The explosive takeoff of New Energy Vehicle (NEV) sales in China this year has left us stunned. Who could have predicted that NEV share of passenger vehicle sales would triple in less than a year in the world’s largest auto market, growing from 5.9% in 2020 to 20.8% in November 2021? And, it doesn’t seem like a fluke, as NEV penetration has consistently increased month-to-month in 2021, with no signs of slowing. The target set by the Chinese government of 20% NEV penetration by 2025 has essentially already been achieved, albeit for just a few months.

These unexpectedly bullish results have left us scratching our heads – what changed to cause this China clean car commotion? Here is what we found:

  1. Two “Killer App” new NEV models make up almost half of the sales growth in 2021
  2. New incentive policies drove outsized growth in six large provinces / municipalities
  3. “Word of Mouth” influence may be having an exponential effect on sales as the number of NEV owners increases

What Happened?

After slow, but steady growth in NEV unit sales over the last several years in China, sales in the first eleven months of 2021 were already 117% higher than for the entire year of 2020. Furthermore, NEV sales as a % of total car sales (NEV penetration rate) have increased month-to-month nine out of eleven months in 2021, a phenomenon never witnessed. Why?

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Two “Killer Apps”

As it turns out, much of the NEV market increase in 2021 is due to two “Killer App” vehicle models, the Wuling Mini EV and the Tesla Model Y. Almost half (43%) of the increase in China sales in 2021 was due to these two models, launched to the market in September 2020 and December 2020 respectively.

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The success of these two models highlights two reasons consumers buy electrified vehicles: 1) as a very low cost, but “cool” personal transportation option, and 2) as a premium, and “cool” high tech gadget that also happens to get you from point A to point B.

We can see that the NEV market is bifurcating somewhat along these two lines, with the low-price vehicle segment (< 120k RMB) and high-price vehicle segment (above 300k RMB) both gaining share in the last two years relative to other price ranges.

Policies with Potential

Local incentive policies also seemed to give the NEV market a boost in 2021. As the central government incentives continue to phase out, as they are replaced by a NEV credit trading scheme, certain provinces and municipalities have bolstered their own local stimulus measures. Specifically, six provinces and municipalities, all of which promulgated new NEV incentives in 2021, were at the vanguard of NEV sales growth in 2021.

One well-known example is in Shanghai, where NEVs are offered free license plates, without going through the license plate quota auction process and paying more than 80,000 RMB (more than US$12,500) to register a gasoline-powered vehicle. This helped Shanghai to achieve a 36.5% NEV penetration rate in October 2021, well above the national average. Incentives do seem to work.

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Word-of-Mouth Influence Snowballing

One of the more surprising findings of the AlixPartners 2021 Global Electric Vehicles Consumer Perspective Survey was the inordinate influence of family and friends on the purchase of battery electric vehicles. Consumers who were “Very likely” buyers of electric vehicles indicated in the survey that the primary reason for their increased interest in EVs was due to a family member or friend who owned an EV and recommended it. This was more than twice the importance of word-of-mouth recommendations for other types of cars.

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We also found that buyers of EVs love their cars. More than 99% of those who own an EV say that they would buy another EV as their next vehicle. It seems that many of the concerns about owning an EV, e.g., anxiety about running out of battery power or expected difficulty in finding a charging source, evaporate once people actually own an EV and find out these concerns are not such a big deal, given the way most people use their cars.

As the number of EVs on the road in China exponentially increases, the social family and friends influence will only snowball, potentially contributing to ever-increasing EV sales penetration.

Tipping Point?

2021 has certainly been a watershed year for China NEV sales. Will the share growth trend continue? It is hard to say, given how unexpectedly fast it has happened. Chinese consumers are historically interested in the newest vehicle models. Once the shiny new models of 2021 get a little “long in the tooth”, there will need to be newer models to replace them to keep the sales momentum.

Although EV subsidies in the U.S. just got a shot of adrenaline with the Biden administration’s proposed programs, subsidies in China are likely on the way out, to be replaced by Corporate Average Fuel Consumption (CAFC) and NEV credit quotas and trading schemes. Theoretically, these credit programs should have a similar effect to subsidies in incenting NEV sales, but these are uncharted waters still.

One factor that will not go away, however, is the strong influence of family and friends as social influencers. As the NEV parc in China continues to grow, the probability of each consumer knowing a happy NEV owner will only increase, making this growth trend likely to continue. We may indeed have reached a tipping point in the transition to electric vehicles in China.