Beware of the steamroller!
I have read and heard quite a lot of comment recently about the challenges that the Chinese new entrant brands (with the notable exception of MG) are having in getting sales traction in Europe. Dealers are signing up to the available franchises, but then not rushing to actually open the showrooms or move from a temporary multi-brand site to a permanent solus site. The manufacturers themselves are chasing fleet deals at deep discounts in order to get the registrations and move the stock that they have built up. One premium Chinese brand had to pre-register a large number of cars in order to avoid penal taxation, and is still stuck with most of them months later.
It would be easy in those circumstances to mock, and settle back, thinking that the immediate threat to the established brands had gone away, or for dealers to wind back on their previous determination to secure at least one Chinese brand as a bet on the future of the industry, and mitigate the risk of decline in the share of their existing brands. I saw one post referring to the new BYD-owned RoRo car transporter ships, pointing out that just the first of their fleet of at least two, potentially up to ten vessels would carry two thirds of their European sales volume for 2023 in just one voyage. There was a hint that the investment was foolhardy, that the company’s ambitions far exceeded what it would realistically achieve.
I first worked in China over 20 years ago, when there probably were nine million bicycles in Beijing as the Katie Melua song goes. In some work with SAIC (now the owners of the MG and Maxus brands amongst others), the then CFO pushed back when I and colleagues urged them to make a quick decision on an investment before they lost the opportunity. Her response was that “China had been the largest economy in the world for most of the last two thousand years, so they did not need to hurry.” She was right on the first historical point, but also on the outlook as China overtook the US again in 2014. She was also right insofar as SAIC has blazed the trail for Chinese manufacturers entering the European market, with MG achieving over 230,000 sales here last year, taking the position of the 20th largest manufacturer. In that moment, I realised that we were looking at a steamroller. Not particularly fast, but nobody should doubt the ability of it to flatten anything in the way.
A couple days ago the Financial Times reported (subscriber access only) on the growing trade tensions between Europe and China over electric cars, which has its roots not only in the ambition to build a globally leading position in this area, but also the underlying foundation for this which has been the huge investment made by existing and start-up manufacturers in R&D and manufacturing capacity. Although the Chinese central government has stopped issuing new manufacturing licences, they have limited leverage to cut back on the capacity that is already in place, as many of the new ventures are backed by local governments who have some autonomy over their decisions, at least up to a point.
The pressure to utilise this capacity will therefore continue to force the Chinese manufacturers to look for export opportunities, and for electric cars that mainly means Europe, as the US is effectively closed by political sentiment and specific tariffs, and the rest of the world is still predominantly a combustion engine market (where they also make big inroads). There is no question that some will fail, but these will most likely be the start-ups (such as WM that filed for bankruptcy in October) rather than those that have the backing of one of the main state-owned manufacturers such as FAW, GAC and SAIC, or come from the largest private companies like Chery and Geely. Having said that, every time one of the start-ups seems to be on the wire, they get thrown a lifeline by an external investor as happened last year with both Nio and XPeng, the latter ironically by Volkswagen.
The whole environment is therefore unpredictable in the short term for distributors and dealers considering taking on a Chinese brand in Europe, or for that matter the established manufacturers who might be thinking about the prospects for their market share (and therefore network and manufacturing capacity) over the next five years. Will the EU impose tariffs? If so, how will the Chinese brands respond with their pricing and market entry strategies? Which brands will stick it out, which will withdraw or fail completely?
As I am writing this on my way to Las Vegas for the NADA Show, it is probably appropriate to think in terms of roulette wheels rather than steamrollers. If you put all your money on one number, you might win big, but if you can, you need to spread your bets. At least if you do your research, you will find that the odds on some of the new brands are definitely better than others, so it’s not a 1 in 36 chance of getting a return on your stake. Faites vos jeux!