Mainland China became the world’s second-largest automotive
exporter last year, and with domestic sales softening, could become
the No. 1 exporter in 2023.

Mainland China’s automotive industry is rapidly expanding into
export markets and could disrupt the leadership positions of
traditional global legacy automakers. In 2022, it passed long-time
No. 2 exporter Germany, and through the first quarter of 2023
surpassed Japan as the world’s leading vehicle exporter. Can it
maintain that lead for the rest of the year?

Chinese automakers are improving their technology, design, and
manufacturing processes, gaining market share in new regions, and
addressing brand recognition issues to continue their growth in the
European market. However, political risks and regulatory challenges
remain a concern for Chinese manufacturers as they navigate
different markets worldwide.

Data from China’s General Administration of Customs stated that
China exported 3.32 million vehicles in 2022, with a year over year
growth rate of 57% – with battery-electric vehicle exports
accounting for more than one-in-four total exports. The pace shows
no signs of slowing year-to-date, with January-April 2023 export
volume surging by 76% year-over-year, to nearly 1.5 million
vehicles.

Part of that rapid growth was due to Chinese automakers
capitalizing on the shortage of chips and other core components
among legacy Western OEMs’ far-flung supply chains. By contrast,
many Chinese automakers have access to a complete industrial chain,
which helped rapidly increase capacity while Western automakers had
to cut production.

China’s strong vehicle exports also have helped the country’s
auto sector cushion the impact of softening demand for new cars in
the domestic market. In the coming quarters, China’s new vehicle
market is expected to continue to face headwinds from economic
uncertainties and tepid consumer spending – putting pressure on
domestic automakers to find new export markets.

Currently, SAIC Motor and Chery rank first and second in terms
of export scale, although BYD and Geely are ramping up their export
operations. BYD’s current strategy is to enter markets that already
have an immediate demand for new-energy vehicles, especially
markets with tariff reductions, purchase tax reductions or
subsidies. By cooperating with experienced overseas distributors,
the BYD network has expanded from its launch points in South Asia
and South America to the Middle East and Europe.

Gaining footholds in Europe

Chinese automakers face challenges in the European market,
however, due to brand recognition issues and strong consumer
loyalty to domestic brands in countries like Germany and France.
However, SAIC’s investment in the undervalued British MG brand
provided an opportunity to use the marque’s historical presence as
a way of establishing an overseas marketing foothold that domestic
Chinese brands like Great Wall or Chery might not. Since 2020, MG
has sold more cars outside of Mainland China than domestically – it
aims to sell more than 200,000 vehicles in Continental Europe and
England this year.

By comparison, BYD recently released the Atto 3, which is also
known as the Yuan Plus, in England to complimentary reviews. But
there has been little marketing support, and with only four
dealerships, brand familiarity is an issue. Same holds true for
Xpeng, Ora and NIO. BYD is considering building a factory in Europe
to help reduce costs and avoid customs duties; it will also allow
consumers to build trust in BYD.

And Chinese brands need to establish that trust if they are to
conquest legacy-brand customers. European consumers with long
memories recall the cataclysmic failures of early Chinese vehicles
in NCAP crash tests. Those days are long gone, however. Several new
models currently entering Europe – such as BYD Atto 3, Ora Funky
Cat, and MG 4 Electric – all received five-star ratings in European
crash tests, and their safety performance has been <span/>greatly improved.

The initial wave of Chinese vehicles also <span/>carry a competitive price advantage: In
the UK, for example, the Volkswagen ID.3 has a starting price (as
of the week of June 12) of around GBP 37,000. The comparable MG 4
is SAIC’s latest compact electric car, with a starting price of
less than GBP 27,000 and a top model priced at about GBP 32,500 for
a richly configured car.

In terms of new markets, Norway is a tempting target, as 90% of
its market is new-energy vehicles. But the top 15 brands are Tesla
and established European, Japanese, and Korean brands. Still, that
<span/>hasn’t stopped the
entry of Chinese brand EVs such as the Hongqi E-HS9, Aiways U5,
Voyah Free, BYD Tang, Xpeng P7, and NIO ES8 and ET7.

Russia and Central Asia opportunities

The Russian market also presents an opportunity for Chinese
brands, due to the withdrawal of European, American, Japanese, and
Korean car companies on account of the Russian invasion of Ukraine.
In the absence of Western OEMs, Chinese brands like Chery, Haval,
and Geely have seized market share. According to the Russian
Dealers Association, by the end of 2022, the number of passenger
car brands in the Russian market had decreased from 60 before the
conflict to 14. Except for the three local brands LADA, GAZ and
UAZ, the other brands are all Chinese.

Before the Russia-Ukraine conflict, the sales volume of
passenger cars in Russia exceeded 1.5 million; while now below
760,000 units forecast for 2023, that is still larger than Thailand
or Malaysia. That could give Mainland Chinese automakers dominant
share of the Russian market – primarily in the mid- to high-end of
the market with vehicles such as the Great Wall Haval F7X, Haval
Dargo, Changan CS75, Chery Tiggo 8 and Geely Monjaro and Atlas.
This leaves the low end of the market to the Russian domestic
brands.

Several Central Asian “Belt and Road” markets, particularly
Uzbekistan, are also receiving attention from Chinese automakers
due to close economic and trade exchanges with China, low political
risks, and potential for growth. BYD announced last year to set up
a joint venture factory with local manufacturer UZAVTOSANOAT JSC
(UzAuto) in Uzbekistan to produce new-energy vehicles.

That said, political risk is a major concern for Chinese car
companies expanding overseas, as seen with Turkey’s recent increase
in import tariffs on Chinese electric vehicles from 10% to 40%.
Another example of this is that Chinese automaker Great Wall Motor
had to drop its plan last year to acquire GM’s idled Talegaon plant
in India as the deal failed to gain approval from Indian
regulators. The deal was under scrutiny from local authorities from
the signing of the <span/>MOU in January 2020. The political tension
between India and China served a major element behind the failed
acquisition.

Targeting North America

In North America, <span/>it’s all about Mexico. Strong exports of
China-made vehicles into Mexico have made the country by far the
top export destination of Mainland China. However, Mainland China’s
vehicle exports to Mexico in recent years are <span/>mainly led by General Motors’ vehicles
made in China. With <span/>GM increasingly leveraging its Chinese
joint venture factory to supply vehicles to Mexico, and Tesla
shipping more models from its Shanghai plant to Canada, imported
China-made vehicles will grow their share in the North American
region.

However, Chinese automakers have taken a cautious approach to
the US, the region’s largest auto market. The 25% tariff that the
US imposed on vehicles imported from Mainland China is not the main
deterrent that keeps Chinese brands out of the US market. Rather,
the tense US-China political tensions do not present the right
atmosphere for Chinese automakers intending to enter the US
market.

As the US aspires to become a major player in the global
electric vehicle industry, its policies in the next few years will
continue to support local manufacturing and local sourcing. The
Inflation Reduction Act (IRA) passed by the Biden Administration in
2022 has tied <span/>EV tax
credits to certain criteria – including sourcing of battery
components and critical minerals in the US or with a US free-trader
partner.

Since the passing of the IRA in 2022, global automakers
including Hyundai and Honda have announced plans to set up EV
battery manufacturing plants in the US to support local EV
manufacturing. However, it is unrealistic for Chinese automakers to
commit huge investments in the US, when faced with the geopolitical
risk and expected small initial sales volumes once they eventually
were to enter the US passenger vehicle market. Against this
backdrop, Chinese automakers including BYD and Great Wall Motor
have opted to prioritize Europe and Southeast Asia in their global
expansion plans, where they are more likely to obtain scale and get
approval for setting up local production facilities.

Western OEM plants in Mainland China

The rise of Chinese automakers also has squeezed market shares
of global automakers in the Chinese domestic market and forced them
to adjust their strategies to cope with the intensifying
competition. French automakers have leveraged their joint venture
plants in China to produce certain models for export. That tactic
is also in place with Kia for its EV5 and BMW for new-generation
MINI electric vehicles moving production to China.

As more joint-venture brands transfer production capacity to
China for export, it is evident that Chinese factories are becoming
more efficient and capable of producing vehicles for global markets
and global standards. With China being the world’s largest electric
vehicle market, the shift towards new-energy vehicle production in
Chinese factories is significant for the global uptake of battery
electric vehicles.

China’s expanding automotive industry is not just a matter of
economic growth and technological advancement. It is also a sign of
China’s increasing influence in the global market, and its
potential to disrupt established industries. As Chinese automakers
gain market share in different regions, they are a challenging the
dominance of traditional players, and forcing them to adapt to a
new reality.

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This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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• Source: http://www.spglobal.com/mobility/en/research-analysis/china-exported-more-than-3-million-vehicles-in-22.html