China Will Dominate the Auto Industry (And How U.S. Automakers Strengthen China’s Dominance) …

In 1979, I was asked by Walter Kissinger, then Secretary of State Henry Kissinger’s brother and the CEO of The Allen Group (a manufacturer of automotive parts), to lead a group of automotive industry financial analysts on a delegation to China. The purpose of the trip was to visit the country’s few auto parts producers and meet with state government officials. As automotive analysts, we wanted to understand China’s potential to use its abundant, but unskilled, workforce to manufacture automotive parts for export and eventually support auto assembly.

Then, the streets of Beijing and Shanghai were crowded with pedestrians, bicycles, buses, and vendors selling everything from food to on-the-spot sewn clothing. Although there was ample evidence of Chinese innovation and engineering expertise in its historic buildings and artifacts, there was little evidence that workers had the production capabilities and attitude to deliver consistent quality. Even the simple assembly of car jacks produced as much scrap as saleable product. Our meeting, however, with government officials communicated an understanding of, and commitment to, the development of a local auto industry. While the factories offered little evidence to suggest that China, within two decades, would be among the top auto parts producing nations in the world, the Chinese government was determined to succeed.

Learning from joint ventures allowed China to scale rapidly…

The Chinese government already understood the multiplier effect that automotive production has in the development of an industrial base. Our visit included numerous meetings with government bureaucrats whom, to our surprise, were well schooled on the structure and economic importance of the U.S. automotive industry. They recognized that successfully producing a car, by definition, supports an industrial infrastructure of highly skilled suppliers.

By the 1990s, in just 10 years’ time, China transformed its automotive parts ecosystem from scattered factories into a global powerhouse. U.S. auto companies began demanding that parts manufacturers match the “China price,” thus forcing more companies to relocate production and investments to China. Those investments, along with assembly joint ventures, transferred technology and know-how that accelerated China’s development of the modern automotive industry. 

China is now the world’s largest producer and consumer of motor vehicles, and its scale places it in a prominent position of influence over product development and investment by every major automaker, especially given automaker dependence on profits generated by their Chinese operations.

But it isn’t just the profits generated from Chinese production that bolster the country’s status, China can now influence global vehicle technology through its own regulations. 

Strategy One: Push electric vehicles to achieve dominance.

China’s embrace of electric vehicles, and its market’s forced acceptance of them through regulation, is linked to its dominance in lithium ion battery production. China already controls the raw materials for batteries and the lion’s share of global capacity of the anodes, cathodes, separators, and electrolyte solutions, which are the foundation of these batteries. Unsurprisingly, the world’s largest producer of lithium ion batteries, Contemporary Amperex Technology Co. Limited (“CATL”) is located in China. So as global demand shifts to electric vehicles, Chinese companies will benefit in ways they could not with internal combustion engines and, more importantly, in ways that their global competitors cannot match. The scale of the Chinese market and the forced acceptance of electric vehicles through regulation cements China’s leadership in batteries, a role that it could not claim in internal combustion engines and powertrains.

Strategy Two: Export cheap cars that fill the gaps left by other automakers.

In the U.S., vehicle affordability has become a major issue. Established automakers have raised prices while eliminating low priced alternatives of small sedans, leading to an average vehicle price of $35,500 – more than the average per capita income in the U.S.! This situation is nearly identical to the market in the late 1960s and 1970s when the void left by U.S. automakers allowed the Japanese to establish themselves with lower priced, acceptably equipped models, such as Toyota Corollas and Honda Civics. These small, fuel-efficient cars sold at bargain prices and quickly became popular on American roads. U.S. automakers addressed the issue of affordable small cars with a rogue gallery of infamous models named Vega, Pinto, and Gremlin, each synonymous with horrible quality, poor reliability, and inferior safety. That market void enabled the Japanese to build upon their initial success with small cars and increased their current share of the U.S. vehicle market to 40%.

Chinese design, engineering, and quality have reached the point where Chinese cars have the potential to repeat Japan’s success. The process of displacing Japanese and U.S. brands in Latin America is already well underway. With prices that are already cheaper than their counterparts, the race to establish Chinese brands in North America will gain momentum unless stymied by a trade war that raises the U.S. duty on imports from China well above the current level of 2.5%

Conclusion...

Global automakers are learning that marching to the Chinese anthem has been costly. Their joint ventures transferred technology, thus enabling the rapid development of the automotive industry. Now, China, not the U.S. or Europe, will dictate future technology, and automakers are admitting that meeting Chinese mandated electric vehicle targets will reduce margins and raise capital spending. As Chinese automakers export in earnest into developed markets, they will take share from the established sellers just as the Japanese automakers did 30 and 40 years ago.

Maryann Keller is principal of Maryann Keller & Associates, a Stamford-based automotive strategy consultancy.