Can China’s NEV market sustain its rapid growth?

Increases in battery raw material prices, cuts to the NEV subsidy and ongoing chip shortage issues could lead to slower growth going forward

Yan Zhang, Powertrain Market Analyst

15 March 2022

China’s New Energy Vehicle (NEV) wholesale sales achieved a record of 3.4 mn units in 2021, equivalent to a penetration rate of 14.5% which is double that of 2020.

BYD’s innovative DualMode (DM-i) system helped the plug-in hybrid vehicle (PHEV) segment gain much traction while the battery electric vehicle (BEV) sector has boomed, leading to a December 2021 NEV share of over 20% of the car market. China’s NEV sector has now certainly entered the mass market, with most brands announcing ambitious targets for 2022. However, the economic situation for NEVs changed quickly following the Chinese New Year, with significant hurdles emerging which were not there in 2021. The question that now arises is whether China’s new energy market can reach a new high in 2022, or could we even see a decline?

There are multiple reasons to question NEV growth in 2022. Firstly, the impact of the Russia-Ukraine war has extended to the auto sector, leading to a rapid rise in the cost of raw materials, especially nickel, a key battery material. The battery accounts for 30%-40% of the total cost of a BEV of which the cathode material accounts for 51% of the battery cost (source: BloombergNEF). The cathode is typically composed of lithium, nickel, manganese, and cobalt. Lithium prices were rising even before the conflict in Europe. Since the end of 2021, a new price record for lithium carbonate has been set almost every day. By 8th March 2022, year-on-year growth had reached 550% (source: trading economics).

Secondly, the raw material price spikes are being passed on to vehicle retail prices. Tesla, BYD, SAIC, Xpeng and others have announced price increases for their NEVs since the end of 2021. We made a simple calculation based on Ganfeng Lithium’s announcement of raw material price increases. For a BEV with a battery capacity of 60 kWh to 80 kWh, the implied cost increase due to lithium price inflation is around 14,000-23,000 RMB per vehicle.

The price of nickel has been even more volatile than lithium in recent times, doubling in the space of a week and, at one point, reaching US$100,000 per tonne before subsiding.

As raw material costs have risen, the NEV subsidy has become more important. However, the 2022 subsidy was cut by 30%. Until that point, the subsidy compensated for cost pressures, but as the lithium price continued to rise, OEMs started to incur losses and announced price increases or, in the worst cases, stopped taking orders altogether. ORA is a brand that has done this (it was losing money on each BEV sale) but has continued production. We expect more price increases if the situation continues to worsen.

As for the subsidy itself, the Table below summarises the changes for 2022.

Thirdly, the prospect of further chip shortages has emerged with the outbreak of the war. Ukraine and Russia are the suppliers of key raw materials, including neon gas and palladium. Seventy per cent of global neon gas production is sourced from Ukraine and forty per cent of global production of palladium comes from Russia. Both are vital raw materials for chip manufacturing. Though stocks of these are predicted to be sufficient for half a year, the disruption has the potential to seriously impact long-term strategy. For example, Bosch’s ESP systems are in a supply crisis because of the chip shortage, having been impacted badly during 2021 by COVID-19.

On the positive side, consumers continue to have a strong interest in NEVs as the gasoline price has increased alongside NEV prices. According to our research, most consumers will not return to an ICE car after having had a NEV. Cost-saving is not the only reason – driving a NEV is often a more thrilling experience than that of an ICE car. The advanced connectivity, usually enhanced on NEVs, helps relieve the boredom of long journeys. Charging takes longer than refuelling, but this allows more time for rest, enjoyment of the scenery and shopping in the charging station.

In our forecast, we take all these points into consideration. However, if the macro environment gets more challenging by way of a more serious chip shortage and higher raw material prices, sales will suffer. The demand will not disappear, but some of it may be pushed back into subsequent years. We expect the NEV market to maintain rapid growth in the medium term.