Why American Automakers Are Failing In China

Summary

The transcript discusses the transformation of China's automotive industry from limited private car ownership to becoming the largest car market globally. It highlights how foreign automakers, especially American ones, initially thrived but are now struggling due to competition from rapidly improving Chinese brands. Chinese automakers, supported by government investment in electric vehicles (EVs), have become global competitors, leveraging technological advancements and quick product development cycles. The transcript emphasizes the growing dominance of Chinese firms and the challenges faced by foreign companies as they lose market share in China.

Takeaways

• 🚗 China's auto industry has transformed from virtually nonexistent four decades ago to becoming the largest auto market in the world.
• 🌍 Foreign automakers, especially American ones, initially benefited greatly from entering the Chinese market, but are now being pushed out due to Chinese companies catching up in car production quality.
• 📉 GM, Ford, and Jeep have seen dramatic declines in sales in China since 2017, with Jeep even going bankrupt in the country.
• 🇨🇳 Chinese automakers have rapidly improved the quality of their cars, partly through joint ventures with foreign firms and acquiring global brands like Volvo and MG.
• 💡 China's focus on electric vehicles (EVs), supported by massive government subsidies and a strong local supply chain, has given it a significant advantage in global competition.
• 🔋 China leads in EV battery development and production, as well as in vehicle software and infotainment systems, surpassing many foreign competitors.
• 🚀 The speed of vehicle development in China is much faster than in other markets, with models being refreshed or updated in just 12 months.
• 📱 Chinese automakers treat cars as technology platforms, integrating advanced software and maintaining close relationships with customers through social media and apps.
• 🛠️ Foreign automakers now face a highly competitive environment in China, with Tesla being one of the few companies still faring relatively well due to early entry and independent operations.
• ⚠️ Experts predict that many foreign automakers could completely exit China in the next five years unless they adapt by investing in local design, development, and EV production.

Q & A

What was the state of private car ownership in China four decades ago?

Private car ownership was virtually unheard of in China four decades ago, and most people commuted using bicycles like the Flying Pigeon.

How did foreign automakers initially benefit from the Chinese auto market?

Foreign automakers, including American companies, profited significantly from China’s growing auto market, enjoying prestige and high sales due to strict trade rules and partnerships with Chinese companies.

Why have foreign automakers, particularly American ones, started losing ground in China?

Foreign automakers are losing market share in China because local Chinese car companies have rapidly improved in quality, lowered prices, and gained favor with Chinese consumers who now prefer domestic brands.

What role did joint ventures play in the growth of China’s automotive industry?

Joint ventures between Chinese and foreign automakers helped Chinese firms learn advanced car-making techniques, allowing them to quickly catch up and eventually compete with their foreign partners.

How did Chinese automakers improve vehicle safety and quality?

Initially, Chinese cars performed poorly in crash tests, but over time, they improved significantly due to knowledge gained from joint ventures with foreign automakers and investments in better technology.

What role did government policies and investments play in China's automotive growth?

The Chinese government supported the automotive industry through policies like the 1994 Auto Policy, investments in EVs, and infrastructure, such as highways, tax cuts, and research funding, which gave local companies a competitive advantage.

Why did China focus heavily on electric vehicles (EVs) as a strategy?

China prioritized EVs to address air quality issues and to gain a competitive edge, believing it would be difficult to surpass Western and Japanese companies in internal combustion engines, so they aimed to lead in the EV space.

What impact did the 2023 price war, started by Tesla, have on the Chinese auto market?

The price war, initiated by Tesla in 2023, intensified competition, leading to accelerated vehicle development and pushing companies to release new models at lower prices faster than ever before, creating a cutthroat market environment.

How do Chinese automakers leverage technology and customer feedback to gain an edge?

Chinese automakers excel in software development, infotainment systems, and maintaining close relationships with customers through social media and apps, creating a strong feedback loop to improve their products rapidly.

What is the future outlook for foreign automakers in China, according to experts?

Experts believe that many foreign automakers, including Ford, GM, Hyundai, and others, are likely to exit China in the next five years due to intense competition, while companies like Tesla may hold out longer but still face similar challenges.

Outlines

00:00

🚗 The Rise of China's Auto Industry and Foreign Automakers

Four decades ago, private car ownership in China was rare, and bicycles were the primary mode of transportation. However, the country has since become the largest auto market globally. Initially, foreign automakers like American companies thrived in China, profiting from joint ventures and teaching Chinese firms about car manufacturing. Over time, Chinese automakers quickly caught up, becoming formidable competitors. Today, these domestic brands dominate the market, pushing foreign firms out. The competitive nature of the industry has transformed, with Chinese companies producing new models faster and at lower prices. Now, foreign firms face a serious challenge in maintaining market presence.

05:02

📉 Decline of Foreign Automakers in China

Foreign automakers, once highly successful in China, have seen their market share rapidly decline. GM's sales have dropped significantly since 2017, with a sharp fall in 2023. Ford and Jeep faced similar fates, with Jeep even declaring bankruptcy in China. The downfall of these companies is tied to the rising competitiveness of Chinese car manufacturers, whose quality has drastically improved over time. Chinese firms now produce vehicles that meet global standards, thanks to the knowledge gained from joint ventures and foreign investments. Some key Chinese brands grew through acquisitions of foreign companies, such as Geely's purchase of Volvo and Lotus.

10:04

⚡ China's Focus on EVs and Global Competitiveness

China's government has played a crucial role in supporting its automotive industry, particularly in electric vehicles (EVs). Massive investments, totaling billions, were made in EV infrastructure and production to combat pollution and position the country as a leader in green technologies. Companies like BYD received significant subsidies, and Chinese automakers now lead in battery development and software innovations. This shift has given China a global edge, and its automakers are rapidly becoming leaders in EV technology. Chinese firms have not only excelled in battery production but also in the development of software and infotainment systems, thanks to the country's expertise in the electronics industry.

15:08

🚘 China's Fast-Paced Auto Development and Tech Companies' Entry

China’s automotive market has evolved at an unprecedented pace. New entrants from the technology industry, like Li Auto, Xpeng, and Nio, are producing highly connected vehicles, positioning cars as technology platforms. The Chinese auto market, with its fast refresh cycles and innovative approaches, is incredibly competitive. Foreign automakers struggle to keep up with the speed and lower prices offered by local companies. Furthermore, Chinese CEOs engage directly with customers via social media, creating tight feedback loops that enhance product development. This new approach contrasts with older, more traditional car manufacturers, giving Chinese firms an advantage.

🔄 Political Tensions and Changing Trade Policies

Political factors have also influenced the decline of foreign automakers in China. In 2017, geopolitical tensions between China and the U.S., as well as South Korea, led to a significant drop in sales for both American and Korean automakers. At the same time, China began rolling back trade rules that once benefited foreign firms, including the requirement for joint ventures. As Chinese companies grew stronger, they no longer needed foreign partnerships to compete. As a result, many analysts predict that within the next five years, major foreign brands like Ford, GM, and Hyundai may exit the Chinese market altogether.

🚀 Tesla's Success in China and the Future of Foreign Firms

Tesla has managed to fare better than other foreign automakers in China, partly due to its ability to set up a wholly-owned operation without a joint venture. As a result, Tesla now produces more than half of its global vehicles in China. Despite this, the future remains uncertain, as China has a history of learning from foreign companies and eventually pushing them out. Former Chrysler executive Bill Russo advises foreign firms to stay in China, invest more in local development, and focus on producing EVs, as the global market shifts toward electric vehicles.

Keywords

💡Private car ownership

Private car ownership refers to individuals or households owning their own vehicles, as opposed to relying on public or shared transportation. In the video, it highlights how private car ownership was once nonexistent in China but has rapidly grown, symbolizing the country's economic transformation and its rise to become the largest auto market in the world.

💡Joint ventures

A joint venture is a business arrangement where two or more parties, often from different countries, collaborate to achieve a common goal, sharing profits, losses, and control. In China’s automotive industry, foreign car manufacturers entered joint ventures with Chinese companies to gain access to the market. The script emphasizes how these partnerships initially benefited foreign automakers but eventually empowered Chinese firms to compete globally.

💡Detroit three

The 'Detroit three' refers to the three major American automakers: General Motors (GM), Ford, and Chrysler. These companies were significant players in China’s automotive boom, but the video outlines how they have been losing market share in recent years due to rising competition from Chinese brands and shifting consumer preferences.

💡Chinese automakers

Chinese automakers are car manufacturers based in China. Initially reliant on partnerships with foreign firms, these companies have rapidly advanced in technology, quality, and production capacity. The video discusses how companies like BYD, Geely, and Nio have overtaken international competitors in China, benefiting from state support and an evolving domestic market.

💡Electric Vehicles (EVs)

Electric Vehicles (EVs) are vehicles powered by electric motors instead of internal combustion engines. The video stresses China's strategic focus on EVs to leapfrog ahead of Western competitors in the auto industry, especially in terms of environmental goals and technological leadership. Companies like BYD and Tesla are noted as significant players in this sector.

💡Tesla

Tesla is an American electric vehicle and clean energy company. The video discusses Tesla’s competitive position in China, being the first foreign automaker allowed to operate without a joint venture, and its dominance in the EV market. However, it also warns that Tesla, like other foreign automakers, may eventually face the same fate of declining influence as China’s domestic firms grow stronger.

💡Market share

Market share refers to the percentage of an industry’s sales that a particular company controls. In the context of the video, foreign automakers like GM and Ford have been rapidly losing market share in China to domestic competitors due to changing consumer preferences and the rise of Chinese automotive technology.

💡Software and infotainment systems

Software and infotainment systems refer to the digital technologies and interfaces within vehicles that control entertainment, navigation, and vehicle functions. The video highlights that Chinese automakers have become leaders in this area, capitalizing on China’s strong tech industry, while Western automakers struggle to keep up with these advancements.

💡Subsidies

Subsidies are financial aid provided by governments to support industries or sectors. The Chinese government has heavily subsidized the electric vehicle industry, including companies like BYD, to foster domestic innovation and production. The video mentions how these subsidies were part of China's strategy to address environmental issues and accelerate EV development, giving Chinese automakers a competitive edge.

💡Price war

A price war occurs when companies competitively lower their prices to attract customers, often sacrificing profitability for market share. In the video, the price war initiated by Tesla in 2023 in China is mentioned as a key factor that has further intensified competition in the already cutthroat Chinese automotive market, forcing companies to lower prices and innovate faster.

Highlights

Private car ownership was nearly unheard of in China four decades ago, but the country is now the largest auto market in the world.

Foreign automakers, including American ones, initially thrived in China but are now losing ground to domestic companies.

Chinese automakers have advanced rapidly and now dominate the local market, with foreign brands being pushed out.

Many Chinese automakers are privately owned and operate in a highly competitive, fast-moving environment, producing new models quickly and at lower prices.

Chinese consumers increasingly prefer local brands due to better customer relationships and product offerings.

The initial success of foreign automakers was due to joint ventures with Chinese firms, helping the latter learn how to produce high-quality vehicles.

By 2023, GM’s sales in China fell by more than 50%, and Jeep exited the market entirely after going bankrupt in China.

Chinese automakers improved their vehicle quality dramatically, making significant strides in crash tests and overall performance.

Cross-border investments by Chinese companies, such as Geely’s purchase of Volvo, contributed to creating globally competitive brands.

The Chinese government invested heavily in electric vehicles (EVs), spending an estimated ¥200 billion to support the industry’s growth.

Chinese companies lead the world in battery development and production, giving them a competitive advantage in the EV market.

Recent entrants to the auto market include major Chinese tech companies like Xiaomi, Huawei, Baidu, and Tencent, viewing cars as technology platforms.

The Chinese automotive market is extremely competitive, with new models being refreshed in as little as 12 months, while foreign automakers struggle to keep up.

Elon Musk and Chinese CEOs alike engage with customers on social media, fostering direct feedback loops that accelerate product improvement.

Chinese automakers focus on software and infotainment systems, a growing strength that reflects the country’s rise in the electronics industry.

Transcripts

Just four decades ago, private car ownership was

unheard of in China.

For most people. In a country where private cars

still don't exist, the journey to work is still by

flying pigeon bicycle.

And there was almost no auto industry in the country, but

now it is the largest auto market in the world by far.

Some of the biggest beneficiaries of this

meteoric rise were foreign automakers, including

American ones.

They made piles of money.

But the good times have come to an end and their

future in the country is seriously threatened.

Detroit is under pressure in China, and for the same

reasons they're losing in China, they could very

easily lose globally.

Lured by the promise of access to a burgeoning

market of at the time, more than 1 billion people,

global automakers agreed to strict trade rules and

taught inexperienced Chinese partners a lot about

making cars.

For a long time, it was worth it.

Foreign companies enjoyed prestige and popularity, but

Chinese firms caught up fast to the point that

foreign firms are now being pushed out.

The new market isn't quite like the state owned

industry, one might imagine.

Many top firms are privately owned.

There are fewer restrictions. It's highly

competitive. New models can come to market in a fraction

of the time it takes automakers elsewhere in the

world, and always at lower prices.

Increasingly, Chinese consumers prefer to buy

Chinese brands, and the CEOs who run these companies

have close and direct relationships with their

customers.

It's unlikely that once they've once you've been

dethroned, that you'll regain any any power in the

market.

Despite the daunting circumstances, some say

foreign firms, including American ones, need to

double down.

If you don't compete in China, then what are you

going to do when China shows up in your backyard?

How do you know how to compete with them?

You haven't even tried.

China's automotive industry dates back to the early

1980s. Two Chinese automakers formed joint

ventures with foreign manufacturers, one with an

American firm, another with a German one.

The industry was tiny at the time.

The first vehicle, the Volkswagen Santana, sold

7500 units and dominated the market.

The only vehicle buyers were government institutions

and the like.

Concept of a family car or a private car?

It wasn't. Nobody was even allowed to buy cars.

But reforms in the 80s and 90s opened the floodgates

and created the 21st century auto market

recognizable today.

In 1994, one of China's top planning commissions issued

the policy for the Automotive Industry, also

known as the 1994 Auto Policy.

This rule allowed foreign automakers to take up to a

50% share.

In a joint venture with any Chinese auto manufacturer.

Foreign firms could start no more than two joint

ventures for any single type of vehicle.

Later rules favored foreign automakers capable of

producing cars that met global quality standards

from locally sourced parts.

General Motors, the biggest automaker in the world at

the time, entered China in 1997, partnering with

Shanghai Automotive Industry Corporation.

As China's economy liberalized and grew, so did

auto sales.

Demand pretty much tripled in the 1990s, and throughout

2000 2001, China finished its negotiations to enter

the WTO, and that gave more security and reliability

predictability to foreign automakers and China really

took off.

Sales grew ten fold in less than ten years, and China

became the world's largest car market that year.

Gm used to be the poster child for an awesome

US-China relationship.

At one point, the CEO from GM China told me, Here in

China, we're making more money than God.

Things are great.

Chinese people love our Buicks.

We're bringing Cadillac soon, and it looked like

there was going to be a forever annuity for the big

three GM, Ford and Jeep in China.

But that didn't go as planned.

A quick look at the market share of international auto

manufacturers in China illustrates how rapidly

things have changed.

Gm sales in China have fallen from that high water

mark consistently since 2017.

In 2023, they fell to 2.1 million lower than their US

sales for the first time since 2009.

Equity income from the country GM's metric for how

much it earns in its second largest market fell 34% in

2023 to $446 million.

It fell 54% during the fourth quarter alone.

Things have been downhill and accelerating downhill,

so much so that GM sales are down by more than 50%,

Ford's down by more than 60%, and Jeep has actually

gone bankrupt in China and had to get out.

So in the last five, six years we've seen just a.

Disastrous, you know, outcome for the Detroit

three.

It's very abrupt.

It's very sudden.

But I think it shows the the maturity, basically of

these Chinese competitors.

So here is how it happened.

First, Chinese cars improved by a lot.

When Chinese firms first started exporting, and they

started to soon as the Koreans did 30 years

earlier, they didn't have the requisite quality.

They failed miserably in many crash tests,

particularly in Europe.

And the internet was full of pictures of Chinese cars

crumpling like tinfoil.

510 years later.

They have extremely good results in crash tests and

you don't hear a word about it.

A lot of that.

Improvement was thanks to what Chinese automakers

learned from foreign partners.

The whole point of the joint ventures was to bring them

up to speed, to make sure that, uh, Chang'an that far,

that Shanghai all could come up to a to a point

where they could compete with basically their

partners and everybody else if they hadn't seen that

coming, that's on them.

But Bill Russo, a former Chrysler executive who now

runs a consulting firm in Shanghai, sees it somewhat

differently. Cross border investments made by Chinese

investors and some non-Chinese ones, were

perhaps even more important than joint ventures in

creating globally competitive brands.

Nanjing Automobile Group bought the legendary British

brand MG in 2005, and began making cars in 2007.

Geely bought Volvo from Ford in 2010 for $1.8

billion, and then spun out the Polestar performance

line as a standalone EV brand.

Geely also bought British sports car maker Lotus.

In 2017, American investor Warren Buffett took a stake

in BYD, although he has since reduced it.

Some leading brands are privately owned and didn't

grow out of joint ventures.

Government support, of course, played a crucial

role. The country knew it needed some kind of edge on

incumbents. It bet big on EVs, spending an estimated

¥200 billion, which comes out to about 27 billion

American dollars.

Byd received over $3.6 billion in direct subsidies

between 2018 and 2022, most of it in that last year.

Partly this was to combat China's intolerable air

quality problems. Decades of industrial development

had left cities like Beijing with some of the

worst air pollution in the world.

But the decision was also economic.

The Chinese felt that they had a hard time competing

with the Western, and especially Japanese

companies with internal combustion engines, because

it would be hard to catch up.

So they decided they would leapfrog and go into

electric vehicles. And this is an area in which nobody

was proficient.

In 2008, at the height of the financial crisis, the

Chinese government made massive investments in

transportation worth about $586 billion, including

investments in a nationwide high speed railway system,

airports and critically, highways.

The following year came tax cuts on smaller cars and

incentives on vehicle sales in rural areas.

A new policy outlined eight goals for the next two

years. The plan grow car production and sales and

fund research on EVs, plug ins, hybrids and fuel cell

vehicles. Those investments have given China a

considerable leg up.

A lot of the supplier base, including critical

materials, is local.

Chinese firms are really leading the world in battery

development and battery battery production.

And there's a tendency in the US, again, to think of

this as all a matter of subsidies or cheap labor or

lousy environmental controls, and all those

things have some role to play and particularly played

a role in the past. But it underestimates the degree to

which Chinese dominance is based on technical capacity.

Strengths go beyond batteries and motors.

Chinese firms have become quite strong in software and

infotainment systems, a benefit of the country's

rise in the mobile phone and electronics industries.

Volkswagen, for example, had big problems with the

software trying to hold together its EVs, and

they've looked to China to help solve that.

And I think that's a really important part of the story

that you don't hear much about.

Recent entrants with backgrounds in the

technology industry include Li Auto, Xpeng, Nio, Xiaomi,

Huawei, Baidu, Tencent and Alibaba.

A little bit like Tesla, they're new.

They don't have the burden of history.

They don't have old factories to or not so many

old factories to reconfigure, and they have a

very fast pace of development.

These companies view the car as a technology platform for

the distribution of services and the continual

collection of service revenue, rather than a thing

that is simply sold once and then forgotten.

The concept of the car as a rolling smartphone or

computer is already normal in China.

China's younger buyer base prefers the highly connected

products Chinese firms are selling.

They now are often saying that the Americans and the

and the Europeans produce cars that have inferior

software and don't use the latest chip, and are not as

much on the cutting edge.

The image many non-Chinese may have of the Chinese

economy is one where the central government controls

these large state owned enterprises.

That's partly true, but there's a lot of nuance.

Three of China's major automakers are controlled by

the central government in Beijing, but most of them

are owned by provincial or municipal governments.

A few are completely private.

It's not all operating perfectly according to

market principles, but if you look at the number of

producers and the number of models, it is by far the

most competitive market in the world.

You know, they probably will surprise a lot of people,

especially given this year's, um, bloodbath.

Right. Of pricing pressure, economic headwind, trying to

push these vehicles out into the marketplace at

lower prices, sacrificing profitability for volume.

And so the foreign automakers, they have to

look at this and they have to balance, do I want market

share or do I want profitability?

The bloodbath Lei Xing is speaking of is the price war

Tesla started in 2023.

It began in China, but for years, an incredibly

cutthroat environment has dramatically accelerated the

pace of vehicle development in the country compared to

other parts of the world.

Normally, a car company might refresh or update a

vehicle every 2 to 3 years and then make a significant

generational change every 5 or 6.

In China, a refresh can happen within 12 months, and

the company will sell it at a lower price than the

outgoing model.

And this is where kind of foreign automakers, because

of that legacy, they can't keep up.

In addition, Elon Musk is not the only CEO who talks

to customers on social media.

Chinese CEOs do, too, through China's major

platforms such as Weibo and TikTok.

They also solicit comment through the apps customers

use to interact with and maintain their cars.

This creates tight feedback loops.

Michael Dunn, who for decades has been studying

the auto industry in China and its neighbors, says

politics are also to blame.

We look back at 2017.

It was a year in which GM and South Korea signed this

agreement to supply South Korea with anti-missile

defense, um, facilities, important ones.

China didn't like that.

And since then, we've seen the sales and market share

of both the Detroit three and the Korean automakers

just nosedive.

No one made an announcement and said, hey, you guys are

in trouble. You're going to be shoved out of the market.

But it's pretty clear that 2017 was a time in which the

tide turned, and the usefulness of the Detroit

three just sort of began to fade as far as the Chinese

were concerned.

At the same time, a lot of the rules the Chinese

government once had in place, like requiring joint

ventures, have since been rolled back or removed

entirely.

The Chinese themselves learned.

They grew strong enough.

So no, there's no more production needed.

Let's just have people compete.

Let's have the market open up.

I don't want to sound overly dramatic, I just want to be

realistic when I say that within the next five years,

Ford, GM, Hyundai, Kia, Nissan more likely than not,

will be out of China.

Some automakers, such as Volkswagen, the first

foreign firm in the country, are trying to

retrench and stay in the game.

They are working with local firms and trying to move

faster from decision to execution.

Tesla might be in better shape than its Detroit

rivals, at least for now.

It was the first foreign automaker to be able to set

up shop in China without a joint venture, thanks to the

liberalization of trade policies.

Just over one out of every two Teslas sold in the world

is made in China.

But even leaders face daunting odds.

In my 27 years of living and working in China, what I've

seen is a consistent pattern.

That is, China.

Invites in world class companies learns as quickly

as they can the secret superpowers of those

companies. And then gradually and, you know,

almost methodically sees them to the exit door.

And so Tesla one day will also meet this fate.

You can bank on it.

Russo, the former Chrysler executive, hopes US firms

will not back out of the country and instead invest

more in local design, development and production.

My fear is most of the the global auto makers have

delayed the investment in EV because they don't see

Americans embracing the electric vehicle.

He thinks foreign firms can still compete in the market

and maybe even chalk up some wins.

Stay in the game in the next 3 to 5 years.

Don't give up, right?

Invest and find some way to introduce those products,

maybe even build them in China.

If you can't find scale in the United States, and then

you at least have the hedge on the possibility of

competing with China as they go global.