Despite global EV slowdown, China’s car industry refuses to put on handbrake

Global demand for electric vehicles (EVs) has cooled in recent months after a dramatic rise over the last decade, leading several major car manufacturers to scale back electrification plans.

Despite a slowing domestic economy, China is steaming ahead with its own transition to EVs.

And while legacy Western automakers seem to have hit a speed bump in the Chinese market, local car firms are challenging the traditional motoring giants both at home and abroad.

What’s happening in China’s car market?

China’s economy is facing a period of weak growth and low demand, amid a prolonged downturn in the property sector.

Passenger vehicle sales fell in August for the fifth straight month, reflecting weak consumer confidence.

It’s been a tricky time for Western automakers like Volkswagen (VW), who had bet big on China.

Preferences have shifted in the country’s automotive sector, with a big rise in support for local brands like BYD.

The market share for foreign brands has fallen sharply to 44 per cent in the first four months of 2024, down from 62 per cent in 2019.

China is VW’s single biggest market, accounting for about a third of global sales.

But local market share has fallen from 19 per cent in 2019 to 14.5 per cent last year — with profits in the country halving over the past decade.

Weakening demand for foreign brands comes at a particularly bad time for VW.

Reports this month that the firm could shut plants on German soil — for the first time in its 87-year history — sent shock waves through the global automotive industry.

Meanwhile, Mercedes-Benz also reported a sharp drop in net profit in the second quarter of 2024, singling out cooling demand in China.

What’s driven the shift?

VW’s troubles in China underscore the bleak prospects for foreign automakers in the country.

Domestic brands have harnessed government subsidies and superior battery supply chains, moving faster to develop EV tech than traditional manufacturers.

Over the past five years, China has dramatically shifted from the combustion-engine age — when foreign-made cars were seen as the pinnacle of engineering — to the electric age, where the country is a world leader.

Longtime motoring journalist and car enthusiast Peter Anderson also said patriotism in the Chinese car market had accelerated in the past decade.

“Homegrown companies clearly have government support, both financial and moral,” he said.

“Good patriots” had accordingly gone out and purchased Chinese brands, Anderson said, and foreign makers now had to respond to the evolving market.

“Every Western company goes into China thinking they’re going to ‘print money’.

“The only reason the foreign automotive industry had previously ‘printed money’ is because there wasn’t a Chinese automotive industry.”

But these days, local consumers have the option of purchasing a Chinese-made EV, with craftsmanship rivalling German or Japanese-made vehicles, at a fraction of the price.

Chinese-made EVs are also often packed with Tesla-inspired gadgets like tablet screens, entertainment, AI and autonomous driving capabilities.

What about Chinese car makers overseas?

Given China’s recent sluggish economy, exports have been seen as a bright spot.

Total exports have grown at their fastest pace in 17 months, according to data released last week.

And Chinese car makers’ share of sales in Europe has also risen from 12 to 17 per cent in a year, according to the Inovev consultancy.

The legacy European car giants are struggling with high energy costs and face immense pressure from Chinese brands like BYD, Geely (Polestar) and SAIC Motor (MG).

After years of battery development and a low-cost labour force, Chinese companies are able to make cars much more cheaply than traditional manufacturers.

With China’s car exports reaching record highs this year, Anderson said prospective owners in markets like Australia had become more open to Chinese brands because their performance was much improved.

“The early days of the Chinese brands were pretty dire,” he said.

“The cars were unexportable because we wouldn’t put up with how poor they were to drive. They felt awful.

Is an automotive trade war on the horizon?

China’s car exports are about to hit a big stumbling block.

The EU will vote next week to introduce tariffs — of up to 35 per cent — on Chinese-made EVs, according to media reports.

And the measures come at the same time the US also enacts steep tariffs on Chinese goods, including a 100 per cent duty on EVs set to come into effect on September 27.

The US says tariffs are needed to counteract China’s state subsidies and technology transfer policies which have led to excess production capacity.

In turn, China has vowed retaliation against “bullying” tariff hikes, arguing its EV industry success is due to innovation, not government support.

But even as the West erects new trade barriers, Chinese car firms are still investing heavily in overseas expansion.

Chery Automobile, for example, is expected to start production this year at a new factory in Barcelona and spend “billions of euros” on new brand development in Europe.

“Producing cars in Europe will help us avoid tariffs.”

By building in newly tariffed areas — to avoid the restrictions — Chinese companies are merely “doing what Japanese and Korean car makers did before them”, Anderson said.

And because Chinese companies have the “financial firepower” to quickly bring factories online in Europe, like BYD’s plant in Hungary, the car industry analyst said the EU was “probably encouraging them faster into that market”.

If Chinese manufacturers navigate trade restrictions and engage in price competition in the West, Anderson said the average car consumer would likely benefit.

“It’s going to be on for young and old — in Europe and the US — if the Chinese makers get in there and make some noise.”

Anderson said the importance of export brands as a “soft power play” also meant Chinese companies would remain interested in overseas markets.

Why should firms be optimistic about China’s auto industry?

Still feeling the pinch of US tariffs imposed during Donald Trump’s presidency, most analysts say Beijing does not want a trade war with the EU.

That’s good news for companies like VW, who would be heavily exposed to Chinese counter-tariffs.

And despite the global slowdown in the EV market, and the increasingly uncertain trade environment, there is still a strong belief that China’s car market is simply too big for Western firms to abandon.

European firms are spending big in China and taking new ownership stakes in Chinese car companies — like VW, which has teamed up with XPENG Motors, an EV firm it has a 5 per cent shareholding in.

“[Western firms] investing in Chinese companies, while still producing their own product there, is a way to hedge their bets because it’s still a massive market,” Anderson explained.

Similarly, European auto giant Stellantis, which owns Fiat, Peugeot and Jeep, has bought a 21 per cent stake in EV maker Leapmotor for 1.6 billion euros ($2.6 billion).

CEO Carlos Tavares was notably candid in his comments when announcing the investment last October.

“With this deal, we can benefit from it rather than being the victims of it.”

Anderson noted that — whether by accident or design — China had clearly cemented itself as the centre of the global car industry through decades of economic globalisation.

“From a supply chain perspective, China is critical to global automotive production,” he said.

“It doesn’t matter whether you’re making a Ford truck in Michigan or you’re making a sports car in a garage in the UK, you have got Chinese parts in there, unless you have been incredibly careful [to specifically avoid them].

ABC/wires