An Automotive Frankenstein Is Born

Extreme Competition With Chinese Characteristics

An Automotive Frankenstein Is Born

One humid June morning a few years back, I found myself standing at the entrance of a massive car assembly plant on the outskirts of Zibo, a sooty industrial city about a three-hour train ride south of Beijing.

The five million residents of Zibo had no prior history in making cars. But Mr Zhang, the 40-something CEO of National Gold Motors, was hell-bent on changing that.

Zhang, wearing a Calvin Klein shirt, blue jeans and Converse high tops, welcomed me at one end of the plant:

What do you think? “Ni kan zenmo yang?”

First thing I noticed was that the plant was huge. There was enough capacity, I learned later, to build 150,000 cars a year. Long rows of world-class Kuka robots, imported from Germany, stood idle and silent. Like shiny, disciplined soldiers.

Over in one corner, a few engineers fussed with a prototype that faintly resembled a Citroen Picasso.

Most of all, I noticed the quiet. There were no more than 10 workers in the plant. This operation was still very far away from production.

“Impressive.” I answered. “Very impressive.” Then I ventured my own question: “How many cars do you plan to sell next year.”

Zhang turned his head a bit and gave a wry smile, like he was dealing with a junior staffer who did not get the memo. Instead of answering, he delivered another question: “What EV technologies can you get us from America?”

“EV technologies from America?” I repeated with what must have been a very puzzled look on my face.

Zhang, who had been hired in from Zhejiang, that southern cradle place of China’s boldest entrepreneurs, then turned to one of his lieutenants.

“Explain things to our guest.”

His R&D chief stepped forward. “You see, sales don’t matter right now. What matters is that we tell the municipal government, the Mayor, that we are sourcing advanced technology from America. Then he will instruct the state bank here to give us another big loan.”

“What kind of advanced technology?”

“Oh, the kind really doesn't matter. Anything. What matters is getting the money from the bank. That’s how we got the first $1 billion to build this plant and buy the Kukas.”

The first billion?

I took a short ride in the Picasso-like prototype. During the test drive on factory grounds, a panel affixed to the roof flew off. I asked the driver to slow down. Clearly, the car needed work before it would be ready for production.

“How can I be helpful,” I asked CEO Zhang as I stepped out of the car.

“You’re from California, right? There must be a lot of good EV tech there. Tell us a couple of technologies we can source there.”

My mind raced. I still had no idea what they wanted. Then it occurred to me: Neither did they. The technology did not matter.

What mattered was that my visit would give the Mayor enough confidence to instruct the bank to make the deliver the next tranche of loans.

Later that night, CEO Zhang and his team took me to dinner. Our chauffeured van pulled up to the front steps of…City Hall. You guessed it: Dinner was catered at the Mayor’s office. Sitting at the top of the table was the Mayor of Zibo himself.

During our three-hour dinner, sprinkled with shots of Maotai, there was exactly zero conversation about technology. “An American guy from California who knows cars was here and he knows a lot about EV technology” was going to be enough to get the bank loan approved.

The State Capitalism Playbook

Across China, you can find scores of startups like National Gold. They are run by street smart, hard working people. Some, like NIO, Xpeng and Li Auto, are much more advanced than others. But they all follow a standard playbook for operating in the arena called state capitalism.

1. Secure a manufacturing license, with help from a government sponsor.

2. Get a billion-dollar loan. Build a plant. Buy some Kukas.

3. Get another billion. Build a second plant. Whenever possible, build plants in a few different provinces. That’s good risk diversification.

In the West, we (usually) try to spec the plant to market demand. In the PRC, you secure the hard-to-get license and build the plant. The bigger the better. Then you hustle like crazy to sell your cars. Sell them to anyone. Anywhere.

Result: China today has enough capacity to supply half of annual global demand for cars - some 40 million a year. Chinese consumers buy about 25 million, leaving 15 million units of extra capacity.

Now, if all that excess capacity stayed at home, inside China, no one would give a hoot. But it’s not staying home.

Chinese automakers are on a global offensive, exporting cars and trucks – to more than 100 markets worldwide. China will ship 6 million vehicles in 2024, cementing its position at the world’s No. 1 exporter.

Western automakers are feeling the pain. In recent weeks, VW and Nissan both announced plant closures and layoffs of thousands of workers. GM took a $5 billion charge as it restructures its China business.

Leaders in the West are beginning to shout accusations of unfair play, even going to far as to utter the “O” word.

The “O” Word

Overcapacity is a clunky, boring word that suddenly has the power to make lots of people angry.

West: You can’t just recklessly build a bunch of car plants and flood the zone like that. You are weaponizing overcapacity!

China: We’re supposed to hold back because you’re lazy, slow and stupid? You’re just pissed because we are winning!

There are truths on both sides.

There is no question that China ramps up capacity and subsidies in targeted industries - solar, ship-building, steel – and demolishes global competitors with impossible-to-match pricing. At the same time, the West has been complacent – too comfortable and slow to innovate.

Overcapacity and subsidies are big, complex topics distracting us from a much simpler reality: We are experiencing a high-speed collision of two distinctly different economic systems.

In this corner, market capitalism. In that corner, state capitalism. The two heavyweights, locked in a clench at center ring, do not like each other.

The West pushes off and yells to the referee: “Disqualify him. He’s juiced! China steps forward: “I’m strong and quick. And you’re fat.”

Suddenly, An Export Powerhouse

People in there West naturally wonder: How does China make the spectacular jump from exporting 1 million cars in 2020 to 6 million just four years later? How is that even possible?

Chinese carmakers like BYD, Chery, Geely and Xpeng have made stunning improvements in the past five years. These companies, led by ambitious and hard-working people, offer tremendous products at affordable prices.

But if BYD were headquartered in India or Brazil or Indonesia, the company would be an industrial pipsqueak. The secret superpower is China itself and its state capitalist system.

There’s China. And Then There’s Everyone Else

China as a manufacturing base for cars is simply impossible to match in scale, supply chains, materials, regulatory speed and intensity of competition. State subsidies in all shapes and sizes - measurable and dark – also play a crucial, if impossible-to-measure, role.

China’s rise as an automotive superpower is not an anomaly—it’s a case study in the power of state capitalism, a system that marries ambition with strategy, and brute scale with surgical precision.

The West can gripe about subsidies, overcapacity, and unfair competition, but the reality is clear: China is playing a different game, and it’s playing to win. Where do your solar panels come from, again?

A Decisive Moment for the West

The collision of economic systems is a battle for the future. And right now, one side is moving faster, thinking bigger, and building smarter.

Western leaders and businesses must wake up – right now. Innovation, agility, and investment in the next generation of technologies are the arsenal to be built. Fast.

The question isn’t whether China is dominant in manufacturing EVs today; the question is whether the rest of the world will be content watching from the sidelines - or will dig deep right now to find the will – and the way - to compete.

Michael Dunne

December 10, 2024

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Special Note to Readers:

My good friend, Ken Wilcox, has written a tremendous new book: The China Business Conundrum. It’s a refreshingly genuine account of the joys and trials of building a joint venture bank in China. Before his tour in China, Ken was the Chairman and CEO of Silicon Valley Bank during its golden years. I highly recommend that you buy a copy today - you will learn a lot from a smart professional who gets China.

Available on Amazon. The China Business Conundrum