Invest or Cut Out: The Conundrum of Western Automakers in China

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When a market turns against you, how should companies respond? This is the question being pondered with some urgency in automotive boardrooms around the world.

The market is China, the world’s largest auto market. It was once the industry’s breadbasket, filled with a hugely profitable group of newly wealthy consumers, many of whom were eager to flaunt their status in a shiny Mercedes-Benz or Buick. The price of entry for the overseas automakers, a joint venture to share technology with a local automaker, seemed worth every yuan.

But the tide has turned. The build quality of Chinese brands has caught up with global brands, no doubt helped by the experience of running joint factories. And inside vehicles, technology, the key to opening the hearts of Chinese consumers, is now higher.

Whether it’s the touchscreen systems, the connectivity, or the batteries themselves, many of the Chinese-made models are now considered comparable, if not better.

The difference is already being felt in the showroom. While Volkswagen once accounted for nearly one in five motor vehicles sold in China, its EV market share is less than 5 percent.

Others, from Nissan to General Motors, have faced similar churn rates. Nissan Chief Executive Makoto Uchida admitted last week that local brands were moving “much faster than we expected before.”

The question is how to answer. VW, a company so attached to China that it has a board member dedicated to the market, is doubling down. The group brought a host of executives to the Shanghai auto show last month, where it revealed its commitment to invest 15 billion euros by 2024.

Ford this week traced a different path. Chief Executive Jim Farley told the Financial Times he would pursue a “lower investment, more focused” approach, cutting back on commercial vehicles and keeping some other operations as a “listening post” on battery developments and battery trends. consumers. The winners in electric vehicles are not, Farley warned, the Western (or Japanese) automakers, but the new local brands.

The move is a strategic one, made in the knowledge that automakers have limited resources and a growing number of investment mouths to feed, from engines and batteries to software. Investing money in a market that has decided it doesn’t want your vehicles is unwise.

But not all automakers will be able to break free so easily. A decade ago, Ford was the sixth largest player in the market. He has fallen almost to 20th place, a drop that paradoxically has given him the ability to make this decision.

It is easier for Ford, or Stellantis, whose Peugeot and Citroën brands also struggle in the market, to redial without offending the local ecosystem, than for others who are still heavily dependent on profits from China. Not surprisingly, Mercedes-Benz, which sells a third of its cars in the country, has said it is “unthinkable” to cut ties.

At the same time, if you ingratiate yourself too much and risk bungling international operations: German consumers and politicians are well aware of the growing geopolitical tensions pitting China and the West over the fate of Taiwan, and the ways in which its auto national champions have irreversibly embraced the Chinese market.

Volkswagen’s annual meeting last week was disrupted by protesters over the company’s involvement in a plant in Xinjiang, a region that is under scrutiny for discriminating against the local Muslim population.

The business is small, with fewer than 250 people, and is run by SAIC, the company’s Chinese joint venture partner, VW chief financial officer Arno Antlitz told the FT automotive summit the next day. But the bond in the minds of global consumers, be they car buyers or protesters, is indelible.