A circumspect general is always preparing for the next war, not the last one. That shows you where foreign automakers have been going wrong in China. To judge by the tone of the current policy debate in Brussels and Berlin, there are only two car markets worth thinking about at the moment: Europe and China itself.
The rapid expansion of electric vehicle (EV) sales in the EU by BYD, Geely and SAIC-owned MG appears to be pushing the two blocs toward a trade war, as my colleague Juliana Liu has written.
Meanwhile, the still-substantial Chinese arms of European automakers are working flat out to make themselves relevant again to a domestic market distracted by newer home-made electric vehicles.
Mercedes-Benz has been developing “tailored models and deeper localization,” the carmaker’s CEO Ola Kallenius told investors last month. Volkswagen has been even more aggressive, spending three years tearing up its former top-down industrial strategy in favour of one where more vehicles are designed and built “in China, for China.”
They need to face up to reality. China’s best years as a growth market for automobiles are behind it—but it still has a bright future in exports. Rather than fight over domestic drivers for whom competition has become cut-throat, China’s own car companies have spent the past few years rushing to sell electric vehicles to every other spot on the planet. European carmakers, wary of hollowing out their own home-grown export machines, have been far too slow in catching up.
Consider: China’s labour force has shrunk by about 13 million people since 2021. That is equivalent to laying off every worker in the Netherlands. Growth of its urban population seems to be levelling off at around 950 million people. Auto sales have been going backward since late last year and overall consumption is perennially weak.
The secret sauce that carmakers have historically depended on to spice up their profits—the aspirations of a growing crowd of upwardly-mobile consumers—is conspicuous by its absence.
The loyalties of the next few billion motorists up for grabs, however. Developed countries and China make up no more than about half of the roughly four billion people in the global middle class. The fastest-growing auto markets over the years ahead are likely to be in other regions of the world, dominated by India, Latin America, Southeast Asia, West Asia and North Africa.
European carmakers have strong legacy brands there. Volkswagen can claim to have more or less created Brazil’s auto market, where Stellantis’ Fiat and Jeep remain dominant today. Premium cars in West Asia and India are synonymous with Mercedes-Benz, BMW and Volkswagen’s Audi. Southeast Asia is still dominated by Japanese companies, but their sluggishness on electrification represents an opportunity.
Europe’s car industry, always more export dependent than the US, has been far too complacent about the threat posed by Chinese rivals in these places.
The problem is that executives are torn between their economic self-interest and their role as standard-bearers for European manufacturing. The best way to target cost-conscious consumers in emerging markets would be to use their Chinese industrial bases to deliver new, electrified models at the speed and price that BYD, Geely and Chery are achieving.
Instead, they are sticking with what they did best five years ago. In Brazil, Stellantis will focus on defending its market share in petrol-powered entry-level Fiats and Ram pick-up trucks, in the hope that Chinese carmakers will not try to compete in those segments, CEO Herlander Zola told investors in May. Only Volkswagen, which has recently taken to talking about using its Chinese unit as an “export hub” for the global south, seems to have grasped the scale of the threat.
The industry would do well to look at what is working within their own businesses. Of the top 10 European car brands in China, only Mercedes-Benz’s Smart, BMW’s Mini and Volkswagen’s Audi have shown success turning their local factories into export hubs. All have leaned heavily into electrification and maintained deep associations with local partners.
That is pretty much the opposite approach to the political push underway to build a moat between an electrifying global market and a group of rich countries using protectionism to defend vehicles driven by internal combustion engines. But it is the only one that offers a sustainable future that pairs Europe’s design expertise with battery technology and the low-cost manufacturing needed to capture the world’s next billion drivers. It is not too late for carmakers to change course. ©Bloomberg
The author is a Bloomberg Opinion columnist covering climate change and energy.