“Made in China” crisis awaits major automobiles

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 while the ad is unfamiliar and unsettling, it at least serves as a preview of what’s to come for the global auto industry.

Jaguar, the storied but struggling British brand owned by India’s Tata Motors, is breaking with established tradition with a 30-second video featuring an ugly-looking model with no sign of the actual car. It all heralds a new direction: high-end electric cars, and the Type 00, a concept unveiled in Miami shortly after. If the idea was to get attention, which can often lead to strokes, 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: closing its German car factories. 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 combination of 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. cruise.

The industry has been hit by not one, but two meteorites: Chinese automakers and electrification.

Reflecting China’s transformation of the solar panel industry, the country 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 the center of EVs, accounting for two-thirds of global sales and more than 90% of the growth rate last year. Still, domestic sales of 11.2 million EVs 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 at a time when existing business in China has collapsed, China’s growing exports are eating away at other markets, and Chinese manufacturers and suppliers already have a monopoly on EVs is inviting a crisis.

Now let’s get into the world of 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. However, even Europe raised tariffs on Chinese-made 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 failures. President Trump’s over-protectionism and perhaps relaxing fuel efficiency standards will provide some respite. 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.

Given the ongoing global reordering, increasing tariffs seems like a stopgap measure. 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 a streamlined Chinese 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. In more prosaic terms, when suddenly there are too many manufacturers with too many factories and too many similar brands and products, they have to cut costs or even cut entire companies. Maybe it’s time to do so. “Delete the ordinary” to recycle 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 seem 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 lot 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. More from Bloomberg Opinion:

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is an energy columnist for Bloomberg Opinion. A former banker, he edited the Wall Street Journal’s “Hard on the Street” column and wrote the Financial Times’ “Rex” column.

This article was generated from the Automata news agency feed without any modifications to the text.