Great questions. China has bigger scale, quicker speed, lower costs, and much richer subsides than any other country in the world. On costs, China is 25-30% cheaper when it comes to manufacturing cars. It's a giant problem for the West.
I would add ‘skill’ to that list. The depth of the skilled market is unmatched. Tesla’s China factory was their best performing for quality, throughput, as well as cost. Before germany and far ahead of the US.
Back from China so have access again: My take would be the following: A lot of the subsidies in China is through free/cheap land/facilities, high-tech status lower tax rates, and soft (low interest) loans. Foreign companies get those subsidies as well. Especially a company of the scale of Tesla. Local/provincial governments compete heavily to incentivize companies to locate in their area, and foreign companies can get even better deals then domestic.
Local companies can still create a cost benefit by 'navigating' labor, permitting, and environmental rules more aggressively, and by their willingness to run zero profit, and more aggressive cost management. But the reason Tesla is loosing market share in China now is mostly because the lack of new models. The Musk/Sillicon Valley speed of hardtech innovation pales in comparison to that of China.
If you look at pricing structure of foreign brands that are manufactured in China you will see that the China price is significantly lower than the same models in their home markets. It begs the question do they also receive Chinese subsidise?
Generally I feel it is more of a case of pricing for the market, you charge as much as you can to maximise profit but still need to maintain market share to benefit from
Volume effects. Manufacturers also need to sell enough vehicles to give public perception that the model is popular.
Impossible to analyse, but it would be good to be able to compare actual factory gate cost cars in China vs ROW. Then look at direct costs and the indirect costs. Having worked for a great American multi national you see the packages of CEO, board members and senior VP’s etc. of Western companies (usually multiple millions $ plus bonuses, equivalent to the salary cost of many hundreds of productive workers). time to design a new model in China is faster and therefore cheaper. The Chinese do not pay huge fees to agencies to dream up new names for their models.
Add to the above the Chinese have moved to the Tesla model of route to market, no dealers marking up prices and damaging reputations.
There are more factors at play than whether governments do or do not give subsidies.
I would hardly call this a Chinese government “Blitzkreig” on home turf the competitors are fighting hard to destroy each other, the market decides who fails or succeeds. 6million cars to 100 countries averages out at only 60,000/country/year or 5,000/month/country. Realistically the majority of these will come from BYD which is quite simply a huge company with massive production capacity.
Tariffs are not the solution, this denies the general public access to economic personal transport devices (cars), the rich will continue to buy the Bentley, Mercedes s class, hypercars etc…. The western manufacturers have made billions in profits in China, if the CEO and VP’s were doing there job and looking at future strategies they would not be in trouble now. Tariffs will spill over to contaminate other products trading, the Chinese are smart in that they apply tariffs where they know the impact will hurt.
I heard nobody of the Chinese manufacturers is except Tesla and BYD are making any money. How long do you think this can last. Sounds like massive consolidation is on the way and at the end only a handful of manufacturers will remain. Basically what you see in the US and Europe today. What’s your view ?
US car manufacturers have had an oligopoly of 3 manufacturers that haven't had serious domestic competition since the 1920s. They failed to successfully respond to the Japanese since the 1970s, other than make big SUVs and trucks, and with their allergy to innovation they will not likely have a successful response to Chinese competition. The US government will probably need to provide subsidies to new domestic manufacturers to have a chance in preserving domestic car production or allow the Chinese to own factories in the US.
Michael - excellent analysis, as always. I would add that the average Chinese consumer/laborer earns anywhere between 25% to 30% less than their Western counterparts. The Chinese standard of living is no longer impoverished, but it also calls for compromises that would make many Westerners uncomfortable. The Chinese economy, industrial output and pricing structures for durable goods are geared to that reality. So BYD’s Seal EV priced at $11,000 USD domestically is absurdly low by Western standards. But to the average Chinese, it is a not an inconsiderable sum to pay, even though the Seal EV is priced at the lower end of the spectrum.
Cheer up, Mike. China's nouveau middle-class are still buying allll of the fancy Western makes! I trip over BMWs, Chevys, Teslas, Lexi all day here. It's probably going to be a couple of years before they come to their senses. That gives you ample time to make a career transition.
This is interesting, foreign brands only sold 480,000 units in August (average give 5,760,000) this equated to 27% drop from a year earlier, so 1 year ago ~610,000units (average gives 7,320,000). These number exclude their imported expensive models?
So foreign brands have had a 20-30 year boom period selling many millions of cars per year (at inflated prices and huge margins). Now they complain about dropping below 50% market share and want to ring fence their domestic markets to stop Chinese sending 6million cars to the rest of the world. The sensible thing would be to insist the Chinese for JV’s in their domestic markets with full assembly there.
If you think this is happening systematically only in the auto market, check out appliances, fast food, electronics, and pretty much everything else that's consumable.
That is changing rapidly. BMW maintained sales early in the year by massively cutting prices, but they have had to back off that now - sales collapsed 42% in August vs. a year earlier. Porsche sales also down hard. Audi and Mercedes holding up better but the avalanche of new Chinese high end models will create more pain. BYD just bought Mercedes out of the last 10% of their previous 50/50 joint venture Denza.
Chevy sales are also collapsing, down by over a quarter year over year. Tesla sales are static while the EV market is growing at 40% a year - Tesla is losing big in market share while offering 5 year 0% financing!
I'll add that Chinese consumers here are deaf to my protestations that Teslas are actually crappy cars. The releavnt point here is that people don't understand quality and are susceptible to marketing. Maybe you can dress in a tutu and be an ornament at the car shows, working for BMW and so on. I'm sure the agencies pay promptly, though I imagine the constant leers and whistles might be a bit of a downer.
The western world generally came up with the tech; solar panels, the lithium ion battery, etc.
Western businesses couldn't or didn't want to lose money whilst making them profitable, China was happy to wear the losses until they were better and accepted, they now dominate. Yes they use subsidies etc but they also have a huge local market which helps.
I recall non tarrif barriers, like safety standards, when Japan was rising. Is China submitting vehicles for independent crash testing and publishing the data before shipping cars? Maybe someone else is testing?
And as of today we have news reports of remotely detonated pagers and walkie talkies in Lebanon. Discussions have already been circulating about parallel if not similar threats that may one day involve electronic devices, especially those with large lithium ion batteries.
Just like the controls on Japanese cars "bought time"? The North American manufacturers will stagnate while the intense competition in China will drive their manufacturers to new heights. Tariffs plus an oligopolistic structure and bought and paid for politicians leads to clientelism, price gouging and inefficiency. A good example is South America during their 1960s to 1980s Import Substitution Industrialization (ISI). Once the tariff walls came down those local industries were devastated.
The Japanese learnt to play the higher prices game as they understood that their market share would be limited. The Chinese allowed Western manufacturers to dominate their market (through JVs) and then let Tesla own its own plant 100%. All to drive the industrial learning, and then competition needed to drive the industry. It never picked winners, but rather supported the overall industry.
Rings true to me! Was in Uzbekistan over the Chinese national holiday and all the nicest vehicles on the road were flashy Chery, BYD, Li Auto and others….
Let's not forget that EVs are far simpler than ICE vehicles, with far, far fewer moving parts. Western carmakers priced EVs as a "premium" product, while China swiftly exploited the potential simplicity of design and manufacturing, gambling on vast volumes at substantially lower margins. The trickery of US makers quickly unmasked.
I was just looking around in northern China a few weeks ago and while there are many Western branded vehicles still on the road, the shift is happening at breakneck speed. The same is true for clothing and other luxury goods. As you said it’s not fully transitioned but any western company selling high value goods that is not already making a rapid transition is likely to be on the way to near fatal reduction in revenue in the next year.
It’s pretty scary to witness how fast things have changed.
Western cars are becoming disposable, electronics plagued garbage. A Camry manufactured in 2005 probably still has more life left in it than a VW manufactured today. The car industry in the west is entirely shaped by marketing departments and govt regulations, so much so that the question of whether the cars are actually any good seems to have become a minor, secondary consideration. They are absolutely ripe for the picking for anyone with an ounce of common sense and it will be no surprise if the chinese manufacturers wipe the floor with them.
No one we know would buy a BYD in particular. They might be cheap but it seems they are full of manufacturing flaws and have a tendency towards fiery battery failure.
As a resident of Thailand, I can confirm Mike's impression. In my little village, there are two Seals and a dozen other EV brands. On the corner of the lane that connects to the main road is a Wuling Kei car dealership selling $10,000 city runabouts, and my local supermarket has six charging stations right by the entrance..
How do these companies achieve these prices?
Automation?
Slave labour?
Government subsidization?
The North American response to date is to double the sales price of Chinese manufactured vehicles imported into Canada and the US.
But that still leaves the prices lower than those manufactured in Canada, United States and Mexico.
Why are these prices so high?
Profit?
High wages/lack of automation?
Lower government subsidies?
Great questions. China has bigger scale, quicker speed, lower costs, and much richer subsides than any other country in the world. On costs, China is 25-30% cheaper when it comes to manufacturing cars. It's a giant problem for the West.
I would add ‘skill’ to that list. The depth of the skilled market is unmatched. Tesla’s China factory was their best performing for quality, throughput, as well as cost. Before germany and far ahead of the US.
Is Tesla also subsidised by the Chinese government? If not how come their cost are so much lower?
Back from China so have access again: My take would be the following: A lot of the subsidies in China is through free/cheap land/facilities, high-tech status lower tax rates, and soft (low interest) loans. Foreign companies get those subsidies as well. Especially a company of the scale of Tesla. Local/provincial governments compete heavily to incentivize companies to locate in their area, and foreign companies can get even better deals then domestic.
Local companies can still create a cost benefit by 'navigating' labor, permitting, and environmental rules more aggressively, and by their willingness to run zero profit, and more aggressive cost management. But the reason Tesla is loosing market share in China now is mostly because the lack of new models. The Musk/Sillicon Valley speed of hardtech innovation pales in comparison to that of China.
If you look at pricing structure of foreign brands that are manufactured in China you will see that the China price is significantly lower than the same models in their home markets. It begs the question do they also receive Chinese subsidise?
Generally I feel it is more of a case of pricing for the market, you charge as much as you can to maximise profit but still need to maintain market share to benefit from
Volume effects. Manufacturers also need to sell enough vehicles to give public perception that the model is popular.
Impossible to analyse, but it would be good to be able to compare actual factory gate cost cars in China vs ROW. Then look at direct costs and the indirect costs. Having worked for a great American multi national you see the packages of CEO, board members and senior VP’s etc. of Western companies (usually multiple millions $ plus bonuses, equivalent to the salary cost of many hundreds of productive workers). time to design a new model in China is faster and therefore cheaper. The Chinese do not pay huge fees to agencies to dream up new names for their models.
Add to the above the Chinese have moved to the Tesla model of route to market, no dealers marking up prices and damaging reputations.
There are more factors at play than whether governments do or do not give subsidies.
I would hardly call this a Chinese government “Blitzkreig” on home turf the competitors are fighting hard to destroy each other, the market decides who fails or succeeds. 6million cars to 100 countries averages out at only 60,000/country/year or 5,000/month/country. Realistically the majority of these will come from BYD which is quite simply a huge company with massive production capacity.
Tariffs are not the solution, this denies the general public access to economic personal transport devices (cars), the rich will continue to buy the Bentley, Mercedes s class, hypercars etc…. The western manufacturers have made billions in profits in China, if the CEO and VP’s were doing there job and looking at future strategies they would not be in trouble now. Tariffs will spill over to contaminate other products trading, the Chinese are smart in that they apply tariffs where they know the impact will hurt.
I heard nobody of the Chinese manufacturers is except Tesla and BYD are making any money. How long do you think this can last. Sounds like massive consolidation is on the way and at the end only a handful of manufacturers will remain. Basically what you see in the US and Europe today. What’s your view ?
@ “Sounds like massive consolidation is on the way and at the end only a handful of manufacturers will remain.”
Nick we heard that prediction from the experts 20 years ago but that contraction just doesn’t seem to come about.
Meanwhile there are countless little (Santa’s) workshops turning out cars albeit crude, in Shandong Province alone, and there seems no end in sight.
US car manufacturers have had an oligopoly of 3 manufacturers that haven't had serious domestic competition since the 1920s. They failed to successfully respond to the Japanese since the 1970s, other than make big SUVs and trucks, and with their allergy to innovation they will not likely have a successful response to Chinese competition. The US government will probably need to provide subsidies to new domestic manufacturers to have a chance in preserving domestic car production or allow the Chinese to own factories in the US.
Michael - excellent analysis, as always. I would add that the average Chinese consumer/laborer earns anywhere between 25% to 30% less than their Western counterparts. The Chinese standard of living is no longer impoverished, but it also calls for compromises that would make many Westerners uncomfortable. The Chinese economy, industrial output and pricing structures for durable goods are geared to that reality. So BYD’s Seal EV priced at $11,000 USD domestically is absurdly low by Western standards. But to the average Chinese, it is a not an inconsiderable sum to pay, even though the Seal EV is priced at the lower end of the spectrum.
I look forward to your next post.
Conrad - Very good points, all of them. Thank you for helping to paint a more complete picture. MD
Cheer up, Mike. China's nouveau middle-class are still buying allll of the fancy Western makes! I trip over BMWs, Chevys, Teslas, Lexi all day here. It's probably going to be a couple of years before they come to their senses. That gives you ample time to make a career transition.
https://www.scmp.com/business/china-business/article/3279264/bmw-gm-toyota-lose-more-market-share-china-transition-evs-hurt-deliveries?utm_source=twitter&utm_campaign=3279264&utm_medium=share_widget
This is interesting, foreign brands only sold 480,000 units in August (average give 5,760,000) this equated to 27% drop from a year earlier, so 1 year ago ~610,000units (average gives 7,320,000). These number exclude their imported expensive models?
So foreign brands have had a 20-30 year boom period selling many millions of cars per year (at inflated prices and huge margins). Now they complain about dropping below 50% market share and want to ring fence their domestic markets to stop Chinese sending 6million cars to the rest of the world. The sensible thing would be to insist the Chinese for JV’s in their domestic markets with full assembly there.
If you think this is happening systematically only in the auto market, check out appliances, fast food, electronics, and pretty much everything else that's consumable.
That is changing rapidly. BMW maintained sales early in the year by massively cutting prices, but they have had to back off that now - sales collapsed 42% in August vs. a year earlier. Porsche sales also down hard. Audi and Mercedes holding up better but the avalanche of new Chinese high end models will create more pain. BYD just bought Mercedes out of the last 10% of their previous 50/50 joint venture Denza.
Chevy sales are also collapsing, down by over a quarter year over year. Tesla sales are static while the EV market is growing at 40% a year - Tesla is losing big in market share while offering 5 year 0% financing!
I'll add that Chinese consumers here are deaf to my protestations that Teslas are actually crappy cars. The releavnt point here is that people don't understand quality and are susceptible to marketing. Maybe you can dress in a tutu and be an ornament at the car shows, working for BMW and so on. I'm sure the agencies pay promptly, though I imagine the constant leers and whistles might be a bit of a downer.
The western world generally came up with the tech; solar panels, the lithium ion battery, etc.
Western businesses couldn't or didn't want to lose money whilst making them profitable, China was happy to wear the losses until they were better and accepted, they now dominate. Yes they use subsidies etc but they also have a huge local market which helps.
Why should low Chinese car prices be "frightening"?
I recall non tarrif barriers, like safety standards, when Japan was rising. Is China submitting vehicles for independent crash testing and publishing the data before shipping cars? Maybe someone else is testing?
And as of today we have news reports of remotely detonated pagers and walkie talkies in Lebanon. Discussions have already been circulating about parallel if not similar threats that may one day involve electronic devices, especially those with large lithium ion batteries.
How does one spell non tariff barriers again?
Where do the proposed gigantic tariffs on Chinese cars (in Canada and the US) fit into this?
Basically, they are designed to buy time. Things have shifted so quickly that the existing automakers are scrambling to come up with a response.
Just like the controls on Japanese cars "bought time"? The North American manufacturers will stagnate while the intense competition in China will drive their manufacturers to new heights. Tariffs plus an oligopolistic structure and bought and paid for politicians leads to clientelism, price gouging and inefficiency. A good example is South America during their 1960s to 1980s Import Substitution Industrialization (ISI). Once the tariff walls came down those local industries were devastated.
The Japanese learnt to play the higher prices game as they understood that their market share would be limited. The Chinese allowed Western manufacturers to dominate their market (through JVs) and then let Tesla own its own plant 100%. All to drive the industrial learning, and then competition needed to drive the industry. It never picked winners, but rather supported the overall industry.
Rings true to me! Was in Uzbekistan over the Chinese national holiday and all the nicest vehicles on the road were flashy Chery, BYD, Li Auto and others….
Let's not forget that EVs are far simpler than ICE vehicles, with far, far fewer moving parts. Western carmakers priced EVs as a "premium" product, while China swiftly exploited the potential simplicity of design and manufacturing, gambling on vast volumes at substantially lower margins. The trickery of US makers quickly unmasked.
Blame unions and greedy CEO's making millions a year.
I was just looking around in northern China a few weeks ago and while there are many Western branded vehicles still on the road, the shift is happening at breakneck speed. The same is true for clothing and other luxury goods. As you said it’s not fully transitioned but any western company selling high value goods that is not already making a rapid transition is likely to be on the way to near fatal reduction in revenue in the next year.
It’s pretty scary to witness how fast things have changed.
Western cars are becoming disposable, electronics plagued garbage. A Camry manufactured in 2005 probably still has more life left in it than a VW manufactured today. The car industry in the west is entirely shaped by marketing departments and govt regulations, so much so that the question of whether the cars are actually any good seems to have become a minor, secondary consideration. They are absolutely ripe for the picking for anyone with an ounce of common sense and it will be no surprise if the chinese manufacturers wipe the floor with them.
They didn't see this coming? If true, they deserve to die.
No one we know would buy a BYD in particular. They might be cheap but it seems they are full of manufacturing flaws and have a tendency towards fiery battery failure.
As a resident of Thailand, I can confirm Mike's impression. In my little village, there are two Seals and a dozen other EV brands. On the corner of the lane that connects to the main road is a Wuling Kei car dealership selling $10,000 city runabouts, and my local supermarket has six charging stations right by the entrance..
Thank you for the report on your changes in your neighborhood. Fascinating how changes happens and happens quickly.