continued operation no longer makes sense. In addition, collaborations could be entered into with Chinese companies in order to share knowledge on topics such as connectivity. However, the decision needs to be assessed and made individually for each company.

Author

Willy Wang

Associate Partner

willy.wang@berylls.com

Willy Wang

Willy Lu Wang (1981) joined Berylls Strategy Advisors in 2017. He started his career participating in the graduate program of Audi focusing on production planning. After stations at another strategy consultancy as well as being the strategy director for a German Tier-1 supplier, he is now responsible for the China business at Berylls.

He has a broad consulting focus working for all clients in China, whether they are JVs, WOFEs or pure local players. He is also responsible for the development of AI and Big Data products dedicated towards the Chinese market further strengthening the Berylls End-to-End strategy and product development capabilities.

Wang studied Electronics & Information Technology with focus on Systems and Software Engineering and Control Theory at Karlsruhe Institute of Technology.

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Background to the success of Chinese manufacturers

Outlook

Implications for German suppliers

Strategic guidelines for German suppliers

Author

Willy Wang

Willy Wang

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