Global car makers contemplate exit from China

Sales are plummeting and profit margins are shrinking as local giants such as BYD and Geely continue to grow

Global car makers are starting to question their continued presence in China as once healthy sales plummet and profit margins fall amid the rise of local giants such as BYD and Geely.

China is the world's largest automotive market, with 26 million light vehicles sold last year, but tough competition and even tougher price wars have put once-dominant foreign firms on the back foot after a decade of reaping riches from the country.

Chinese car makers grew their share in their domestic market from 40% in 2015 to 57% in 2023, according to automotive analyst firm Inovev, and "it will be very difficult for non-Chinese car makers to regain lost market shares".

Some have already left. Stellantis sold its assets to its partner Dongfeng last year following aborted efforts to boost sales of its once popular Citroën and Peugeot brands there. Its Jeep joint venture with GAC went bust in 2022. And Renault pulled out of its joint venture, also with Dongfeng, in 2020.

General Motors has the biggest market share of any global car maker in China after Volkswagen, but it too has started to struggle, with its share falling from 14% in 2017 to just 7% last year. 

GM’s situation has got so bad that Bank of America analyst John Murphy asked CEO Mary Barra on the company’s January financial results call whether following Stellantis out of the door “might be the best move to make”.

Barra didn’t push back, reminding Murphy that GM giant took a similarly tough decision to end its unprofitable Opel/Vauxhall operation in Europe, selling it to PSA (now part of Stellantis). “So we're not going to shy away from making tough calls or maybe calls that people wouldn't expect,” she said.

“For years, GM 'made more money than God' in China, a former executive once told me,” Michael Dunne, the head of a China-focused consultancy and a former GM executive, wrote in a recent blog post. “Today the company is grasping at straws.”

Fellow American giant Ford has it even worse in the country, with sales now so bad that the output of its partnership with Changan is now below 20% of its factory capacity, according to figures crunched by Bloomberg. 

The mistake made by the Detroit three was believing that the good times were going to stay, according to Dunne.

“GM, Ford and Jeep grew convinced of two eternal truths: first, Chinese consumers would forever prefer foreign car brands over the Chinese offerings; and second, [petrol]-powered vehicles would be dominant until kingdom come,” he wrote. “As things turned out, they were wrong on both counts.”

The rise of EVs and the attraction of nimbler local players persuaded generally younger, more tech-savvy buyers to abandon the safety of the established brands.

Last year, EVs accounted for 23% of all car sales. But it’s not just the shift to EVs that has prompted the customer drift. Only a handful of Chinese brands are electric-only, and while BYD may be the biggest player in the space, half its sales are still of plug-in hybrids.

Whatever the powertrain, the rise of the local players and their cut-throat approach to winning market share has pushed up the price of doing business in China much, much higher for foreign car makers.

“In China, competition from domestic players has transformed in the market,” Nissan CEO Makoto Uchida told journalists earlier this week when announcing the Japanese company’s new mid-term plan.

The reason for the revised plan was partly to combat EV pricing in China, he suggested, saying: “The price of EV is falling much faster than what we anticipated, maybe two years before what we imagined. How to generate profit in these circumstances is a big challenge.”

Nissan’s share in China has fallen from 4% to 3% in the six years to 2023, according to Inovev. That drop in sales doesn’t just mean lost revenue but also undermines profit margin through the loss of manufacturing scale.

The Nissan-Dongfeng partnership is one of six foreign car maker joint ventures operating below 50% factory capacity, according to the Bloomberg figures, giving Nissan a real headache. 

“Capacity in China is a common challenge across the auto industry,” Uchida said. “We're doing everything we can.” That includes developing new EVs with its local partners and exporting vehicles.

Also on Bloomberg's list of sub-50%-capacity joint ventures are SAIC-Volkswagen, SAIC-GM-Wuling, SAIC-GM and BAIC-Hyundai.

Volkswagen last year lost its number-one position in China to BYD and is staring down the barrel of a long decline in the country unless it can persuade buyers that its EVs are on par with those of local players. 

The strategy is working, slowly. The Volkswagen Group's EV sales rose 22% to 191,000 last year, but they’re still well behind those of combustion cars. Last year, the Group sold 3.2 million vehicles in total in China.

Illustrating just how important China is for the German giant, it made €2.6 billion (£2.2bn) in profit from its joint ventures there last year. 

That margin is falling, however. Volkswagen indicated that profits will drop to between €1.5bn and €2bn in 2024 as competition heats up.

As the likes of BYD continue with ferocious levels of price-cutting with the message that EVs can be cheaper than petrol, Volkswagen has indicated that it’s prepared to lose volume rather suffer an even steeper decline in profits.

“We're deliberately prepared to give up some more shares in the next two to three years,” Group CEO Oliver Blume told investors earlier in March.

It estimates that from 2027, its investment in EVs tailored for China, including those developed on local firm Xpeng’s platform, will allow it to return to strength.

Volkswagen’s share of the Chinese market fell from 14% in 2017 to 10% in 2023, according to Inovev.

Not all foreign car makers are suffering in China. Toyota has actually grown share since 2017 from 4% to 6%, according to Inovev, thanks to continued demand for its ICE vehicles. Tesla meanwhile has grown sales from nothing to take a 3% share.

Riding loftily among the cut-throat price wars meanwhile are the premium brands, particularly the German trio of Audi, BMW and Mercedes-Benz but also JLR and Volvo (which is Chinese-owned).

These brands are capitalising on the slow shift to EVs in the premium sector, but BMW has even grown that share, doubling its EV sales last year to over 100,000 in China.

China has some ferocious local competitors angling for the German share, for example Li, Nio and Zeekr, but so far they’re not making the same dent as achieved by their mass-market brethren. 

“The price competition in the lower segments in China is very, very tough,” BMW Group CEO Oliver Zipse told analysts earlier in March. “But it's not happening in the upper segments of the market in the same way.”

Zipse made the point that among EVs, at least 90% of the market competition is under ¥300,000 (£32,000)

“Our cars start more or less from ¥300,000 onwards,” he said.

Last year, China was the BMW Group’s biggest market overall, with sales of 826,000, or 32% of its total.

The figures are going up, not down. Audi sold 670,000 cars in China in 2023, compared with 510,000 in 2015, according to Inovev. Mercedes sold 690,000, compared with 255,000. And BMW sold 745,000, compared with 287,000.

Those figures show that China is crucially important to the premium brands, which is likely why they more than anyone have come out so strongly against the expected increase on tariffs on Chinese cars imported into the EU.

They fear retaliation (despite any EU increase likely only matching existing Chinese tariffs on European cars) or worse backlash from famously nationalistic Chinese car buyers, who have been known to turn on countries or regions perceived as being anti-China.

China is clearly in a shake-out phase in which multiple local players are battling for a place for when the market matures. The very best have reached the point where they're making enough money to be able to afford a price war, putting the squeeze on competitors in the most painful way possible. Witness BYD dropping the entry price of its best-selling Qin Plus plug-in hybrid saloon – a Volkswagen Passat rival – to the equivalent of just £8800.

To retaliate, global players have got to dig deep into their reserves of both cash and competitiveness – otherwise the Chinese treasure chest will shut to them forever.