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Shanghai Auto Show – sign of a new world order?

My blog is again a couple days late this week, but it does provide an opportunity to see the headlines from the Shanghai Auto Show with the press days scheduled on Tuesday and Wednesday this week.  Whilst auto shows in Europe are in decline and looking to reinvent themselves with new formats, venues and focus, the Chinese still put on auto shows like they used to be - on a grand scale and with the focus on product.  Non-Chinese brands now choose Beijing or Shanghai for global premieres like the Maybach EQS today.

China has had a tough time over the last couple years with their Zero Covid policy but has emerged with a bang since that was dropped at the start of this year.  In the words of a Chinese friend “everyone got Covid all at once and then they moved on from it” and we are now back to business as usual.  However, that does not mean the car market remains an easy source of profit for everyone.  The domestic market is only expected to grow in 2023 by 3% year-on-year according to CAMA, the Chinese Association of Automobile Manufacturers, despite the easing of restrictions and more confidence that none will be reimposed at short notice as happened over the last couple years.  There have also been a number of new domestic brands launched by newcomers and the established players, each with a growing product portfolio.  Meanwhile, the foreign brands all hope to take advantage of the reopened economy, perhaps hoping they can return to their previous position when more than half their global profits came from the Chinese market.

The reality is different as competition is now much more intense than it was when I was last in China in 2019.  At that point Tesla was still building its plant in Shanghai and brands whose names we recognise today like Xpeng and Great Wall’s Ora had barely started production.  Now both of them and major players such as BYD (the largest manufacturer of electrified cars and second largest manufacturer of battery electric cars in the world) and SAIC through its MG brand are established in Europe with a positive market reaction.  European sales by the new MG last year of 114,000 cars were the same as those achieved by the old MG Rover in 2004 before its decline to collapse in 2006.

The competitive intensity is greater than any other market globally and this has led to a price war which risks running out of control.  Tesla grabbed the headlines with the substantial cuts that they made in China and elsewhere in the last quarter of last year, but this has now spread to most manufacturers and ICE as well as BEV products.  Analysis by German boutique consulting firm Strategy Engineers cites price reductions of between 5% and 49% across twenty brands with Tesla sitting in the middle with 10%-14% reductions on Models Y and 3.

William Li, the co-founder with my friend and former colleague the late Martin Leach of Nio, has estimated that the Chinese domestic brands have a cost advantage of up to 20% over Tesla because of the dominance that China has in the supply of batteries and battery raw materials for EVs.  Given that most analysts believe that Tesla in turn has a significant cost advantage over established western and non-Chinese Asian brands then that has to be a cause for concern in terms of who can stay the distance in a prolonged price war which could easily spread from China to other major global markets.

I commented in a blog a few weeks ago about the volume ambitions of the Chinese brands in export markets.  The intensity of the price war in China makes it even more important for them to find opportunities to sell significant volumes of product in markets where they have more headroom in terms of pricing.  There are clearly costs associated with entering new markets and for now all the product is shipped from Chinese manufacturing plants.  An indication of the likely near term ambitions comes from the expansion of the shipping fleet of very large car carriers.  I learned this week that the number of ships in build exceeds the normal replacement rate by around 16 ships each year over the next two years.  With 9000 cars each and a three month round trip from China to Europe that is the equivalent of almost 600,000 cars annually.  If it is not the Chinese who will be utilising this additional capacity, then who will it be?

In challenging economic times and with rising product prices due to electrification and other added regular regulatory requirements forcing a number of manufacturers to slim their product offer and exit lower price segments, I don't see the established manufacturers looking to add capacity and grow significantly over the coming years.  So 600,000 additional cars from China probably means 600,000 fewer cars from the established players or roughly two assembly plants.  As I said in my earlier blog, I do not believe that protectionism is the answer, even if viewed from a European perspective.  This is a fight that must be played out in the marketplace, and a key area of potential advantage will be in the distribution model.  It is up to the Chinese brands to develop effective market entry strategies, and for the established players to make the step change improvements that ICDP has highlighted for years, before complacency pushes them into the same history books as MG Rover.

Image: Autocar

Steve YoungComment