China is the world’s largest market for new cars and new electric vehicles. It’s fast to adopt the latest technology and produces some of the world’s finest cars.
It’s also a terrible, deteriorating market for auto makers, and the country isn’t only exporting its vehicles, it’s exporting its disastrous market dynamics.
“China is a situation, right now, of hyper competition,” Mercedes-Benz CEO Ola Källenius tells Barron’s. “There are 100 players in the game. What will the market ultimately support? We shall see. But that is a very tough game at the moment.”
It’s probably closer to three dozen meaningful auto makers. Källenius isn’t wrong though. There are more than 100 nameplate brands vying for market share.
The dynamic has been terrible for profitability. Chinese car makers make less money than their global peers, and profitability is sliding. It’s no accident that Toyota’s profit margins are almost twice those of BYD. The former is dominant in its home market, Japan, with a share of more than 30%. BYD has about half that share in China.
Hypercompetition is taking its toll on everyone. Mercedes’ Chinese car sales fell 27% year over year in the first quarter. Operating profit in the car division was about €800 million, down more than 50% year over year.
The overall Chinese new car market slid in the first quarter, down about 7% year over, according to data tracked by Citi analyst Jeff Chung.
Now, China is exporting its problems. BYD sent 42% of its April volume outside of its home market. Its European sales grew 155% in the first quarter. Its European market share more than doubled to 2%. Overall, Chinese branded market share is closer to 10%, up roughly 100% year over year.
The situation is getting dire. There is no choice but to meet the challenge, says Källenius. “How do you respond to that? In our strategy… You invest,” he said, adding that Mercedes is building R&D capabilities in China and leveraging local cost advantages.
As far as Europe is concerned, Mercedes isn’t afraid of competition but wants a level playing field. In 2024, European officials put anti-subsidy tariffs on Chinese cars. But those only applied to all-electric cars, not plug-in hybrids. The U.S. took a different tack, imposing a 100% tariff on any Chinese car. That blunt instrument has proved more effective.
President Donald Trump has said that Chinese cars can come to the U.S. if companies build factories in the country and source local parts. Europe might go in the same direction. That provides some protection for the domestic industry, but it still leaves more carmakers vying for the same share.
The next phase of policy might have to be for European and U.S. policy makers to ask China to clean up its own house first and reduce the number of domestic car makers via consolidation. Then foreign auto makers could better compete with China worldwide.
“Tougher competition makes you fitter, and that fitness level can be applied around the world,” says Källenius.
True, but there is only so much that Mercedes or any other auto maker can control. Policies are needed to help set the rules of the game.
Write to Al Root at allen.root@dowjones.com
