China’s auto market has become a Darwinian battlefield

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In the early 1980s, Volkswagen chairman Carl Hahn sent his engineers to start building VW’s boxy Santana sedans in Shanghai. Defending the decision, the boss told his top lieutenants in Wolfsburg that Volkswagen could achieve great things in China “if we could harness the enormous potential of it, surpassing what we did in other countries.”

Hahn, who died earlier this year, was right on two fronts. The rise of China’s middle class created the world’s largest automobile market. And the German automaker, one of the first foreign groups to show faith in Deng Xiaoping’s new China, enjoyed for decades the billions in annual profits that came from being the country’s best-selling brand. However, his foreknowledge may not have extended to what would happen four decades later, when Chinese companies began to make better and more affordable cars than their foreign rivals.

For most foreign auto groups, the good days in China are over. The likes of VW, Ford and Toyota have been caught in China by two fundamental transitions. First, the rate at which consumers will abandon the internal combustion engine. And second, the rise of China’s local EV groups.

Spurred by the arrival of Elon Musk’s Tesla models, manufacturers of Chinese-made electric vehicles have developed rapidly, armed with cutting-edge software and supported by deep domestic supply chains. They are now outselling their foreign legacy rivals at a breakneck pace. It is becoming increasingly clear to industry executives and analysts that automakers are in a Darwinian fight for survival in China. Only a handful of EV-focused winners will stay afloat; the rest will sink in the market.

So far this year, nearly two-thirds of the total number of passenger cars sold in the “new energy vehicle” market (Beijing classifies this as including battery-powered and plug-in hybrid cars) were made by four groups. Chinese and Tesla, according to Automobility, a Shanghai consultancy. Just one company, Shenzhen-based BYD, which is backed by Warren Buffett’s Berkshire Hathaway, has absorbed a staggering 38 percent share of those sales.

VW until this year sold more cars than any other company in China and still owns 13 percent of fuel vehicle sales. BYD is now poised to unseat VW from its first overall spot in 2023. More importantly, in terms of EV market share, the German group was in eighth place this year with just 2.5 percent of sales, and it’s the only other foreign group in the top 10 outside of Tesla.

“Before all the electrification happened, nobody knew who was going to win,” said Yuqian Ding, a veteran Beijing-based analyst at HSBC. “BYD and Tesla are the winners.”

For producers still trying to make money from internal combustion cars in China, the writing is on the wall. Nearly one in three cars sold are electric vehicles. TO price war launched by Tesla last year has only exacerbated these trends. Bill Russo, the former Chrysler China director who now runs consultancy Automobility, says the remaining price advantage that fuel-powered vehicles had over electric vehicles is “eroding.”

Consolidation is probably the next step. In 2022, about three quarters of electric vehicle sales in China were among the top 10 best-selling EV brands, according to HSBC. That leaves a long tail of nearly 60 EV car brands vying for scraps. The future for dozens of Chinese groups looks bleak without state support. And Greenpeace predicted that if the adoption rate accelerates to around 70 percent by 2030, both General Motors and Volkswagen would have more than 2 million capacity units locked up in China.

In the 1920s, the American physiologist Walter Bradford Cannon called the responses to danger fight or flight. This is now being discussed in the boardrooms of global automakers. In recent weeks, VW has doubled down on billions of dollars in new investment focused on electric vehicles and vowed to produce cars that are more attractive to Chinese consumers. Ford, by contrast, is cutting spending in China, an impressive concession from a company that just a decade ago was the sixth-biggest player in the market.

Against this backdrop, 2023 is on track to be the first year in which Chinese brands outsell foreign cars in China. But the multinationals’ losses in China are just the opening salvo. Containers loaded with cheap, high-tech Chinese electric vehicles are shipped from China’s ports at such speed that the country is poised to overtake Japan as the world’s biggest car exporter this year. Automaker boardrooms must consider not only survival in China, but also the existential battle they will soon face at home.

edward.white@ft.com