"For years China was the place to be for global car makers. This golden era is showing every sign of drawing to a close.
The latest jump in Covid cases in the country, as well as the weekend protests against Chinese leader Xi Jinping's zero-Covid policy, raise the risk of further supply disruptions and volatile vehicle sales. But the longer-term threat is competition: China's electric-vehicle companies, particularly BYD, have sophisticated products that Chinese consumers want to buy. With EV sales growing faster than the wider market, local companies are gaining market share.
This breaks the pattern of two decades, when German car brands emerged as the prime beneficiaries of China's booming market. Their joint ventures with local auto makers grew rapidly while churning out double-digit margins. They exported parts and top-end vehicles to China. The country's overall contribution to their profits isn't known, but prepandemic estimates were as high as 50%.
German companies poured money back into China in response: A recent report by research firm Rhodium Group found that Volkswagen, BMW and Daimler, which then owned Mercedes-Benz, together with chemical company BASF accounted for 34% of all foreign direct investment from Europe into China between 2018 and 2021. The trend continued this year as BMW increased its stake in its key Chinese joint venture to 75%. Now Berlin, burned by its previous coziness with Moscow, has started to worry about overdependence on China.
Detroit never benefited as much, leaving it with less to lose. General Motors made a $600 million in equity income from China over the past four quarters, compared with $11.5 billion from its North American business, even though one of its Chinese joint ventures produces a popular microcar, the Hongguang Mini EV.
Investors noticed the difference. GM's stock used to trade at a valuation discount to those of luxury manufacturers Mercedes-Benz and BMW in terms of price-earnings ratios and on par with VW's. Now the U.S. company fetches a sizable premium to all three. This started during the pandemic-era meme-stock craze but has persisted even during this year's selloff.
China isn't the only reason: Investors are worried about European sales and operating costs as the region weans itself off Russian pipeline gas. And GM is in a much better position than foreign brands to tap the EV-related subsidies in President Biden's Inflation Reduction Act.
Still, the world's largest car market matters, and the current trend of market-share losses for global brands shows no sign of reversing.
Infotainment, and other software, seems to be a key weakness. Local solutions are required, partly because digital technology is geopolitically sensitive, but this hands an advantage to local players.
VW last month said it would invest roughly $2.5 billion alongside a Chinese tech company, Horizon Robotics, to develop software and chips for autonomous driving. Rather than bringing know-how to China, Europe's largest car maker is buying Chinese technology.
Tesla may retain its fat Chinese profits longer than its German rivals, protected by its status as today's tech leader. Even its business is showing signs of wear, though: It cut prices in China in October.
After a long smooth run, German companies need to prepare for a much bumpier road in China. In time, investors might expect a sharper focus on the American market as well as on boosting the efficiency of its factories back at home. The ride could get uncomfortable." [1]
1. Car Makers Face Bumps in China --- Germany's auto powerhouses look exposed as EVs upset established order in largest market
Wilmot, Stephen.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 30 Nov 2022: B.14.