Surrender to China - Or Punch Back

D-Day For Legacy Automakers

Surrender to China - Or Punch Back

Future historians will look back at 2024 as a moment in time when a massive earthquake shook the global auto industry. They will call that earthquake China.

Never before have we seen the scale – China produces 30 million vehicles a year. That’s twice as many as North America builds.

Never before have we witnessed this much capacity - 48 million units - enough to supply half of global demand.

Never before have we encountered such cost advantages: China makes cars at 25% to 30% lower cost than any other country.

Never before has the production of batteries – the ascendant energy for powertrains - been so highly concentrated in one nation. China accounts for 76% of global EV battery production.

Juicing? China does that bigger, too. China’s subsidies are 4-5 times higher than those in the West. They include low-interest loans, free land, discounts on energy to power plants, cash back to consumers, and much more.

Then there is “China speed.” It’s real. Chinese automakers develop new cars in half the time of traditional automakers in the West.

Never before has America or its allies faced up to a bigger, faster, stronger competitor.

This summer, board members outside of China are sweating in stunned disbelief as they fully take in this new reality.

They watch in horror as their market shares and profits in the China market collapse. GM, which for decades counted on China as a profit machine, will lose several hundred million dollars there this year. Hyundai is closing plants.

Even mighty Porsche saw its China sales tank 33% in the first half of 2024.

The shock and aftershocks are not limited to China’s own market. Global auto executives watch in anguish as Chinese automakers, led by BYD, Chery, SAIC and Geely, take growing chunks of markets in every time zone: Mexico, Israel, Brazil, Thailand, Spain, Australia and the UK.

They’re not selling solely EVs: they’ve taken share in multiple segments and powertrains.

China will ship 6 million cars to 120 global markets this year. That will be almost two million more than second-place Japan, for 30 years the world’s preeminent exporter of automobiles.

As Elon Musk warned earlier this year: “If there are no trade barriers, they [the Chinese] will pretty much demolish most other companies in the world.”

Automotive executives not named Musk wonder: How did the Chinese get so good, so fast?

Leadership teams at global automakers, suppliers and tech companies are turning to my company for recommendations … at a pace I’ve never before seen.

“We now understand the urgency,” they say. “What options do we have?”

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As global automakers face the realities of China’s powerhouse auto industry, four themes are apparent:

1. This Is War

Legacy automotive executives must realize they are engaged in a war. It is cutthroat – and it will not go away any time soon.

Chinese automakers face massive overcapacity and brutal price competition at home, which has driven their profits to zero. Now, they are hunting for easier marsupials in global markets.

Walking through a Hyundai showroom a few weeks ago, a senior Chinese automotive executive pointed to one model and then another. “We are going to kill this one first, then that one,” he said with conviction.

2. High-Quality Intelligence is Crucial.

In wartime, everyone knows that intelligence can be the difference between victory and defeat. Legacy automakers find themselves blindsided by China’s power today because – for too long – they ignored China growing capabilities.

Outsiders have a lot to learn. How do the Chinese produce such low-cost cars? What are China’s weaknesses? How are they able to move with such breathtaking speed? How strong is their innovation?

During a recent visit to China, Ford CEO Jim Farley seemed delighted to learn about extended range electric vehicles (EREVs).

"EREVs drive like EVs … so you get an EV, and you have 700 miles of range. You don't have range anxiety for a long trip.”

EREVs have been on the road in China for a few years. The technology should not have been news in 2024 to the CEO of Ford Motor Company or any global automaker.

3. Batteries and Costs - They Win, For Awhile

In The Art of War, Sun Tzu warns his generals to absolutely avoid areas where the enemy enjoys a decisive advantage. In 2024 – and for the next decade – China will maintain overwhelming supremacy in two key areas: batteries and low manufacturing costs.

In a conversation this week with Vincent Pluvinage, CEO of OneD Battery Sciences, I learned the capex requirements to build and operate the same factory can be three times as high in America as in China.

Northvolt, Europe’s most promising battery startup, is now battling for survival. BMW cancelled a $2 billion contract, citing missed delivery targets. Earlier this week Northvolt closed Cuberg, the prized American R&D startup it acquired in 2021.

Battery innovation, production and supply chains will remain centered in the People’s Republic of China to serve China’s massive EV market. Closing the battery and cost gaps will be impossible in the near term.

4. Punching Back – Software

There is one powerful weapon available for a counter-attack: Software.

Features and functions powered by software will separate the automotive winners from losers in the future.

Tesla is the proof of concept here. The Tesla Model Y was the world’s best-selling car last year.

Tesla wins because it offers the best end-to-end experience for Tesla owners. The Tesla App is magic. Over-the-air updates are like Christmas gifts under the tree every few weeks. Tesla’s navigation and entertainment features are so intuitive you don’t even notice them.

A New Playbook

It is no secret that legacy automakers have struggled with software, losing billions.

Last week, I rode with my high-school buddy in his beautiful $57,000 Ford Explorer. I asked him how he liked it. “I absolutely love everything about this vehicle – except for that thing,” he said, pointing at the center stack screen. “Sometimes I can’t get Bluetooth to sync up. Other times the screen just goes blank,” he shrugged.

Ford is not alone. Volkswagen sank billions of dollars into CARIAD, an internal software-development team. It was a complete bust; VW had to take a share in EV startup Rivian for its software. Toyota, Honda and Hyundai have their own software trials and tribulations.

Chinese EV startups like NIO, Xpeng and Xiaomi now produce world-class features and functions powered by advanced software. Several CEOs of China’s best automotive companies frequently test drive Tesla products, learn the latest innovations and work hard to match them.

Global automakers would be smart to do more of that. Ditch the pride.

Tapping smart software engineers from outside works, too. I’ve seen several companies make dramatic improvements by partnering with boutique-software specialists.

China On Top … But The Game Ain’t Over

The earthquake called China has transformed the global automotive arena.

Today, China enjoys a massive lead in manufacturing cars: capacity, speed, scale, batteries, supply chains, subsidies, technology and ambition.

But the automotive game never stops changing. Software is now the new king of differentiation. Customers are looking for simpler and more accurate navigation. Safer cars. Fresh entertainment features. Better autonomous driving.

Bottom line: Software is the powerful counterpunch legacy automakers need – and need to get right – to live another day.

Michael Dunne, CEO, Dunne Insights

michael@dunneinsights.com

August 24, 2024