Over the last decade, China’s automotive industry has been in overdrive, growing at an average 15 percent each year, and accounting for 70 percent of global growth during this period. By 2012, China surpassed the United States as the world’s largest auto market.
By 2018, however, China’s cooling economy put the brakes on the auto market, pushing sales growth into negative territory, a trend that persisted through 2019. As China’s auto market enters an entirely new phase of its development—which we call the “2.0 era”—automakers are faced with a host of new challenges as well opportunities.
In this article, we highlight the five main characteristics that define this new era and pose a series of questions automakers must answer if they hope to thrive in a time of slower growth.
1. Competition is spurring consolidation
Many weaker players shielded by the sustained and rapid growth of the past decades simply won’t survive the ongoing downturn. Already, the performance of automotive companies in China has splintered. In the last two years, a large profitability gap has opened between the leading players and their low-end rivals.
Consider the case of a joint venture, which just two years ago enjoyed annual sales of one million units. In the first half of this year, it sold fewer than 100,000 cars. Over the next few years, brands like these are likely to exit the Chinese market if they do nothing to arrest their decline. Strong branding will be crucial. McKinsey research shows that Chinese consumers’ automobile brand loyalty, measured by their willingness to buy their existing brand of car again, increased from 12 percent two years ago to 31 percent this year.
Companies selling cars in the midprice range (100,000-200,000 renminbi) will face particular challenges, with pressure coming from opposite ends of the price spectrum. At the top, premium brands are making their cars more affordable to appeal to consumers seeking to trade up. At the bottom, independent brands are launching increasingly appealing and competitive vehicles in the 100,000-plus renminbi price range.
2. ACES investment needs are intensifying
Leading international automotive manufacturers typically spend as much as 50 to 100 billion renminbi a year on research and development (R&D). In China’s auto 2.0 era, much of this money, and more, will need to be redirected toward the four trends redefining not just the automobile itself but the whole experience of auto travel: autonomous driving, connected vehicles, electric vehicles, and shared mobility (ACES). In China, consumers’ acceptance level for autonomous vehicles is 80 percent, double that of Germany and the United States. With the Chinese government expected to double down on support for autonomous vehicles as part of the 14th Five-Year Plan, China is likely to be at the forefront of autonomous vehicle development. The considerable costs of keeping pace with these trends is forcing consolidation and collaboration among rivals. BMW and Mercedes-Benz, for instance, have forged a partnership focused on the next generation of mobility. Volkswagen and Ford have also teamed up to develop autonomous and electric vehicles, in a further example of a trend we expect to see more of in future.
3. New automotive retail models are emerging
The days of consumers purchasing their cars exclusively through dealers are numbered. For a start, China’s dealership industry is highly fragmented, with the top 100 dealerships groups constituting only 30 percent of total sales, making them vulnerable to downturn pressure. Recently, dealers’ profit margins have been feeling the squeeze, with 30 percent of dealers operating at a loss and new dealer inventory reaching an average of 1.5 months. Tesla, for example, has focused on selling cars online directly to the consumer, Chinese electric start-up NIO has succeeded with online-only sales, and Daimler launched Mercedes me, a system that allows drivers to track and control their vehicle.
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SOURCE: McKinsey & Company
