China in 2025 and Implications for the Automotive Industry: Part 2

Plausible Scenarios for China in 2025

Urbanized world

China has gone through rapid urbanization over the past few decades, with urban population share rising from 17.9% in 1978 to 53.7% in 2013.  City clusters such as Beijing-Tianjin, Shanghai and Guangzhou are home to 18% of China’s population and generate 36% of the nation’s GDP.  Cities are the main engines of China’s unparalleled economic growth in the past few decades.  Nonetheless, the development is highly unbalanced with urbanization rates of 62% in the coastal regions, but only 44%-48% further inland.

The urbanization momentum will continue, on a size and scale never before experienced in history.  By 2025, 65% of Chinese citizens will live in high-density urban population centers. This will no doubt place significant stress on the environment as well as the urban transportation infrastructure, which is already struggling to keep up with the current urban population.  While limits placed on car registrations has limited growth rates in the more mature coastal tier 1 and tier 2 cities, China’s automotive industry will continue to expand with a steady stream of first time purchasers from lower-tier cities joining the repeat buyers and upgraders of the more mature regions.   Emergence of the less developed lower-tier regions will be the key driver to incremental demand for personal mobility.

Demand for mobility solutions will need to anticipate the emergence of a more “binary” market with consumers in the more mature upper-tier cities continuing to prefer globally recognized brands, while those from lower-tier cities will seek no-frills products and solutions from brands that deliver “the greatest bang for their RMB”.  This presents unique opportunities for both foreign and domestic manufacturers. 

Figure 2:  China 2025 Scenarios:  Urbanized World

Possible 2025 scenarios
Implication to automakers
·       Emerging from China’s lower-tier region, a Chinese automaker has become the first to sell 1M cars in overseas markets, and they are commonly called ‘the Chinese Hyundai”.  Chinese OEMs are now competing in the EU and North America
·       To secure long-term growth, automakers must strengthen offerings in the entry-level segment
·       Leverage China as the base to develop entry-level models for export to other developing markets
·       Having successfully penetrated China’s lower-tier markets with cars engineered in China, automakers are selling “Engineered in China” cars in the global markets
·       To expand the market, auto loan penetration reaches 50% in China and financing becomes a critical lever for growth, particularly with younger, budget-conscious buyers.
·       Leverage automotive financing as a platform to sell a full range of mobility services

Domestic brands are more popular among lower-tier cities consumers as they penetrate the market with lower-priced cars “good enough” to meet their mobility needs.  Chinese automakers could continue to serve this base by leveraging their low-cost advantage improving their product safety and quality performance.  International OEMs must also seize the opportunity to develop competitive entry-level models and no-frills platforms tailored for the Chinese market, while subsequently leveraging such “Engineered in China” offerings to penetrate other developing markets.

New mobility solutions

Today, China has 14 cities with more than 10 million residents.  This number will perhaps double by 2025.  As the home to so many densely populated urban areas, China will require unique solutions for traffic congestion, energy consumption and pollution. The privately owned, energy-intensive and people-driven cars we have today are not viable and sustainable options for future urban mobility.

By 2025, new urban mobility solutions will comprise of a mixture of public transportation, non-motorized alternatives and energy-efficient personal transportation solutions.  Innovations in technology, business models and regulation will come together to disrupt the automotive industry.  We anticipate a number of discontinuities:

Innovative car use model

In an effort to rebalance supply of transportation solutions with demand for mobility, we believe a car ownership model will gradually migrate to a “pay per use” service model.  This migration can be significantly accelerated with regulatory intervention forcing higher usage charges on those who choose to own vehicles. 

By 2025, a pay-per-use model will emerge as a preferred option for providing personal mobility in populous urban areas.  On the one hand, the China government will continue to regulate new car registrations through tax or quota to limit the growth of private car ownership in large urban areas to within 1% per year.  On the other hand, high fuel prices, parking and traffic congestion charges will make private vehicle ownership less economical and therefore less attractive.

A technology-enabled intelligent model will supplant traditional car leasing and rental companies’ asset-heavy offline model.  This will confer advantages and pave the way for internet-powered “mobility services” companies to emerge in the market.  Moreover, person–to-person (P2P) car sharing will position platform companies at the center of the eco-system, connecting online and offline activities through advanced mobile technology.  As the ownership-usage model evolves, OEMs will need to partner with digital players and service providers to offer innovative products in order to maintain their market shares.

Figure 3:  China 2025 Scenarios:  New Mobility Solutions

Possible 2025 scenarios
Implication to automakers
·       Chinese internet companies vertically integrate car leasing services into their internet portals
·       Partner with innovators and internet companies to deliver “urban mobility services” for different markets
·       Alibaba successfully builds alliances with a leading Asian OEMs to develop synergies with the “Internet of Mobility”
·       Tencent has successfully acquired a recognized automotive brand

Connected “smart” cars

In big cities, driving is becoming a frustrating, time consuming chore for people who have to commute. At the same time, traffic accidents and congestion are a by-product of human driving behavior and inadequate traffic and urban infrastructure planning.  Smart connected cars will rely on telecommunication and sensor technologies to respond to vehicles, objects and people while navigating, and communicating with its passengers through their on-board telematics system.  A smart transportation system has the potential to eliminate accidents, increase the capacity of existing road infrastructure, collect and disseminate useful real-time traffic data, and at the same time facilitate new models of vehicle ownership, increase travel time predictability, and improve productivity and energy efficiency.

Figure 4:  China 2025 Scenarios:  Connected “Smart” Cars

Possible 2025 scenarios
Implication to automakers
·       Driven by policy in tier 1 and some tier 2 cities, China has invested in building a smart transportation infrastructure and 300M “Smart Vehicles” are on the road
·       Consider leveraging China as a base platform for smart car technology development for the global markets
·       Just 17 years of age, Jasmine summons her car via her Xiaomi device, which arrives at her door step within minutes and delivers her to school, while allowing her to do her last minute revision for her Gaokao (高考) en-route
·       Invest in disruptive technologies at the intersection of automotive and internet - leveraging both organic and in-organic business development
·       “TencentCar” competes with “Apple Car Play” and “Android Auto” on user experience, network connectivity and localized content – and enjoys strong user acceptance

According to China’s Ministry of Industry & Information Technology, as a strategic focus of the national development plan, the Chinese Government will provide up to 10B RMB in subsidies to catalyze the development of “smart mobility”.

Energy Saving & New Energy Vehicles

China has become the largest world’s carbon emitter.  Big cities suffered from smog, often exceeding “hazardous” levels.  By 2025, China will become the world’s largest oil importer, spending USD500B a year on crude oil imports, 66% of which will likely be from OPEC nations.  Worsening pollution and energy security has compelled China to seriously invest in NEV and related infrastructure development.  The Government will continue EV subsidies and qualify a wider range of fuel-efficient and environmental friendly technologies.

City cars will adopt fuel-efficient and environmentally friendly technologies, such as lightweight composite components and electric powertrains. New generations of ultra-light weight personal urban mobility (PUM) devices will become popular – designed specifically for city-use to transport 1-2 persons and light cargo over short distances. OEMs will partner with non-traditional suppliers and utility companies to complete the eco-system.

Figure 5:  China 2025 Scenarios:  Energy Saving & New Energy Vehicles

Possible 2025 scenarios
Implication to automakers
·       China’s investment in EV charging stations and smart grid construction has created the complete eco-system for “Made in China” New Energy Vehicles, which are now being exported to the US and Europe
·       Engage with Chinese partners (auto, government and infrastructure) to build the supporting ecosystem in order to make EV technology value proposition accessible in the China market
·       New generation of ultra-light weight personal urban mobility (PUM) devices are popular – designed specifically for city-use to transport 1-2 persons and light cargo over short distances
·       All taxi and bus fleets in China are fully electrified, with foreign brands excluded from the approved vendor list
·       Energy Saving and New Energy Vehicles achieve 25% share of a 40M unit market as traditional gasoline-powered cars are banned from densely populated cities

Emergence of mega-SOEs and mega-Suppliers

As we have witnessed in the time since the opening of China’s economy to foreign investment, the changes in the market have occurred rapidly, making China the engine for growth of many multi-national corporations.  However, China’s policies and industrial developments are typically implemented via investments made with government-backed State-Owned Enterprises (SOEs).  While SOEs and huge investment holding companies and are often contained profitable businesses, they often lack the capabilities and entrepreneurial spirit of independent, market-driven businesses.

In the coming decade, China’s state-owned automotive OEMs and suppliers will be influenced by a new round of SOE reform led by the State-owned Assets Supervision and Administration Commission of the State Council (SASSAC).  The reform will focus on diversifying ownership, adopting modern corporate governance and establishing a state-owned asset management company.  As a result, state-owned automotive OEMs and suppliers will become more efficient and market-driven, and gradual consolidation will eliminate several weaker players.  Several of these OEMs and suppliers will play an even more important role in the international market.

Meanwhile, we expect to see new entrants into the automotive ecosystem, especially innovative companies armed with disruptive technologies.  It is entirely plausible that an Internet mobility services provider becomes a major player the automotive industry by initially offering a portal to provide “mobility services”.

MNC players will need to adjust their strategies to address a competitive landscape that includes a new breed of mega-SOEs and mega-suppliers, as well as nimble Internet mobility services suppliers who aim to create a new ecosystem of personal transportation services.   Many of these services may be first incubated in China before being rolled-out to the rest of the world.

Figure 6:  China 2025 Scenarios:  Emergence of Mega-SOE’s and Mega-Suppliers

Possible 2025 scenarios
Implication to automakers
·       More efficient SOEs and innovative new entrants with preferred access to the 40M unit China market provide a platform for rapidly scaling up new transportation solutions for global deployment
·       Strike a balance of power with local SOE partners, e.g. become strategic partners to jointly exploit overseas market leveraging China as a base
·       飞马 (Fei Ma, or Flying Horse) is the top selling luxury sedan globally for the past 5 years; fully designed and crafted by skilled artisans in China, it offers unparalleled but understated luxury with strong oriental themes and innovative technologies that have become the rage of the globally mobile elite around the world


The discontinuities we have described are all very plausible – the key question is whether traditional auto OEMs at first recognize the potential disruptive threats, and are then willing to seize the discontinuous opportunities that may ensue.  Like Nokia and Motorola 10 years ago, auto OEMs may be facing an existential threat from new entrants from outside their traditional competitive set.  Such competitors are anxious to seize on the Chinese consumer’s rapid acceptance and adoption of mobile technology and pervasive Internet connectivity services to deliver a new ecosystem for “mobile connected car services”.  

Automotive OEMs have the complex challenge of addressing this potential for disruptive change, while simultaneously continuing to deliver better and more cost efficient products in the hyper-competitive China market.  The ability to simultaneously address these challenges will separate the ultimate winners and losers in the next decade.  The only thing that is certain is that the formula that has worked until now is no guarantee for future success.


 End of Part 2

For further discussion, please contact the authors:
Bill Russo
Managing Director,
Gao Feng Advisory Company
Dr. Edward Tse
Founder and CEO,
Gao Feng Advisory Company

Chee-Kiang Lim
Gao Feng Advisory Company

Note:  The above authors wish to thank Ms. Emily Wang for her efforts in researching and summarizing the findings of this analysis.

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