Trends, Technologies, and Regulations in China's Auto Market

At "Ludwigsburg", officially the International Autombil Elektronik Kongress, there was a push this year to be more international. In particular, attendees last year had asked for a deeper perspective on what is happening in the largest automotive market of all. There were several presenters who covered different aspects of the market and I learned a lot from very basic facts (all interenal combustion cars in China have to be kept off the road one day per week) to more technical (self-driving cars in China assume that there will be a 5G network that can be relied on).

The most comprehensive presentation was by Dr Volkmar Tenneberger who works for the VW Group in China, and I stole his title for the title for this blog post.

It is easy to fall into the trap that the market you know best is the leader in some sense, and China, still being relatively poor, is not yet that significant. But here are a few statistics Volkmar presented to show just how big markets are in China. The per-capita GDP may be lower than the US or Western Europe, but there are a lot of capita. All data in this table is 2017, so it is pretty much up to date.

Regulations

The Chinese government is pushing very hard to encourage electric vehicles, in their terminology NEV for "new energy vehicle". I think there are two reasons for this. The first is that there is an urgent need to reduce pollution, especially in Beijing. The second is that electric vehicles are a discontinuity in the market, giving China a chance to be the world leader in electric vehicles in a way that would be impossible for ICE (internal combustion engine) vehicles. Overall, the Chinese market is very regulated compared to US or Europe. Even when you have bought a car, you don't automatically get a license plate, you either need to get in line or get in an auction. The authorities limit the number of vehicles by limiting the number of license plates available.

There are multiple incentive programs in place:

• National subsidies of up to 666 K RNB, equivalent to €8.92K (a bit over $9K). There are also often local subsidies.
• Unlike for an ICE vehicle, there is no waiting time for a license plate and it is free (in Shanghai they are auctioned and a plate was €12K in the May auction)
• There are no driving ban days, whereas every ICE vehicle is banned for one day per week in Beijing
• There is tax exemption on NEV (and plug-in hybrid, PHEV, except in Beijing where only NEVs qualify)

Volker did an interesting calculation and took the NEV subsidy and worked out how many batteries it would pay for, coming up with 90kWh. "In Germany, we say the battery is too expensive, but in China the subsidies cover it." The sum of all the incentives means that you don't have to be a technology enthusiast to buy an NEV. This year there will be more NEV sold than ICE. "They are everywhere, nobody nudges their neighbor and says 'look a Tesla'."

There is also a quota system a little similar to the CAFE system we have in the US, that operates across a company's (like VW's) whole fleet. Volker said that "for one EV I can sell two ICE at present." There is pressure to keep the cars small too. "Chinese people love big cars and given full freedom they will buy big SUVs...but we have to keep the fleet targets on the correct part of the curve as the numbers tighten over time.

A big difference between China and Europe is that China is not pushing for all the intelligence on the vehicle to be on-board. In fact that shows up in the names used: autonomous vehicles in Europe, Intelligent connected vehicles (iCV) in China. In China, the intelligence is distributed between vehicles and the surrounding ecosystem. This obviously depends on a very reliable network. Of course, 5G has not been rolled out yet, but I have to say that in all my trips to China, I have never once noticed that I had no signal: not in the countryside, not in underground parking garages, not on the subway. I can't say that for any other country.

In Europe, governments are typically only involved in autonomous vehicle standards. but no central cloud infrastructure is planned by governments, and minimal government monitoring is expected. China has aggressive government strategies and regulations on iCV., including (planned) running of the cloud infrastructure with data collected from vehicles. There is expected to be heavy government access and monitoring.

Megatrends

Nine cities so far have published regulations for road-testing autonomous vehicles. 13 companies haveacquired licenses from 6 of the 9 cities, and more companies and cities are expected. The big tech companies all have test licenses. There are already 27km² in Shanghai and will be 100km² next year.

The status as of May is on the map below:

Another difference from the US and Europe is the dominance of WeChat (WeiBo) as a sort of "super app". In the rest of the world there is Facebook, WhatsApp, GoogleMaps, Tinder, Yelp, Paypal, Uber, games, and more. In China, these functions are all part of WeChat. Despite the name, it's not like WhatsApp, with just chat and voice. It has navigation, social, video, photo, payment, dining, and more.

As a result, mobile payment is a part of everyone's everyday life. 84% of Chinese respondents are comfortable not carrying any cash, since you can always pay with your phone. "Whatever, I can use mobile payments." I'm not sure if the map below is an actual track of a real individual or just an archetype, but it shows the day in the life of an individual. As a result, in the last 2 or 3 years, mobile payments have shot up and last year reached over 200 trillion RNB (about $35T).

Summary

• China is serious about its "Made in China 2025" with ambitions to become the lead market for ICVs (and for NEVs too).
• The Chinese market for electric vehicles is policy-driven more than customer-driven.
• The digital ecosystem is almost entirely within China (behind "the great firewall") and centrally controlled, but more widespread than in the West. Literally everyone, from the poorest peasant to the techies, is online all the time, and the society is becoming cashless.

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