Blue Whale News, June 15 (Reporter: Li Zhuoling) Amid the intensifying competition in the automotive market, more and more new energy vehicle companies are turning their attention to the sinking market.

Recently, Zeekr stated during its 2024 first-quarter earnings call that it will strengthen channel construction and accelerate its channel expansion in third- and fourth-tier cities this year, aiming to create more growth space for the brand. As of the end of May, Zeekr had a total of 392 global stores, and it is expected that the number of stores will increase to over 520 by the end of this year, with a focus on increasing the construction of Zeekr Home and Zeekr Space stores.

Image source: Visual China

Zeekr's move is just a microcosm of new energy vehicle companies' deepening penetration into the sinking market. Currently, including NIO, Lixiang, BYD, XPeng, and other new energy vehicle companies, they have all extended their reach to third- and fourth-tier cities. Previously, Li Bin, the founder of NIO, even stated during a financial report conference call that sinking into third- and fourth-tier cities is an important opportunity for NIO in 2024.

With the general consensus of seeking more market growth in the sinking market, what challenges will car companies face?

Multiple car companies are targeting incremental growth in sinking markets

The so-called sinking market refers to markets in third-tier and below cities, counties, towns, and rural areas. In the past two years, more and more car companies have entered the sinking market competition.

"In fact, we have been investing in third- and fourth-tier cities since the second half of 2023. Currently, it is indeed true that the sales proportion in first-tier cities is very high, accounting for more than 50% in the Yangtze River Delta alone, and all first-tier cities combined may account for about 80%, with over 70% of total sales. Therefore, we do need to solve the problem of efficient channel expansion into these markets, and we are trying various methods," Li Bin said during NIO's 2023 fourth-quarter and full-year earnings conference call.

Last May, He Xiaopeng, the chairman of XPeng Motors, also stated that while improving the efficiency of sales networks in first- and second-tier cities, XPeng will also introduce more dealers in third- and fourth-tier cities to support its product layout and sales targets in the 150,000-350,000 yuan price range in the next few years.

The same goes for Lixiang Motors. According to its official Weibo message in mid-January, Lixiang's sales network will further expand into third- and fourth-tier cities. It is expected that by the end of 2024, 100% coverage will be achieved in third-tier cities, and over 70% coverage in fourth-tier cities, continuously deepening the retail layout in various cities across China.

According to a report by LatePost Auto in April this year, BYD's Dynasty network will adjust its channel strategy in 2024. It quoted sources close to BYD's sales network, stating that this year, the primary sales channel centered around 4S stores in the Dynasty sales network will significantly slow down its expansion, with "the focus on seizing the county-level market."

Meanwhile, the Dynasty network will intensify its efforts to develop sinking markets such as counties, increasing the number of stores in these markets, with the aim of capturing more shares from fuel-powered vehicles. Regarding this news and BYD's current store layout in third- and fourth-tier cities, Blue Whale News interviewed BYD, but no response was received as of press time.

Lang Xuehong, Deputy Secretary-General of the China Automobile Dealers Association, told Blue Whale News that the current penetration rate of new energy vehicles in cities above the third tier has reached about 40%, and even exceeded 40% in first-tier cities, with Shenzhen and other places exceeding 50%. Therefore, the penetration rate is relatively slowing down. However, the penetration rate of new energy vehicles in cities below the third tier is currently only around 20%, leaving significant room for improvement compared to first- and second-tier cities.

"This is one of the reasons why many new energy vehicle companies are beginning to accelerate their layout in sales and channel networks in cities below the third tier, aiming to seize the opportunities in the sinking market," said Lang Xuehong.

According to data released by the China Passenger Car Association on June 11, the top three cities in terms of new energy penetration rate in April this year were Shenzhen (60.2%), Hangzhou (57.0%), and Chongqing (52.3%). In terms of sales volume, the top 10 cities accounted for 27.3% of total sales, with Beijing, Shanghai, and Chengdu ranking among the top three in terms of new energy passenger car sales.

In the industry's view, the regional market competition is a continuation of the intense competition in the new energy vehicle market. Third- and fourth-tier cities have a broader customer base compared to first- and second-tier cities, making them important incremental markets for China's new energy vehicles in the future.

Entering this market is not an easy task

Although the sinking market has considerable market potential, it is not easy for new energy vehicles to enter this market, especially for companies like NIO, Lixiang, and Zeekr, which originally positioned themselves in the mid- to high-end market above 200,000 yuan.

The "Insight Report on Consumer Behavior of New Energy Vehicle Users in Sinking Markets" previously released by the China Electric Vehicle Hundred People Forum mentioned that new energy vehicle companies must clearly understand the purchase characteristics of the sinking market. Users in the sinking market have a distinct "cost-effectiveness" trait, with trade-ins and upgrades being their primary purchase forms, especially trade-ins. Users in the sinking market are more influenced by automotive policies than users in first- and second-tier cities, especially car-less users who are most strongly stimulated by policy incentives.

Apart from pricing, the construction of charging infrastructure is also a significant pain point. According to data from the China Electric Vehicle Charging Infrastructure Promotion Alliance, the total number of public charging piles below the county level currently accounts for only 11.28% of the national total, which is still relatively weak overall. The total number of public charging piles below the county level accounts for 12.11% of the national total; the total number of DC charging piles below the county level accounts for 14.51% of the national DC charging pile total, while the total number of AC charging piles accounts for 9.47% of the national AC charging pile total.

According to a previous report disclosed by McKinsey, compared to first- and second-tier cities, owners of pure electric vehicles in third-, fourth-, and lower-tier markets have a 10-percentage-point lower satisfaction rate with their charging experience. The growth rate of charging infrastructure construction in lower-tier cities lags behind the growth rate of new energy vehicle sales.

In the opinion of Yang Bo, the general manager of NIO's Guangzhou regional company, the construction of charging infrastructure in the sinking market is a significant challenge. He told Blue Whale News, "Of course, we hope that every county-level city can have a battery swap station, but this is not realistic in the short term. From a cost-benefit analysis perspective, investing in first-tier cities like Shanghai may have a greater impact on service and a higher possibility of promoting sales."

However, he also pointed out that NIO cannot abandon the sinking market of third- and fourth-tier cities and aims to promote its sales system simultaneously. "For regions without battery swap stations, we will rely on the user operation system to provide solutions, such as helping them install home charging piles, and we will implement these measures in phases."

Li Bin previously stated, "On the one hand, we need to increase the coverage of our charging and battery swap networks because most of NIO's cars are sold in first- and second-tier cities. In third- and fourth-tier cities, whether in terms of brand awareness or infrastructure networks, we are at a disadvantage and need to strengthen our weaknesses."

Lang Xuehong also believes that apart from infrastructure such as charging facilities, a greater challenge for new energy vehicle companies in developing the sinking market lies in consumer perception.

"Compared to first- and second-tier cities, consumers' acceptance of new energy vehicles is relatively low in sinking markets. However, consumers in lower-tier cities tend to have a more pronounced herd effect. Therefore, whoever can enter such markets first will be better able to drive consumption in this region and seize the initiative, which is crucial for new energy vehicle companies," Lang Xuehong told Blue Whale News.