China is coming - things to consider before committing to distribute a Chinese EV product!
Alastair Cassels · October 20th 2022 · read
Last week I was fortunate enough to attend a fascinating Webinar run by Auto Retail Network. The event promoted a report that ARN have authorised regarding the impeding influx of EV products from hitherto unknown Chinese car brands.
There was also some valuable insight from Urban Science, Autotrader and International Motors.
There is a lot excitement, curiosity and appetite amongst the sector about these brands as many of them promise a more affordable route into Electro mobility and the potential that Chinese cars can be as successful at growing share in western Europe as mobile phones manufactured by the likes of Huawei, Xiaomi, Oppo etc. Evidence from Autotrader, who have a unique insight into the customer car acquisition journey, suggests that cars could indeed be similar to phones and that brands with little or no history in the UK market could have a material impact on sales.
The last 12 months have also seen an acceleration of interest from dealer groups who are looking to pivot or de-risk their franchise portfolios as a hedge against the uncertainty of potential changes to the distribution model and a return to lower margins in used and new car sales. There would appear to be no shortage of candidates for a new entrant to use when constructing a network of distribution points. On the surface, this is a really exciting opportunity for car dealers / investors in auto retail.
There remains a huge challenge in the coming years of scaling EV supply and allowing demand to keep up. By mid-decade it is forecast that c45% of passenger car sales will be EV but unless there are significant technology strides in manufacturing and battery design, the marginal cost of production will not fall enough to allow profitable mass market adoption of EVs. The traditional OEMs are of course improving this but against a backdrop of rising costs in raw materials and logistics.
China is significantly ahead of the west in terms of its EV market. Estimates are that they will produce between 5 and 6 million units for domestic sale this year. Production is spread amongst some long-established players and a number of “start-up” enterprises. The segmentation of the market is also wide leading to extremely affordable electro mobility products as well as many premium and ultra-premium offers. Many of these OEMs are now eyeing other markets for expansion, presumably as a route to gain further economies of scale.
Cheaper Electric vehicles is a good thing. It’s good for consumers and better for the environment but only if the correct rigour is applied by the producers in managing supply chains in a transparent and ethical way. That in no way suggests that Chinese OEMs are not complaint and trustworthy partners, but they are largely an unknown quantity and operating in a vastly different political, economic, and social environment. Of course, western OEM don’t exactly have a clean record ESG over the recent past, but they are atoning and subject to rigorous scrutiny.
Investors, distributors, and potential franchisees have a responsibility to shareholders, employees, and customers to engage in due diligence before entering into any contractual agreement. They should also consider what might go wrong in the future and have contingency plans. There is always risk in this industry, just ask ex Rover, Saab, Chevrolet, Mitsubishi dealers who have seen their partners withdraw from the market or cease to exist. Thankfully, the incidence is low but still consequential for those invested. With any new entrant the risks are higher, when the potential partner is based in China the risks are higher.
China and the west are on divergent political paths and the economic co-operation the early 2000’s is now in a different phase. The political climate in the west is less stable than in the East and the US influence cannot be underestimated. Should President Trump get re-elected we can expect a far more protectionist approach and political pressure for the US’s close allies to fall in line.
We can also expect the UK market’s current group of brands to defend against any share erosion. MG has fired the first warning shot as to what a relatively new entrant can achieve in a short period of time having grown to share greater than Citroen, Renault, Fiat, Skoda and SEAT. Their trajectory must be alarming to other OEMs especially as they are heavily biased to EVs now.
So, what is the point of all this? There is an undoubted attraction to securing a slice of any new market development especially if there is a pricing and technological advantage. Consensus is that Chinese EVs have excellent quality, attractive design and more advanced tech content. However, it’s important to consider long term commitments and resilience to political and economic changes that can arise.
Customers need to be assured that a brand has sufficient sales and aftersales service, stable Residual Values and a long-term plan for operating in the UK market. We take this for granted as most brands are long established and have significant “skin in the game”.
From a dealer point of view, they should consider the impact of any protectionist measures (tariffs) undertaken by government, the risk posed to any assets invested in the new brand and the impact on current franchise partnerships.
There is little certainty in this industry at present, but dealers/investors can reduce future risk by carrying out appropriate due diligence prior to contract. Past the glitz and gloss of shiny new products is the commercial reality of operating a new entrant brand in a saturated market. The silk road was a path to untold riches in the past, time will tell if it can be again.
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