During the past two decades, global automakers and key suppliers have benefited from the booming auto industry in China as it emerged as the world’s largest market for new vehicles, surpassing the United States.
However, expectations that prosperity would make China more democratic have faded, noted Michael Dunne, who studied Asian economy for decades and consulted with an array of clients in China and throughout East Asia.
Dunne, speaking at virtual conference organized by Detroit’s Society of Automotive Analysts in Detroit, said the economic and political relations between the U.S. and China are undergoing a re-alignment as the two countries move into a new version of the 20th Century’s Cold War between Western powers and the Soviet Union.
Dawn of a new era
The changes are evident in several recent developments such as the Biden administration’s decision to retain the tariffs originally imposed by the Trump administration. “The tariffs are staying,” said Dunne, who is the founder and president of the consulting firm of ZoZoGo.
In addition, the announcement Australia will purchase nuclear submarines from the United States and the United Kingdom sends the message the U.S and its allies will continue to project military power in the South China Sea and other parts of the Western Pacific. At the same time after 25 years, Harvard University is moving its Chinese language program from mainland China to Taiwan, he said.
Meanwhile, the Chinese have increased their overflights of Taiwan and when a top executive from Huawei, the Chinese cell-phone giant, was released from detention in Canada, she was greeted as a hero by the Chinese media, noting only China’s rise as a world power pushed the Canadians to release her.
China also punishes those who act against what it considers its best interest. After South Korea purchased a new air defense system China believed Korea didn’t need, sales by Kia and Hyundai dropped precipitously. Before then, the two South Korean brands combined to sell more than 1 million vehicles in China, Dunne noted.
The confidence comes from the world’s largest market and now possesses some of the world’s most sophisticated technology.
China tightens grip on foreign automakers
Economically China and the U.S. remain significant trading partners, but the terms of the relationship have changed.
In the case of the auto industry, well-established companies such as General Motors and Volkswagen and now Tesla continue to sell vehicles. But some of the western companies with smaller presence such as Ford Motor Co., Stellantis or Renault may ultimately realize staying isn’t worth the effort.
However, even companies that stay will have to play by China’s rules. Tesla CEO Elon Musk has proven adept at playing by the rules laid down by China, which is keen to acquire the latest in electric vehicle technology.
At the same time, Musk has been differential to Chinese authorities and with the company’s factory in Shanghai succeeding in producing expensive vehicles for affluent, well-educated, urban dwellers in Shanghai, who previously been fans of BMW and Mercedes-Benz vehicles. At the same, Musk is proving it is possible to export cars made in China to Europe — for the time being anyway. Once GigaBerlin is up and running, it’s expected to handle European demand.
GM also deferred to Chinese policy makers, Dunne said, citing GM’s recent $400 million investment in Momenta, a Chinese autonomous vehicle company. Rather than bring its Cruise AV subsidiary to China, GM elected to work with a Chinese company rather than try to transfer critical data out of China back to the Cruise engineering center in San Francisco.
Electric vehicles are a major prize
China already has a significant edge in electric vehicles. Half of the 6 million EVs sold in around the world will be sold in China and another third will be sold in Europe.
The U.S. currently holds only 10% of market, Dunne said, adding the Biden administration’s emphasis on EVs is welcome because the U.S. is in danger of falling even further behind.
Meanwhile, Chinese companies are interested in entering the U.S., which is still one of the world’s largest and wealthiest markets. While long-expected consolidation of the Chinese domestic auto industry remains elusive because of the subsidies and China’s own internal politics — where local authorities have considerable authority — several EV builders such as Nio, Yulon and BYD appear to have the financial resources and technical expertise to break into the U.S. market.
But the 25% tariffs aren’t going away anytime soon and the bigger Chinese companies with eyes on the U.S. market, may follow the path of Japanese and South Korean automakers and wind up building and selling cars in the U.S. without any overt Chinese names. Geely’s already on this path with Polestar, which was developed in China, will be built in a new plant in South Carolina.