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09-07-2024 | Automotive Industry | Editor´s Pick | News

What German OEMs Can Learn from Chinese Car Manufacturers

Author: Christiane Köllner

6:30 min reading time

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China's automotive industry is on course for success. Why is this and what can we learn from the Chinese OEMs? An analysis. 

China is now the largest automotive nation in the world, both as a sales market and as a producer. For the German automotive industry, the Middle Kingdom is therefore both the main market and the main competitor. Especially in the field of electromobility. China accounts for more than half of global electric car sales and a similar share of exports. When it comes to e-mobility, China seems to be increasingly outstripping the western world. However, China is also making up ground in vehicles with combustion engines and is already selling them worldwide. What is the Asians' recipe for success? 

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01-05-2024 | The Hansen Report

China's Automotive Industry - Pragmatism as a Strategy

China is not only overtaking the Western world with its electric cars, but also catching up with its combustion-engine vehicles, which it is now selling worldwide. What are Chinese companies doing better than their Western counterparts? And what are they doing differently? The country's recipe for success lies in its highly pragmatic, technologically neutral approach and its apparently unlimited supplies of raw materials and labor.

Joint Ventures: Market Access for Technology Transfer

To answer this question, it helps to start with a historical perspective: the first vehicle production in China began in 1956, "but only slowly gained momentum in the 1980s," explains Springer author Armin Schirmer in the German book chapter Germany: From World Export Champion to Car Importer? "In order to catch up in terms of car design, technology and production processes, it was decided to allow joint ventures with foreign car manufacturers," says Schirmer. The deal was as follows: the foreign manufacturers supplied product technology and production know-how and in return gained access to the market. Volkswagen launched a joint venture with the Shanghai Automotive Industry Corporation (SAIC) as early as 1985, followed seven years later by the second joint venture with FAW. Numerous other joint ventures with various manufacturers followed.

This approach initially worked very well for Western OEMs. "As long as Chinese car manufacturers were not present on the global market as exporters and were seen as uncompetitive, they were happy about the newly opened huge market [...]", says Schirmer. However, this view has changed in recent years, "as soon as Chinese manufacturers set their sights on the global market and various Chinese brands announced an offensive". The strategy behind this: First build up a strong automotive production, then supply the domestic market and then export worldwide. As a result of the opportunity presented by the transformation from vehicles with combustion engines to fully electric cars, China finally launched an export offensive to Europe. 

Complex and Rigid Structures

Competition for supremacy in the electric car market in particular is becoming ever more intense as a result - and more to the detriment of Western OEMs. "In the past, the major German car manufacturers have focused more on plug-in hybrid vehicles than on battery-powered electric vehicles," explains the consulting firm Alvarez & Marsal. The reasons for this are the lower costs for smaller batteries and the fact that they are maintaining capacity utilization of their production units for combustion engines. However, the market is trending towards fully battery-powered electric vehicles, "which is having a decisive impact on the development and performance of traditional OEMs compared to the new EV giants", according to the consultants.

What's more: "The long track record of German OEMs also means complex and rigid structures that are hindering the transition to e-vehicles," say the consultants from Alvarez & Marsal. In the meantime, new, agile companies have emerged on the market for electric cars, offering consumers cheaper and better alternatives. Chinese brands such as MG, Geely, BYD and Nio are trying to establish themselves in Europe and the USA. According to a recent VDE study on Germany as an automotive location, inexpensive e-cars for the mass market will mainly come from China by 2035 if Germany does not design low-cost e-cars. However, not only significantly lower costs, but also shorter development times and advantages in electrification and digitalization speak in favour of the Chinese competition. 

Chinese Manufacturers Build Good and Affordable (Electric) Cars

Ultimately, the know-how resulting from cooperation with European companies is paying off. Chinese manufacturers are "now producing very good electric cars that are also very cheap", as Frank Urbansky writes in the ATZelectronics worldwide article China's Automotive Industry – Pragmatism as a Strategy. And that is the crux of the matter: "The Achilles' heel of European manufacturers still lies in the lower and middle market segments," says author Schirmer. In order to avoid producing losses, European manufacturers are primarily offering higher-priced models, as small electric cars from European production are difficult to produce economically. However, this leaves part of the mass market open to low-cost manufacturers from the Far East. Imports from China would therefore benefit from this gap in the market. Another advantage for Chinese manufacturers is that they are at the source of the raw materials for batteries in particular.

In general: "Small Chinese cars are of high quality and are being sold in Europe at attractive prices," Urbansky quotes Andreas Maennel, Head of Automotive at Deloitte China, in his article. This trend is expected to continue in markets with high demand for smaller combustion engines and low prices, such as South America and Russia. Chinese manufacturers have successfully served this niche. This is because China has "never stopped making combustion engines and have caught up with European manufacturers despite lagging a long way behind, particularly when it comes to engine design", as Urbansky writes. European manufacturers are under pressure here: "In the case of combustion vehicles, which are still relevant, the EU's constantly tightening emissions regulations must be dealt with in parallel," says Schirmer. 

China as a Key Market and Main Competitor: What Can Be Learned?

What can we learn from the advance of Chinese car manufacturers? The consulting firm Alvarez & Marsal has drawn the following four lessons:

  • Focus limited R&D resources on selected projects: "While EV OEMs focus only on EV technology and already have a well-established system and supply chain, traditional German OEMs stick to multiple powertrain technologies, which limits the focus and resources for EV development," the consultants said. The challenge is to balance the conflict between developing new EVs and maintaining the competitiveness of existing engines.
  • Development of battery production: "Currently, all top 10 battery manufacturers are located either in China, Japan or South Korea. Numerous investments will ensure a positive development of the German and European battery industry in the coming years," say the consultants. A mixture of in-house technological expertise and cooperation with qualified partners would drive development forward the fastest.
  • Government support: "The Inflation Reduction Act in the USA is forcing Europe to revise its subsidy system in order to strengthen the competitiveness of European companies," say the consultants. Government support is one of the most effective methods of promoting electric vehicles.
  • Support for charging infrastructure: Longer ranges could boost sales of electric vehicles, as range is still one of the main concerns of consumers.

According to Alvarez & Marsal, the four key areas of demand, supply, policy and infrastructure need to be addressed in order to take a leading position in the EV market. "However, as German car manufacturers are heavily dependent on exports, improving their competitiveness on the supply side is even more crucial. This requires innovation, cost control and technological breakthroughs in both electric vehicle and battery development. Various structural changes need to be made that require a rethink of current corporate structures," comments Richard Hell, Managing Director for the European Supply Chain, Operation & Procurement Practice at Alvarez & Marsal Germany.

Pragmatism as a Strategy

For Frank Urbansky, however, the Chinese manufacturers' recipe for success lies in their very pragmatic openness to technology – and "apparently unlimited supplies of raw materials and labor". China also dares the balancing act of wanting to be a leader in all areas of modern mobility, including automated driving. New ride-hailing services are also emerging. In addition to the expansion of the e-charging infrastructure, the introduction of hydrogen-powered vehicles is also part of the Chinese mobility strategy.

This makes it clear that the Chinese automotive industry is focusing on pragmatism rather than dogmatism. "China is being pragmatic, as its automotive strategy demonstrates. It is trying out several different technologies and assessing whether or not they work. But even if they do not work, this does not necessarily mean that they have failed. It is a question of perseverance, precision and making use of the expertise acquired from cooperating with European companies", says Urbansky. He sums up: "The range of different mobility concepts indicates that China's openness applies not only to technologies but also to concepts. Anything that is useful and works effectively is adopted. This is an approach which would serve Germany and the rest of Europe very well."

This is a partly automated translation of this German article.

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