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The 5 Faces of the Chinese Automotive Industry

Dr. Rainer Mehl
13 Jan 2023

Major market, serious challenger, source of innovation, powerful partner, and supply chain linchpin. How do you see the Chinese automotive industry?

China is much more than an emerging market for traditional automotive OEMs – it’s the world’s biggest market, a major challenger, and – perhaps most importantly – a crucial partner for innovation. What will China’s role be in the global automotive industry?

I’ve made more than 40 trips to China over the last 15 years and it’s incredible to observe just how much the country’s role in the global automotive industry has changed during that time. Put simply, it’s a story of rapid evolution, from ambitious copycat to serious challenger. The industry’s transformation – driven by electrification, softwarization, and the pursuit of autonomous driving – has led to a fascinating and rapid role change for China’s automotive industry and its technology ecosystem.

The early days of the automotive industry in China and my beloved Santana

So, how should we view China within the automotive industry? Ten or fifteen years ago, the answer might have been simple – a huge, emerging market for established brands to sell to and an important supply chain partner providing many of the materials and components needed for cost-effective mass production.

Today, the answer is much more complex. In recent months, we’ve seen Chinese manufacturers make headlines with their presence at the Paris Motor Show, and we’ve seen Volkswagen Group (through its software division CARIAD) enter into a huge partnership with Horizon Robotics (a company that’s less than ten years old, and yet already a leader in the development of technology to support assisted and autonomous driving), and we’re seeing more and more Chinese electric vehicles (EVs) appearing on European roads.

Let’s explore the many faces of China’s booming automotive industry.

1. China as a (unique) market

As the biggest market in the world (and still growing), China is hugely important for car makers to sell to. Increasingly, it’s becoming the main focus for major automotive companies. China was the biggest buyer of German car exports in 2021. The trend continued into 2022, with Mercedes Benz selling almost 3 times more vehicles in China than in the US. Such is the importance of the market that both Tesla and Mercedes-Benz recently announced price reductions on their electric vehicles in China, despite prices initially holding firm or increasing in other markets. Preferential treatment for a car manufacturer’s most-important market?

The competition for market share goes beyond pricing. Audi recently revealed its urban sphere concept, a luxury EV (described as a “spaceship on wheels” by Head of Design, Marc Lichte) designed in collaboration with Chinese customers with Chinese megacities in mind. Whether the car makes it into production in its current guise remains to be seen. Still, it clearly indicates that China is at the heart of carmakers’ thoughts when designing and developing new products.

It’s too simplistic to say that it’s just the size that makes China unique as a market. It’s also the customers. During my many trips to the Far East. I was struck by how Chinese consumers had largely bypassed the PC era – the first ‘computing’ device to reach the masses was really the mobile phone. This ‘mobile first’ mindset has led to high expectations for sophisticated, personalized, connected digital mobility experiences.

Carmakers aspiring to compete in this important market need to think beyond infotainment and raise the level of their in-car and digital mobility experiences in order to appeal to this demanding and massive demographic. There is much to learn from the Chinese market and the capabilities needed to compete there would undoubtedly help European and North American car makers elevate their service and feature offerings and become more competitive globally.  

2. China as a challenger

Based on sales in the first three quarters of 2022, China overtook Germany as the world’s second-largest exporter of cars.  A single year (especially one characterized by almost constant turbulence) does not tell the whole story but this ‘serious challenger’ status was also confirmed at the Paris Motor Show, where Chinese carmakers were out in full headline-grabbing force. While Chinese ICE vehicles often lacked the credibility to penetrate European markets (largely due to weak brands, low safety ratings and build quality), electrification has levelled the playing field and Chinese brands are now rivalling European and North American in markets they’ve dominated for decades.

This is due to a variety of reasons, including the head start and government backing for electric mobility, proximity to the materials and manufacturing capacity needed to produce large volumes, as well as strong advanced driver assistance system (ADAS) capabilities. This unique set of advantages has translated into highly competitive and innovative propositions, such as NIO’s battery-swapping technology and service or XPENG’s use of AI-powered in-car assistance and progress toward autonomous driving. As carmakers race to bring their electric and semi-autonomous vehicles to market, Chinese manufacturers could be well positioned to challenge for increased market share in the years ahead.

Traditional manufacturers, several of which are currently grappling (and arguably struggling) with the transition to electric mobility, might not welcome this additional competition in the near term. But, having witnessed the entry and dynamic growth of Tesla, it’s clear that increased competition, from new sources, motivates other automakers to accelerate their progress. Customers and industry observers will welcome the increased competition and the opportunity to enjoy more choices and more innovation. 

3. China as the supply chain linchpin

From steel to rare-earth material mining and refinement, chips, and semiconductors, China-sourced resources and manufacturing capabilities are at the heart of the global automotive industry, more so now that the industry is firmly focused on electrification.

Batteries typically account for 30% to 40% of the value of an electric vehicle (EV). With the exception of mining the raw materials required for battery production, China dominates the entire downstream EV battery supply chain – it is the leader (by far) in the areas of material processing, cell components, battery cell production and EV production (IEA).

Although European and North American car manufacturers are now working to diversify their global supply chains and reduce dependence, it is clear that, in order to build electric vehicles cost-effectively in large quantities today, China must be a key part of the plan.

Geographical distribution of the global EV battery supply chain - china an emerging market for automotive
Source (IEA)

Another key factor working in Chinese manufacturers’ favour is their ability to keep churning out vehicles while manufacturers elsewhere (especially in Europe) have struggled. A recent example of the growing confidence in China-made electric vehicles can be found in SIXT’s agreement to purchase 100,000 BYD units from BYD for its European operations. It’s a deal that indicates not only the growing credibility of the Chinese product but also a high degree of confidence in production capacity, as well as material and component availability.

4. China as a source of (rapid) innovation

When we consider the key streams of disruption happening in the global automotive industry – electrification, softwarization, and autonomous driving – it’s obvious that China has a major or leading role in all of them. Thanks to companies like CATL (and their impressive growth story), China is bringing battery technology, production know-how and innovation to the rest of the world and – through its sale of batteries to Volkswagen Group, BMW, Mercedes and Stellantis – enabling other OEMs to grow their EV business in the process.

European and North American car makers are playing catchup now (with their own battery initiatives), but their recent progress in rolling out viable electric vehicles owes much to technology developed and manufactured in China.

A snapshot of the present-day automotive and mobility landscape in China

Battery production is not the only area where China looks like a role model for the industry. With a rich tech ecosystem consisting of fast-moving tech giants like Alibaba, Baidu, Huawei, Tencent and Xiaomi, China is arguably leading the way or is at least at the forefront of innovation when it comes to connectivity, in-car software, AI, and automated/assisted/autonomous driving (look up RoboTaxi examples on YouTube to see what I mean).

As Europe and North America grapple with the pros and cons of letting Apple CarPlay and Android Auto into their vehicles, Tencent is enabling everything from intelligent cars all the way through to in-vehicle integration of social media, video streaming, messaging, and commerce functions. Some 600 industry partners, including Geely (Volvo and Polestar), Mercedes Benz, and BMW are already collaborating with Tencent, putting the company and its ecosystem in a prime position to play a major role in shaping the driver and passenger experience in the world’s largest market, and perhaps beyond. 

It’s perhaps natural to assume that what works in China might not be appropriate for European and North American markets, but this is an oversimplified view. China has some of the most congested (and often chaotic) road systems in the world, making it a perfect test environment for assisted and autonomous driving. Similarly, the diversity of the population – from Gen Z to the Silver Generation, not to mention regional variation – means that the Chinese industry is adept at catering to an extremely wide range of needs, values, and levels of digital maturity. The innovation that is inspired by this diversity – and the rapidity with which the Chinese industry moves – is something that both European and North American carmakers could also benefit from.

5. China as a key partner

Leading carmakers in Europe and North America already have well-established partnerships with Chinese companies in areas like battery production and manufacturing. These are crucial for the future of the industry and yet reflect just one dimension of the relationship with China.

For many years, the common consensus was that China had a lot to learn from the rest of the world. Today, one can argue that the tables have turned and that traditional car markers have as much – if not more – to learn from their Chinese peers.

These days, international companies are lining up to access Chinese-developed expertise through new partnerships or increased investment in R&D. For example, Volkswagen Group – through its software division CARIAD – recently announced a EUR 2.4 bn investment in a partnership with Horizon Robotics aimed at accelerating the Group’s progress toward autonomous driving.

Mercedes-Benz has entered into several partnerships with Tencent, including key deals in the area of autonomous driving, infotainment, and cybersecurity. In 2022 alone, Mercedes Benz, VW/CARIAD, and Audi opened or expanded R&D operations in China. Although a lot of this is geared toward strengthening positions in the Chinese market, it’s clear that China and its outstanding automotive talent are increasingly being looked to to provide rapid innovation and inspiration that can be applied globally.

And the partnerships are not exclusive to China either; Renault is rumoured to be backing BeyonCa, a Chinese newcomer to the premium EV category hoping to make waves in Europe. Elsewhere, Polestar, an EV brand that leverages its relationship with Volvo and Scandinavian heritage to appeal to customers around the world, is owned by the Chinese company Geely. Cars are designed in Sweden and manufactured in Luqiao, China, where they are shipped to the United States, Europe, and other significant markets. The Polestar story is a great example of how China has risen to the fore as central to the prospects of a fast-rising, highly respected brand and how it is deeply embedded at the heart of the industry and connected in all possible directions.

So, what should the world make of China’s growing role in the global automotive industry? It’s the largest and fastest-growing market, a major player in the supply chain, a driver of electric mobility, and a thriving source of new innovation. China shouldn’t be seen as simply a supplier of materials and manufacturing capacity, or indeed as purely a challenger to be wary of. Instead, we need to look at how mutually beneficial partnerships can deliver the greatest good, for customers and for the planet.

By welcoming Chinese innovation and perspective into a global, diversified, automotive ecosystem and supply chain, and by facilitating the right partnerships, we can accelerate the industry on its journey to achieving its important generational goals and helping us all enjoy a future of sustainable, safe, stress-free mobility.

I look forward with optimism to observing the ongoing evolution of China as a major player in the global automotive industry.

About Author

Dr. Rainer Mehl

EVP and Managing Director Strategic Account Intelligent Industry
A leader who serves: leadership in the digital age is Rainer’s passion allowing him to successfully lead transformations both at clients and in service organisations. He supports companies in their digital transformation with a focus on customer centricity, agile organization and new business models

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