The Deeper Transformation Driven By New Energy Vehicles Has Not Yet Arrived

In June 2025, the China Association of Automobile Manufacturers and the People’s Daily each published articles opposing the “involution-style” competition among new energy vehicle (NEV) makers. NEV companies keep “competing” on price: while pushing down the prices of internal combustion engine (ICE) cars (in 2024 alone, the average new ICE car price fell by 13,000 yuan), they have also driven NEV prices steadily lower — the average NEV price fell from 184,000 yuan in 2023 to 161,000 yuan in 2025.

The direct result of this “price war” is declining industry profits. In 2017 the overall profit margin of China’s auto industry was 7.8%; by 2024 it had dropped to only 4.3%. The root cause of NEV companies’ continual price competition is insufficient product differentiation and excess capacity. This situation stems both from the firms themselves and from the industry’s stage of development.

The disruptive future of the car can be divided into two stages: new energy vehicles and new-form vehicles. At present, NEVs are relatively mature, whereas the foundational conditions needed for the second stage are not yet in place — new-form vehicles are still far off.

Many core functions of new-form vehicles are still being planned and evolving. NEVs are seeking differentiation largely through non-core features — such as refrigerators, large TVs, oversized sofas, sports-car styling, and feature-rich in-cabin entertainment systems. Moreover, because cars are high-priced, long-lived goods, and the existing stock of ICE vehicles is huge, it will take a long time for NEVs to fully replace ICE cars. With the auto market saturated and most sales coming from replacements and upgrades, lowering prices seems to be the easiest option for NEV manufacturers to boost sales.

But low prices without low costs cannot last. Greater transformation in the auto industry will arrive in the future second stage of new-form vehicles; firms must invest in R&D and prepare now to ensure they remain eligible participants when that stage arrives. When automakers fight on price, they cause short-term profit declines — sometimes even selling at a loss to gain market share — and in the long run, that hurts R&D investment and future competitiveness.

This article analyses the two stages of the auto industry’s future development and the conditions required to transition from the first stage to the second, pointing out directions for automakers’ future planning.

Cross-industry disruption and self-disruption

First, we introduce two concepts: cross-industry disruption and self-disruption. Disruption challenges an existing industry (or category) that already has large sales. In the mature phase of an industry, challengers from outside or inside the industry create value for customers under different rules of the game, thereby changing the industry’s landscape and potentially displacing incumbents.

The key is “different rules of the game.” If a disruptor satisfies the same consumer needs with a different product form, we call it cross-industry disruption. Cross-industry disruption often arises from technological progress, and the disruptors typically come from outside the industry. Success depends on whether the entrant can meet consumers’ existing needs better or at a lower cost.

If a disruptor steers the original product toward new customer value, or trims original product features to serve new customer value, that is self-disruption. Self-disruption is an extension or transformation from within the industry; disruptors usually come from incumbent firms. After self-disruption, the original industry may not suffer a fatal blow, but the disruptor gains much greater room for development.

Currently, the replacement of traditional ICE cars by NEVs is the first stage of disruption, manifested as energy substitution: the driving energy changes, but fundamentally, NEVs are still cars. This wave of disruption is cross-industry: mainly, outsiders entered the auto industry and changed its structure. Success in this stage depends on whether NEVs better satisfy travel needs or meet them at a lower cost.

In the second stage of disruption, NEV forms will diversify further. Cars will break beyond their limits as mere transport tools and reach into other industries; with autonomous driving, vehicle operating systems, and software, more intelligent application scenarios will emerge; or cars’ physical forms will change to become various new activity spaces; or entirely new, currently unimaginable forms may arise.

We call vehicles in this stage “new-form vehicles.” This wave of disruption is self-disruption of the auto industry: it will not only expand the boundaries of the auto industry and have huge impacts across the supply chain and related industries, but will also change how people work and live.

Disruptive development — Stage One: New energy vehicles

NEVs are vehicles that use unconventional automotive fuels as power sources (or use conventional fuel with new power devices), integrating advanced technologies in vehicle power control and drive systems to form fundamentally new-technology, new-structure cars.

NEVs mainly include four categories: hybrid electric vehicles (HEVs), battery electric vehicles (BEVs, including solar vehicles), fuel cell electric vehicles (FCEVs), and other NEVs. “Unconventional fuels” means fuels other than gasoline and diesel.

Hybrid electric vehicles include conventional hybrids and plug-in hybrids. Mild hybrids, plug-in hybrids, and range-extended EVs are all measures to increase driving range when battery range is insufficient. Pure battery EVs and fuel cell vehicles are true electric-drive architectures where batteries power motors, which drive the vehicle — structurally different from hybrids. Hydrogen fuel cell cars currently hold small market shares due to high costs and safety concerns, so the following discussion focuses mainly on battery electric vehicles.

Like ICE cars, NEVs are still transport tools and represent mainly a technological revolution. Compared with ICE cars, NEVs have several advantages.

Stronger power and better driving feel. 0–62 mph (0–100 km/h) acceleration time is an important metric for choosing ICE cars and a major source of premium for luxury ICE cars. NEV models under ¥300,000 with 0–62 mph in 3–4 seconds are common — accelerations comparable to sports cars of the ICE era.
Higher energy conversion efficiency and lower operating cost. ICE cars convert only 20%–45% of fuel energy into driving force, while electric vehicles convert over 80% and can recover energy during braking. The electric vehicle fuel cost per mile is about 1/10–1/5 that of ICE cars.
Lower environmental pollution. NEVs use electric energy that can come from wind, solar, and other clean sources, producing almost no tailpipe emissions. Even if electricity is generated from fossil fuels, because NEVs have much higher energy efficiency, the emissions per kilometre are still less than one-third of comparable ICE cars.
Simpler structure and lower maintenance cost. ICE cars’ core systems include power, fuel, and transmission systems; an ICE car may have about 30,000 parts. Pure EVs mainly consist of a battery, motor, and electronic control systems — about 10,000 parts — resulting in lower operating and maintenance costs. Without engines, exhaust pipes, and driveshafts, NEVs also run more quietly.
Better response for intelligent operation. BEVs can more readily implement higher-level autonomous driving and complex intelligence. Partial intelligence (lower-level driver assistance, telematics, in-cabin entertainment) can also be added to ICE cars, but mature ICE cars must be modified to achieve it, and the cost of implementing higher-level autonomy is high. The mechanical nature of ICE engines makes them hard to control via AI with high reliability, precision, and responsiveness. NEVs can be designed from the start for intelligence: onboard systems can directly send data/commands to the electric drivetrain for prompt, precise control. Also, ICE cars’ smaller battery capacity cannot support power-hungry, complex intelligent functions.

Progress of Stage One

After ICE car sales peaked in 2017, they fell continuously, and the decline accelerated. NEV sales accelerated from 2021 with an average annual growth rate above 35%, which also boosted total auto sales; in 2023, total auto sales surpassed the 2017 peak, reaching 30.094 million units.

Meanwhile, quasi-new-form vehicles with various levels of driver assistance and intelligent applications have been introduced. The first and second disruption waves are stacking.

From an industry penetration perspective, NEVs’ replacement of ICE cars has progressed smoothly: market share has risen rapidly since 2021, reaching 44.3% in the first half of 2025. Battery and NEV technology improvements are the main reasons, but national subsidies and vehicle plate policies have also acted as accelerators.

A new technology product can win early adopters relatively easily, but gaining mainstream users requires enduring different evaluation standards.

According to the diffusion of innovations theory, early adopters are made up of tech enthusiasts and visionaries who adopt for curiosity or to capture new value. Mainstream users are pragmatists who value complete supporting infrastructure and ease of use and service; they prefer proven, mature products and are reluctant to buy innovations that still need tuning. Pragmatists care more about value for money — the ratio of benefit to price.

NEV market penetration over 40% means mainstream users have begun buying NEVs. NEVs still have disadvantages affecting consumers’ choices, mainly in the following aspects.

Charging time remains long, and battery-swap station networks are in their infancy; charging and swapping are less convenient than refuelling ICE cars. This causes “range anxiety,” especially for long trips. Actual NEV range is also weather-dependent: cold weather reduces battery charge, and real-world range can fall below the rated range.
Battery safety concerns deter some users. The “unnerving” feel of software-based braking also leaves doubts for certain consumers.
High-level autonomous driving and complex intelligence have not yet reached commercial maturity; the levels of autonomy and intelligent applications implemented on EVs so far are not essentially different from what’s available on ICE cars. Users lack motivation to proactively switch to EVs based on intelligence alone.
The auto market is saturated, and most sales are replacement or upgrade purchases. With high prices and long lifespans, the existing stock of ICE cars is large: by the end of 2024 China had 270 million ICE cars, 76% of the passenger vehicle total. This will further delay the shift to NEVs; ICE and NEVs will coexist for a long time. A price war can speed NEV penetration and substitution, but it also erodes company profits and thus affects future investment and development. Automakers must balance short-term survival with long-term planning.

Disruptive development — Stage Two: New-form vehicles

When NEVs advance to a certain point — particularly when computational power is abundant (which requires sufficient battery capacity) and autonomous driving is achieved — the essence of the car will change. Its core value will no longer be limited to transportation; cars will appear in a variety of new forms and reach into other industries. We call this stage new-form vehicles.

New-form vehicles will have sensing, communication, and computing capabilities, and will be able to drive themselves. They will be perceiving, networked, communicative, and autonomously mobile intelligent terminals. With large-capacity batteries, new-form vehicles become energy storage terminals: having enough on-board electricity enables many additional functions; sensing and computing can collect and analyse driving and in-cabin activity data; networking enables remote commands and interaction with other terminals; autonomous driving frees the driver and greatly facilitates automated dispatch.

New-form vehicles will bring new intelligent application scenarios. As distributed energy storage terminals, future vehicles can help balance power usage: charging during off-peak hours and returning power to the grid during peak demand. Three hundred million NEVs with 65 kWh batteries would store roughly one day of residential electricity consumption in China.

Full autonomous driving will first change people’s mobility. People will no longer need to drive themselves, vehicle utilisation rates will rise dramatically, and road safety will improve significantly. According to the Ministry of Public Security, over 90% of traffic accidents are caused by human factors. Humans get tired; cars do not. Autonomous systems react in milliseconds, far faster than humans, and can predict and mitigate hazards — all of which can reduce accident rates.

With vehicle networking and communications, usage patterns and scenarios will change. Cars can interconnect with other smart terminals and city infrastructure — traffic lights, parking facilities, charging stations, and other vehicles — bringing conveniences such as automatic parking reservation, direct parking into available spaces on arrival, synchronisation with traffic lights to improve throughput, and pre-booking of available chargers to reduce wait times.

Related facilities’ utilisation will be optimised. Cloud information can interact with vehicles in real time, and traffic authorities can monitor conditions. Because vehicles can be issued commands, they will self-adjust routes to optimise traffic.

People’s use of cars will be more flexible: for outings, shopping, hiking and other activities, users can summon vehicles rather than going to where they parked.

New-form vehicles could become new activity spaces. With full autonomy, cabin layouts will change. Some concept autonomous vehicles already lack steering wheels, pedals, or brakes. Interior space can be configured on demand; designers will consider what people might do during travel and design cabin layouts accordingly.

Electric power will greatly expand in-transit activities: working, entertainment, and rest. The cabin will become a mobile intelligent living space: meeting rooms, classrooms, game rooms, cinemas, and more.

Unimaginable new forms may also appear. Before the iPhone, 3G networks and smart applications existed, but phones still used physical keys and small screens, limiting software use. The iPhone replaced physical keys with a glass multi-touch screen and simplified access to software, dramatically increasing user engagement. More importantly, the iPhone created a new ecosystem — an independent mobile OS + app store + third-party developers — enabling endless apps and decoupling hardware and software. Users flocked to smartphones and pushed the industry into the smart era.

New technologies not only optimise existing functions but, through industry convergence, create new functions and scenarios. Internet–phone integration produced smartphones and the mobile internet ecosystem, changing how people communicate, work, and shop anywhere, anytime. What will the internet and intelligence, combined with cars, produce? The physical forms and ecosystems of new-form vehicles may be far beyond current imagination.

New-form vehicles will spawn new business models. Technological change invites new entrants, but more importantly, it alters industry structure. Fully autonomous intelligent vehicles will change travel and lifestyles. Data show that in 2018, U.S. vehicle utilisation was only 5%. Autonomous driving will greatly increase utilisation rates, making private car ownership economically less sensible. Shared mobility will be more economical and feasible: people might stop buying private cars and instead obtain mobility via shared services, or they might buy a car and list it on a sharing network when not using it.

Higher utilisation and lower ownership will reduce the need for parking, changing urban form.

As cars become mobile intelligent living spaces, office, teaching, and everyday life will not have to happen at fixed locations; mobile classrooms and offices will become possible. A nomadic lifestyle may emerge: some people may choose to buy a vehicle as their living space rather than a house, living a more mobile life.

New-form vehicles will hugely impact the supply chain. Historically, ICE upstream suppliers centred on engines and transmissions; new-form vehicles upstream will centre on motors, batteries, autonomous driving, and operating systems — especially autonomous driving and OS, called the soul of future cars. This will also transform aftermarket and repair markets: battery and software diagnostics and maintenance will become core competencies.

Preparing for opportunities from the second-stage disruption

New-form vehicles require extra electrical energy to support heavy computation, intelligent functions, and in-cabin power demand; full autonomous driving is a precondition. Automakers should focus on the following areas.

Sufficient power and strong computing are foundational. Current EV batteries meet typical travel ranges, but to enable full autonomy, more intelligent features, and richer in-cabin functions, much greater battery capacity and faster charging are needed.
Perception, communication, autonomous driving, and cloud interaction generate large volumes of data requiring real-time processing, demanding high computing power and speed in the vehicle.
Autonomous driving is the prerequisite. Only after autonomous driving is achieved will people’s car usage fundamentally change, enabling reconfiguration and new uses of cabin space and making new-form vehicles possible.

To achieve meaningful intelligence, vehicle software and hardware must be decoupled so software can iterate and evolve; system and software upgrades should improve vehicle performance without adding hardware. Modules must be able to exchange data in real time to reduce hardware redundancy. Computing should evolve from distributed to centralised: information from many sources should be aggregated, jointly assessed, and executed by coordinated modules.

The EE (electrical/electronic) architecture determines the ceiling for vehicle intelligence: distributed architectures cap out around Level 2 driver assistance. Higher levels of intelligence demand better EE architectures. Vehicle EE architectures are gradually evolving from distributed to domain controllers and then to centralised architectures to support intelligence, digitisation, and connectivity.

Industry insiders predict that the evolution toward “central computing + regional control” may take 5–10 years, so what we see now is only the start of vehicle intelligence. New-form vehicles will also emerge over a relatively long period.

Operating systems and application software are core competitive battlegrounds. A mobile, networked, autonomous vehicle will become the next massive information and data platform after PCs and phones, spawning a new ecosystem. Users and a range of content and service providers will join to add value.

The new-form vehicle ecosystem will be open. It needs a foundational operating system to unify the ecosystem and many application programs on top. Who leads the OS and which apps become popular will be central competitive questions.

This speculation draws on the PC and mobile phone industries’ experience, but new-form vehicles could evolve different models.

Cars are considered the next massive mobile intelligent terminal after smartphones — this is from the intelligence perspective. In every dimension that can be “re-formed” — space utilisation, usage scenarios, business models, and supply chain — new-form vehicles present huge opportunities for development and innovation.

To seize these opportunities, automakers must choose the right angles, invest in R&D, plan ahead, break conventions, not be bound by past experience, and fully apply imagination and creativity.

Translated from Chinese. Authors: Wang Gao, Professor of Marketing and Associate Dean at China Europe International Business School; Zhang Rui, Assistant Researcher at China Europe International Business School