As China sales slump, global carmakers tap local ventures for EV catch-up

THE increasing popularity of homegrown new energy vehicle (NEV) brands among Chinese consumers has foreign auto giants sweating. As they try to rev up stalling sales in China amid a broader economic decline, some are trying an unorthodox strategy: tapping their local joint-venture (JV) partners for NEV research and development.

International carmakers were traditionally forced to enter into JVs with local state-owned car brands in order to access the mainland market, under rules that were finally lifted in 2022.

As sales of local NEVs grow, these JVs have found their own stakes in the market slipping.

Headline announcements from the likes of Volkswagen, BMW and Toyota Motor Corp in the past year have brought the strategy into relief. They are pivoting their China ventures hard to electrification.

But for the plan to work, their local JVs will have to overcome their reputation of being essentially glorified assemblers that rely on technology developed by their foreign stakeholders.

In interviews with Caixin, industry insiders raised doubts about the efforts due to concerns over the level of innovation at such JVs, as well as the challenge of developing the sophisticated supply chains already honed by China’s EV-focused startups.

Chinese brands have been at the forefront of the electric-vehicle (EV) transition, and have been more aggressive at adopting whiz-bang smart-driving technologies. Local consumers are voting with their wallets.

In the first nine months of 2023, homegrown brands collectively sold 9.9 million passenger vehicles in China, representing a year-on-year increase of 21.2 per cent. That equalled a market share of 54.6 per cent, up 6.5 percentage points from a year earlier, according to a report published on Wednesday (Oct 11) by the China Association of Automobile Manufacturers (CAAM).

The gradual rise of homegrown brands, which had a local market share of around 40 per cent for most of the last decade, has raised anxiety among the bosses of international auto JVs, which have maintained a leading position in the local fossil-fuel-powered passenger vehicle market for many years.

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Weeks after his firm posted a 24 per cent year-on-year drop in sales for June, Jia Jianxu, general manager of SAIC Volkswagen Automotive, a JV between Volkswagen and SAIC Motor, warned that his company was facing a choice: “go bigger or go home”.

Since its inception in 1984, SAIC Volkswagen had regularly been one of China’s top three car sellers, capitalising on the prestige of German technology. But in recent years its sales have started to decline.

In the first nine months of this year, SAIC Volkswagen sold 832,328 cars, down 13.5 per cent on the comparable period last year, according to a stock exchange filing. The figure rarely dropped below one million in the prior decade.

SAIC Volkswagen’s major JV rivals also took a hit. Of the group, Nissan Motor’s China JV with state-owned Dongfeng Motor Group performed the worst in the first nine months of this year, with a year-on-year sales drop of 30 per cent to 506,879 units.

It comes even as passenger car sales have been a rare bright spot for consumer confidence in a year that China is in the economic doldrums. Auto sales jumped 6.7 per cent in the first nine months to 18.1 million units, largely driven by rising demand for NEVs.

Sales of China-made NEVs, which are mostly pure electric and plug-in hybrid models, surged to 6.3 million units, up 37.5 per cent compared with the same period last year, according to the CAAM.

Electrification drive

In September, about 60 per cent of NEVs sold to individual consumers in China bore local brands, according to the China Passenger Car Association in an analysis on Oct 11. For international automakers’ China joint ventures, the figure was just 6.2 per cent. Overall, 36.9 per cent of total auto retail sales in China for the month were NEVs, up 5.1 percentage points from a year ago.

Expecting NEVs to continue to drive growth in the world’s largest auto market, a succession of foreign carmakers have announced new business plans, under which their China JVs will double down on EV development and marketing.

In July, Caixin reported that SAIC Volkswagen would start developing its own plug-in hybrid models. The team from the JV will be responsible for at least 75 per cent of the development work, according to Jia.

It was a departure from the JV’s tradition of making vehicles using licensed technologies and kits from the German group, which has long been the norm for such firms. Of 20 Volkswagen car models SAIC Volkswagen sells in China, only five are NEVs, according to the company’s website.

In the same month, to ramp up its focus on EVs, Toyota Motor announced plans to rebrand its largest R&D unit in China, Toyota Motor Engineering & Manufacturing (China), as Intelligent ElectroMobility R&D Center by Toyota (China). The company said it would also strengthen local development of battery, hybrid and plug-in hybrid models.

In early August, Ford Motor handed the operations of its EV unit, Ford Mustang Mach-E, over to its China JV with Chongqing Changan Automobile, in an attempt to tap the local firm’s strong dealership network to boost sales.

Just three months before the business change, Changan chairman Zhu Huarong said at an earnings briefing that Changan would work with its JV partners to develop new technologies, new products and even new brands. Changan will team up with Ford to launch new EV models in 2024, Zhu said at the time.

Challenges persist

Wu Wenguang, the executive president of MXNAVI, a Tencent-backed developer of automotive navigation systems, told Caixin that the JVs will find it hard to make disruptive innovations in an era when cars are transitioning from hardware-driven machines to software-driven ones.

They need to reshape their idea of developing cars and carry out organisational restructuring for the transition, Wu warned. MXNAVI partners with a range of automakers including FAW Volkswagen, SAIC Volkswagen, Toyota, BMW and Geely, according to its website.

Some international JVs also tend to be at a disadvantage due to the fact their supply chains often shun the use of local suppliers and cheaper components. A person working at a car-making JV gave the example of Hyundai, which has prohibited its China JV with BAIC Motor from opening its supply chain to local suppliers.

During a ceremony in August marking the 5 millionth NEV to roll off its production line, Wang Chuanfu, founder and chairman of NEV startup-turned-titan BYD, predicted that homegrown brands will control 70 per cent of China’s passenger car market by 2025 as the EV transition deepens. CAIXIN GLOBAL