U.S. and Chinese automakers are headed in completely different directions

A truck transports new Tesla cars at its factory in Shanghai, China, on May 13, 2021. (Aly Song/Reuters)

American automakers and their Chinese rivals are heading in different directions.

Able to produce far more cars than they can sell in China, Chinese companies like BYD are entering markets all over the world. Their global expansion comes as major U.S. carmakers - whose once-lucrative China sales are withering - have withdrawn from promising markets such as India, Indonesia and Thailand to focus on their North American base.

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As Chinese manufacturers try to sell as many cars as possible to keep their workers employed, their U.S. competitors are betting on making each vehicle sale more valuable by selling consumers software subscriptions for entertainment, hands-free driving and performance upgrades.

The contrasting strategies involve risks for both sides as they approach what some analysts say is an inevitable fight for the U.S. car market. They also underscore what’s at stake with President Biden’s imposition of 100 percent tariffs on Chinese electric vehicles this past week.

If American companies - widely regarded as trailing the Chinese in EV offerings - fail to use the latest tariff protection to catch up in zero-emission vehicles, the market that is their chief source of profits ultimately could be at risk.

“We’ve painted ourselves into a corner,” said Michael Dunne, former president of GM Indonesia who is now an industry consultant.

The Americans’ global retreat has boosted profits while leaving them with a narrower geographic base. Both Ford and GM retain dominant positions in North America and still produce and sell vehicles in China, the world’s largest car market. But their profits are largely made at home on sales of pickup trucks and sport-utility vehicles.

GM’s international retrenchment has been especially striking. In 2015, the company quit Indonesia two years after reopening a plant that it had first closed in 2005. In 2017, it left Europe after selling its two principal European brands and exited both India and South Africa.

Next to go was Thailand in 2020, with the GM plant there sold to China’s Great Wall Motors, followed by New Zealand and Australia.

GM officials at the time said they were pulling out of markets where they could not identify a path to profitability. Rather than pour more money into loss-making operations, they chose to save cash to fund development of new electric vehicles.

From a financial standpoint, the strategy worked. GM last year earned more than $10 billion, roughly twice its annual profit a decade earlier. Ford’s earnings topped $4 billion.

But those profits mask worrisome weakness in China, where annual vehicle sales of more than 26 million are roughly 70 percent greater than in the United States.

Until recently, China had been a success story for GM, which produces cars for the Chinese market through several joint ventures. From 2010 through 2022, the company sold more vehicles in China than in the United States.

But as American automakers were slow to introduce new models with the latest technology, Chinese consumers increasingly favored homegrown nameplates. Last year, more than half of the passenger cars sold in China were domestic brands, up from 36 percent in 2019, according to AlixPartners, a consulting firm.

Starting in 2015, generous government subsidies fueled China’s EV success.

“They are formidable competitors,” one American car executive said, speaking on the condition of anonymity to discuss rival companies.

GM last year sold half as many vehicles in China as it did in 2017; its income from Chinese operations has shriveled by nearly 80 percent since 2014. In the first quarter, the company reported a loss of $106 million.

GM - which established its first Chinese partnership in 1997 - is not alone. Ford’s sales in China last year were down 28 percent from two years ago and its market share fell below 2 percent, less than half what it was in 2016. From 2018 to 2022, Ford reported more than $3.7 billion in pretax losses from its China business. (The company no longer breaks out regional results.)

Even Tesla, which doubled its Chinese factory capacity in 2021, has been losing ground. Its market share in China fell over the course of 2023 from 10.5 percent in the first quarter to 6.7 percent in the final three months of that year, according to Bloomberg News.

If current trends continue, some foreign automakers, including the Americans, could be squeezed out of the Chinese market, some analysts said.

“We’re now in a position where the idea of exiting China in some form or fashion has got to be on the table for these companies,” said John Murphy, an auto industry analyst for Bank of America.

When Murphy asked last month if GM might sell or quit its China business, GM chief executive Mary Barra insisted that the company is committed to the country “for the long term” and expects to return to profitability there in the current quarter, which ends June 30.

“We still think there is a role and a place for GM,” she said.

Both GM and Ford still operate in some foreign markets, including South America. This year, GM tiptoed back into Europe with its luxury EV sedan, the Cadillac Lyriq. Ford has a strong presence in the commercial market in Europe and last year announced an effort to overhaul its presence there by cutting 3,800 jobs and “completely reinventing the Ford brand.”

As part of its EV development, Ford also announced the opening of a new plant in Cologne, Germany, following a $2 billion investment.

Stellantis, the product of the 2021 merger of Fiat Chrysler and the PSA Group of France, is smaller than GM and Ford. But given its corporate lineage, it sells more cars in Europe than in North America.

Detroit’s strategy is to focus on profits, not volume, with “software-defined vehicles,” according to Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners. The idea is to sell consumers subscriptions for in-car services, such as WiFi, stolen vehicle location, virtual assistants and self-driving capability.

Such sales would provide automakers a new source of recurring revenue. GM has set a goal of doubling annual revenue by 2030, in part by growing sales of software-enabled services.

“Business models are changing,” Wakefield said.

The auto industry’s geographic rebalancing leaves the American car companies with little exposure to the markets with the greatest potential for volume growth. Global light vehicle sales are projected to increase 1 to 3 percent annually through 2026, with the fastest growth in Southeast Asia and India, according to S&P Global Ratings.

But Murphy said profits on sales of basic vehicles in those emerging markets offered meager profits. GM and Ford made a “rational decision” to exit, he said.

Still, investors have been unimpressed with the companies’ performance. Over the last five years, shares of both GM and Ford have risen by less than 25 percent, trailing the S&P 500 index gain of 85 percent.

Chinese carmakers have a different set of problems, which mostly involve finding customers outside the country to absorb all of the industry’s excess production.

Last year, China became the world’s largest auto exporter, beating Japan and Germany, according to Wells Fargo analyst Colin Langan. Even as it exported 5 million cars in 2023, China has excess production capacity of more than 11 million vehicles, enough to flood global markets with low-cost products, Langan wrote in a recent report.

Many Chinese-produced vehicles are “high quality and offer great tech,” Langan said. Tesla CEO Elon Musk and Ford CEO Jim Farley have praised the quality of Chinese EVs and called them a serious threat to global automakers.

Market share for Chinese manufacturers has jumped in many markets over the last five years, growing from 3 percent to 10 percent in Thailand, from 1 percent to 9 percent in Australia and from nothing to 13 percent in Mexico, according to Wells Fargo. Chinese gains in Russia have been even starker, jumping from almost nothing to more than a third of the market after many Western automakers, including Ford, pulled out over Russia’s invasion of Ukraine.

China’s boom has created new automotive giants, including BYD, which is backed by Warren Buffett’s Berkshire Hathaway and is now neck and neck with Tesla as the world’s top-selling EV maker. BYD’s global sales have grown sevenfold in three years and are expected to be just 150,000 vehicles shy of Ford this year, Langan said.

Chinese automakers make most of their vehicles at home, but some such as BYD plan to expand production in Europe and Latin America - some of which will help these companies skirt import tariffs meant to protect local production.

In Western Europe, Chinese brands have captured about 9.5 percent of the EV market; including Tesla models produced in Shanghai, the total share of made-in-China EVs doubles, according to Schmidt Automotive Research, a German firm.

Europe is expected to impose import duties of up to 30 percent on EVs from China in the coming weeks in an effort to protect domestic automakers, but some Chinese producers will still be able to earn “comfortable profit margins … because of the substantial cost advantages they enjoy,” the Rhodium Group consultancy concluded in a recent report.

Chinese EV makers have made inroads in Europe in part by snapping up Western brands such as MG. The venerable British nameplate is now affixed to vehicles manufactured in China and exported to Europe.

To further boost exports, both BYD and SAIC have invested in fleets of car-carrying ships.

SAIC’s logistics unit boasts China’s largest fleet of car carriers, with 31 different types of vessels, including some that are up to 13 stories tall; it carries cars from Chinese makers including Dongfeng, Yutong Bus, Great Wall Motor and SAIC to Europe, Mexico, Southeast Asia and the west coast of South America, according to the company’s website.

As China’s auto industry continues its global push, the largest U.S. carmakers need to take advantage of the protection provided by Biden’s tariffs to reconsider introducing more hybrid gas-electric models or refreshing their product offerings more frequently, said Nishit Madlani, managing director of S&P Global Ratings.

GM also has a goal of 200,000 to 300,000 EV sales this year. Reaching it means the company would probably achieve the manufacturing cost efficiencies required to make EVs profitable.

“It’s buying them time. It’s also helping them think about how they can avoid more strategic missteps,” Madlani said.

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