Auto Makers Raise Bets in China Despite Market Slowdown

Date: June 11, 2019
Source: Wall Street Journal
Three decades of blistering growth in China’s auto sales came to a stop last year. But for the big foreign competitors that dominate the market, the country still represents the industry’s future.
 
As Beijing steps up to prioritize electric vehicles, the world’s largest auto market by sales is becoming the proving ground in the battle among Volkswagen AG, General Motors Co. and Toyota Motor Corp. — plus the new generation of upstarts, many of them Chinese, following Tesla Inc.’s electric-only lead.
 
“Technology-wise, in certain areas China is even getting into a leadership position,” said Holger Klein, a board member of German supplier ZF Friedrichshafen AG. “And in battery electric vehicles, we see a lot of momentum and market growth in China.”
 
No foreign company with a presence in China can ignore electric vehicles. Beijing offers tax incentives to consumers that make it hard to beat electric vehicles on price, and requires manufacturers to fill an electric-vehicle quota, forcing them to put more EVs on the market. But most auto makers see China’s move as a strategic challenge.
 
In addition, foreign companies face competition from local startups such as Byton, which was founded by former BMW AG and Nissan Motor Co. executives. In Silicon Valley, it works with American engineers and other experts to produce technology to use in its factories back home.
 
Automotive manufacturing directly employs 3.4 million people in the European Union, about 11 percent of the bloc’s manufacturing jobs, according to the European Automobile Manufacturers’ Association. Most of those jobs are linked to the production of internal-combustion-engine vehicles and could be at risk as the industry goes electric. Electric vehicles require different components and fewer manufacturing workers, auto-industry executives have said.
 
Many car makers and government policy makers worry that if China takes the lead in core technology for electric cars, Western auto makers could lose their innovation advantage and many development jobs could migrate to China. As a result, major auto companies are planning to invest more than $150 billion in China’s electric-car market over the next few years, according to company forecasts.
 
German companies, which account for well over half of that investment, “were always strong in developing internal-combustion engines, but the Chinese are way ahead in electric vehicles,” said Max Zenglein, an economist at Mercator Institute for China Studies, in Berlin.
 
“These structural changes in the automobile market are far more significant than what is really a mild slowdown of the Chinese economy,” he said.
 
Volkswagen, China’s largest car maker with more than four million vehicles sold a year, is investing more than any other traditional auto maker there. Chief Executive Herbert Diess flies to China at least every two months to oversee progress. In early January, at the height of investors’ concerns about the economy, Mr. Diess landed in Beijing and told reporters: “China will become an incubator for innovation and new technologies around mobility. China is the new automotive powerhouse.”
 
VW expects China’s demographics to favor continued growth. Nationally, China lags behind Europe and the U.S. in car ownership per capita, and its western cities are still underdeveloped. Growth will come increasingly from electric vehicles—which is why VW is building a €700 million ($793 million) factory there to make all-electric cars.
 
BMW, the German luxury-car maker, is investing about $4 billion to take control of its Chinese joint venture, BMW Brilliance Automotive; it has said that BBA will begin production of its first fully electric sport-utility vehicle, the iX3, which it will export to foreign markets. BMW also is ramping up plans to build an electric version of its MINI.
 
The U.S.-China trade dispute is encouraging companies like BMW to build more cars in China to avoid China’s retaliatory tariffs on U.S.-built cars, which are now hitting the SUVs that BMW builds in the U.S. for export.
 
“The best strategic footprint is if you have good production in each of the three regions: Europe, China and the U.S.,” BMW Chief Executive Harald Krüger told The Wall Street Journal earlier this year. “Now we produce the X3 in China, and we are not sensitive to any tariff discussions.”
 
Other manufacturers that had been holding back are now stepping up their involvement in China. France’s Renault SA sold 216,699 vehicles in China in 2018, a more-than threefold increase from 72,100 vehicles the previous year, because of its joint venture with Brilliance China Automotive Holdings Ltd. Renault aims to more than double its sales in China to 550,000 a year by 2022.
 
Renault in December invested in what it called a “significant” stake in JMEV, the electric vehicle unit of Jiangling Motors Corporation Group. Renault Chief Thierry Bolloré said in March that China was a “key pillar” in the company’s global expansion drive. “We are expanding our product range as part of a coherent approach, ‘In China, for China,’” he said.
 
Despite the general slowdown in new-car sales last year, Japan’s Toyota sold 1.5 million vehicles in China last year, a 14 percent increase. This year it aims to increase sales again. Next year, Toyota plans to launch its first electric vehicles for sale in China—the C-HR and the IZOA.
 
U.S. manufacturers are more skeptical about electric cars, although in 2012 China became General Motors’ largest single market. GM sold 3.6 million vehicles there last year and its Cadillac XT5 is one of the top luxury SUVs on the market.
 
“We knew that the years of record after record wouldn’t go on forever in China,” said Mr. Klein, who runs ZF’s global chassis business from China. “However, many of us still believe in the fundamentals. This is today the largest auto market and is still growing.”
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