In an era where people are increasingly recognising the need to lead more climate-friendly, environmentally positive lives, the adoption of electric vehicles (EVs) is advancing rapidly. There are now 12 million passenger EVs being used on the road worldwide, with 1 million commercial EVs – such as delivery vans and trucks – as well as over 260 million electric two and three-wheelers[1].
The shift to EVs is accelerating thanks to government support, technological improvements, lowering battery costs, more charging infrastructure and commitments from automakers. In fact, BloombergNEF predicts passenger EV sales should reach 14 million by 2025[2] before accelerating even faster during the rest of the decade.
China is prioritising its transportation transformation and its pace of EV adoption and has placed it at the centre of several government initiatives. EVs were named as one of the key industries of its ‘Made in China 2025’ programme and the electrification of transport is one of the core components in its drive to achieve carbon neutrality by 2060.
While the government is targeting new energy vehicles[3] (NEVs) to make up 20% of new car sales by 2025, we expect penetration to be faster thanks to China’s favourable government policies and their increasing consumer popularity, reflecting more competitive pricing, the introduction of new features and the rollout of more charging stations. In fact, this faster-than-expected transition is starting to reflect in the latest data, with China Passenger Car Association suggesting NEVs reached 20% of new car sales in August[4].
Favourable government policies
NEV sales in China have been growing exponentially since 2009, when the government introduced subsidies and its electric vehicle pilot programme, “Ten Cities, Thousand Vehicles”. These initiatives have proven to be highly successful, with NEV sales representing approximately 6% of new car sales.
However, as the industry matures and the cost of EVs continues to decrease, the government is starting to phase out these subsidies by reducing the amount in 10% annual increments. Instead of encouraging consumers, it has shifted its focus towards EV producers and introduced a dual-credit policy in 2017, which requires automakers to meet an annual credit target by selling a certain percentage of EVs. This target will become more stringent each year and auto makers that do not produce enough EVs and do not increase their average fuel economy levels will be forced to buy credits from those that have achieved a surplus.
Additional policies to support EV adoption in China include mandating EVs as the preferred choice for government procurement, exempting them from vehicle purchase tax until 2022 and offering preferential access to licence plates in a number of cities.
Overcoming the barriers
Historically, the adoption of EVs has been impeded by some major barriers, notably the higher cost of these vehicles versus traditional combustion engine models and anxiety about batteries’ range capabilities. Yet advances in battery technology and economies of scale has seen the cost of batteries fall significantly in recent times – the price of lithium-ion batteries has fallen 89% since 2010[5]. The reduced cost of this key component has enabled automakers to launch EVs at a more competitive price and the range capabilities of these models has also increased. For example, Tesla has recently introduced a new version of its Model Y in China that uses lithium iron phosphate (LFP) batteries instead of Nickel Manganese Cobalt (NMC) batteries, which can achieve a comparable range (525km) to the longer-range model (595km) but at a 20% lower cost.
The greater rollout of charging stations is another pivotal step to easing range anxiety and therefore supporting the growth momentum of EV adoption. According to BNEF, there are 884,400 public charging connectors in China as of July 2021, which is equivalent to five EVs per connector and this compares favourably against other countries. Even so, charging speeds and reliability remain an issue as many public chargers use slow AC and some connectors are not operational. Automakers are doing their bit to address this issue. Chinese car manufacturer Nio has developed a battery swapping EV model, while other companies – including Tesla and Xpeng – are expanding their fast-charging networks, which should be a more scalable and economic solution.
Innovative new features
An additional attraction of EVs is that they are at the forefront of smart and autonomous driving technologies, with automakers investing heavily in this area to provide points of differentiation with rivals. Upcoming mass-produced models will include innovations such as remote sensing LIDAR technology (Light Detection and Ranging) and Navigation Guided Pilot (NGP) systems, both of which will aid vehicles to drive from point A to point B largely without human intervention.
The Chinese government supports the development of autonomous driving and aims to have 50% of new car sales equipped with Level 2 and Level 3 automation by 2025 and 70% by 2030[6]. In our view, regulations that are supportive of these technologies will be a positive for the industry and can help enhance safety mechanisms and reliability.
Increased competition as the demand for EVs expands
There will be no ignoring the electric car revolution in the coming years. While China has been driving EV adoption, demand is expected to spread across the world. And as demand for EVs rises, so will the competition.
The supply and choice of electric or hybrid models (that combine a battery and traditional engine) models is set to expand from around 330 currently to over 500 by 2025.[7] Additionally, a number of incumbent auto makers are looking to enter the EV market alongside more new entrants, particularly among the technology giants, which should inject around USD330 billion of investment into the sector by 2025[8] .
Amid such a changing investment environment, identifying those companies with a strong brand presence, differentiated offerings (in terms of both hardware and software) to serve the target audience and a secure upstream supply chain will be key. At BNP Paribas Asset Management, our Environmental Strategies Group is using their technological knowledge and understanding of this rapidly changing marketplace to uncover EV businesses set to win this long-term race and those that will be left by the roadside.
[1] https://about.bnef.com/electric-vehicle-outlook/
[2] https://about.bnef.com/electric-vehicle-outlook/
[3] NEV include battery electric vehicles, plug-in hybrid electric vehicles and hydrogen fuel cell vehicles
[4] China Passenger Association
[5] https://about.newenergyfinance.com/electric-vehicle-outlook/
[6] https://www.caixinglobal.com/2020-11/china-wants-self-driving-tech-in-half-of-new-cars-by-2025-101626619.html
[7] https://www.ft.com/content/fb4d1d64-5d90-4e27-b77f-6e221bc02696?segmentId=b0d7e653-3467-12ab-c0f0-77e4424cdb4c
[8] https://www.alixpartners.com/media-center/press-releases/2021-alixpartners-global-automotive-outlook/
