In the early 1980s, Volkswagen chairman Carl Hahn sent his engineers to start building Volkswagen’s boxy Santana sedan in Shanghai. Defending the decision, the boss told his top lieutenant in Wolfsburg that Volkswagen could achieve great things in China “if we can tap into its enormous potential, beyond what we can manufacture in other countries”.
Hahn, who died earlier this year, was right on two counts. The rise of China’s middle class has created the world’s largest auto market. The German automaker — one of the first foreign groups to show confidence in Deng Xiaoping’s new China — enjoyed billions of dollars in annual profits for decades and became China’s best-selling brand. However, his foresight may not have extended to what happened four decades later, when Chinese companies started making cars that were better and more affordable than their foreign rivals.
For most foreign auto groups, the good times in China are over. Companies such as Volkswagen, Ford and Toyota have encountered two fundamental transformations in China. First, consumers give up the speed of the internal combustion engine. Second, the rise of China’s local EV groups.
Spurred by the arrival of Elon Musk’s Tesla model, Chinese-made electric carmakers have grown rapidly, equipped with cutting-edge software and backed by deep domestic supply chains. They are now leapfrogging their traditional foreign rivals at breakneck speed. It is becoming increasingly clear to industry executives and analysts that automakers are engaged in a Darwinian struggle for survival in China. Only a handful of EV-focused winners will survive — the rest will sink in the market.
Nearly two-thirds of the total number of passenger cars sold this year in the “new energy vehicle” market, which Beijing classifies as including plug-in hybrids and battery-powered vehicles, are made by four Chinese companies, according to Automobility. Group and Tesla Manufacturing, a Shanghai-based consulting firm. One company alone, Shenzhen-based BYD, which is backed by Warren Buffett’s Berkshire Hathaway, accounts for a staggering 38% of those sales.
Until this year, Volkswagen sold more cars in China than any other company, and still accounted for 13% of gasoline car sales. BYD is now on track to overtake VW’s overall title in 2023. What’s more, the German group ranks eighth this year in terms of EV market share, accounting for just 2.5% of sales — and it’s the only other foreign group in the market to surpass Tesla’s top 10 .
“Until the whole electrification happens, no one knows who will be the winner,” said Yuqian Ding, a senior analyst at HSBC in Beijing. “BYD and Tesla are the winners.”
That bodes ill for producers still struggling to make money from China’s internal-combustion-engine vehicles. Nearly one-third of the cars already sold are electric. The price war Tesla launched last year has only exacerbated these trends. Bill Russo, the former head of Chrysler China and now the head of consulting firm Automobility, said the remaining price advantage of fuel vehicles over electric vehicles is being “eroded”.
Consolidation may be the next step. According to HSBC, by 2022, nearly three-quarters of EV sales in China will be concentrated among the top 10 best-selling EV brands. That leaves a long tail of nearly 60 EV brands competing for scrap. Without state support, the future looks bleak for dozens of Chinese groups. Greenpeace predicts that if adoption increases to around 70% by 2030, GM and Volkswagen will have more than 2 million spare capacity in China.
In the 1920s, American physiologist Walter Bradford Cannon referred to the response to danger as fight or flight. Now, the boardrooms of global automakers are discussing the issue. In recent weeks, Volkswagen has stepped up its multibillion-dollar investment in new electric vehicles and vowed to make cars more attractive to Chinese consumers. Ford, by contrast, is reducing spending in China, a stunning concession from a company that a decade ago was the sixth-largest company in that market.
Against this backdrop, 2023 is expected to be the first year in which Chinese brands outsell foreign cars in China. But the multinationals’ losses in China are just the beginning. Containers loaded with cheap, high-tech Chinese electric vehicles are leaving Chinese ports at such a rate that China is on track to overtake Japan this year as the world’s largest car exporter. The boards of automakers have to think not only of survival in China, but also of the existential battle they will soon face at home.
edward.white@ft.com