The race is on for automakers

The United Auto Workers’ first-ever coordinated strike against Detroit’s Big Three automakers shows not all is well on the home front. Industry titans undoubtedly are looking outside the U.S. market for growth potential.

As usual, China is a prime candidate, but it increasingly is looking like a pipe dream. China’s home-grown auto industry is thriving, with where nearly half the market is comprised of home-grown manufacturers. And that share is rising due to consolidation, particularly in the electric vehicle (EV) space.

The pandemic shifted this trend into high gear. Volkswagen, which counted on China for more than 40% of its global deliveries last year, has found itself increasingly priced out by cheaper Chinese models. From the start of the pandemic to the end of China’s lockouts, automakers in China roughly doubled the number of hybrid or fully electric vehicles on its streets. They also account for 17% of the global auto market, with some projections this share will double by 2030 as they search elsewhere to increase market share. To put this in perspective, Tesla, the world’s most widely discussed automaker, has a comparatively microscopic 2% of global market share today.

The key to China’s success

The playbook of Chinese auto manufacturers is as straightforward as it is difficult to pull off: commoditize the EV market by offering high-tech yet lower-cost products compared to the legacy players. China also is developing supply chains that will put their own parts manufacturers front and center—exactly how CATL has become one of the world’s largest EV battery suppliers seemingly overnight.

As a result, China-based vehicle manufacturer BYD headlines the list of global cost leaders with a staggering 75% of its products manufactured internally. In contrast, most automakers have spent years perfecting their outsourcing to the point they typically produce less than half of their products inhouse.

If this strategy sounds familiar, it’s because Japanese and Korean manufacturers used it to great effect. But the China companies have an advantage over their predecessors: the secular shift toward the EV technology it already dominates in the largest auto market on earth—theirs.

A new world order?

Legacy automakers are set to relinquish substantial market share over the next decade. Clearly investors are waiting for the other shoe to drop. Where will it fall first? With its mandate of accelerated EV adoption, Europe (Germany in particular) is a likely early destination for Chinese automakers. The EU is trying to defend its most important industrial sector. President Ursula von der Leyen just announced a probe into Chinese manufacturers and subsidy levels in the face of an influx of cheap cars. Chinese companies more than doubled their turnout at Europe’s biggest auto show this year compared to 2021’s attendance. BYD’s Seal EV model has already made it to Europe, where it will square off against Volkswagen’s comparable ID.4. An all-out price war would not go well for Volkswagen. Only Renault has managed to build a low-cost EV that beats Chinese manufacturers on price: the Dacia Spring. To the surprise of nobody, it is manufactured in China’s Hubei province. The U.S. auto market feels “safe” from Chinese encroachment given the slow adoption of EVs. But the industry doesn’t, given its diminishing economic importance. 

How this all plays out depends on the pace of EV adoption worldwide. In China, the technology comprises a declining share of new car sales. If this trend repeats itself in other markets, legacy automakers may have time to correct course.