“Made in China” crisis awaits large vehicles

When Jaguar’s ‘Copy Nothing’ brand relaunch took place late last year, one self-proclaimed car enthusiast responded at X: “What on earth does this mean?” Jaguar’s answer: “The future.” That remains to be seen. But this unfamiliar and unsettling ad does at least serve as a preview of what’s to come for the global auto industry. Jaguar, the prestigious but struggling British brand owned by India’s Tata Motors, shattered established tradition in a 30-second video. Although it is a long-faced model, there is no sign of an actual car. It all heralded a new direction: high-end electric cars, and the Type 00, a concept unveiled in Miami shortly thereafter. If the idea is to get attention, it can often cause a stroke, but it worked. Elon Musk also responded.

In the automobile industry, the era has come when innovative movements are required. Just before the Type 00 announcement, news broke that both the CEO of Stellantis NV and the finance director of Nissan Motors would suddenly resign. A few weeks ago, Volkswagen AG announced the seemingly unthinkable that it would close its German car plants (it later reached an agreement with unions to keep the plants open but at reduced capacity). . Not long before that, Ford Motor Co. was touting something like a millionth pivot to EVs. Not to be outdone, General Motors Co. ended last year with a trifecta: a $5 billion writedown in China, the sale of a stake in a U.S. battery factory project, and the abrupt closure of the company’s robotaxi division. The cruise industry has been hit by not one, but two meteorites: Chinese automakers and electrification.

Reflecting how China has transformed the solar panel industry, it has built an incredible amount of auto manufacturing capacity, enough to produce more than 50 million passenger cars of all types annually. This is about twice the domestic demand and enough to satisfy more than half of the global market. As GM’s writedown shows, foreign manufacturers that enjoyed decades of growth and profits from China through joint ventures have seen them collapse. Last year, China exported up to 6 million vehicles, surpassing Japan.

In this context, China has become an EV hub, accounting for two-thirds of global sales and more than 90% of the growth rate last year. Still, domestic EV sales of 11.2 million units are only about half of the EVs that can be produced domestically. China also controls the underlying supply chain.

Electrification is difficult enough for the traditional automotive industry. Doing so while existing businesses in China are bankrupt, China’s growing exports are eating away at other markets, and Chinese manufacturers and suppliers already have a monopoly on EVs is a crisis in itself. Now, get into politics. Great powers cannot stand by and watch their strategic industrial sectors be eviscerated by cheap imports from countries that have built large-scale production capacity on the back of their own strategic policies and subsidies. It’s fleeting. The United States already has barriers in place against Chinese EV imports, and they will almost certainly be tightened under President-elect Donald Trump. Europe’s position becomes more complex given its growing trade ties with China and ties with German automakers. But even Europe raised tariffs on Chinese EVs last year. But protectionism comes at a cost. Ford and GM have already retreated from much of the world to protect the United States, where their profits are overwhelmingly tied to meeting demand for pickup trucks and large SUVs that are unusual by local and global tastes. be. Advances in EVs and autonomous driving have been slow, uneven, or flat-out unsuccessful. President Trump’s overzealous protectionism and likely loosening of fuel efficiency standards will provide some respite (though not without some pain). But some basic realities remain the same. Although the United States is a large and relatively profitable market, it is also a mature market. Post-pandemic average transaction prices have risen to nearly $50,000, supporting revenue growth despite flat unit sales. However, the cost of owning a car, including financing and insurance, is reaching its natural limit.

“We are nearing the end of the runway for ATP’s growth with no growth in volume,” said Kevin Tynan, head of research at Presidio Group, an investment bank focused on the auto sector. Additionally, his recent analysis points out that the U.S. is already suffering from overcapacity, with auto factories operating at less than 75% capacity in 18 of the past 19 quarters. Second worst record in the past 50 years. The worst period was from 2006 to 2011, when the financial crisis and bankruptcies of GM and Chrysler occurred. The lack of growth and cost overruns are reflected in Detroit’s single-digit revenue multiple.

Raising tariffs seems like a stopgap measure given the reordering going on around the world. Even if Europe also becomes more protectionist, China’s combination of low costs, supply chain advantages, and EV leadership will encourage its companies to continue expanding into other regions, especially growth markets like Southeast Asia. It means. Intuitively, China’s excess capacity should prompt restructuring at home, with the country’s auto sector already suffering widespread losses. But that reckoning may be years away, and even China’s streamlined auto sector will remain a formidable global actor. As Michael Dunn, an industry consultant at Dunn Insights, wrote in a recent blog post, criticism of unfair competition is understandable, but “China is playing a different game, and it’s not playing to win. Where do solar panels come from?

Electrification, led by Chinese manufacturers, is also changing the underlying architecture of cars. In addition to the brand, the bulk of an automaker’s added value traditionally lies in the engine, which is the most complex and essential element of the vehicle. EVs overturn that. Batteries and electric motors are becoming increasingly commoditized, as evidenced by price trends. The arc of the EV bends in a direction that brings the car closer to the device. A new electric SUV designed to take on the likes of BYD and Tesla was unveiled in China last month by smartphone maker Xiaomi.

No wonder Jaguar is going bankrupt with six-figure EVs, androgyny, and neon colors. More naively, if you suddenly have too many manufacturers with too many factories and too many similar brands and products, it’s time to cut costs, or perhaps cut the entire company. Maybe it is. “Delete the ordinary” to reuse Jaguar’s awkward phrase.

Most exposed to immediate challenges is Nissan Motor Co., which has suffered losses due in part to low-cost competition from Chinese rivals and is facing a bond maturity wall this year. The company has already begun merger talks with Japan’s Honda, but the deal is reportedly in response to interest from Taiwan’s Hon Hai Precision Industry, the iPhone maker known as Foxconn. Worth it. Stellantis, which has 14 brands in international markets and is exposed to Chinese competitors and a badly misjudged U.S. market, appears ripe for restructuring. Brands like Jeep and Ram look fine, but brands like Maserati and Fiat may be more valuable as trophies to international (and perhaps Chinese) buyers.

Cost cuts and closures at other companies like GM, Ford, and Volkswagen may seem less dramatic, but they speak to the same fundamental challenge. Even Tesla is at least facing a challenge from China. The company’s recent record market capitalization of $1.5 trillion captures this, albeit in a roundabout way. That’s because a large part of it has to do with Musk’s touted robotaxi vision and his newfound political clout. All of this is helping to distract from Tesla’s stalling EV sales and declining profit margins.

Serious and persistent challenges to the auto industry’s economics will force cost cuts, consolidation, and all the attendant political controversy, labor unrest, and trade tensions. The future has already begun.