China's EV Revolution Disrupts Global Automakers

The automotive industry in China has undergone a seismic shift, with the rise of electric vehicles (EVs) and domestic brands upending the dominance of foreign automakers. This week's announcement by German luxury carmaker BMW, cutting its profit margin forecast due to sluggish demand in China, is the latest example of a broader trend that is reshaping the world's largest car market.

Navigating the Changing Tides of China's Automotive Landscape

The Decline of Foreign Automakers in China

Nearly a decade ago, the Chinese automobile market was a lucrative playground for foreign companies, allowing them to reap substantial profits. However, the landscape has since transformed, with data from Dunne Insights, a global automotive industry consulting firm, revealing a significant decline in sales and profitability for these foreign players.The challenges faced by foreign automakers in China are multifaceted. In addition to an expensive braking issue affecting 1.5 million of their vehicles, BMW cited "ongoing muted demand" in the country as a contributing factor to its profit margin forecast reduction. The German automaker acknowledged that "despite stimulus measures from the [Chinese] government, consumer sentiment remains weak."

The Rise of Domestic Chinese Brands and "New Energy Vehicles"

The dominance of foreign brands in the Chinese automotive industry has been usurped by domestically produced cars, particularly those classified as "new energy vehicles" (NEVs), which include both electric vehicles and plug-in hybrids. In July, data from the China Passenger Car Association revealed a record-breaking 50.7% of Chinese car purchases were NEVs, underscoring the rapid shift in consumer preferences.This trend has had a significant impact on the fortunes of global automakers. General Motors, for instance, saw its annual sales in China cut in half, from more than 4 million vehicles in 2017 to just 2 million in 2023. Similarly, Stellantis, the owner of Chrysler, was forced to cease Jeep production in China as its joint venture that manufactured the brand filed for bankruptcy.

The Challenges Facing Foreign Automakers in China

Industry observers attribute the declining market share and profitability of foreign automakers in China to their inability to meet the evolving demands of Chinese consumers. These demands include a growing preference for lower-priced vehicles and the need to adhere to Beijing's strict policies.According to data from Dunne Insights, the market share of foreign automakers has been on a steady decline for the past four years. During this period, Japanese cars' market share fell from 16% to 12%, German cars from 19% to 16%, American cars from 12% to 7%, Korean cars from 7% to 2%, and French cars from 3% to 0.4%. Conversely, China's domestic brands have seen their market share grow from 43% to 62% during the same timeframe.

The Role of Government Subsidies and Competitive Pricing

The success of Chinese automakers in the domestic market can be attributed, in part, to the significant government subsidies and their ability to offer more competitively priced vehicles. Clark Packard, a research fellow in international economic policy at the Cato Institute, noted that Chinese auto giant BYD can build cars approximately 25% more cheaply than its global competitors, with some of this advantage stemming from market forces and some from government subsidies."I do think that it is true that the Chinese subsidies are heavier and more sustained than U.S. subsidies for auto," Packard told VOA in a phone interview. He acknowledged that while he has "more of a problem with the subsidies than market forces forcing down prices," the combination of these factors has allowed Chinese automakers to gain a significant edge in the domestic market.

The Shifting Landscape and the Squeeze on Legacy Automakers

The transition from internal combustion engine (ICE) vehicles to NEVs has been a significant driver of the changes in the Chinese automotive industry. Tu Le, the founder and managing director of Sino Auto Insights, an American automotive innovation and management consulting firm, explained that the "legacies are getting squeezed on both sides" as a result of the "significant decrease in ICE demand and significant increase in NEV demand."This shift has forced foreign automakers to adapt and rethink their strategies in China. As the country's consumers increasingly embrace electric and domestically produced vehicles, the once-dominant foreign brands have found themselves struggling to maintain their market share and profitability in the world's largest automotive market.