Foreign carmakers in China face ‘increasingly precarious’ position, consultancy says

BEIJING — New tariffs on Chinese electric cars aren’t enough to help foreign automakers stay competitive, especially in the lucrative China market, according to consulting firm AlixPartners.

China is the world’s largest auto market. It’s taken the global lead in the development of new energy vehicles, which include battery-only and hybrid-powered cars.

The NEV category now accounts for more than 40% of new passenger cars sold in China — and domestic automakers are mostly leading sales, with foreign companies lagging behind.

A lot of foreign car companies still haven’t figured out how their products can stand out in China’s EV market, Stephen Dyer, co-leader and head of AlixPartners’ Asia automotive practice, said during an annual industry outlook event on Wednesday.

“Unless [foreign car brands] change their mindset of developing and manufacturing cars to one that is more willing to take risks, and consider how to design and manufacture a car from the so-called principles, their position will become increasingly precarious,” Dyer said in Mandarin, translated by CNBC.

German luxury brand Porsche said last Tuesday that China sales plunged by one-third in the first-half of the year. The company blamed consumers’ “focus on value oriented sales.”

Chinese automakers from Nio to BYD have already started to export cars to Europe and other overseas markets, prompting the U.S. to raise tariffs on the vehicles from 25% to 100%.

The EU also announced in June it would impose tariffs of up to 38% on Chinese EV imports to combat the “threat of economic injury” to European EV makers. In response, China has said it’s in talks to “reach a mutually acceptable solution” with the European Commission ahead of the tariffs’ implementation in November.

Even with the EU tariffs to come, China cars will still make a profit of 20%, according to Dyer, who noted that the profit margin would be the same as if they were sold in China’s market. That’s because the wave of tariffs will likely accelerate China EV makers’ move to localize production strategies in Europe that will cut transportation costs, he added.

BYD is opening a factory in Hungary. Last week, the company announced a $1 billion deal with Turkey, and opened its factory in Thailand.

Currently, Chinese-made EVs cost 35% less to produce than comparable vehicles from foreign automakers, according to AlixPartners.

China has been a major market for many of the world’s largest carmakers, which are trying different strategies to retain their domestic sales.

Some foreign firms are trying to enter China’s market by partnering with local brands. Dyer cited Volkswagen and Xpeng‘s inked partnership earlier this year to launch an SUV which saw the German automaker buy nearly 5% of Xpeng for $700 million last year. 

Other brands are trying to cut prices.

Earlier this month, German automaker BMW launched a new Mini-Cooper EV in China through its joint venture with Great Wall Motor (GWM).

Based on prices in China, the vehicle’s retail price starts at the equivalent of $26,140 — almost 5% cheaper than the fuel-powered Mini Cooper 3-door’s price of about $27,520.

In comparison, BYD sells its cheapest EV, the Seagull, at a much lower price of $9,700.

BMW announced the first electric Mini Cooper in 2019, which began deliveries in China and Europe the following year.

While collaborations are “rational” to attain market share, Dyer said it is difficult to stay in the China market long-term if foreign carmakers don’t switch things up.

Last month, an analyst from the Bank of America said U.S. automakers based in Detroit should exit China “as soon as they possibly can” because they were at the losing end against China EV giants.

China’s NEV makers have also slashed development time for new models to 20 months — that’s half the 40 months needed by Chinese legacy auto brands, according to research by AlixPartners. 

Chinese NEV-dedicated brands also roll out new models far more quickly than non-Chinese brands, the research firm said, noting the cars come with tech and battery specifications that are about two to three years ahead of what the foreign companies have planned.

Electric cars are less complex than internal combustion engine-powered vehicles. A major industry challenge has been convincing consumers to buy the battery-powered vehicles, primarily by reducing anxiety about driving range.

The Chinese government has mandated nationwide construction of battery charging stations, while startup Nio has rolled out battery swap stations that claim to give drivers a full charge in just a few minutes.

Another problem for foreign automakers is competing with local manpower, as Chinese workers are far more willing to pull long hours.

China EV employees worked up to 140 hours overtime per month, far more than the 20 hours of excess work at traditional car companies worldwide, Dyer said, noting the Chinese “spirit of being able to overcome hardship.”

With that drive, AlixPartners expects Chinese brands to take more than 70% of the NEV market in China by 2030, and grab one-third of the global auto market — or 9 million cars a year.