CHINA is expected to maintain its status as the world’s largest auto market this year, with a record-high 29 million cars sold, according to the Ministry of Commerce.

That’s just over a third of the cars expected to be sold worldwide this year, according to the website Statista.

Despite the top-line figures, sales growth of cars in China — once entrenched in double digits — has been slowing and that trend is forecast to continue. Sales in 2018 are predicted to rise about 3 percent, lagging the estimated 5 percent growth rate this year, according to the China Association of Automobile Manufacturers.

While the numbers of cars driving out of showrooms may be decelerating, changes in the auto industry are not. Stiff competition among carmakers is producing an almost constant flow of new models. Electric cars, under benevolent government policies, are making inroads in public acceptance. Internet and car technologies are merging, with the advent of “smart” cars that can sense traffic hazards, provide in-cabin entertainment and even drive themselves.

It’s a dizzying array of new horizons for both automakers and consumers. For car manufacturers, it’s a stark reminder that they have to be quick on their feet to adapt to a fast-changing market. For consumers, it means more choices and often cheaper prices.

The younger generation, who are avid consumers, online addicts and enthusiast embracers of new technologies, will play a defining role in shaping the future of the auto industry in the next five years. The Chinese government, which wants to clean up the skies and reduce dependence on fossil fuels, will be pulling the policy levers.

So where have been and where are we going? The end of another year and the advent of a new one is the perfect time to stop and take stock. This issue of AutoTalk is devoted to that endeavor.

Highlights of 2017

Dual credit policy to boost green vehicles

China issued a regulation in September requiring automakers to produce a minimum number of nonpolluting vehicles. Known as the dual credit policy, it forces carmakers to generate new-energy credits equivalent to 10 percent of the sales in 2019, rising to 12 percent in 2020. Car manufacturers that fail to meet minimum production targets must “buy” credits from other companies. The regulation will take effect next April.

The regulation also includes targets for fuel economy and a credit-trading system aimed at saving energy and promoting green cars. The new policy is part of the government’s campaign to reduce dependence on fossil fuels and clean up the skies in major cities.

“The policy will affect the future of China’s auto industry and the strategies of automakers, especially foreign original equipment manufacturers,” said Xu Qian, China head of automotive practice at AlixPartners.

Some foreign manufacturers are stepping up alliances with domestic partners, such as green car pacts between Volkswagen AG and Anhui Jianghuai Automobile Group, and between Ford Motor Co and Anhui Zotye Automobile Co.

Online car sales

The Internet has become a prime channel for Chinese consumers seeking information about car brands and the latest models. Car buyers can now also purchase vehicles or car accessories through online channels, such as Alibaba’s Tmall shopping site and JD.com, China’s second-largest e-commerce retailer.

Consulting firm J.D. Power said in a report that online vehicle shopping is a fast-growing trend that is expected to continue. The proportion of online shoppers among all new car buyers has increased from 8 percent in 2015 to 17 percent this year, the report said.

Car manufacturers are closely watching the trend. Earlier this month, Ford Motor Co and Alibaba Group signed a letter of intent to collaborate in online car sales. It calls for the two companies to conduct a study of digital solutions for new retail opportunities, from pre-sales to test drives and leasing options.

Internet giants and electric car start-ups

China’s Internet giants Baidu, Alibaba and Tencent — also known as BAT — are investing in electric car companies.

Alibaba took a 10 percent stake in Guangzhou Xiaopeng Motors Technology. Baidu and Tencent have invested in Shanghai-based electric carmaker NIO. Baidu also invested in Shanghai-based WM Motor Technology Co Ltd, which works on intelligent electric vehicles.

The three companies are betting that more new cars will be connected to the Internet in the coming years, giving their technologies an edge in the development of future vehicles that will feature software, data, settings and algorithms inside cars.

Connectivity that links vehicles and other online systems also will become extremely important for vehicles.

Tesla in China

US electric carmaker Tesla said the company is in talks with the Shanghai government on setting up a plant in the city. Elon Musk, chief executive officer of Tesla, said he expects to start manufacturing cars in China in about three years.

“Tesla probably will make the smaller and cheaper Model 3 sedans and upcoming Model Y crossovers in China, but won’t build the pricier Model S or Model X there,” Bloomberg News reported.

Tesla is actively setting up more charging stations and charging poles in China in order to meet the demands of electric car owners in the world’s biggest auto market.

In October, Tesla opened a charging station in Shanghai with the capacity to charge 50 electric cars at a time. Tesla said it is the company’s largest supercharger station anywhere in the world. The company opened another large charging station in Beijing in November.

Popularizing car-sharing

With the rise of the “sharing economy,” more people are participating in programs that share cars. The business model is similar to that of bike-sharing. Consumers rent cars for a short period of time with the use of their smartphones. They can drop off the cars in parking lots near destinations, instead of returning them to the points of departure. All payments can be made digitally.

Beijing-based car-sharing company TOGO and Shanghai-based Global Carsharing & Rental Co are among those expanding their networks into more cities in China. Earlier this month, BMW launched its own car-sharing service, called ReachNow, in the southwestern city of Chengdu in Sichuan Province.

Consumers typically use car-sharing services for commuting to work, business trips and recreational outings. The system is especially popular with younger drivers, who find it a convenient, low-cost way to get to and from work.

The Ministry of Transport issued a guideline in August to standardize the development of the car-sharing industry. It requires car-sharing companies to improve customer services and ensure that safety mechanisms are in place.

Trends in 2018Hu Yumo

Consumer interest in luxury cars helped keep China’s auto industry afloat in the black in 2017, and that trend is expected to continue into the new year.

The big market trends — electrification of vehicles, autonomous driving, connected driving and car sharing — have gained pace and are set to continue defining the auto industry going forward.

Overall, sales in the passenger-car segment slowed this year after double-digit growth in 2016. Still, foreign carmakers were busy launching new vehicles in China, especially luxury cars and sports-utility models. Domestic auto companies, meanwhile, have sought to lift their brand profiles and to expand into higher-priced cars and overseas markets.

So what’s ahead for 2018?

Premium cars

Chinese car buyers have always been enthusiastic about luxury cars, which resulted in expected 16-17 percent sales growth this year. Industry analysts said that rapid pace shows no signs of abating.

“The luxury segment remains the most attractive segment,” said Xu Qian, China head of automotive practice at AlixPartners. “Most luxury brands have shown significant sales increases this year. I expect that momentum to continue in 2018.”

Bill Peng, a partner with PwC’s Strategy&, agreed with that assessment. Many consumers are likely to choose a luxury vehicle car as their second car, he said. “In major cities, consumers are now in a transition period from first car to second car,” Peng said. “Five years ago, they bought their first car. With an increase in disposable income, they will tend to buy more expensive cars the second time around.”

The “second tier” of the premium car segment is expected to show particularly strong growth in the coming year. “First-tier premium cars include Mercedes-Benz, BMW and Audi,” he said. “But it’s the second-tier brands such as Cadillac, Jaguar Land Rover and Volvo that are set to do especially well, with the introduction of new models. This trend already began this year, with sales of General Motor’s Cadillac as one example. Chinese consumers are willing to try new brands, and if second-tier car brands can offer competitive models, people are likely to buy them.”

Ye Sheng, auto research director at market research firm Ipsos, takes the same view.

“Second-tier luxury brands will see faster growth,” he said. “They have diversified products with different price ranges that appeal to the younger generation. Chinese consumers are looking for distinctiveness when buying vehicles. Many second-tier premium car brands are good at telling the stories behind their brands.”

Domestic carmakers

Domestic carmakers, long the laggards in vehicle sales, are seeking to improve their image with higher-priced models to attract more consumers. Sales of domestically made cars are expected to maintain stable growth next year, but the competition and differentiation between domestic car manufacturers may get fiercer.

“Domestic brands will likely continue to maintain a steady upward trend next year,” said Ye Liang, a Shanghai-based principal of Roland Berger. “Chinese car manufacturers are seeking opportunities to improve themselves in terms of price, quality, after-sales service, product experience and other areas to compete with joint-venture automakers.”

Domestic carmakers are also making inroads overseas. Chinese automaker Zhejiang Geely Holding Group launched its Lynk & Co brand, which will be introduced to the US and Europe, and Great Wall has unveiled a premium brand called WEY.

Indeed, Chinese carmakers are on a roll in research and development to catch up with foreign brands. Those companies failing to innovate will be left behind.

In order to enhance their advantage, domestic carmakers are also starting to collaborate with one another.

Earlier this month, Chinese auto giants FAW, Dongfeng and Changan signed an agreement on joint technology innovation, industrial value chain operation, global expansion and new business models.

“The strategic alliance of these three companies is a good example of the new trend,” said Ye Liang. “In the future, competitive breakthroughs may be achieved through cooperation. Chinese carmakers are seeking opportunities to work together in areas such as connected vehicles, mobility service and batteries.”

Domestic brands are also positioning themselves in the field of new energy vehicles amid a national drive to encourage pollution-free driving.

“Next year, domestic brands will put more focus on new energy vehicles and entry level products in the luxury segment so that they can elevate their brand image and increase profit margins,” said Xu at AlixPartners.

Government policies

China’s auto market faces the implementation of several policies next year, affecting both manufacturers and buyers.

On January 1, the purchase tax for vehicles with engines below 1.6 liters will be raised from 7.5 percent to 10 percent, according to the Ministry of Finance. Analysts said the change is leading to a small peak in sales at the end of this year and perhaps will result in a slight reduction in car sales for the first half of next year.

New car loan policies also come into force in the new year. China’s central bank and the China Banking Regulatory Commission announced earlier that consumers may borrow from banks up to 85 percent of the cost of a green vehicle for personal use. The ratio for traditional internal combustion engine vehicles is 80 percent.

“The policy is a good sign for new-energy vehicles,” said Roland Berger’s Ye. “It will enlarge the potential consumer base for new-energy vehicles and prompt the sales of more green cars, even in the premium segment. The new policy may also further promote the development of car sharing because it reduces the initial investment costs for companies operating in that realm.”