Exploring China’s huge market
China’s car market in 2016 closed with record-breaking sales of almost 23 million passenger vehicles. Our research reveals what’s ahead for the world’s largest, and still one of the fastest growing, car markets.
After registering its lowest growth since 2011, China’s automotive market rebounded strongly in 2016. Car sales jumped 20 percent, nearly twice the rate of increase in 2015. Much of this vigorous expansion resulted from the country’s temporary suspension of sales taxes for cars with small engines. Volatility continued in 2017: A large drop early in the year reflected the impact of strong “pull ahead” sales in December 2016, as many consumers sought to take advantage of a lower sales tax rate before an increase took effect on January 1, 2017. However, sales growth eventually picked up again over the course of the year.
Chinese brands are the biggest winners in the entry-level SUV segment (priced between RMB 50,000 and 100,000), where they faced limited competition from international players. They captured an 89 percent share of this lower-price-tier market. Dominating this segment helped Chinese brands grow their combined total share (not including joint-venture brands) in the SUV market from 27 percent in 2012 to 48 percent in 2016.
We expect SUVs to retain their strong appeal. This growth will occur across all SUV segments and price bands, with the entry-level SUV segment contributing “only” 44 percent of the total. This means that in 2022 one out of every two cars sold will be an SUV.
Premium on the rise: Like many other consumer categories in China, the move upscale to premium products is an ongoing trend in the car market. Our survey shows that 55 percent of respondents who replaced or complemented their existing cars in 2016 chose more expensive new ones. Also, although we found that around half of our respondents no longer think of cars as status symbols, more young people and those who bought expensive cars (vehicles costing over RMB 400,000) still consider cars status symbols compared to the average.
Premium brands* (see the full list of included brands in the end note in the PDF) continue to outpace the rest of the market. Moving forward, as the market slows from double- to single-digit growth, we expect that premium brands will continue to outpace the rest
Electric vehicle demand centered in restricted license cities
China is now the largest market for new energy vehicles (NEVs) in the world. However, demand is still highly concentrated and regulatory driven. The cities in China with license plate restrictions for ICE (internal combustion engine)-powered cars account for about 60 percent of the national NEV sales (while only for about 10 to 15 percent of ICE sales). Although we expected to see an increase in interest in purchasing a NEV, our results show that interest remained flat at about one out of five car buyers expressing interest.
Buyers exhibit limited preference regarding the type of EV they would purchase, with about half considering both battery-electric vehicles (BEVs) and plug-in hybrid-electric vehicles (PHEVs).
Our survey also shows a positive correlation between a consumer’s household income and his or her willingness to consider and purchase an EV. Affluent consumers with incomes that exceed RMB 25,000 a month are three times more likely to purchase an EV than consumers in the mass middle class with incomes in the RMB 4,000 to 12,000 per month range.
Among current EV owners, 78 percent express satisfaction with their vehicles, slightly more than the 69 percent in 2016, and 63 percent would recommend them to others. The top drivers of EV satisfaction identified by consumers include exemptions from “no drive days” and license restrictions, cost savings for fuel, and free use of city-wide charging service platforms.
Top reasons for not buying EVs have switched from complicated issues such as a scarcity of charging locations and high pricing in 2016, to concerns in 2017 about the EV’s quality and safety, and a lengthy charging process. This indicates that the investments in charging infrastructure and its higher visibility are starting to work. Now it is up to the car brands to deliver attractive, high-quality models. One reason mentioned to further support sales is that more than half of the car owners would consider purchasing an EV if the driving range increased to 400 kilometers or if the prices dropped to match those of ICE models.
Although infrastructure is less of a concern for new buyers than in the past, 23 percent of current EV owners would still like to see more charging stations. About one-third of EV owners lack their own charging infrastructure, with 38 percent of them stating that their residences do not allow the installation of charging stations. Building a public charging network could be a solution for this, since 67 percent of people would be interested in a subscription-based charging service and 59 percent of people would be interested in a pay-as-you-go charging service.
Looking further ahead: autonomous driving shift perceptions
Although not being available in the market yet, we also tested consumer thinking around autonomous driving. Overall, consumers are excited about and have faith in autonomous cars. Over 60 percent of survey respondents believe autonomous cars will transport families in the future, compared to 43 percent in the US and 31 percent in Germany. Our survey shows that 61 percent think that car OEMs are expected to have the best autonomous driving technology, with two-thirds of these respondents having a preference for foreign OEMs. Surprisingly only 12 percent expect technology players such as Baidu to develop the leading technology. This lead nearly matches the 38 percent of ICE car buyers that believe foreign OEMs are more reliable than local ones, and likely reflects the same thinking. However, when it comes to operating an autonomous fleet, many respondents prefer parties outside of the traditional automotive industry. One-third of respondents say car OEMs enjoy the best positioning, while 26 percent and 15 percent, respectively, prefer the government or new mobility players. China will remain a must-win market for car brands in the foreseeable future. As Chinese consumers continue to become more sophisticated, automakers must reinvent their success formulas to surprise and delight them. That means delivering leading-edge connectivity options, pursuing digital innovations, participating in the electric vehicle space, and taking steps in the burgeoning used-car market. With increasing competition from Chinese brands, digital players, and shared mobility companies, no traditional automotive player can afford to put off the substantial actions they should take today. Yesterday’s “easy” growth in China is a memory; tomorrow’s success will require a different set of skills and ideas.