We've Been Here Before

A presence in China is vital for many industry players, but the facts are changing.

Source: FutureAtlas.com | License

For a couple of decades, virtually every global original equipment manufacturer spent significant capital and attention raising their sales/production profile in China. It became the world’s largest light vehicle market by 2010 and has not looked back. Forming new joint ventures to expand their portfolios through the extension of global offerings, several OEMs even took the opportunity to design China-specific variants. Western OEMs followed these JVs, and scores of European, North American, Japanese and Korean Tier 1 and 2 suppliers followed their OEMs, creating a local supply of global components as China became an integral cog in the machine.

A presence in China is core to success for many industry players. China produced about 28 million light vehicles in 2023, based on S&P Global Mobility’s estimates. China is not only key for Western OEM profitability, from a volume perspective it is the largest single market (about 31% of the world in 2023) with the highest growth profile. It also resides between Europe and the U.S. from a content and vehicle segment profile. Additionally, global unibody platforms from virtually every global OEM count on China for significant contributions. As recently as 2019, non-Chinese OEMs accounted for 13 million units (53%) of China’s light-vehicle output.

Why the history lesson? While this enviable position was key for Western OEMs and their suppliers, a number of factors have and continue to buffet their position in China. These include extraneous events such as COVID-19, chip supply shortages and port delays. More important has been China’s regulatory drive toward new-energy vehicles (NEVs) and the improving technical and scale economic profile of Chinese OEMs. Companies such as BYD, Geely, SAIC and others have moved up the past few years and are positioned for more. Their success is apparent. In 2023, Western OEM share dropped to about 40% of China’s volume. At this rate, Western OEMs are losing share at a rate of over 900,000 units per year – equal to the loss of three-and-a-half 250,000-unit assembly plants per year. A startling decline. Despite continued market growth, Western OEMs can no longer count on China as an automatic contributor to their global scale.

Growth in China, by China

There are other impacts of this decline to heed. As Chinese OEMs raise their profile domestically, they start to look toward export markets to diversify demand. Exports have risen from China to South America, various Southeast Asian locations, Mexico and scores of markets in Central America. As export volumes bolster domestic positions, scale economies and designs for multiple markets improve. Already, several Chinese OEMs are eying plants in Europe or Mexico to better serve these new markets from the inside.

Western OEMs must adjust their perspective. For instance, China accounted for over 16% of Ford’s global production volume in 2016. In 2023, this slipped to 8%. Mazda’s production volume in China declined from 17% in 2016 to 6% in 2023. Virtually every OEM is grappling with pressure on their China-based volume. This places even greater dependency on success in home markets of North America, Europe and Japan/South Korea. Similarly, their suppliers must adapt to the new reality of lower volume in China and stronger China-based competitors.

Turning this tide will be difficult. Many are seeking to slow the growth of China OEMs and suppliers in core export markets in North America and Europe through trade restrictions. Make no mistake, the problem is extremely complex, although history is a wonderful teacher. Any trade-based measures can distort competition and possibly raise prices for consumers. Over the long term, increased competition will result no matter what barriers are erected.

Chinese industry players have faster cadence, are nimble and are breaking many industry norms. This is the new reality. Western industry players will need to adapt as they have before.