As I have detailed before, the global car manufacturing industry is the largest and most impactful manufacturing sector, with huge spin-offs in electronics, software, electric battery and general mass manufacturing technologies. With the replacement of internal combustion engines (ICE) with electric propulsion system vehicles (EV), the area in which Chinese car manufacturers lagged was replaced with an area where they could leap-frog (along with Tesla). Already in the Chinese car market, the largest car market in the world, the sales of ICE cars have peaked and are falling:
2020 Chinese Car Sales: 19.7 million, of which 1.27 million were EVs
2021 Chinese Car Sales: 21.48 million, of which 2.9 million were EVs
2022 Chinese Car Sales: 23.6 million, of which 5.92 million were EVs
Therefore, Chinese ICE car sales were 18.43 million in 2020, 18.58 million in 2021, and dropped to 17.68 million in 2022 even as the overall car market grew substantially. Estimates for Chinese EV sales in 2023 are forecast to reach 8 million with little overall car market growth, meaning that ICE sales will fall to 15.6 million – a fall of 2.08 million sales (11.7%)! This fall will be concentrated in the foreign car manufacturers (excluding Tesla) as they provide the majority of the ICE vehicles while having little or no share of EV sales (excluding Tesla). The Chinese car manufacturers are generally represented in both ICE and EV sales (e.g. SAIC, GAC, Changan, Geely, Chery) or are completely focused on EV sales (BYD, Li, Xpeng, Nio). Every extra EV sale will tend to reduce sales of foreign manufacturers brands and increase those of local brands.
Could things be much worse for the foreign ICE brands? Yes, for two reasons, the Tesla instigated price war and new ICE emission standards coming into effect in July. The Tesla China price cuts in October of last year then in January of this year, together with the falling costs of manufacturing inputs (e.g. Lithium) has produced somewhat of a price war which has brought EVs on par with ICE cars with respect to purchase price. This has easily offset any negative effects from the reduction in EV incentives at the end of 2022 and may lead to a faster displacement of ICE vehicles; EV sales will be higher than forecast and therefore ICE sales less than forecast. Lower sales for the European manufacturers and higher sales for Chinese manufacturers (plus Tesla). In the first two months of 2023, Volkswagen only outsold BYD by about 60,000 cars (ICE and EV) with Toyota lagging far behind and with Changan and Geely nipping at its heels. The German and Japanese manufacturers used to dominate the Chinese car market and rely on China for a large share of their profits (e.g. 50% for VW); none have a meaningful position among EVs in China. This will only get worse in 2024 and 2025, as EV market share moves well past 50%.
With sales lagging far behind production, the ICE manufacturers and their dealers have an increasing number of cars swelling their inventories. The problem is that those cars will become illegal to sell in China from July, when the new emissions regulations come into place (Electric Viking covers this well in the video below). The ICE manufacturers only option is to slash prices to move those cars, with the EV price war significantly reducing the prices required to move the cars, or ship the cars abroad to sell them at significantly lower prices (with the net price reduced even further by shipping costs). There could possibly be millions of cars sold at losses of US$10,000s, producing overall losses of tens of billions split between the dealers (who own the cars once they take delivery) and the car manufacturers; possibly bankrupting much of the European, Japanese and US manufacturer’s Chinese dealership network and producing large losses for the manufacturers themselves.
Recently the Chinese government has been rumoured to be looking at extending the changeover time to reduce the negative impacts on car manufacturers and dealers.
The end result will be a financially damaged set of Western car manufacturers, some impact to Chinese manufacturers (some of the smaller more marginal ones may go by the wayside), and a significant jump by the winners which may include BYD, Tesla, GAC and many other Chinese manufacturers; with domestic manufacturers taking a much larger, and increasing, share of the Chinese market.
With a recession in the offing for both the US market (important to Japanese as well as US manufacturers) and Europe, together with the effect of the Tesla price cuts in the US and the price cuts plus increasing China brand sales in Europe (e.g. MG), the traditional Western ICE car manufacturers may find themselves in a rapidly falling downward spiral. They will not only have falling revenues, and losses from selling Chinese ICE cars below cost to clear them, but also many of their assets (e.g. ICE manufacturing plants) may be rendered obsolete; requiring significant write-offs for not fully depreciated assets. As a manufacturer’s revenue and asset levels form the basis for loan agreements, and these ICE manufacturers have extremely large amounts of debt, they could rapidly find themselves in both liquidity and solvency crises.
There may be some protection for the US home market from the Trump implemented China tariffs and the recent protectionist Inflation Reduction Act (for example, BYD has no plans to set up a US plant), but the European market has no such protection. GM has pretty much exited its international operations, with its Chinese sales produced through joint ventures with SAIC (SAIC-GM) and SAIC and Wuling (SGMW) that it does not have majority control over. The recent travails of GM joint-venture sales in China:
Ford has already significantly retrenched its international operations, and its Chinese sales are handled through a joint-venture with Changan-Ford; with a 2% market share. To all intents and purposes GM and Ford have become US domestic manufacturers of mostly trucks and SUVs. In China both SAIC and Changan have the possibility of offsetting falling GM and Ford sales with sales of their own brands, including EVs. The threat in the US will tend to come from Tesla for the next few years, the real battleground will be Europe and the rest of the world outside the US and China. The biggest losers may be VW, Toyota, BMW and Mercedes Benz – exposed to the Chinese, European and US markets.
This will be at a time when Western government deficits are stretched by increased defence spending and recession, European deficits have been stretched by subsidies to cushion populations from huge increases in energy costs, and COVID has already produced much higher debt levels. The significantly increased interest rates to fight inflation, from near zero levels, will also exacerbate deficits due to increased interest payments. It is these stretched governments that will be asked to bail out the failing Western car manufacturers. Even if some manufacturers are bailed out, the result will be a much-reduced Western car industry (excluding Tesla) and a significant increase in the Chinese share of that industry; one where they already dominate the battery sector.
Such a realignment within the largest and most important manufacturing sector in the world will have very significant geopolitical impacts, with the West being further “hollowed out”. The inclusion of Japan and possibly South Korea in this hollowing out may significantly impact the balance of power within Asia, and the relationship between the nations of ASEAN and China. Any protectionist measures taken by South Korea or Japan to protect their car industries will most probably doom their car sales in the largest global car market, China. The possible devastation and downsizing of the European car industry, combined with the self-harming sanctions fallout, may remove Europe (and especially Germany) as a significant geopolitical player. Chinese automobile dominance in Latin America will further pull that region into the Chinese economic sphere.
Geopolitical strength is most fundamentally based upon geo-economic considerations, and the realignment of the most important global manufacturing industry will have impacts that ripple throughout the world over the next years and decades. The major winner will be China, with a Russia benefitting from a much-weakened Europe.
As a lifelong car nut and Sinophile, I enjoyed this thoroughly!
Many, many thanks for saving me the pain of thinking and giving me the gift of glib assurance when I predict the future of the car industry.
On a more serious note, do you know the year Beijing told manufacturers about the switchover?
I have the impression that it was at least ten years ago and foreign manufacturers, accustomed to resisting government regulations, did very little to prepare for E-Day. Then, about 6 years ago, Dr. Merkel flew to Beijing and begged, unsuccessfully, for an extension.
EVs gonna save lotsa imported hydrocarbons, too. Juicy.