Commentary: Foreign carmakers also have a China overcapacity problem

SHANGHAI: Overcapacity in China’s auto manufacturing has become an acute point of tension between the country and other big economies.
The complaint heard from the West is, broadly, that Beijing’s industrial policy has unfairly advantaged Chinese companies, resulting in an impending tidal wave of below-cost exports. In turn, this has raised fears of an existential crisis for national marques including Germany’s Volkswagen, Japan’s Toyota and American icons of GM and Ford.
Western fears deepened as China last year overtook Japan as the world’s biggest auto exporter. This year exports continue to break new records – about one in five cars made in China are now shipped abroad.
Although about 80 per cent of China’s auto exports are cars with internal combustion engines, the boom in Chinese uptake of low-cost, high-tech electric vehicles (EVs) has drawn protectionist reactions from the United States and the European Union, both of whom have hiked tariffs on made-in-China EVs over recent months.
An awkward trend, however, is that more and more foreign car companies are now also turning to exports from China, hopeful for a release valve from intense competition and financial pressure on their Chinese operations. The other choice might be to close so-called zombie factories, plants that are surplus to requirements in the world’s biggest auto market.
On a recent visit to a sun-drenched stretch of unused tarmac on Shanghai’s outskirts, the Financial Times found several thousand Tesla vehicles baking in the 40-degree heat, waiting to be sent abroad.
The rows and rows of cars at the Yangshan Special Comprehensive Bonded Zone, about 10km from the multibillion-dollar factory Tesla built in 2019, is a reminder that Chinese consumers can fall out of love with even the most successful foreign brands.
Tesla’s China sales have stagnated in recent years and about three of every 10 cars that the US company makes in Shanghai are currently earmarked for overseas markets, mostly Europe. Yet Tesla is an outlier in that its Shanghai factory, located near a major port, was smartly designed as a flexible manufacturing hub that could serve other parts of Asia and beyond when needed.
Almost all other foreign brands established their Chinese operations over recent decades as they targeted the rising middle class in the country of 1.4 billion people. None predicted the precipitous sales slump they are suffering, nor just how fast China’s own industry would develop in the age of EVs.
Foreign brands’ market share of Chinese auto sales is tracking at a record low of 37 per cent in the first seven months of 2024, down from 64 per cent in 2020, according to data from Automobility, a Shanghai consultancy. So far this year, US brands are down more than 23 per cent while Japanese, Korean and German carmakers have also suffered double-digit declines, the data showed.
By contrast, sales of Chinese brands are up nearly 22 per cent with Chinese companies overwhelmingly dominating sales of the EV market.
The groups’ market share slumps are occurring in the context of a bifurcated domestic auto market in China. Sales of EVs, including pure battery EVs and plug-in hybrids, are up more than 30 per cent this year while sales of fuel-powered cars are down nearly 7 per cent, the Automobility data also showed.
Against that backdrop, foreign brands from Hyundai and Nissan to Volvo and BMW have also started pivoting to exports of their made-in-China vehicles, according to company announcements and media reports over recent months. The FT also reported in June that Western and Japanese cars, including Tesla, Volkswagen and Honda, accounted for more than half of the Chinese-made EVs imported into Europe in the first four months of the year.
Tu Le, founder of consultancy Sino Auto Insights, predicts that ultimately GM and Ford as well as Stellantis – which owns the Jeep, Peugeot and Fiat brands – “will all export from China”. Moreover, he believes that as foreign groups come under more financial pressure, they will probably need to increase their sourcing from Chinese suppliers to be competitive.
Chinese companies, spearheaded by Warren Buffett-backed BYD, are rapidly expanding their global manufacturing footprints. Foreign companies will increasingly have to keep up with cheaper, and potentially more technically advanced, Chinese-branded models all over the world.