Roland Berger explores how a full decoupling by the West from the Chinese market may be less-than-optimal from a technology, competition, ecological and consumer point-of-view
China’s challenge to the West is multi-faceted and plays out across geopolitical and industrial domains. Few industrial domains are as much in the public eye as the passenger vehicle industry. Given its importance for the economies of North America, Europe and China as well as its visibility to end customers, this industry can be seen as a bell weather of the relationships between the West and China. Roland Berger believes that the lessons and insights from the passenger car industry are applicable to other automotive and industrial sectors as well.
The current understanding of many Western observers is that the West is at a risk of being flooded by highly subsidised Chinese vehicles with corresponding negative implications for local employment, value creation and industrial eco-systems. China, according to the assertions, is trying to export its way out of a difficult economic situation at home where the lifting of COVID restrictions has not unleashed the forces of the market and driven up growth and consumption sufficiently. This view has merit. However, the Chinese automotive eco-system has developed inherent strength and a full decoupling from the Chinese market may be less-than-optimal from a technology, competition, ecological and consumer point-of-view. Three factors drive competitive advantage for Chinese players: cost, speed and technology.
From an economic point of view, the last decade has been a decade of normalisation for China. Coming from break-neck speeds of double digit growth, the country’s GDP is projected to grow by about 4.6% in 2024 and 4.1% in 2025. Clearly, as the economy is now the second largest in the world in nominal terms, this slowdown was to be expected. However, the continued confrontation with the West has taken its toll as well and amplified economic challenges. Global economic risks such as softer and volatile global demand, exchange rate fluctuations and a foreign investment slump have been headwinds. Geopolitical risks around tariffs, sanctions, supply chain de-risking and technology de-coupling have been negatives for the Chinese economy. In addition, the politicisation of business and changed administrative approach to the economy have increased uncertainty and driven consumer confidence down to record lows. Overall unemployment rates have stabilised at 5%, yet youth unemployment remains stubbornly high at 14-15%.
In this environment, the government as well as entrepreneurs need to take action. One area of activity is the automotive industry, especially in the light of the energy transition. Over the last decade, the Chinese government subsidised the development of its electric vehicle (EV) industry with incentives to the tune of US$250bn. Support included tax exemptions, purchase incentives and subsidised access to raw materials and capital. Direct subsidies to key industry players amounted to several billion US dollars over the last five to six years. Given a soft market at home, both government and companies are also pushing hard to conquer export opportunities. As Figure 1 shows, the export aspirations of Chinese passenger vehicle OEMs are substantial and, if realised, will catapult these companies to world-leading exporters in the space.
These growth ambitions come on the back of a solid market share gain in key regions globally. While entry into North America seems unlikely and building a presence in Europe is not straightforward, Chinese players are visible in many emerging markets such as South America, Middle East and Africa and Oceania. In the CIS they command a share of more than 30% taking advantage of Western sanctions against Russia (see Figure 2).
Yet the success of Chinese OEMs abroad is not only driven by geopolitics and subsidies. As mentioned earlier, cost, speed and technology developments are important contributors to the expansion of Chinese players. From a cost perspective, scale plays a major role. The passenger vehicle market in China is expected to be 40% larger than that in the US in 2024 while labor costs are still at least 40% cheaper. Rather than just relying on these factor cost advantages, Chinese companies are aggressively investing in process automation driving further cost and quality advantages. The old way of competing based on low labor cost, lax envrionmental regulation, high capital and low total factor cost productivity seems a thing of the past.
Speed is driven by several factors, one of them being reduced platform development cycles. Current Chinese OEMs are operating at 30-36 months platform development cycles and are working actively to further shorten the time it takes to bring new vehicles to the market. With shorter development processes, it is easier to react to new technology developments in the market or innovations by competition by moving the vehicle closer to a “smartphone on wheels”. Speed in the form of optimised processes—e.g., regarding testing and E&E/software development for high-voltage batteries—translates into significant cost savings as well as can be seen in Figure 3. Clearly, this speed is also in part a reflection of higher risk tolerance of Chinese OEMs and a different regulatory environment vs the West, yet process innovations still are relevant.
Lastly, technology is an area of competitive advantage for Chinese OEMs. For example, the number of global EV patents filed by Chinese players has increased steadily, so much so that at the beginning of 2024, about 34% of global patent filings were Chinese compared with 27% for US players. Combined with a strong EV battery supply chain in country, this drives a need for Western players to understand what is happening in China. In addition, in the area of infotainment China’s OEMs are catering to a much younger, more digitally savvy audience. Understanding the needs of the target group is an advantage, especially when building up export presence in key young and emerging markets.
Countering the Chinese challenge by import duties as has been implemented by the US and Europe certainly helps mitigate some of the advantages that Chinese OEMs have due to strong state support and subsidies. Given the complexity of the situation, especially for European OEMs with large Chinese exposures and in part large Chinese shareholdings, tariffs are only part of the solution. Similar to the challenge posed by Japanese and Korean OEMs in the past, Western OEMs and suppliers will have to learn how to tackle the Chinese players head on. The speed of development will have to increase and organisational complexity must be reduced, e.g., via the intelligent use of AI in R&D, procurement, supply chain, etc. Efficiency and cost must be again at the centre of organisations after a prolonged, COVID-induced period of simply passing cost increases through to the customer. Local manufacturing and technology ecosystems need to be strengthened, e.g., via the Inflation Reduction Act in the US, to build local competencies. Strategies for emerging markets need to be revisited to ensure success in these growth markets and ward off Chinese dominance. Partnership with Chinese players should be explored to get access to capabilities. The list of to do’s is long and unlikely to subside any time soon.
In addition, global volatility requires a constant reflection and adjustment of China-related strategies. The road that executives have to navigate is likely to be windy. Flexibility, speed and diligence of execution and the capability to create win-win partnerships as well as a thorough understanding of Chinese competitors will be key to navigate these challenges successfully.
About the authors: Elena Yakushkina is Principal; Walter Rentzsch is Director; Giovanni Schelfi is Partner; and Wilfried G Aulbur is Senior Partner at Roland Berger
