Foreign carmakers confront ‘moment of truth’ in China

The crowds of foreign executives returning this month to the Shanghai motor show after three years of Covid-19 restrictions were taken aback by the rapid advances made by Chinese carmakers in the interim. With scores of new Chinese electric vehicle models and battery technologies on display, the scale of the challenge to established players was there for all to see.

The world’s carmakers now face a “moment of truth”, said Fabian Brandt, a Munich-based industry consultant who had not been in China since late 2019. The country’s electric-vehicle manufacturers had demonstrated how they were extending their local dominance and would start taking on US and European companies on their home turfs.

China, already the world’s biggest market for electric vehicles, is set to knock Japan from the top spot for global car export volume this year after overtaking Germany in 2022.

Pointing to China’s advances in so-called infotainment features, experimental interior concepts and the use of multiple exterior cameras and sensors in anticipation of autonomous driving, Brandt, who leads the global auto team at consultancy Oliver Wyman, said Chinese players could “jeopardise the currently very solid financial performance of many established players”.

“On the cost side, the scale effects resulting from the fast adoption of electric mobility in combination with world-class battery technology innovation are resulting in highly competitive Chinese car models that will put established manufacturers under significant cost pressure,” he said.

The share of pure battery and plug-in hybrid vehicles in China has surged to more than a quarter of sales, or nearly 7mn, last year from less than 5 per cent, or 1.2mn, in 2019.

Chinese companies’ dominance of the EV supply chain has also rattled western executives and governments. Across many of the key materials used in producing EV batteries — the cars’ most expensive part — China has more than an 80 per cent market share.

In 2019, Chinese companies such as Xpeng and Nio were still little-known start-ups, barely five years old and unthreatening to established giants such as Germany’s Volkswagen, Japan’s Toyota and American groups Ford and GM. So far this year, Chinese carmakers, led by Warren Buffett-backed BYD, have made eight of the 10 top-selling models in the EV segment in China.

In an acknowledgment of the urgent challenge posed by Chinese rivals, Volkswagen executives used the Shanghai event to announce a €1bn investment in a new innovation centre in Hefei, eastern China.

For the German group, which has relied on Chinese consumers for at least half of its annual net profits, the Hefei centre is a key part of a plan to reduce the time needed to develop new products and technologies for China by about 30 per cent in the coming years.

However, Christoph Weber, general manager of a Swiss engineering software company in Shanghai, said foreign car groups need to become more agile and execute “true localisation strategies” to compete with the rapidly rising new clutch of Chinese carmakers.

Whereas some foreign executives may have begun to appreciate the existential threat they face in China, Weber said companies struggle to overcome corporate structures and cannot execute swiftly enough, despite the tectonic changes confronting the industry.

Local staff of foreign groups in China have not been given “empowerment to do what is needed”, meaning they have struggled to keep pace with changing tastes and technology expectations in the world’s biggest consumer market.

“They develop some models for the local market, but they are still quite similar to the global product portfolio,” said Weber. “Every product must be approved by headquarters. If you live in Shanghai or Beijing, you see the speed, how fast things are happening, how there are really sexy new cars, like Nio and Xiaopeng.”

A rabid price war, sparked by Elon Musk’s Tesla in late 2022, is also complicating the outlook for foreign and local brands.

Musk has indicated he is willing to sacrifice Tesla’s profits in the short term and sell vehicle at lower prices in an aggressive push for market share. While Tesla has not boosted its market share in China this year, analysts forecast the consolidation of weaker brands in electric and internal combustion vehicles.

Companies selling at the lower end of the market are under “tremendous pressure”, with many confronting a precipitous year-on-year decline in unit sales, said Shanghai-based consultancy Automobility.

“Losers will far outnumber winners,” Automobility said in a client note.

An employee from an automotive logistics company in Jiangsu province, north of Shanghai, surnamed Chen, said he believed many foreign groups would have to refocus their efforts on alternative emerging markets after losing so much ground in China’s EV market.

The price war, Chen added, was quickly reaching a tipping point for some companies, with foreign and local carmakers struggling. In one example, sales of battery and plug-in hybrid vehicles at state-backed Chery slumped nearly 70 per cent year on year in the first quarter.

“Many companies are struggling to survive,” said Chen. “Many will die soon.”