At the national level, in order to implement long overdue structural reforms and contain a looming financial crisis, Beijing has had no choice but to put the brakes on overall economic growth. At the same time, in cities such as Beijing, Shanghai, and Hangzhou, local governments are imposing new vehicle sales restrictions to combat severe traffic congestion and air pollution.

In fact, the product and industry life cycles have already started to decouple, a key moment that typically results in high levels of overcapacity, significant price and margin pressure, and, eventually, a massive shakeout. As a result, the underlying industry and competitive dynamics will likely look very different within a few years. The business model itself will change from today’s “hunter-gatherer” model, focused primarily on generating profits from new vehicle sales, to a “seed-harvest” model, wherein profits come mostly from selling complementary and aftermarket products and services.

At the same time, customer demand will become increasingly binary. Tier 1 cities in the coastal provinces will be characterized by much lower growth rates, replacement demand, and rising price points. In contrast, the lower-tier cities in China’s interior will see much higher growth rates, but at lower price points, as demand will increasingly come from new buyers who are crossing the mobility threshold and exchanging their motorcycles and electric bikes for cars.

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