Challenges Facing China's NEV Market
China is both the largest passenger vehicle market and the largest NEV market in the world as measured by sales volume. China's NEV market is currently skewed towards BEVs(battery electric passenger vehicles), as 81.3% of the NEVs sold in China in 2019 were BEVs, according to the CIC Report. We believe that smart electric vehicles represent the future of the automotive industry. However, the development of NEVs in China is currently facing two fundamental challenges as follows.
Inadequate Charging Infrastructure
Charging infrastructure is currently a bottleneck of China's NEV market. The inconvenience of, and lengthy time needed for, BEVs' charging solutions cause range anxiety, which limits use cases and impedes the wider acceptance of BEVs in China.
China faces a problem of inadequate private and public fast charging infrastructure. The development of private charging infrastructure is affected by factors such as limited residential parking space in cities with high population density, low percentages of residential parking space suitable for installing home charging stalls, and power grid capacity limits in aged residential areas. As of December 31, 2019, fewer than 25% of families in first-tier cities in China had parking space suitable for installing home charging stalls, compared with over 70% of families in the United States, according to the CIC Report.
As a result, a substantial number of BEV owners in China have to rely on public charging infrastructure. As of December 31, 2019, the ratio of NEV parc to public fast charging stalls was 17.7 to 1, according to the CIC Report. This demonstrates the insufficient number of public fast charging stalls in China to support the growth of BEVs.
Exceedingly Higher Costs Compared to ICE Vehicles
The current costs of manufacturing NEVs, especially BEVs, far exceed those of comparable ICE (internal combustion engine) vehicles. While government subsidies and other favorable incentives used to enable automakers to price NEVs competitively, the phase-out of subsidies makes it difficult for automakers to price NEVs at levels that are attractive for consumers while still generating appropriate profit for themselves.
The higher costs of NEVs to automakers are primarily attributable to the current level of battery technology. Lithium-ion batteries, which are widely used in BEVs, are costly and were priced at approximately US$166 per kilowatt-hour in 2019, according to the CIC Report. The incremental cost of battery, electric motor, and electric controller replacing the ICE powertrain could contribute to an extra 30% to 35% of BOM cost for a large battery electric SUV, compared with a large ICE SUV. In addition, BEVs generally use a higher percentage of lightweight materials such as aluminum for the vehicle body and suspension system in order to balance the heavy weight and accommodate the large size of battery packs.
To address the challenges facing China's NEV market, Li Auto have developed EREV technology and applied it to Li ONE.
An EREV is purely electric-driven by its electric motors, but its energy source and power come from both its battery pack and range extension system. A range extension system generates electricity with a dedicated ICE designed with high fuel consumption efficiency, an electric generator, and a speed reducer to connect them.Li ONE electric propulsion system consists of a 140-kilowatt rear-drive electric motor, a 100-kilowatt front-drive electric motor, and a 40.5-kilowatt-hour battery pack, which supports an electrically powered New European Driving Cycle, or NEDC, range of 180 kilometers. Li ONE's range extension system consists of a 1.2-liter turbo-charged engine configured and fine-tuned for EREV purposes, a 100-kilowatt electric generator, and a 45-liter fuel tank. With its integrated powertrain system, Li ONE delivers a total NEDC range of 800 kilometers, acceleration from zero to 100 kilometers per hour in 6.5 seconds, and energy efficiency of 6.8 liters per 100 kilometers or 20.2 kilowatt-hours per 100 kilometers, depending on its driving mode.
Li ONE's energy can be replenished by slow charging, fast charging, and refueling. Li ONE can operate even when customers have no access to charging infrastructure, thereby completely eliminating range anxiety. To offer the same driving range as BEVs of a similar class, Li ONE requires much less battery capacity. A smaller battery pack not only is less costly, but also contributes to a more cost-efficient body structure design, which results in less usage of costly aluminum parts for the vehicle body and suspension system. As a result, the BOM cost of Li ONE is close to that of an ICE vehicle and is much lower than that of a BEV of a similar class.
Benefiting from its all-electric-driven propulsion, Li ONE offers a similarly high quality driving experience to that of BEVs, such as smooth acceleration, and superior noise, vibration, and harshness performance, or NVH performance. The overall energy consumption level of Li ONE is much lower than that of ICE vehicles in a similar class, as a result of its high energy efficiency range extension system. Li ONE customers enjoy lower total running costs compared with ICE vehicle owners, including lower aftermarket service costs and energy consumption costs. In addition, our Li ONE customers can also benefit from vehicle-related tax exemptions in China and local government policies in favor of NEVs in certain cities in China, such as no quota limitations for vehicle license plate application and exemption from traffic restrictions.
1.limited operating history and face significant challenges as a new entrant into this industry.
2.The ability to develop, manufacture, and deliver automobiles of high quality and appeal to customers, on schedule, and on a large scale is unproven and still evolving.
3. currently depend on revenues generated from a single model of vehicle and in the foreseeable future from a limited number of models.
4. unable to adequately control the costs associated with our operations.
According to the prospectus, the IPO proceeds will be used as followings:
• approximately 30% for research and development of next-generation electric vehicle technologies, including high-voltage platform, high C-rate battery, and ultra-fast charging;
• approximately 20% for research and development of the next BEV platform and future car models;
• approximately 20% for research and development of autonomous driving technologies and solutions; and
• the balance for general corporate purposes.
Overview of China's Passenger Vehicle Market
China has been the world's largest passenger vehicle market as measured by sales volume since 2009. Driven by economic growth and increasing urbanization, China's passenger vehicle sales volume reached 22.1 million units in 2019. Nevertheless, according to the CIC Report, private car penetration in China was only 18.0% in 2019, compared to 61.0% in the United States in 2019. Despite a slowdown in 2018 and 2019, China's passenger vehicle market is expected to grow at a CAGR of 2.6% from 2020 to 2024, higher than the expected CAGR of 1.0% for the world's passenger vehicle market over the same time period, according to the CIC Report.
The Premium Vehicle Segment
China has continued to experience strong growth in consumption power in recent years. As of December 31, 2019, China's well-off and affluent population, whose average consumption power is similar to that of consumers in developed economies, has exceeded 500 million. With continued urbanization in China, an increasing number of low-tier cities and their surrounding townships have achieved faster economic growth than major metropolises, resulting in more well-off and affluent families with rising consumption power.
The China passenger vehicle market can be categorized into entry, medium, and premium vehicle segments based on brand classification. Despite a slowdown in overall passenger vehicle sales in China since 2018, the premium vehicle segment had continued to grow rapidly at a CAGR of 13.6% from 2016 to 2019 driven by the rising well-off and affluent population. In particular, the growth of non-first-time buyers who generally prefer premium vehicles significantly contributes to the development of this segment. According to the CIC Report, the premium vehicle segment is expected to continue to outperform other segments of China's passenger vehicle market, growing at a CAGR of 10.4% from 2020 to 2024, and is expected to eventually represent 20.6% of the total passenger vehicle sales volume in China by 2024.
The SUV Segment
The China passenger vehicle market can also be categorized into sedan, SUV, and MPV segments based on vehicle type. The SUV segment is expected to become the largest segment by 2020 as measured by sales volume. It also has become, and is expected to continue to be, the fastest-growing segment of the China passenger vehicle market. According to the CIC Report, SUV sales volume has increased at a CAGR, of 1.5% from 2016 to 2019, with a penetration rate increasing from 38.9% to 45.4%. The SUV sales volume is expected to continue to grow at a CAGR of 3.9% from 2020 to 2024, achieving a penetration rate of 49.2% in 2024. The rapid growth reflects Chinese customers' preference for larger vehicle cabin imam and superior driving experiences under different road conditions.
The SUVs can be categorized into small, compact, mid-size, large, and full-size SUVs in order of ascending size. Mid-size and larger SUVs, which include mid-size, large, and full-size SUVs, represent the fastest sales volume growth from 2016 to 2019. The sales volume of mid-size and larger SUVs as a whole increased at a CAGR of 11.2% from 2016 to 2019 and is estimated to increase at a CAGR of 13.5% from 2020 to 2024, significantly higher than the sales volume growth of other SUVs. The rising demand of mid-size and larger SUVs is primarily driven by the expanding average family size and the pursuit of better riding experiences in China. The lifting of the one-child policy is expected to boost average family size in China, hence driving the demand for larger vehicles with more seats. In addition, due to limited parking space in urban areas, a majority of families prefer to choose a car that can address multiple mobility needs. As automobiles have become an extension of home for families, mid-size and larger SUVs are best positioned to offer quality riding experiences to all family members. Mid-size and larger SUVs are preferred by non-first-time buyers, and half of China's passenger vehicle sales volume in 2019 was attributable to non-first-time buyers looking for a second or replacement car.
China's NEV Market
High Growth Potential
China has become the world's largest NEV market. In recent years, the PRC government has provided great support and implemented various favorable policies to drive the development of the NEV market. In addition, with the rapid advancement of NEV technology, growing environmental awareness of consumers, and increasing acceptance of NEVs, the growth of NEV sales volume has surpassed that of the ICE vehicles in China. According to the CIC Report, the NEV sales volume in China increased from 0.3 million units in 2016 to 1.1 million units in 2019, representing a CAGR of 54.6%.
In 2019, the NEV sales volume only accounted for 5.0% of the total passenger vehicle sales volume, indicating massive future growth potential. The draft New Energy Vehicle Industry Development Plan (2021-2035) issued by the MIIT in December 2019 has set China's target sales volume of NEV to be 25% of total vehicle sales volume by 2025. The NEV sales volume is expected to continue to grow at a CAGR of 34.5% from 2020 to 2024.
Challenges to Wide Adoption of BEVs
NEVs in China primarily include BEVs, EREVs, and PHEVs, according to the Guiding Opinions on Accelerating the Promotion and Application of New Energy Vehicles issued by the General Office of the State Council and the classification standard in the current market. Among these NEVs, BEVs have been granted the most favorable government policies over the past few years and have become the largest segment within the NEV market, accounting for 81.3% of total NEV sales volume in 2019.
Wide adoption of BEVs in China faces various challenges. Inadequate charging infrastructure is a key constraint for BEV development. The development of the private charging infrastructure is affected by limited residential parking space in cities with high population density, low percentage of residential parking space suitable for installing home charging stalls, and power grid capacity limits in aged residential areas. As of December 31, 2019, the ratio of car parc to residential parking space was below 2 to 1 in first-tier cities in China, and fewer than 25% of the families in first-tier cities in China had parking space suitable for installing home charging stalls, compared with over 70% in the United States. As a result, a substantial number of BEV owners in China have to rely on public charging infrastructure. As of December 31, 2019, the ratio of NEV parc to public charging stalls is 7.4 to 1. As of December 31, 2019, fast charging stalls only accounted for 41.6% of total public charging stalls, and the ratio of NEV parc to public fast charging stalls was 17.7 to 1. Most charging stalls require over 30 minutes for waiting and charging, which is longer than consumers' expectation.
In addition, the range anxiety typically associated with BEVs currently remains largely unsolved. The typical range of a BEV available in the China market is currently 300 to 500 kilometers, while the typical range of an ICE vehicle is 700 to 800 kilometers. The relatively shorter driving range of BEVs compared to ICE vehicles limits the driving scenarios for BEVs.
Competitive Landscape of Premium Mid-Size and Larger SUV Segment
The competition in the China premium mid-size and larger SUV segment is currently dominated by leading global automakers and Chinese NEV startups. Compared to imported SUVs, domestically manufactured SUVs possess a price advantage because they are not subject to tariffs imposed on imported vehicles. In addition, purchasers of domestically manufactured new energy SUVs are exempt from vehicle purchase tax, while most of the imported SUVs are ICE vehicles which subject purchasers to vehicle purchase tax. Most domestically manufactured new energy SUVs are BEVs constrained by the challenges facing BEVs. Li ONE, as the first successfully commercialized large extended-range electric SUV, possesses the advantages of unique EREV technology and market positioning, to offer a superior product at a competitive price.