Shanghai’s drive-thru

This month’s Shanghai car show has taken top billing as the biggest gathering in the industry since the onset of the pandemic. Organisers this year were pleased simply to welcome back visitors to the 10-day exhibition, albeit in carefully controlled numbers.

With a wide-ranging selection of sleek and futuristic designs, companies did their best to grab attention in different ways.

Great Wall Motors infused its booth in bright pink to promote its Ora brand. Named after cats, the cars have been tailor-made for women drivers, with automatic parking functions and with interior storage specially designed to hold shoes and cosmetics.

In a widely reported piece of showmanship the chief executives of rivals NIO and XPENG took the chance to visit each other’s stands, talking intently as crowds took photos behind them.

And in less choreographed scenes Tesla’s booth was hit by a protest from a female customer, who leapt onto one of its cars to trumpet complaints about brake failure. The protest came in the same week that Tesla announced record profits for the first quarter, with revenues growing 74% on the same period last year to $10.4 billion. It now sells one in three of its cars in China, where Elon Musk’s firm has forged ahead since being granted the right to manufacture there without a local partner.

But Tesla’s success has served as a clarion call for the rest of the electric vehicle sector, inspiring a huge group of Chinese challengers. They were all at the auto show, readying for an unprecedented period of change in their industry.

What was the Shanghai show signalling?

Auto Shanghai and its sister event in Beijing are regular reminders that China is easily the largest market for new car sales. Pundits are talking about how the event is significant in looking beyond the pandemic to a season of much stronger sales. The exhibition is also a signal of the seismic change ahead as carmaking moves closer to the end of the combustion engine era.

Governments are signposting the way with stipulations for the sector, such as the warning from the Chinese government that only new energy vehicles or hybrids can be sold after 2035. These deadlines are pushing the carmakers to prepare for a future without gas-fuelled cars: General Motors won’t sell any gasoline-powered models after 2034, while Volvo is promising to deliver on the same goal by 2030, for instance.

China is the first major market to feel the impact, contributing to the sense of a sector on the cusp of more dramatic change.

William Li, chief executive of NIO, told the media last week that March was already a milestone as the first monthly period that electric vehicles had accounted for more than 10% of new sales. The transition is going to pick up a lot more pace. Sales of EVs in China, which account for more than 40% of global purchases, nearly tripled in the first three months of 2021 over a year earlier to 515,000 units, reported the China Association of Auto Manufacturers.

The switch to electric is getting most of the attention but there are other trends that will further reshape the industry, claims Daniel Yergin, a winner of a Pulitzer Prize for a best-selling book on the oil trade. Self-driving cars have already clocked up millions of miles in test zones, he told the Wall Street Journal last weekend, and they will soon be integrated into ride-hailing programmes in trendsetting cities, allowing automated vehicles to take the place of today’s drivers.

This is the new age of ‘AutoTech’, Yergin believes, and the big question is how other nations will match the Chinese in embracing change.

Who are the runners and riders in China’s ‘AutoTech’ race?

The field is splitting into a dizzying array of competitors. In electric vehicles there is a flurry of contenders aspiring to unseat Tesla as the best-selling brand so far. They include the established carmakers, separated between foreign manufacturers and the Chinese ones, as well as a series of joint ventures between the two groups.

Then there are the start-ups that have launched EV brands of their own – most notably NIO, Li Auto, XPENG and WM Motor, all founded after 2014.

Joining them are new entrants that have made names for themselves in other sectors but now dream of building electric and self-driving cars. Earlier this month we reported how Xiaomi, a major smartphone and home appliance brand, is one of the latest to declare itself in the race via a $10 billion investment (see WiC535). OPPO, Xiaomi’s main rival in the smartphone market, news portal 36Kr reported this week, is about to announce plans to enter the frame. TV maker Skyworth said Wednesday it will launch four EV models between 2020 and 2025 as well.

Also on the scene is a diverse mix of component makers, technology suppliers and systems integrators all looking to profit from the shake-up in the sector. In battery production CATL is the standout performer (see WiC537). In software systems for autonomous driving, search engine giant Baidu is staking a strong claim. Huawei is active too, although the telecom equipment maker insists it won’t make cars. Instead, Huawei will focus on providing the information and communication technologies to help manufacturers to make better and smarter cars.

Drone-making king DJI was another of the newest contenders, making its debut at the Shanghai car show this month. Earlier this year it announced that it was working with Volkswagen’s China subsidiary on software to be installed in VW’s self-driving cars of the future.

Who is going to get in front?

Tesla is at the head of the pack but there isn’t much clarity on how the race will play out to catch up with the US firm. Even the near future can be unpredictable. Elon Musk’s firm has been having a publicity nightmare as Chinese media outlets continue to focus on its cars’ safety issues. The crisis is likely to affect Tesla’s sales, Beijing Business Today suggested. Pointing to intensifying competition, speculation has also been rife that the aforementioned protest at the Shanghai auto show was actually a “PR stunt” against Tesla. A photo of the female protestor’s entry pass – provided by a supplier of NIO – got widely forwarded this week online although NIO has swiftly denied it has anything to do with the protest, Beijing Business Today said.

NIO came close to bankruptcy last year before being rescued by an investment from the Hefei city government. Its fortunes then reversed dramatically and it subsequently latched on to a soaring share price to complete $4.5 billion in quick-fire capital raisings (see WiC526).

The challenge for NIO and its peer group is that their production levels trail Tesla by some distance. They also lack the political relationships enjoyed by China’s larger carmakers, which ought to buy these elite auto firms more time to find their own route to the EV market. The battle for market share is going to be corrosive for the cash reserves of the challenger brands too. Further fundraisings will be required: Reuters is reporting that NIO, Li Auto and XPENG are all eyeing up secondary listings in Hong Kong.

For the traditional car manufacturers the conundrum is how to achieve more sales of electric vehicles while milking the final returns from the gasoline-fuelled era. Some of them are adapting faster than others. BYD Auto – a Warren Buffett-backed business that started out making batteries for mobile phones before branching out into EVs well before many other carmakers – is a leader in sales. Shanghai Auto (SAIC) – China’s largest traditional automaker – is another strong performer, particularly through its joint venture with Wuling Motors and General Motors. Its micro-EV, priced at not much more than $4,000, is a local bestseller.

All of the groups still need to ramp up spending on design and technology to counter the threat from rivals, especially those from the tech sector, many of which have deeper pockets and a better grasp of the power of new technology.

The barriers to entry are eroding. It is generally accepted that electric vehicles are easier to build than gasoline-fuelled cars, with far fewer parts, while rapid shifts in consumer behaviour are transforming the landscape too. All of this is deeply disruptive for the established carmakers, says Jiashipai, a Chinese auto industry blogger: “Why are car companies so anxious? Against this huge new wave, a hundred years of experience is no longer a barrier and it can’t prevent new players from ripping up the rules that have governed the market.”

Partnering for profit

With the path ahead so uncertain there’s a proliferation of partnerships between companies looking for an edge on their competitors. Most of the traditional carmakers are working on their own designs, not just in electric vehicles but also for other models that anticipate new dawns in self-driving cars and ride-hailing. Other are betting on open-source platforms that offer others the chance to build cars more cost-effectively, such as Geely’s Sustainable Experience Architecture, which it is co-developing with its subsidiary Volvo (see WiC530).

The same platform is a factor in why Geely has joined forces with Baidu in another new venture to make intelligent EVs powered by Baidu’s self-driving technologies, especially its Apollo operating system (see WiC524).

The search engine giant marked the opening day of the auto show in Shanghai by announcing that it aims to have Apollo pre-installed in a million vehicles in the next three to five years. It is also taking the lead on a series of trials of its autonomous vehicle platform, including robobus and robotaxi programmes.

In fact barely a week goes by without news of another deal in the ‘AutoTech’ world. In two more examples Huawei has announced partnerships with state-backed Beijing Auto to make autonomous cars that incorporate a specially designed operating system, driven by its proprietary Kirin chip (see WiC520), as well as another venture with BYD (see WiC530). Alibaba, Tencent, Meituan and Bytedance have all made investments of their own in EV and smart car ventures. Last week we reported on a partnership with more of an infrastructural focus in which oil major Sinopec inked a deal to host more of NIO’s charging outlets at its service stations (see WiC537), while Volvo has just announced that it is pairing up with ride-hailing app Didi Chuxing for a new breed of SUV.

Will the bubble burst for parts of the AutoTech world?

There is an initial logic to most of these deals, with each of the parties bringing something different to the table. But even China’s supersized market is unlikely to support demand for such a huge range of competing alternatives. The number of pure-electric vehicle models on offer almost doubled to 244 over the last three years, according to BloombergNEF data.

In a few cases it is already difficult to see how the aspiring carmakers justify their sky-high valuations. That was the claim in the state media last month in reports that warned against a speculative bubble in the sector. One of the companies in the spotlight was Evergrande New Energy Vehicle Group, which boasted one of the biggest booths in Shanghai. Spawned from its property giant parent, the new unit is yet to sell a single car, although its Hong Kong-listed shares have climbed more than tenfold over the past 12 months. As Bloomberg points out, the surge has taken Evergrande NEV to a market capitalisation above that of Ford and General Motors.

Evergrande has tied up with Canada’s Magna International to launch its new Hengchi brand of vehicles, with further partnerships with Tencent and Baidu to develop operating systems and software. Yet although Hengchi translates as “unstoppable gallop”, Evergrande bosses have repeatedly pushed back deadlines for when the cars will be available for sale. First delivery dates have just been postponed again to an unspecified point next year.

The company doesn’t seem discouraged, recommitting recently to making “one car a minute” at full production and promising production of at least five million cars a year by 2035. But is that realistic for a firm that has made its name in property development? Bloomberg’s reporters sounded unconvinced in their review of the rollout plan this month (14 new models in rapid succession, far more than anyone else has ever tried in the sector). In another unusual step, new hires at the car unit have been tasked with drumming up interest from friends and family to buy flats from the parent firm’s property portfolio. Managerial-level executives are even being rated on the real estate sales push as part of their performance bonuses, the news agency says.

A decade of disruption

The reshaping of China’s auto sector over the next 10 years is going to reverberate more widely across the global economy. Some companies will flourish and others will go down in flames as smart cars and electric vehicles move from the periphery to the epicentre of the market. But there’s also a national dimension to the struggle ahead, particularly between the US and China as they battle for supremacy in a fast-changing field.

After years of failing to close the gap on carmakers from the US, Europe and Japan, Chinese manufacturers see a clear opportunity to leapfrog their rivals, building on millions of domestic sales to set global standards and take their new brands into international markets. Joe Biden sees the threat clearly enough as well, citing the Chinese lead in electric vehicles in his own proposals for $174 billion in EV-related investment, including subsidies similar to those that the Chinese government has made available to its own EV industry.

This extra layer of competition complicates the picture further, making it even harder to predict the winners in the race. That’s why events like Auto Shanghai take on more significance, spotlighting which of the heavyweights are making the biggest splash.

This is a ‘race’ that will not just impact the business world but reshape geopolitics – particularly when you consider how the new cars will incorporate cutting edge technologies like 5G and AI.

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