In 2023, domestic and export deliveries of automobile products jumped 10.8% to 26.94 million units through November. The China Association of Automobile Manufacturers expects promotions in December to push full-year sales beyond 30 million vehicles.

Yet, some automakers will fail to meet their sales goals while intense price competition pressures profitability industrywide.

The new year “will decide who are the winners, who are the losers, who will survive and who will die,” Liu Luochuan, director of strategic development research center at state-backed Dongfeng Motor Corp., told Caixin.

Vehicle prices fell 8.4% in 2023 after a 1.9% drop the prior year and a 1.3% increase in 2021, according to Hao Hong, director of market and brand management at Shanghai Automotive Industry Corp. (SAIC).

The manufacturers association expects sales growth to slow to 3% in 2024 as exports continue to drive gains. Meanwhile, the domestic market remains locked in fierce competition that may lead to industry consolidation or even the elimination of some producers in 2025 and 2026.

The industry’s transition to electric and smart vehicles is accelerating. Most automakers have yet to reach enough scale to pass the break-even point, Liu said. Only manufacturers producing at least 500,000 NEVs a year will be able to make a profit, Liu said, while the rest will fall into a fight for survival. NEVs include battery electric cars and plug-in hybrids.

Price war

The year that just passed marked a turning point for China’s automakers. Hefty government subsidies for NEV purchases expired at the end of 2022, prompting price cuts by manufacturers seeking to maintain sales. In the prior three years, NEV sales quintupled from 1.37 million units in 2020 to 6.89 million in 2022.

The subsidies, introduced in 2009, helped make China the world’s biggest market for electric vehicles. The government incentives could reach 12,600 yuan ($1,767) for each electric passenger car purchase, depending on how far it can travel on a single charge. Since 2009, the Chinese government handed out almost 150 billion yuan in sales incentives for NEVs.

With EV industry leader Tesla, other global automakers, and local producers all ramping up domestic production, the policies have helped spawn a competitive EV ecosystem in China. In 2022, the government cut the subsidies by 30% and eventually phased them out at year-end.

At the start of 2023, Tesla triggered a price war in the Chinese EV market with several rounds of price cuts that were followed by competitors.

Profitability threshold

The automotive industry has always been a capital-intensive sector in which manufacturers rely on scale to achieve profitability. In the era of gasoline-fueled vehicles, multinational carmakers, with their brand premium, usually turned profitable after reaching annual production and sales of 200,000 units in China, while the breakeven point for local brands was 300,000 units, Dongfeng’s Liu said.

NEV manufacturers face a higher profitability threshold — of 500,000 units a year — because the cost of batteries and smart technology used in NEVs can’t be reduced quickly, Liu said. Only Tesla, BYD, CAC Aion, and Li Auto have achieved or come close to that level.

The future NEV market may not tolerate those small but niche brands, such as Subaru, Mitsubishi, and Mazda, in the era of fuel vehicles, Liu said.

Between January and November, China’s NEV sales increased 36.7% to 8.3 million units from the year-earlier period, accounting for 30.8% of the 26.89 million total vehicles sold. The automaker association expects 2024 growth in NEV deliveries to slow to 22.3%.

In the view of Li Auto founder and CEO Li Xiang, only China’s top five NEV producers can survive. So far, Tesla, BYD, and Huawei have already locked their positions, which means the other manufacturers will have to compete for the remaining two slots, he said.

On Dec. 28, Chinese smartphone maker Xiaomi Corp. unveiled its first electric vehicle, declaring ambitions to become a top global carmaker in 15 to 20 years and compete against Tesla. Xiaomi, once known as a producer of cheap smartphones, can shake up the transport sector much as it did smartphones a decade ago, CEO and co-founder Lei Jun said at the launch event.

Two days earlier, Huawei officially launched the Aito M9, a flagship SUV that has garnered more than 60,000 orders since presales began in September.

In the electric-vehicle (EV) industry, the next phase of competition will focus on smart car systems, which is the strength of Huawei and Xiaomi. For smaller NEV manufacturers, partnerships with tech giants will be the preferred option.

In November, Huawei introduced the Harmony Intelligent Mobility Alliance (HIMA) app, a smart driving application for its Huawei-branded cars. HIMA represents an upgrade of the company’s auto ecosystem, currently used in the Aito and Luxeed series models, which are co-developed with four partner automakers. Under the partnerships, Huawei is deeply involved in product design, development, and quality control for models equipped with Huawei smart car systems.

Rather than developing their own intelligent driving system, it makes more sense for automakers to partner with a technology supplier to share the system, said an executive at one of Huawei’s auto partners. Xiaomi may also make its smart driving technology available to the auto industry in the future, or form an alliance like Huawei’s, the executive said.

While alliances will help companies save on development costs, they won’t guarantee success in the marketplace, an auto executive said.

Global push

Chinese NEV makers have been aggressively pushing international sales to become less dependent on the domestic market, where oversupply and a price war are pinching profits.

In the first 11 months of 2023, China exported 4.4 million vehicles, up 58.4% from the comparable year-earlier period, surpassing Japan as the world’s largest auto exporter. In 2024, auto exports are expected to grow to 5.5 million units, according to China Association of Automobile Manufacturers.

Chery Automobile Co. Ltd. exported 837,000 vehicles in the latest January through November period, about half of its total sales for the 11 months.

Russia became the largest importer of Chinese gasoline-fueled vehicles in 2023. After the outbreak of the Russia-Ukraine war in 2022, many multinational automakers exited Russia, leaving the market to Chinese manufacturers. In the first 10 months of 2023, China exported 736,000 vehicles to Russia, a fourfold increase from the 2022 total.

But this growth was mainly the result of the war, said Shu Xueming, assistant general manager of Chery Automobile’s global unit. Moreover, the Russian auto market is now so crowded with Chinese brands that it’s as competitive as China’s home market.

Meanwhile, exports of Chinese NEVs are facing more uncertainties than gasoline-fueled vehicles. On Oct. 4, the European Commission launched an investigation into whether Chinese EV-makers are benefiting from alleged state subsidies that allow them to undercut European Union rivals. BYD, Zhejiang Geely Holding Group Co. Ltd., and SAIC Motor Corp. Ltd. — three of China’s biggest automakers — are at the center of the probe.

In December, France unveiled a list of EVs that are eligible for subsidies of as much as 7,000 euros ($7,725) that partly hinges on their carbon emissions in the manufacturing process and effectively excludes most Chinese-made cars.

After 2025, China’s auto exports may enter a plateau period, said Sun Xiaohong, secretary-general of the automobile branch of the China Chamber of Commerce for Import and Export of Machinery and Electronic Products. He said Chinese auto companies should focus on both exports and overseas investment.

Chinese NEV makers are already doing so. BYD announced on Dec. 22 that it plans to build its first European car factory in Hungary. Other Chinese brands, such as SAIC Motor and Nio, have also been expanding in Europe. Chery Automobile has been mulling building a factory in Mexico, while Great Wall Motor Co. Ltd. and Chongqing Changan Automobile Co. Ltd. are also considering setting up operations there.

This piece was originally published by Caixin Global. It is republished here with permission.

Reporters: An Limin and Denise Jia.

(Header image: Artur Debat/Getty Creative/VCG)