How China is strengthening its electric vehicle market during the pandemic

While COVID-19’s impact to China’s car market has been dramatic, there are already signs of a recovery. The country’s reaction to the crisis shows a commitment to new technologies, signaling how the crisis could build resiliencies moving forward.

Impact to the economy
The negative impact brought by COVID-19 is becoming more and more significant. As of 28 May, there have been 5.7 million confirmed cases of COVID-19, including 356,000 deaths, reported by the WHO. According to a forecast from International Monetary Fund in April, public health measures to prevent the spread of virus have severely disrupted business activities and international travels. As a result, the global economy is projected to contract sharply by -3% in 2020 while China sees 1.2% growth.

The automotive sector is one of the top pillar industries for China’s economy and a major employer. In 2019, for example, the automotive sector contributed 9.6% of the total retail sales of consumer goods. The sector also accounted for around 10% of total employment in China (when the entire value chain is considered).

In China, the so-called “5-6-7-8-9 Characteristics” describes the private economy, which comprises approximately 50% of tax, 60% of GDP, 70% of technology innovation, 80% of urban employment, and 90% of total companies. For light passenger vehicle market, roughly 70% of new car buyers in China come from the private economy sector, mainly small and medium sized enterprises (SMEs), according to the data from State Information Center.

COVID-19 placed significant burdens on small- and medium-sized enterprises, the most vulnerable group in China during this crisis. This impact was seen in China’s first quarter vehicle sales. According to the China Association of Automobile Manufacturers (CAAM), sales of passenger cars declined 42.4% year over year during that period. SAIC, one of China’s largest manufacturers, reported a 44.9% percent drop year to date in April. Its SAIC-Volkswagen and SAIC-General Motors joint ventures, which comprise the majority of its sales volumes, dropped 50.4% and 47.7% year over year in retail sales from January to April respectively.

New energy vehicle incentives and plans
To stimulate the automotive market, several government policies were launched. 10 cities released incentive schemes. For instance, Guangzhou announced a subsidy of 10,000 RMB for New Energy Vehicles sold between March and the end of December. Additionally, a State-level subsidy to New Energy Vehicles that was planned to phase out by the end of 2020 was extended until 2022.

Additionally, new commitments were made to investments in infrastructure. The State Grid plans to build 78,000 charging stations at a cost of 2.7 billion RMB in 2020.

Signs of a rebound
With the gradual resuming of industry activities, auto sales are starting to recover. Retail sales of new light passenger vehicles surged ahead in March, as reported by the China Passenger Car Association (CPCA). While just 250,000 units were sold in February, March’s numbers were four times that amount. Year over year, March 2020 sales were still below 2019 levels, but 40% lower, not the 80% drop seen in February. Sales in April have begun to catch up with just a 3.6% drop year over year.

China has a 2-month lead on addressing COVID-19 and may be the recovery example for large economies able to contain the spread of the virus and get its citizens back to work.

Despite the significant impact of COVID-19 on China’s automotive industry, the market potential is still quite huge. China is still expected to become the largest vehicle market with around 260 million units in operation or 186 units on average per every 1,000 people. At 173 units per person now, there is room in China for more light passenger vehicle purchases.

However, after COVID-19, the market will definitely not simply snap back to where it was before the pandemic. According to a forecast from IHS Markit on 21st April, light vehicle sales will decline 15.5% in China for 2020.

Beyond sales, the real opportunity after COVID-19 lies in the shift from internal combustion engines to cleaner, electric vehicles with the government and industry working jointly. Though oil prices have fallen, reducing the total cost of ownership for internal combustion engine vehicles, China is set to keep its long-term strategic goals for automobile electrification and meet climate change and temperature raise goals set by the Paris Agreement.

These approaches are the continuation of policies that had been part of a national strategy since the early 2010s. This tact can help the country 'leapfrog' in the automotive space while also tackling key energy and environmental issues, ensuring the country remains both resilient and competitive.

Other industry leaders could learn from this type of long-term thinking, leveraging the sectors hard times ahead to help further accelerate the development of New Energy Vehicles. That's a move that would surely represent "building back better."