Frost & Sullivan releases the '2022 China Micro-Electrical Vehicle Industry Investment Opportunities Report'

Among Chinese residents, the commuting distances that account for a relatively high proportion are 6 - 10 km and over 10 km. In addition, the average one-way commuting distance of residents in major cities in China is between 8 - 10 km, with a comprehensive daily commuting distance within 25 km. Micro-electric vehicles mainly refer to transportation tools designed for residents' daily commuting distances within 25 km (priced at 50% - 150% of the per capita average income level, purely electric-driven, with an independent enclosed space). The main product forms in the micro-electric vehicle market include mainstream A00-level electric vehicles, low-speed electric vehicles, and electric/intelligent tricycles.

Level A00 electric vehicles, low-speed electric vehicles, and smart tricycles can all meet the short-distance commuting needs of urban residents such as going to work, shopping for groceries, and picking up children. Among them, low-speed electric vehicles and electric tricycles are more focused on lower-tier cities, towns, and rural areas due to factors such as regulatory laws, generally shorter commuting times, and lower prices. Overall, these three types of products not only satisfy residents' short-distance mobility needs but also have the characteristic of being cost-effective, making the overall market quite large.

The sales volume of passenger vehicles in China generally showed an upward trend during the period from 2010 to 2021, reaching 21 million units in 2021, a year-on-year increase of 6.6%.

The sales volume of Class A00 passenger vehicles in China increased overall during the same period. After experiencing a downturn from 2010 to 2016 (sales declined for six consecutive years as subsidies for the rural vehicle policy were reduced), due to the development of China's new energy vehicle industry, the Chinese automotive industry faced severe challenges such as rising raw material prices, supply chain disruptions caused by repeated domestic epidemics, and factory shutdowns. In 2020 and 2021, the sales volume of Class A00 electric vehicles represented by Wuling Hongguang MINI surged, driving an overall increase in Class A00 passenger vehicle sales, from 245,000 units in 2019 to 978,000 units in 2021. Since Class A00 passenger vehicles are targeted nationwide and have a wide coverage, they can meet more diverse needs of users. Their sales growth rate approached 200%, setting a new high for both sales volume and overall growth rate in ten years.

Among them, in terms of the electrification rate of passenger vehicles in China, the electrification rate of A00-class passenger vehicles is significantly higher than that of Class A, B, and C vehicles. In 2021, the electrification rate of A00-class passenger vehicles had reached 92%, while that of Class B was 19.7%, and for Class A and Class C vehicles, it was 8.4% and 8.2%, respectively. Overall, A00-class passenger vehicles are expected to lead the way into the era of full product electrification compared to Class A, B, and C vehicles. Against the backdrop of favorable new energy vehicle subsidy policies in China, many automakers have positioned themselves in the Chinese A00-class electric vehicle market segment. At the same time, during the 2020-2021 market period, A00-class pure electric vehicle products were highly recognized by downstream markets. Their sales increased from 256,000 units in 2020 to 900,000 units in 2021, a year-on-year increase of nearly 200%, accounting for 25.5% of China's new energy vehicle sales and 32.9% of China's pure electric passenger vehicle sales.

Against the backdrop of new energy vehicle technology updates and iterations, as the supply chain gradually improves, the cultivation of microelectronics products has further deepened. The microelectronics automotive industry, represented by the A00-level EV segment, will embark on a new round of growth cycle.

The rapid growth in the sales of Class A00 electric vehicles (EVs) in China from 2020 to 2021 mainly stemmed from the popularity of blockbuster models within this segment market. The main participants in the Chinese Class A00 automotive market are traditional automakers represented by Wuling, Chery, Changan, Great Wall, and SAIC. These manufacturers have positioned themselves in the Class A00 segment market by creating product lines that can meet consumers' needs for cost-effectiveness and low-cost short-distance travel.

Among them, the Wuling Hongguang MINI EV has become the electric vehicle with the highest sales volume in China's A00 segment in 2021, reaching 430,000 units, thanks to multiple advantages such as high cost-effectiveness, precise consumer targeting, consumer-recommended exterior design, and lower industrial chain costs. Meanwhile, from January to May 2022, Wuling Hongguang MINI also had the highest market share among A00-level EVs, followed by Chery, Changan, Leapmotor, and others. Over 50% of the main consumers of Wuling Hongguang MINI EV are concentrated in third-tier and fourth-tier cities and below. However, with the rise in raw material prices such as power batteries and chips from 2021 to the first half of 2022, the prices of mainstream A00 models will be adjusted accordingly, reducing their price attractiveness.

Looking at national models from Japan and Europe, Japanese K-Cars and European Golf cars are priced at around 50% of a national income. The mainstream price range for Chinese A00-level electric vehicles is between 35,000 yuan and 90,000 yuan. For larger underserved markets, Chinese national models have not yet appeared, leaving a market gap between 17,500 yuan and 35,000 yuan (approximately 50%-100% of per capita disposable income) at this stage.

Japan, the United States, and European countries rank among the highest in the world in terms of urbanization rates, all exceeding 70%. Among them, Japan has the highest urbanization rate and population density. The cramped urban space and high vehicle costs brought about by the high population density, coupled with the Japanese government's subsidies and tax incentives for small cars, have made small electric vehicles (represented by K-Cars) the preferred mode of transportation for the Japanese people. Their sales account for 37% of the total automobile market.

In addition, private car lanes on urban roads in mainstream European countries are generally narrow. In some areas, public transportation infrastructure is well-developed. Moreover, against the backdrop of strict European government control over vehicle emissions, the sales volume of small passenger cars in European countries is relatively high. For example, in Italy, the combined sales volume of A00 and A0 vehicles accounts for more than 50%.

The United States is characterized by a vast territory and a sparse population, while the level of high-speed rail construction is far lower than that of Japan and European countries. Consumers based on households have high space requirements. The overall U.S. automotive market leans towards medium to large SUVs and pickups. In 2021, the combined sales of minivans and small cars accounted for a low proportion, at 1.7%.

The product structure of new energy vehicles in China may trend towards that of Japanese and European car products in the future. This is due to China's high urbanization rate and relatively complete urban infrastructure construction. The urbanization rate in China increased from 50% in 2010 to 65% in 2021, gradually increasing the short-distance travel needs of urban residents. At the same time, the population density in eastern Chinese cities is high, leading to a greater demand for travel modes. With the continuous update and iteration of electric vehicle product technology, and under the significant trends of aging populations and smaller family sizes in China, the long-term demand for A00-level products is expected to grow.

In addition, the proportion of Chinese A00+A0 models is only 8.05%, still showing a significant gap compared to Europe and Japan, but still significantly ahead of the United States. With further cost control of new energy vehicles in China and the gradual maturation of the supply chain, the miniaturization rate of mainstream new energy vehicle models in China will increase within 3-5 years. Micro electric vehicles priced between 15,000 and 35,000 yuan are expected to see rapid development.

Level A00 EV:The general selling price of Chinese A00-level electric vehicles ranges from 35,000 to 90,000 yuan. With a charge time of 6 - 8 hours, they can achieve a range of 100 - 150 kilometers. The sales volume of A00-level electric vehicles represented by Wuling Hongguang EV, Chery EQ, and Changan Benben has approached one million units in 2021. Compared with traditional low-speed electric vehicles, A00-level electric vehicles can cover scenarios such as commuting, shopping for groceries, and picking up children. Moreover, they possess higher comprehensive product strength and safety. At the same time, users can enjoy formal insurance and new energy vehicle licenses and other services, creating a high substitution space for low-speed electric vehicles.

The acceleration of rural infrastructure construction in the underserved market can boost the popularization of new energy vehicles and Class A00 electric vehicles (EVs). In addition, with policies such as encouraging automobile consumption in certain regions and optimizing automobile purchase restrictions, as well as the launch of a new round of activities to promote automobiles to rural areas and the growth of alternative incremental markets such as low-speed electric vehicles and motorcycles, the market scale of Class A00 EVs in China is expected to grow from 40.5 billion yuan in 2021 to 116 billion yuan in 2026, with a CAGR of 23.4%.

Low-speed electric vehicle:Low-speed electric vehicles (LEVs) look similar to microcars, but their purchase price is lower than their operating cost. They are not considered cars in the traditional sense. The main market for low-speed electric vehicles is concentrated in third- and fourth-tier towns and below. Due to the lack of regulation in the early stages of low-speed electric vehicles, the industry entry threshold was low, and some manufacturers ignored vehicle quality in order to cut costs and capture the market, leading to difficulties in ensuring the safety and quality of low-speed electric vehicles. A00-level EVs have multiple advantages over low-speed electric vehicles, such as longer range, higher safety, legal registration, and subsidies. Against the backdrop that A00-level EVs can meet the price expectations (stimulated consumption policies and subsidies) of the consumer group for low-speed electric vehicles, the rapid popularization of A00-level EVs in the declining market strengthens their substitution for low-speed electric vehicles, directly squeezing the sales space of traditional low-speed electric vehicles. In the context of increasingly strict policies and the gradual threat of substitutes due to the price drop of A00 EVs, the market scale of low-speed electric vehicles in China has rapidly declined. However, as market clearing gradually completes, the market scale of low-speed electric vehicles will stabilize at around 6 billion yuan in the next five years.

Low-speed/intelligent electric vehicle:Due to limited transportation infrastructure resources in cities and towns such as fourth- and fifth-tier areas, and the main reasons for residents in these areas to purchase such products are convenience and cost-effectiveness. Electric tricycles have advantages over traditional two-wheeled electric vehicles in terms of loading and unloading, carrying passengers, and space. Moreover, while maintaining their cost-performance advantage, electric tricycles have further increased their short-distance travel range based on their endurance capacity. Therefore, the demand for electric tricycles in fourth- and fifth-tier cities and rural markets is evident.

In addition, with the continuous updates and iterations of electric tricycle configurations, intelligent tricycle products equipped with electronic screens, in-car multimedia system Bluetooth capabilities, electric windshield wipers, and reversing cameras are accelerating market penetration. Moreover, intelligent tricycles produced using the four major automotive manufacturing processes have higher quality and body safety than traditional electric tricycles. Overall, against the backdrop that intelligent tricycle configurations are being improved while maintaining the same price as traditional ones, it is expected that intelligent tricycles will replace traditional tricycles, and the market size of electric/intelligent tricycles in China is expected to reach 798 billion yuan by 2026.

Overall, the micro-electric market for cities, towns, and rural areas within a travel distance of 25 kilometers is the mainstream mode of travel in China. Its product structure includes three types: A00 pure electric vehicles, low-speed electric vehicles, and electric/intelligent tricycles. As the industrial chain of micro-electric products gradually improves and national income as a whole gradually increases, it will boost market scale growth. The Chinese micro-electric vehicle market is expected to exceed 200 billion yuan by 2026.

• Product Definition Capability

Product definition capability is one of the core competencies that micro-mobility manufacturers should possess. The core capabilities of product definition mainly include precise market positioning, continuous product iteration, and cost control. Taking Li Auto, which topped the sales charts for mid-to-large SUVs in May 2022, as an example, Li Auto achieves precise market positioning through user thinking, providing men in multi-person households (born after 1970/1980) with cars without range anxiety, intelligent interaction, and large space. Compared to large SUV electric vehicles, users in the lower-tier market have lower requirements for product intelligence and prefer functional use cases. This requires manufacturers to have a deep understanding of the needs of their target users and continuously iterate.

In addition, the continuous iteration capability of products is equally important. Micro-E Auto consumers have a clear demand for cost-effectiveness in their products, and manufacturers need to flexibly iterate their products in response to ever-changing markets. Taking the Wuling Hongguang MINI EV as an example, each generation of the product iterates to further enhance its range and power while ensuring cost-effectiveness. At the same time, new products are increasingly designed with an appearance that caters to the tastes of young men and women.

• Marketing network layout

Taking the Wuling Hongguang MINI as an example, relying on SAIC-GM-Wuling's network of nearly 3,000 dealers covering major provinces across the country, the provinces with the most dealers are mainly Jiangsu, Zhejiang, Fujian, Hunan, and Guangdong Province. The extensive offline physical stores and dealer network help manufacturers in the micro-mobility market quickly penetrate into lower-tier markets. At the same time, the brand building of stores and products also helps to expand the user base for the products. In addition, micro-electric vehicle manufacturers should vigorously deploy C-end online marketing strategies. For instance, the Wuling Hongguang MINI precisely targets the female market by focusing on the 'her' economy, and creates product personalization through entertainment and content marketing, breaking away from traditional labels of cheapness and low-end. Finally, it continuously connects with young users on the social end.

• Clear business strategy

The number of losses and total losses incurred by Chinese automakers showed an overall upward trend during the period from 2012 to 2021. In April 2020, there were over 6,000 loss-making automaker units in China, and the total losses in 2021 exceeded 50 billion yuan. In addition to factors such as rising R&D costs for automotive products and financing costs, the lack of clear strategic planning is also an important reason for some automakers' losses and bankruptcy.

Product business strategy is one of the key factors affecting a company's profitability. A clear and correct business strategy will point out the direction for the company's future development and enhance its profit potential. Taking Hongri Auto, a participant in the microelectronics automotive market, as an example, it has a relatively clear segmentation market and product layout strategy. Its target blank market in the price range of 15,000 - 50,000 yuan and overseas expansion have brought significant incremental space to the company. At the same time, Hongri Auto considers component sharing at the early stage of product design, with a high degree of overlap in supply chains for various products. It can achieve cost reduction through economies of scale and increase R&D investment in integrated die-casting and digital factories to strengthen its comprehensive competitiveness.

Hongri Automobile entered the new energy vehicle market in 2017 and is a company mainly producing new energy pure electric vehicles. Since its establishment, it has been focusing on the research and development and manufacturing of electric vehicles. Hongri Automobile's product line includes A00-level EVs, low-speed electric vehicles, and smart tricycles. Among them, the low-speed electric vehicle range has launched products such as S1 and U8. The first new A00-level EV product includes a micro MPV focused on married and childbearing families in second- and third-tier cities in China, as well as a refined mini electric vehicle targeted at young users, priced at 40,000 - 60,000 yuan. Smart tricycles are aimed at sinking markets such as third- and fourth-tier cities, towns, etc., with an average price of 15,000 - 25,000 yuan.

Hongri Auto has proven its product capabilities through sales. Based on its deep understanding of the needs of the lower-tier market, products such as S1, U8, and Veli have all become bestsellers. From entering the industry in 2017 to 2022, sales have increased tenfold in five years. In addition, Hongri Auto has a founder serving as the company's chief product manager, achieving highly agile development. Hongri Auto operates 1,100 dealership stores nationwide and has quickly established a vast distribution network relying on its product advantages, with plans to build more than 3,000 stores by 2025. In terms of marketing, the main strategy adopted is an effective investment approach. For example, Hongri sponsored the new talent competition program, achieving precise and effective coverage of the lower-tier market.