Since Karl Benz invented the first modern car in 1885, the global auto industry had never been as much of a converging point as it is today, a converging point of technological changes in a wide range of fields, including energy, transportation, communication, and computers. With the kickoff of the four new auto modernizations (electrification, intelligence, connectivity and sharing) and the fierce collision between traditional 4S channels and emerging channels, the century-old auto industry finds itself on the eve of a major change and reshuffle.

New automakers gain strong momentum, with internet technologies capturing a lion’s share of value

On the eve of the major change, new automakers represented by Tesla are still relentlessly snatching up market share from the traditional manufacturers, by leveraging their first-mover advantages and internet genes. From January to November 2019, Tesla sold 128,000 Model 3 cars in North America, beating same-category BMW 2/3/4/5 series (total sales of which reached 104,000), Mercedes-Benz C/CLA/CLS/E series (total sales of which reached 95,000) and Audi A3/A4/A5/A6 series (total sales of which reached 70,000).

Moreover, under the impact of the COVID-19 pandemic accelerating into a global public health event, many traditional automakers have resorted to layoffs, and FCA has merged with PSA Group to become the world’s fourth largest automaker, highlighting the sharp contrast between traditional automakers’ turning to each other for support and new automakers’ enjoying a strong momentum.

In China, sine it officially went into operation in January of this year, Tesla’s Shanghai Superplant has been continuously improving production capacity. Of the 90,891 electric cars Tesla delivered globally for the second quarter of this year, 29,684 were produced at its Shanghai Superplant. For the third quarter, Tesla set a record high by delivering 139,300 electric cars worldwide, and its Shanghai Superplant has steadily improved output to 37,100 cars.

Telsa’s making its home in China has helped drive, to a tremendous degree, the development of China’s new automakers. Over recent years, NIO, Xpeng Motors and Lixiang have all completed their IPOs. And the Shanghai Securities Regulatory Bureau revealed recently that Weltmeister has officially initiated the pre-IPO process and is planning to list on the Sci-Tech Innovation board.   

Investors spoke candidly about the biggest difference between new automakers and traditional ones, which is that for the former, software controls everything and hardware provides performance. This is the opposite of the automaking logic of traditional automakers. And an example of the difference is that a lot of money is spent on hardware structure because new automakers have many different requirements for hardware than traditional ones. 

Analysts also spoke candidly about the core value of the auto industry in the future, which will no longer be engine, body or chassis, but battery, chip, on-board system and data. The automobile powertrain is facing the biggest change of a century, intelligent network is heightening demand for vehicle perception, interaction and decision-making, and sensor, central-control screen and chip are becoming the core auto components. In the future, auto electronic and electric architecture will evolve from the distributed kind to the centralized kind similar to the architecture of a smartphone (with a low-level operating system and SOC). The uncoupling of software and hardware will help realize hardware standardization as well as the repeated development and utilization of software, which will dramatically reduce internal redundancy. And the auto industry might see a power struggle between iOS and Android.   

The world’s largest automaker Volkswagen announced recently that it will become a software-driven company, and it has set up a Digital Car & Service department in an effort to vigorously drive digital transformation. Toyota followed suit by announcing that it will transform from a car company to a mobility company and that its competitors will no longer be Mercedes-Benz, BMW or Volkswagen but Apple and Google. Automakers are not the only ones undergoing transformation. Internet giants including Google, Qualcomm, Nvidia, Huawei, Alibaba and Baidu have embedded themselves in different segments of smart driving, through collaboration or authorization or in the role of the supplier. The auto industry’s key technological value point is shifting towards technology and internet companies, and automakers without core technology might just be gradually marginalized as a result.  

Battery is at the center of the safety issue behind the technological change of new energy vehicles.

However, with the development of new energy technology, ample attention has always been paid to battery safety. Based on incomplete statistics, there were more than 560 fires nationwide involving new energy vehicles in 2019, and this number has reached 700 for the first three quarters of this year, involving almost all of the new energy vehicle brands.    

Of the numerous new energy vehicle fires, power battery accidentally catching fire accounted for more than 70%. As the energy density of power battery increases, the destructiveness of the fires multiplies. 

Experts were of the opinion that because the current new energy vehicles generally have high ranges, the high-energy battery materials they carry are high in energy but also highly dangerous. From a technical point of view, if spontaneous combustion happens, the first possibility is quality issue of the battery itself. For example, battery consistency, production equipment involved and the stability of materials used can all affect battery quality. And production defects can eventually trigger a short circuit leading to combustion and explosion.

Also, from a hardware point of view, if vehicle protection is insufficient, battery damage can cause fires; from a system point of view, electric cars can catch fire because battery early warning, monitoring and management are not in place or because there are no systematic solutions.

In June of this year, the Equipment Industry Development Center of the Ministry of Industry and Information Technology issued Notice on Investigating Potential Safety Hazards of New Energy Vehicles requesting that new energy vehicle manufacturers and power battery suppliers carry out investigations into potential safety hazards of new energy vehicles already produced, and that new energy vehicle manufacturers complete the investigations and produce written reports by the end of October 2020.  

Per the aforementioned notice, investigations into potential safety hazards of vehicles already sold and still in inventory should focus on water protection, high-voltage wiring harness, vehicle collision, on-board power battery, on-board charging device, battery box, mechanical parts and vulnerable parts, and based on the actual condition of the vehicles, effective technical measures should be employed to minimize the risk of vehicle fires.

Besides battery safety, with the development of intelligent network, vehicle network security is facing more and more daunting challenges.

According to foreign media reports, Tesla had experienced emergencies including network being completely interrupted, the company’s internal system being down, and mobile APP and internal system not being able to connect to vehicles. Once the system was down, Tesla employees were unable to process orders or deliver vehicles, Tesla’s energy products were affected in that solar and Powerwall energy storage battery users were unable to monitor the system, and the Tesla official website was temporarily inaccessible except for the main page. 

The Tesla incidents were not isolated ones. Based on last year’s special survey results, 85% of the key components of Internet of Vehicles (IoV) have security vulnerabilities, more than 80% of IoV platforms and apps carry hidden dangers such as the lack of identity authentication and data reorganization, and close of 60% of companies are incapable of automated network security monitoring and responding. Dynamic IoV monitoring shows that cyber attacks have extended to the IoV field. Since the beginning of this year, there have been more than 2.8 million malicious attacks on auto companies, IoV information and service providers and other related companies and platforms, and platform vulnerabilities, communication hijacking and privacy leakage are among the high risks they face.   

This could mean that new energy vehicle manufacturers should pay more attention to technology management, standardize R&D processes through building management systems, guarantee resources, manage security risks, factor in information security at the initial stages of product development and design, and realize active defense by resolving information security issues through complete chain, closed-loop feedback and proactive prevention. On the level of auto products, the manufacturers should focus on employing technical measures to ensure vehicle security and connection security. Risk assessment and the application of security protection technology, in particular, are the key links. Since vehicle structures designed by different automakers are different, comprehensive planning and setup will be required for protecting information security throughout the vehicle.    

New energy vehicle manufacturers in China are following each other in building new channels, and change is imminent.

While facing opportunities and challenges in technological change, new energy vehicle manufacturers have chosen different paths in building channels. New automakers represented by Tesla, NIO and Lixiang have opted for the direct operation model, by building self-operated showrooms in central cities and offering extremely simple online ordering processes.

The main characteristic of direct operation stores is that headquarters holds all of the ownership and operation rights. Member companies can only have one owner each, be it a company, a joint organization or an individual, and all of them are led and managed by headquarters with centralized HR, procurement, planning, advertising, accounting and business policies. In particular, a unified accounting system is implemented, and each direct operation store follows standardized operation and management.

The advantages of this model are centralized fund allocation, centralized operating strategies and centralized development and use of holistic businesses. And with this model, it is easy to leverage overall strength in talent training and use, development and promotion of new technology and products, and modernization of information and management.

Other new energy vehicle manufacturers including Qoros and Leapmotor have chosen to realize service and channel coverage through “direct operation + collaborating partners”. Their specific strategies are establishing brand value and ensuring user experience through “direct operation + collaborating urban partners” in first- and second-tier cities, and in third- and lower-tier cities, expanding coverage through collaboration with third-party sales channels and careful selection, certification and listing of maintenance sites. This model is favored because it can ensure expansion speed and reduce pressure on the manufacturers’ own funds.

Weltmeister’s sales channels are of four kinds. The first one is self-operated store, of which there are a total of four in Beijing, Shanghai and Hangzhou. The second one is collaboration with dealers through the 4S store model. The third one is second-tier dealers that mainly operate in second- and third-tier cities or remote areas offering test rides and test drives, with sales completed on e-commerce platforms. And the fourth kind is iQuant, which is a heavy-traffic platform responsible for consignment and commission-based sales. 

Heavy-traffic platforms like iQuant have become one of the new channels frequently tried by new energy vehicle manufacturers. In fact, new retail channels including Tangeche and Huasheng Haoche have engaged in many extensive collaborations and new model explorations with new energy vehicle manufacturers.

On the other hand, veteran automakers are also making dramatic changes to new energy vehicle channels. For example, Chery has shifted focus to fourth-tier auto consumption markets and is now selling different models on separate networks, which can further enhance customer experience but exert more or less of an impact on the dealers’ profitability. In an effort to realize new breakthroughs via new channels and a new image, BYD has built its own online platform (mall.bydauto.com.cn). With this and its Tmall flagship store, BYD is focusing on data traffic and enabling offline transactions. It hopes to facilitate online and offline connection through big data and identify new retail models.

Traditional automakers, however, are building new channels more as an afterthought, because they already have relatively sound 4S systems. BAIC Group, for example, insists on not selling gasoline-fueled cars and electric cars within the same system and on independently developing new energy vehicle sales networks. But with regards to channel strategies, BAIC BJEV believes that e-commerce is a business model and a display window aimed at the outside world for the purpose of obtaining customer awareness. It also believes that all online e-commerce platforms exist to serve the dealers and insists that offline 4S stores are the main direction.

“New energy vehicles have really come to a crossroads in 2020.” It seems that after ten years’ planning and cultivation, China’s new energy vehicle industry has secured certain first-mover advantages and scale advantages. For the first half of 2019, China’s sales of new energy passenger vehicles reached 563,000 which equated a global market share of 56.9% and left EU trailing far behind with its share of 20%. The battery/motor/electric control system and charging infrastructure are being completed to support the industry chain. And of the ten automakers selling the largest numbers of new energy passenger vehicles worldwide from January to November of this year, four are independent brands which are BYD, SAIC, Geely and BAIC.   

New automakers have been enjoying impressive sales recently. Data shows that NIO delivered 4,708 vehicles for September which was an year-on-year increase of 133.2% and the seventh consecutive year-on-year increase; it delivered 12,206 vehicles for the third quarter, which was a year-on-year increase of 154.3%, and the cumulative number of vehicles delivered for the first three quarters reached 26,375. Weltmeister reported September sales to be 2,107 vehicles which was an year-on-year increase of 38.8%, while its cumulative sales for the first three quarters reached 6,200 which a year-on-year increase of 79.3%. And since September 2018, it has sold almost 36,000 EX5 models. Xpeng Motors delivered 3,478 vehicles for September, which was a year-on-year increase of 145%, and it delivered 8,578 vehicles for the third quarter, which was an year-on-year increase of 266%. Lixiang ONE delivered 3,504 vehicles for September, which was a year-on-year increase of 29.3%. From January to September, it delivered a total of 18,160 vehicles, and 8,660 of them were delivered in the third quarter which was an increase of 31.1% over the second quarter.     

Europe will become the largest market for new energy export, and domestic policies will continue to be supportive.

Being new to the world, new energy vehicles had a hard time at the beginning competing against traditional gasoline-fueled vehicles in terms of cost and technology. Consequently, during the initial technology accumulation and market access stage, the government provided continuous and vigorous support in the form of a comprehensive range of incentive policies. From government subsidies for R&D and double points earned for production, to financial compensation and tax reduction and exemption in order to encourage consumption, and to unlimited licensing and unlimited purchase on the user end and charging discount on the operation end, these policies almost covered the entire life cycle of new energy vehicles. 

At the executive meeting of the State Council held in October of this year, the Development Plan for the New Energy Vehicle Industry was passed with four key stipulations. The first one is to step up key technological research and encourage the development and innovation of vehicle operating systems and power batteries. The second one is to strengthen infrastructure construction including power charging, battery swapping and hydrogen refilling, speed up the building of a public charging network offering mainly fast charging and covering highways, cities and rural areas, provide financial support for the construction of charging poles as public facilities, and encourage the application of power charging and battery swapping models. The third one is to encourage and strengthen international collaboration in the new energy vehicle field. And the fourth stipulation is to increase policy support for the use of new energy vehicles in public services.  

On the other hand, the continuous growth of domestic new energy vehicle manufacturers has led to significant improvement of their international competitiveness, which has laid a solid foundation for China’s new energy auto products to enter overseas markets. Based on data from the China Association of Automobile Manufacturers, the first half of 2019 saw a 99.3% year-on-year increase of China’s export of new energy vehicles. In particular, BYD and other new energy buses were exported in bulk to developed countries in Europe and the US as well as emerging markets such as Chile, Peru and Brazil, and for 2018, they occupied more than 20% of the European new energy bus market and more than 60% of the British market. In the meanwhile, King Long and Zhong Tong Bus held the largest market shares in Taiwan and South Korea. 

While the COVID-19 pandemic is still raging outside China, China’s new energy vehicle export has shown substantial growth both in volume and value. Based on data released by the China Chamber of Commerce for Import and Export of Machinery and Electronic Products, from January to June of this year, China exported a total of 34,000 new energy vehicles which was a year-on-year increase of as high as 194%, and the total export value amounted to USD 1.077 billion which was a year-on-year increase of more than 300%. 

Over the first six months of this year, Europe has become the largest market for China’s export of new energy vehicles. The total number of vehicles exported to Europe was 23,000 with a total value of USD 760 million which accounted for 71.1% of China’s total export. Sweden, Norway and the Netherlands were among the Western and Northern European countries with the largest numbers of import.    

This was mainly attributable to the intense focus placed on green development by developed countries and regions in Europe and the US. In April 2019, the EU issued Regulation (EU) 2019/631 which included the most stringent carbon emissions standards in history. Norway, the Netherlands, the UK, France and Portugal have set 2025, 2030, 2040, 2040 and 2040, respectively, as the year when no more gasoline-fueled vehicles will be sold in the country, and as a result, developing new energy vehicles is their only way out. Germany has legislated confirming that subsidies for electric cars within the country will rise instead of dropping. For example, the subsidy for pure electric cars priced no higher than 40,000 euros will increase from 4000 to 6000 euros. And automakers are stepping up investment, one example being Volkswagen which will produce 22 million electric cars by 2030 instead of the originally planned 15 million.  

European countries are instituting increasingly stricter carbon emissions standards, and this has created new opportunities for China to export new energy vehicles to Europe.

It’s worth noting that in venturing abroad, new energy vehicle manufacturers still face a lot of challenges such as unclear export certification processes, inconsistent global charging standards and incomplete systems for technological patents and after-sales services. Developed countries and regions in Europe have higher requirements than developing countries for product quality and the level of technology and services. This has set a higher bar for China’s new energy vehicle manufacturers and for matching after-sales services and supporting financial systems.  

What is indisputable, however, is that new energy vehicles will gradually become the main area for future growth in the auto market, as major countries are adopting increasingly strict regulations for energy conservation and carbon emissions. Over the next few years, China’s new energy vehicle export is expected to maintain a rapid growth and become an emerging force driving the steady growth of China’s auto trade.