Gas or electric? Splitting the difference could energize Chinese automakers

Plug-in hybrids, which have both an internal combustion engine and an electric motor, are increasingly seen as the best of both worlds. Their popularity could weigh on companies and investors who have bet big on soaring demand for batteries and the materials that go into them.

Global PHEV sales grew 50% year over year in the first five months of 2024, according to Bernstein—far better than the 9% pace for pure electric vehicles. The major reason for the divergence is China, the world’s largest car market and by far the largest for EVs. In the first half of 2024, sales of PHEVs in China surged 70% from a year earlier. That compares with 16% growth for pure EVs. PHEVs now account for around 42% of new-energy car sales there from less than 20% around three years ago.

The sales pitch for PHEVs has long been clear: They save fuel costs without the range anxiety. A typical user likely could handle their daily trips on electricity alone while filling up the tank for longer journeys. Automakers—especially Chinese ones—have also been rolling out more compelling models. PHEVs are cheaper than pure EVs because of their smaller batteries, and in China they are priced at or below comparable gas-powered models. BYD’s Qin Plus sedan, for example, starts at around $11,000 in China.

While PHEVs are often seen as only a transitional technology, they might be here to stay. J.P. Morgan says they could account for 60% of new-energy vehicle sales in China by 2030, doubling its previous forecast of 30%. That includes so-called extended-range EVs, which use internal combustion engines to charge electric motors instead of propelling the car.

And Chinese automakers are pushing the technical envelope. BYD said in May that its new PHEVs could drive more than 1,300 miles, roughly the distance between New York City and Miami, with a full tank and a full battery. Such long-range models start at around $14,000 in China. Affordable PHEVs with long driving ranges will have particular appeal in some developing countries where charging infrastructure isn’t adequate. Brazil, for example, is a major market for BYD’s PHEV exports.

One potential risk, however, is that PHEVs are cannibalizing potential demand for pure EVs. That in particular could be a problem for battery manufacturers, since a PHEV battery typically has less than half the capacity of those in pure EVs. J.P. Morgan cut its forecast for China’s battery demand in 2030 by 10% for this reason.

China’s EV market has grown by leaps and bounds in the past few years, and the country’s automakers are eager to replicate their successes at home in overseas markets. They are facing increasing trade barriers in markets like the U.S. and Europe, but with their appeal in developing countries, PHEVs could give exporters a serious opening.

Write to Jacky Wong at jacky.wong@wsj.com