China's NEV revolution in the making

Shanghai, China - 11 June 2019

Deloitte recently published A Revolution in the Making—How to Race Ahead in China’s Soaring NEV Market ("the Report"). Drawing on insights from Deloitte’s world-leading practice, advanced research, smart analytics tools, as well as insights on both existing and potential new energy vehicle (NEV) consumers in China, the report outlines five major trends and drivers in China’s NEV market. These are: technology choices, product differentiation, retail and network transformation, the competitive landscape, and value chain evolution. The report also suggests three types of value chain positioning models and strategic thinking frameworks that enable companies to design effective NEV strategies.

As investments by traditional automakers and new NEV participants in the sector increase, consumers are paying more attention to and becoming more accepting of NEVs. Indeed, all eyes were on NEVs at Auto Shanghai 2019 in April, with a record number of models boasting impressive features introduced. The industry still has a long way to go before it perfects its act, but the opportunities are immense.

"The next two years will be crucial for the industry in China, as the NEV market is transitioning from being policy driven to market led. The industry is set to usher in Era 2.0, with highly market-oriented, differentiated NEVs. New retail models, intelligent technologies and the internet of vehicles (IoV) are reshaping the NEV value chain," says Deloitte China Automotive Leader Marco Hecker.

"The traditional rules of the game are being challenged and rebuilt, with competition shifting from products to products-plus-service offerings, from single capability to comprehensive competence in business models, and from intra-industry to cross-industry collaboration."

At the same time, NEV companies face enormous pressure from reduced subsidies, excessive capacity, and competition from emerging players. Huge investments in smart technology R&D and new retail transformation are driving up costs. There is an urgent need to reshape profit models amid uncertainty about new profit sources and value creation through service innovations using big data. NEV companies must address these challenges to win out.

The report predicts that battery electric vehicles (BEVs) will dominate the passenger vehicle market and lead NEV market development with fuel cell vehicles (FCVs); smart, connected functions and human-centric design will be NEVs' key differentiators. These will overtake hard features such as e-range and charging convenience as the primary factors in purchase decisions; the NEV industry will be disrupted by the inevitable transformation to new retail models (including direct sales).

Balancing user experience and cost efficiency is essential for NEV players to achieve successful retail model transformation; full competition involving Chinese and international brands, traditional and emerging players and cross-sector giants will reshape China's NEV market; NEVs are changing the traditional value chain and profit structure of the industry. Upstream sectors including power battery and intelligent technologies, and downstream end-user services, will become important profit pools.

According to the Report, three types of NEV players will dominate the value chain: Type 1. Full-chain NEV players. Most full-chain players will emerge from established traditional OEMs and leading new entrants, gaining market leadership through technology R&D, product innovation, distribution systems balancing user experience and efficiency, and data-driven digital ecosystems; Type 2. NEV OEMs focusing on distribution, sales and services to end-users. They are adept at enhancing brand eminence, building channels, and innovating services and user management models for upstream partners; Type 3. NEV manufacturers specializing in vehicle R&D procurement and manufacturing. Cost control and supply chain management will be these OEMs’ essential core capabilities. They will produce and assemble vehicles (or just chassis and bodies) for downstream partners, achieving profitability through professional production and economies of scale.

"Defining their value chain propositions and business scope is the foundation for NEV OEMs to develop targeted strategies and build core competencies and business models", says Deloitte China Automotive Consulting S&O Partner Andreas Maennel.

The Report proposes a strategic framework for NEV layout design based on value chain proposition and capability requirements, helping NEV OEMs define their value chain propositions and focus on key strategic issues. Deloitte suggests NEV players give serious thought to what value and experiences they should offer users. NEV companies need to put "user-centricity" at the heart of every touch point—from product and service to channel and engagement. Clear brand positioning will determine the design of every experience. NEV OEMs should also consider how to structure business models to achieve these value objectives, including sales model and channel networks, data-enabled digital transformations, partnership ecosystems and manufacturing and supply chain models.

"Strategic planning alone is not enough. OEMs must embrace innovation in technology, model, format, and collaboration. However, they can’t expect to have an innovative business model ready from the start," explains Maennel. "Any model will need to be adjusted and optimized before it is ready for implementation. Each company will have its own innovation strategy and tactics. As a leading provider of professional services to NEV companies, we look forward to working on market exploration, innovation, testing and optimization with industry participants."