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Handelsblatt reported this week that 94% of new cars sold in China in 2020 were equipped with gasoline or diesel engines. Many of them were built by joint ventures between German manufacturers and domestic companies. But that figure will fall to 59% in the first half of 2024, according to automotive data specialist MarkLines, with the German joint ventures bearing the brunt of the decline. It should be noted that sales of plug-in hybrids and so-called extended-range electric vehicles are booming in China, and these cars have gasoline engines. That means the bulk of the 59% sales statistic comes from these vehicles. Meanwhile, sales of pure ICE cars are plummeting as Chinese consumers turn their backs on cars that rely solely on hellish internal combustion engines.
Over the past few years, Chinese automakers have increased their market share from 33% in 2020 to 52% this year, while German manufacturers have lost nearly 6% market share and Japanese brands have fallen 9%, according to Handelsblatt. Hyundai and Kia now have less than 1% market share in China.
Until now, the lack of competitive electric vehicles has been seen as the biggest challenge for the German auto industry in China. Handelsblatt points out that in recent years, high sales of internal combustion engine cars have been able to cover this problem. But now the gasoline car business in China is collapsing and the situation is becoming increasingly precarious. In 2018, Volkswagen made an operating profit of more than 4.6 billion euros in its Chinese joint ventures with FAW and SAIC. In the first half of 2024, it will be less than 1 billion euros, one-third lower than in the same period in 2023.
In 2018, General Motors posted profits of just under €2 billion from its China investments. In the first half of 2024, the joint venture lost €200 million. Stellantis will cease Jeep production in China in 2022 and canceled expansion plans for Opel. Stellantis does not report its China operations separately, but its operations in China, India and the Pacific region all posted losses in 2023.
“It's clear that traditional drive systems are being replaced,” Jan Burgaard, head of AlixPartners automotive consultancy Beryls, told Handelsblatt. “The Chinese are becoming overwhelmed with new technology. For them, a car must have a smart cockpit that easily integrates and mirrors the smartphone and its many apps. If it doesn't, it won't sell.” Driver assistance systems are also becoming increasingly important. “The Chinese are boasting about how many lidar and radar sensors they have in their cars and how powerful the processors they have,” Burgaard said. “German and European manufacturers need to close this technology gap quickly.”
In China, policies matter
A recent New York Times article highlights how China has gained an advantage in battery and electric vehicle production, pharmaceuticals, drones and solar panels. Beijing's challenge to the technological leadership the United States has held since World War II is visible in Chinese schools, corporate budgets and directives from the highest levels of the Communist Party, according to the article.
A much higher proportion of Chinese students major in science, mathematics, and engineering than students in other large countries. Overall, enrolment in higher education has increased more than tenfold since 2000. Spending on research and development has soared, tripling in the past decade and catapulting China to second place behind the United States. According to recent calculations by the Australian Strategic Policy Institute, Chinese researchers lead the world in publishing widely cited papers in 52 of 64 key technologies.
Last month, China's leaders vowed to step up research efforts another level. A once-a-decade meeting of China's Communist Party leadership chose science education as one of the country's top priorities. This goal received more attention in the meeting's final resolution than any other policy except strengthening the Party itself. China will “make special arrangements for fields and majors with urgent need,” Education Minister Huai Jinpeng said. “We will implement a national strategy to develop top talent.” The vast majority of China's undergraduates major in mathematics, science, engineering, or agriculture, according to the Ministry of Education. So do three-quarters of China's doctoral students. Only one-fifth of U.S. undergraduates and half of doctoral students focus on these fields of study.
China's lead is especially strong in batteries: According to the Australian Strategic Policy Institute, 65.5% of highly cited technical papers on battery technology are by Chinese researchers, compared with 12% by US researchers. China has nearly 50 graduate programs focusing on battery chemistry or the closely related field of battery metallurgy; by contrast, the US has only a handful of professors studying batteries.
Central South University, located in Changsha, a city in south-central China that has long been the center of China's chemical industry, is a good example of this centralized approach to research and development. The university has about 60,000 undergraduate and graduate students. The university's chemistry department is housed in a six-story building with many laboratories and classrooms. In one lab, hundreds of batteries with new chemistries are tested simultaneously. Peng Wenjie, a professor at the university, founded a battery research company nearby that employs more than 100 recent PhD and Masters graduates and more than 200 assistants. The assistants rotate with each researcher, and testing of new chemistries and designs continues 24 hours a day.
Tariffs or competition?
China's expanding manufacturing expertise has sparked lively debate in other countries, particularly the U.S., about whether they should invite Chinese companies to set up factories or simply copy what China has done. “If the U.S. wants to build supply chains quickly, the best way is to invite Chinese companies in, and they'll quickly build their supply chains and bring their technology,” said Feng An, founder of the Center for Energy and Transportation Innovation, a nonprofit research group based in Beijing and Los Angeles.
In China, manufacturing accounts for 28 percent of the economy, compared with 11 percent in the United States. Liu Qiao, dean of Peking University's Guanghua School of Management, said China hopes that investments in science education and research will lead to greater efficiency and boost the overall economy. “If you have a large manufacturing sector, it's easier to improve productivity,” she said.
The subsidies and policies that have fueled China's factory boom have made many other countries wary of buying Chinese exports. The European Union has imposed tough interim tariffs on electric vehicles from China. In the United States, political and commercial pressures have prevented China from doing business with battery makers. Still, Chinese battery companies are exploring ways to manufacture in the U.S., even though it costs six times as much to build a battery factory there than in China, Robin Zeng, chairman and founder of CATL, told The New York Times. What's more, it takes up to three times longer to complete a factory in the U.S. than in China.
summary
Numerous federal programs are trying to compete toe-to-toe with China, particularly in battery and solar power manufacturing, but with everyone working on self-driving software and video games, the success of those efforts is bound to be jeopardized if the U.S. doesn't have access to top researchers. “What happens if China overtakes us in R&D and gets our manufacturing base?” asked Craig Allen, president of the U.S.-China Business Council, which represents U.S. companies doing business in China.
The answer is clear: China will continue to gain an advantage in technology and manufacturing, while the US and Europe will continue to distance themselves from China. No matter how high the tariff walls are, they will eventually be overwhelmed by Chinese competition. The US and EU will need to come up with a different strategy if they want to protect their manufacturing industries.
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