China EV Outlook: Before the Dawn
China’s EV sales in 1H-2020 hit 259,743, decreasing by 43.0% year-on-year, largely due to Covid-19 impact and very high base of 1H-2019. The 2020 total EV sales are expected to drop 30% to around 600,000 units, much lower than that of 2019.
When Covid-19 seriously influenced overall car market due to consumers’ lower income expectation and sales/production pause, it is easy to understand that expensive EV cars will naturally face a more difficult situation. Luckily in China, Covid-19 impact on society has been put under control and all economy sectors are recovering.
Industry insiders all agree that EV long-term future is non-stoppable, however EV’s short/mid-term potentials are still subject to some basic barriers that we are familiar with for years, namely, driving ranges, high prices, charging facilities.
Consumers used to concern the most about the EV driving range, a 2017 or 2018 model-year compact EV sedan could drive barely 200-300 Km, insufficient and inconvenient for driving in large cities. But now the latest new EV products’ average driving ranges have improved to 400-500 Km, more than enough for daily commute, the driving range barrier has become much less of an issue in 2020.
Among 3 factors, EV’s high price is the current biggest barrier. Especially now the pandemic added extra short-term pressures. Consumers try to control budget tightly or delay their purchase plan in 2020, and EV products’ higher prices have become more a problem than previous years, not to mention that there are only 21,000 Rmb EV subsidy left in 2020, while it used to be 60,000 Rmb before July 1, 2019 and the mini-EV’s subsidy now was cut to zero.
Consumers are no fools, they are unanimously satisfied with EV’s driving performance, but they are only willing to buy an EV with 20-25% price hike comparing with the same-segment gasoline cars. If any EV cars cannot meet this simple criterion, it does not sell well.
Firstly, this explains why mini-EV, usually with 200-300 Km driving ranges, accounted for about 60% of the EV car market before 2019, and the sales slumped quickly after subsidy cut to zero from 2H-2019, now the sales accounted for just 15% in 1H-2020. In 2019, mini-EV with subsidy was still reasonable for car sharing companies and families buying their 2nd car for daily commute. Without subsidy, mini-EV cars are priced at nearly 100% higher than a 30,000 Rmb mini gasoline car, neither institutional nor individual buyers wanted to buy such mini-EVs.
Secondly, this also explains main stream compact EV sedans (Golf/Corolla size) are performing ok in a difficult year like 2020, compact EV sedans are roughly priced from 150K Rmb to 180K Rmb, around 50% higher than main stream compact gasoline sedans. This price difference is much smaller than mini-EV segment, and as 2020 new compact EV sedans usually have 500 Km driving range, therefore the market share of this segment can still hold around 40% of EV passenger vehicle sales.
Thirdly, this best explains full-size EV sedans, such as Tesla Model-3, is selling very well in 2020, this segment’s market share rocketed to 16% of 1H-2020 from 2019’s 0.6%. Taking Model-3’s price as an example, its 460Km driving-range version sells at 271,550 Rmb, since Tesla brand has been recognized as a premium brand, comparing with same size premium brand gasoline sedans, such as Audi A4, BMW 3 and Mercedes C-class, the price gap is zero already! Many of these entry luxury sedan customers are diverted to Model-3, contributing to the amazing 15,000 units average sales volume per month in Q2.
Furthermore, even comparing with mainstream full-size gasoline sedans, such as Camry, Accord, Passat, which usually sell at around 200,000-220,000 Rmb, the price gap between Model-3 and a typical Camry has been narrowed to around 30-35%. Meanwhile, Tesla is very determined to keep lowering prices to expand its consumer bases and directly compete with traditional car makers, it cut Model-3’s prices for 2 times since Q4-2019 already; by end of 2020, the Model-3’s price is set to lower to < 250,000 Rmb, or the price gap will be 10%-25% against gasoline main stream full-size sedans, the customer base of Model-3 will be suddenly expanded again by the time.
Fourthly, the price gap criterion also explains EV SUV segment slow sales in 2020, its share dropped from 30% in 2019 to 25% in 1H-2020. This segment is somehow disappointing to industry insiders, because local OEMs as well as local EV-Startups launched many EV SUV new models since 2H-2019, however, the segment did not perform as people expected. For those local brands’ EV SUVs with 500Km driving-range, their prices are usually 170,000-200,000 Rmb, comparing with a local brand’s gasoline SUV, the price gap hit nearly 70%-80%. Thanks to some rigid demand in Tier-I cities to get a car plate and consumer’s preference for SUV’s body-type, otherwise these EV SUVs will face even bigger challenges.
Comparing with the same platform’s sedan, SUV is bigger and heavier, and its Coefficient of Drag can never be as good as a sedan, therefore, for the same 500Km driving range, an EV SUV needs a higher capacity battery, which increased cost quickly. When a battery supplier sells a typical EV SUV’s 60-70 Kwh power battery pack still at 1,000 Rmb/Kwh in 2020, this battery alone cost car maker 60,000-70,000 Rmb.
Luckily, battery cost has been dropping very steadily as government planned. By 2023, the battery pack price is expected to drop to 700 Rmb/Kwh, or 30% down over that of 2020. The above-mentioned price gaps in 2023 and after are going to be narrowed to a more reasonable range of <20%, especially for compact SUV and compact sedan, two largest car segments in China. It is confident to believe that after the boom of full-size EV sedan sector in 2020, compact EV sedans & SUVs will quickly expand the customer base by and after 2023.
Though EV driving ranges & high EV prices issues are being solved in an accelerating speed, charging infrastructure indeed remains as the last major obstacle, and it is a difficult one.
By 1H-2020, China roughly built 1.3 million charging piles, however, this number is lagging far behind of government planned target of 5 million by end of 2020. As an online car-hailing EV driver I met last week said, the whole charging infrastructure “can be used, but really not convenient”.
The difficulties of charging infrastructure lie in two fronts: 1. Older residence communities have very limited parking lots, the residents living in these older buildings cannot find a fixed parking lot to install charging piles. 2. Public fast-charging piles need huge investment: machine costs + even higher land costs + management costs + electricity fee to State-Grid, while the charging fee at most can be raised to 2.0 - 2.5 Rmb/Kwh, already a very high fee for EV owners, no charging service company can get a profit at current stage. Government realized the difficulty and now gave more subsidy support to build charging facilities. Hopefully more charging companies would invest in this area in the coming 5 years.
Since driving range and EV prices are no more barriers in 5 years, depending on major cities’ improvements of charging infrastructure from now on, by 2025, there is high possibility that China can achieve the latest planned EV target, or around 5 million EVs, But if the charging infrastructure still lags far behind after 2023, the 2025 EV sales will be much more moderate than the planned one.
The article is written by：Yale Zhang, Managing Director, Automotive Foresight (Shanghai) Co. Ltd., the author can be reached by email firstname.lastname@example.org