Analysis: Why foreign brands are rethinking their approach in China

In 2012, non-Chinese brands produced 18 of China’s top 20 best-selling cars and locked out the top 10. In the first quarter this year, that number had halved, of which just four were in the top 10. Staying relevant in China in the face of ever-improving home-grown competition is a dilemma occupying car makers' boardrooms in Europe, the US, Japan and Korea. In some cases, brands are radically altering their strategy to prepare for a much smaller footprint in the country. Ford is one such example. Back in 2012, the Ford Focus was the most popular car in China, with almost 300,000 examples sold. A decade later in 2022, Ford sold just 223,785 cars in total, according to figures from bestsellingcarsblog.com. The first three months of this year, Ford’s total was 37,306, down 20% on the same period last in 2022. So Ford is changing its approach. No longer will it compete as a traditional volume brand. “We're not going to try to serve everyone,” CEO Jim Farley told investors on the company’s first-quarter earnings call. “We're going to go to a much lower investment, leaner, more focused business in China with higher returns.” Ford has recently shut a plant in Harbin, north-east China (operated with its joint venture partner) that not long ago had been refurbished to make the Focus. When it started production again in 2017, Ford had the capacity to make 1.6 million cars in the country annually. Reports from China this week also say that Ford is aiming to cut another 1300 jobs in the country. Foreign firms are looking at their underutilised plants in China and wondering exactly how they’re going to fill them amid the surging popularity of Chinese car makers, especially amid a price war that makes it very difficult to profit on the models they still sell. Even Volkswagen, for a long time China’s biggest car maker, is feeling the threat from Chinese brands. The first three months of the year, the German brand was overtaken on wholesales (sales to dealers) by BYD, as the local brand capitalised on its cost advantages with EVs. While BYD sales jumped 67% to almost 500,000, Volkswagen saw demand slump by 22% to 442,203, putting clear water between itself and its rival. Behind them in third, Toyota dropped 22%, while fifth-placed Honda fell 47%. Chinese customers increasingly prefer local brands, but this isn’t just a story about nationalism. “Chinese brands have a better reputation [and] better product and the customer experience is good. That’s why the Chinese product is winning in the market right now,” Yoshi Takanuki, senior partner at consultancy McKinsey, told the recent Financial Times Future of the Car conference. Volkswagen executives were given a wake-up call at the recent Shanghai motor show. “I looked at the competition and talked to people on the ground and it’s clear we need to accelerate in three areas: driver assistance, on infotainment, and the speed we adapt to Chinese customers,” Arno Antlitz, chief financial officer at the Volkswagen Group, told the same conference. Nissan is another brand trying to realign itself to local competition. “Their development lead time is quite agile as compared to our global standard,” CEO Makoto Uchida said at the FT conference. “Their time to market is much faster than we expected.” Nissan has also been hit badly. In the first three months of the year, it sold 130,685 cars in China, down 46%. Back in 2021, it sold more than a million. The volume makers are the worst affected. Three-quarters of the budget segment for cars costing ¥100,000-200,000 (£11,000-£22,0000) was for many years occupied by the global firms. Now they’re at 48%, according to McKinsey data. “There's quite a massive shift happening right now,” said Takanuki. In total, 52% of passenger car sales were for Chinese brands in the first quarter of this year, up from 46% for the same period last year. As well as improved quality and a willingness to cater for local consumers’ desire for smartphone-levels of connectivity in their car, Chinese car makers have leveraged home-grown skills in electric propulsion. So called ‘new energy’ car sales in April stood at 29% of total sales at 609,000, of which almost three quarters were pure electric, according to data from the China Association of Automobile Manufacturers. And of that number, 55% were from Chinese brands, led by BYD. Going electric is a battle that global brands are struggling to win. “The Chinese BEV market is growing increasingly rapidly. Our share is much lower in BEV market than in internal combustion engines,” Antlitz admitted. In the first three months of the year, sales of VW EVs (such as the ID 4, ID 5 and China-specific ID 6) in China actually fell by a quarter in a period when overall EV sales in the country climbed 22%, in part because VW wanted to avoid the country’s brutal price war, which is handing consumers EVs priced at the level of ICE cars. The three German premium brands are also struggling to make much headway with electric sales in the country. Of BMW’s 195,100 sales in China in the first three months, only 23,900 (12%) were EV or PHEV. However others did worse, BMW pointed out on its first-quarter earnings call. “We sold significantly more BEVs there than our established competitors,” CEO Oliver Zipse said. Right now, the fact that German premium brands aren’t shifting EVs in substantial numbers there isn’t worrying them too much. In their rarefied price bracket, they’re still doing well. “In our segment, the competition isn't as challenged than in the base segment,” Zipse said. Mercedes-Benz is also quite happy to stay above the fray. “We definitely want to emphasise on the top-end and not enter too much into the very competitive environment in the lower range,” said chief financial officer Harald Wilhelm on its first-quarter earnings call. Mercedes didn’t break out EV sales but pointed out that customers were happy with combustion engines. “The top-end segment is still overall very much an ICE segment,” Wilhelm said. Mercedes increased sales to 190,000 in the first three months, putting it just behind premium-segment leader BMW. Audi’s sales meanwhile fell 16% to 137,315. The problem in China then is very much a volume one for the moment. But what to do? Pull out is one option. Stellantis ended its Jeep joint venture with GAC last year, for example. Skoda executives say they're exploring “all options” when it comes to keeping faith in the country after sales last year fell to just 56,000 for the nine models it makes there. The problem then is one of stranded assets. Solving that would be to keep making cars in China but export them instead of trying to compete locally. Ford last week announced it intends to export more electric and ICE commercial vehicles made with its joint-venture partner, JMC. Nissan too is thinking of going down that route. “Many OEMs are thinking about exporting, and that could be one of the options we have to think about in the future,” CEO Makoto Uchida told the FT conference last week. “There’s a good supplier base in China, and we need to see how we can utilise that asset.” Plenty of non-Chinese car makers already export from China to Europe, for example BMW with its iX3, Dacia with the Spring and Stellantis with the DS 9. This however creates its own problems. With Chinese car makers also looking to export to solve their home-grown overcapacity problem, at what point does the flood of good-value, well-built cars from China start to look like dumping, attracting increased import taxes to protect local industry? Right now, consumers are winning. The losers will be among those car companies in China who bet that their offerings would be good enough to survive the overcapacity crisis. The initial assumption was that the bulk of those would be among the proliferating Chinese brands. That still might happen, but growing dominance of local brands has increased the likelihood that established global brands will also number among the victims.