China became the top auto exporter in 2023 and Chinese brands will out-sell foreign brands in China this year for the first time in decades, displaying an operating model that could win in Western markets; to compete, global automakers must radically change the way they do business in China and home markets, including making customer-focused tradeoffs that favor technological features, speed to market, cost, and accepting the higher risk that comes with those pursuits;

Pent-up demand in western markets will drive near-term auto sales growth, but global growth remains slow, especially in Europe – China is the only major market that will return to pre-pandemic sales levels before 2027

SHANGHAI (July 5, 2023) – After years of substantial government support for many new entrants chasing new-energy vehicle (NEV) growth, and with higher attention to styling and customer-oriented technological features, and increasingly rapid time-to-market, Chinese automotive companies are poised to become the shaping force in the global automotive industry in coming years, says an industrywide analysis from AlixPartners, the global consulting firm. While this disruption will not necessarily be immediately felt outside of China, where legacy players have awakened to the reality of Tesla’s innovations, traditional industry approaches must radically change to address this next source of disruption and seize opportunity, says the report.

The 2023 (and 20th annual) edition of the AlixPartners Global Automotive Outlook finds that the China auto industry has entered a new age of global impact.

"Chinese automakers have now passed the ‘tipping point’ of global relevance”, said Dr. Stephen Dyer, AlixPartners Greater China Co-Leader. “For the first time in recent decades, Chinese car brands outsold foreign car brands in China in the first four months of 2023, and we expect them to achieve 65% market share in China by 2030.”

At the same time, China topped the auto export country leadership board in the first quarter of 2023, surpassing traditional export powerhouses of Japan, Germany and Korea for the first time ever.

“These developments in China are just the latest in a series of remarkable achievements recently by the China auto industry, including reaching a 25% electric vehicle sales penetration rate in 2022, three years earlier than the government target set for 2025,” said Dyer. “And we expect electric vehicles to reach 35% of sales this year in 2023. It is crystal clear that the center of gravity for the global electric vehicle industry is China.”

The industry has been rightly focused on Tesla’s innovations for several years, but now is the time to devote far more attention to the lesson of the success of China’s homegrown New Energy Vehicle (NEV) brands, according to AlixPartners.

China government support for the industry allowed nascent EV players to cross the chasm of investment to build their EV resources and capabilities. China central government electric vehicle purchase incentives over the last decade totalled almost five times that of the U.S. government ($57 billion in China vs. $12 billion in U.S.) in the same period. However, the Chinese brands themselves, also deserve credit for how they have prioritized efforts to deliver an attractive value proposition to an emerging customer base in China.

China EV Brands offer lessons for global automakers: Inside China today, Chinese EV brands are much better than non-Chinese brands at delivering what new and tech-savvy customers want at a price they can afford, with higher digital engagement in the sales and ownership process, says the analysis. This is seen, for instance, in 11 percentage points higher (68% vs. 57%) penetration of ADAS (advanced driver-assistance systems) features for Chinese brands than their non-Chinese counterparts in the highest-volume mid-range price segment in China. Furthermore, Chinese brand NEV models are “fresher”, averaging a mere 1.3 years in the market, compared to 4.2 years for non-China brands with predominantly ICE offerings.  

“Chinese EV players have found a winning formula in offering appealing styling, cutting edge new technology, and digital customer engagement at an affordable price,” according to Dyer. “They keep their product models ‘fresh’ by fast time-to-market, using digital simulations to replace physical testing and by prioritizing engineering resources on attributes that customers value most, while being willing to accept ‘good enough’ performance on traditionally valued attributes, such as ride and handling and noise and vibration.”

This approach, which entails accepting more risk than traditional automakers, will not only be disruptive in the China market, but will also impact global markets in future.

“Incumbent companies that ignore this future disruptive force do so at their own peril, no matter what country they are in,” said AlixPartners’ Dyer.

AlixPartners analysis summarized the lessons learned from the approach of Chinese EV start-ups compared with traditional automaker approaches:

  • Be truly “Customer-driven” to differentiate in new consumer battlegrounds (e.g., styling and intelligent / connected technology) – strive for “good enough” in traditional attributes. This is instead of the traditional automakers’ “Engineering-driven” mindset – striving to compete in traditional vehicle attribute battlegrounds (e.g., ride-and handling, power, NVH, crash safety), all of which are important, but aren’t as highly valued by today’s buyers as consumer-electronics technologies and assisted-driving features
  • Adopt a “Usurper” mindset by establishing a dedicated, “nothing-to-lose” NEV business with independent investment decisions and DTC sales model, as opposed to retaining a “Defender” mindset of an integrated ICE/BEV business with dealership sales model – capital investments in EVs considered vs. other traditional options
  • Maintain a Startup risk appetite – speed-to-market and cost are prioritized over other factors (using digital development tools and less physical testing) – startup mentality toward risk; while traditional automakers strive to Get it right, regardless of cost and time – cautious approach to vehicle development – longer time-to-market acceptable to mitigate risk; allow vehicle launch delays and over-spending in pursuit of attributes that today’s customers do not highly value

Increasingly, says the analysis, what’s winning in China could be a template for what wins globally with consumers. “It’s imperative for global companies to radically change their ways of working to prepare for the Chinese-style competition eventually coming to their markets,” said Shiv Shivaraman, AlixPartners Asia Co-Leader. “A mastery of new technology functionality and a true customer-focus will be critical for automakers, while suppliers need to find a future in EVs and manage cash to restore their financials.”

Global auto market growth is positive, but tempered: The AlixPartners study finds that remaining pent-up demand after the pandemic and chip shortage days, and eroding pricing power from automakers, will allow global sales to creep back to near 2019 levels (it forecasts a 5% year-over-year increase in 2023). Europe, however, will not reach pre-pandemic sales levels for the foreseeable future.

“With the semiconductor chip shortage and pandemic supply constraints beginning to ease, dealer incentives are beginning to increase again in many western markets, leading to short term growth in auto sales there as pent-up demand is fulfilled”, said Shivaraman. “However, Europe will not likely get back to pre-pandemic sales volumes for many years due to regulatory and economic factors.”

Financial performance of automakers, which has exceeded that of component suppliers during the pandemic, is beginning to revert to previous levels as supply increases, driving down effective pricing. “The continued shift of investment toward electric vehicles, which are not yet as profitable as internal combustion engine vehicles, will add financial pressure to automakers”, said Shivaraman.

Shivaraman stated that, “One segment that has clearly benefited in the capital markets from the shift to EVs is the supply base for batteries and other electric vehicle-specific components, with their market equity value sitting at 3-6 times their book equity value, compared with some traditional components suppliers with market value actually less than their book value.”

ICE is “melting” fast: the share of Internal Combustion Engine (ICE) vehicles sold globally is rapidly decreasing. AlixPartners forecasts that electrified vehicles will reach 34% of global sales by 2028 and make up 61% of sales in 2035. This creates near-term pressure on margins and cash flows to fund electric-vehicle (EV) investments, says the AlixPartners analysis.

Investment in EVs now makes up over one third of automakers’ annual R&D and Capital expenditures and continues to increase. However, only a handful of EV companies are profitable. This is due to high costs of batteries and lack of scale, according to AlixPartners. As battery costs come down the learning curve and many automakers shift to LFP battery chemistry for cost reasons, EV profitability will begin to be more feasible. However, many EV start-ups will likely not succeed in the long run.

AlixPartners projects only 25-30 of the more than 160 China NEV brands to be financially viable by 2030, with consolidation expected. “Even with the best-in-class operations, it takes up to 400,000 units of annual production to reach breakeven scale”, stated Dyer. “Over 2/3 of the current China EV brands haven’t had any sales in the last year, let alone achieved scale volume. For those few who survive long term, it will require deep pockets with cash to carry them through the financially lean years. That said, there will certainly be some global winners among the current crowd of Chinese EV companies.”

The AlixPartners Global Automotive Outlook also contains several sales forecasts. Among them:

  • Sales in China will increase 3% in 2023, on their way to slow, but steady growth leading to over 50 million unit sales volume in 2050
  • 2023 U.S. sales will rise 10%, to 15.2 million, absent a prolonged labor strike; but affordability will mute long-term growth to below pre-pandemic levels
  • Sales in Europe will increase 6% in 2023, yet remain far below the pre-Covid levels through 2027
  • Semiconductor-company allocations and efficiencies have increased their supply to auto companies, despite the larger amount of chips inside EVs, allowing global vehicle production of up to 85 million units this year and unconstrainted vehicle production by 2025
  • Battery-electric vehicles (BEV) will account for the majority of sales in all major regions of the world by 2035
  • Financial markets are rewarding EV players – Financial markets value companies that are poised to profit most from the EV transition, says the analysis. It finds, for instance, that 78% of EV-battery suppliers’ worth lies in their terminal value (sometimes called “horizon value,” and indicating worth beyond the present value of consensus expectations for a company’s three-year future cash flows), compared to the low or negative terminal values currently assigned to commodity and ICE suppliers
  • Meanwhile, to meet the U.S. BEV-adoption forecast included in the AlixPartners analysis, $211 billion in capital expenditures (CapEx) is required for charging hardware, installation, and grid updates by 2030. The analysis also finds that U.S. BEV-specific raw-materials costs are now $4,500 per vehicle, down 38% from their 2022 peak but still double 2020 levels. However, it finds, costs for LFP (lithium-ion phosphate) BEVs are now within $2,450 of ICE vehicles
  • The analysis also finds that CASE-related partnerships, including M&A-driven ties, were up 25% last year, including a 37% jump in BEV-related deals

About AlixPartners
AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others. Founded in 1981, AlixPartners is headquartered in New York, and has offices in more than 25 cities around the world. For more information, visit www.alixpartners.com.

Contact:
Claire Cheung，AlixPartners
ycheung@alixpartners.com 
+852 9032 9080 

Oliver Pearce，FGS Global（Shanghai）
Oliver.Pearce@FGSGlobal.com  
+ 86 156 1892 5317 

Yi Wang，FGS Global（Beijing） 
Yi.Wang@FGSGlobal.com  
+86 186 231 55173