Why the big car companies are losing China | Business Beyond

Volkswagen's electric ID3 will cost you around $35,000 in Germany after rebate and less than half that in China for virtually the same car, but why is Volkswagen locked in a price war in China slashing prices in a bid desperate to maintain your market? position because competition has become fierce in the country and its foreign automakers are

losing

their sales, they are slowing down their market share and the reviews have been brutal, how the hell did they come up with this now it's the Chinese auto

companies

that are they on the way? grow and prepare to buy its electric models around the world.

Any market they enter outside of China will be easier for them than the Chinese market right now. Why are the biggest automakers suddenly

losing

their most important market in China and how? Much of this is because Beijing did things right, they know that electronic cars are much cheaper and easier to build and how much because the big automakers did things wrong, batteries are no better than of its competitors and the software in many cases is actually worse. We'll answer those questions and see how Chinese EVs could shake up the global auto industry in this

business

episode.

Beyond understanding what's happening now in China, it helps to understand how things started and it's worth taking a closer look at a particular company. People say, let's go back to 1978. China had just come out of the cultural revolution and was still pretty poor, but it needed vehicles, so one day it headed to Germany. A Chinese delegation led by the country's Minister of Industry simply showed up at the Volkswagen headquarters in Wolfsburg without warning no one thought about China in 1978 because China was closed for more than 40 years in isolation this is Felix Lee is a former China correspondent from a German newspaper in 1978 his father worked as a department head at Volkswagen someone from the main entrance asked him if he still speaks Chinese because there is someone here, he says he is minister of mechanics and yes, of industry and my father thought no, no way, he wanted trucks and buses more than private passenger cars, something Chinese households could not yet do. allow the two sides to finally agree on another approach my father had the idea uh uh if you only sell private Volkswagen cars as taxis as taxis as caps and maybe for the government in numbers because China is so big, this will already be worth it friends, in 1984, German Chancellor Helmut Cole flew to China to lay the foundations for a new joint venture, Shanghai Volkswagen Automotive Company.

Until then, only one other car company, Jeep, had attempted to create a joint venture in China after the communist takeover, but failed to do so. Wow, Volkswagen was luckier when you went to China in the 80s or early 90s in Beijing and Shanghai, all the Caps were Santana Volkswagens and that's how

business

with China started for Volks, we all know what happened next. This very poor country gradually and then quickly became an economic powerhouse, and as personal incomes grew, so did the private car market. Other

companies

like Toyota, GM and Ford came after Volkswagen, but none were as successful as the German company, even in the early 2000s.

It still had a huge 50% of the Chinese passenger car market, many Chinese actually thought that they had their own car because Volkswagen was very dominant at the beginning, especially at the beginning of the economic rise and of course this was a big advantage, until recently. uh Volkswagen had the largest share in the Chinese market and uh because people came first, but success in China carried its own risks for car companies, growing dependence and for no company was it as certain as Volkswagen as The years passed. of its sales were tied to one country and those sales, in turn, were all tied to models with internal combustion engines.

China wanted to have its own car companies, but after years of struggling to produce models with gasoline engines, it didn't have much to show for its efforts at the time. A new technology arrived in 2001. China decided to fund research and development projects for battery electric vehicles along with fuel cells and high-power hybrids, but the true move to electric only gained momentum years later, in 2008, a former Automotive engineer and Tesla fan named Juan Gang became China's representative. Minister of Science and Technology, he had a very technical background and he came to the Ministry of Science and Technology with a clear idea that Araria Matoko testified before the US Congress about China's industrial policy for electric vehicles, so the idea was you.

Find out if, if you start, if instead a different technology takes over, there would be more of a level playing field and Chinese automakers would be more likely to compete directly with foreign automakers now that you know it was a gamble that introduced the Ministry of Kong. China's first consumer subsidies for electric vehicles and, as with Volkswagen, connected electric vehicle companies to taxi fleets and government deals. In other words, electric was finally gaining scale. We first introduced it, you know, in 2009 2010, it was actually kind of a pet project that came out of the ministry of science and technology that wasn't getting much attention outside of that ministry in 2015 this has changed an entire supply chain. for electric vehicles had emerged benefited from China's industrial know-how its battery production even its minerals refining older companies like byd, which used to make phone batteries, suddenly found a new purpose in electric vehicle startups, like Leap Motor and Neo, quickly rose to prominence, while Beijing was there to help its companies every step of the way and not just with subsidies and large government purchases. set of, you know, non-explicit types of support, so access to credit is really important, access to lower market equity is also very important, so in 2020, the Chinese company Neo was having a very difficult time and received an injection. local government funding saved him and now the company is doing quite well;

In other words, Beijing could stabilize young companies with cheap capital or by buying shares, but there was only one problem with China's new electric vehicle market: the quality was still not good enough to compete globally with companies like Tesla. , but that soon changed when Beijing allowed Tesla to build in Shanghai This really started to change when Tesla entered the market and then production started to ramp up and then in 2020 when Giga Shanghai was really up and running, that's when the vehicle market. electric cars took off and I think a big part of that is the appeal of Tesla as this new iconic American brand that is really revolutionizing the market through new sales channels, the kind of direct sales that is not something that many Chinese companies.

Tesla raised the level of competition in China's EV market, but more importantly it also raised the bar for Chinese suppliers, now that they had to produce electronics and components to Tesla's specifications. , which meant they could offer. Same quality for Chinese automakers until Tesla arrived. Chinese automakers were always seen as cheap. They can produce very cheaply and this is definitely an advantage, but they don't have much of this luxury prestige and when Tesla came along, they produced. Electric cars are also much cheaper than Volkswagen's, but they sold them at a premium level, they sold them at a premium like a luxury car and this made them change the conception of electronic vehicles.

Suddenly, Chinese cars had ticked all the major boxes. They were faster to build, less expensive than their competitors, and their quality was comparable, if not better, in many cases in 2012.1 Sales of electric passenger vehicles in China soared 170% from the previous year to approximately 3 million of vehicles that year, about half of all electric vehicles. Worldwide sales took place in China, the biggest seller that year and Tesla ranked third. The electric one has just arrived in China. I was being driven. Now, with Chinese companies suddenly becoming competitive with the world's leading electric vehicle producer, none of the traditional automakers seemed worried about Volkswagen.

Toyota Honda, for example, had a scaling advantage over Chinese automakers Tesla. So they eventually dominate the EV volume market, not really, and this has become emblematic of what went wrong, well, not karaoke like this, but karaoke in a car like this. The thing is that the big car manufacturers had several problems when it came to the costs of electric vehicle batteries, but also software. It turns out that companies with good engineers were not necessarily good at programming, which became clear when Volkswagen launched the ID3 in 2021 for the first time. An EV hatchback installed on a purpose-built chassis, the operating system turned out to be buggy, slow, and updates had to be installed at the dealership.

In comparison, Chinese car companies were already doing updates remotely, the ID3's issues did not go unnoticed by Chinese reviewers in comparison. with byd or saic you have to curse the ID3 system, otherwise you are too nice to this system, you have to scold it, but I was not surprised that that was what I expected, I never had expectations for this VW system, so for a Volkswagen. EV, this is the normal thing I expected other foreign automakers to also face problems. Both Mercedes and Toyota have issued recalls in China for software issues and even Tesla hasn't been immune to a major recall due to its own software, but beyond glitches, many of the new EVS were downright more limited than their rivals.

Chinese, there were fewer fun apps like selfie cameras or karaoke. The K system is, of course, just a symbol of how good these tech startups are, especially in software, and for them. A car is software on wheels or batteries on wheels and they think completely different. I think right now really the software, the digital connectivity of the car is becoming much more important for Chinese consumers, they don't often travel long distances. They don't necessarily need a powerful car if they're stuck in traffic in Beijing or Shanghai, where many of these electric vehicles are ultimately sold. Today, Volkswagen executives' karaoke has become a kind of symbol of the early bugs and Shand for the software. problems, as well as a fundamental misinterpretation of the Chinese market, admitting you have a problem is the first step in solving it, but software problems continue to plague major automakers in China, from Volkswagen to Toyota and Honda, and at The end is just one of the number of problems they face in the Chinese market, from reliability to features, even the growing nationalism of the Chinese consumer.

Volkswagen doesn't really have any distinguishing features that really set them apart from other Chinese automakers. The batteries are no better than their competitors. the software in many cases is worse, so why would you really buy a volkswagen if you can get a byd for a cheaper price? A solution to lower the price, which brings us back to the current situation: prices have been falling rapidly in China, but less as a strategy. More than a necessity, the market is so saturated that automakers are resorting to desperate measures just to maintain their market share. Volkswagen sales actually increased in August because of those prices, but the company's overall market share continues to decline as customers buy fewer non-electric vehicles.

After years of hovering around 15% market share in China, Volkswagen fell to around 11% last year. Large Japanese automakers, including Toyota and Honda, fared even worse, losing about 6% and then, during the first half of this year, byd outperformed. Volkswagen as the number one brand in China it is fair to say that the big car companies have learned a painful lesson: do not rely on their past achievements and be careful not to underestimate Beijing's industrial policies. My feeling was that Western car manufacturers were constantlysurprised. that this policy was moving forward and they felt that this was - you know, they didn't feel that this was realistic and I think they were constantly surprised that the Chinese automakers were taking this seriously and investing in research and development and succeeding Volkswagen.

It is now moving quickly to repair the damage by investing more in Chinese technology. It has created two new joint ventures in recent months, one with Chinese software maker Thundersoft and another with Chinese automaker xping, which will help it develop two new models by 2026. I think Fox Wagen is taking some really unusual steps right now and that really sets it apart from other automakers that are also struggling, for example the Japanese automakers. Toyota has a partnership with BD, but there's nothing really intense about it. We see it from Volkswagen, so I think this really shows that Volkswagen is really anxious not to lose its position in the Chinese markets.

The problem is that automakers have wasted precious time and now the other shoe is dropping in the crowded domestic market. It's pushing Chinese automakers to look for more opportunities abroad and that could mean more trouble for big automakers. Just look at this year's IAA motor show in Munich, where byd was one of the most anticipated exhibitors and presented five new models for the European market. Chinese automakers are betting that consumers around the world, and not just in China, want more digitally connected cars. The Chinese consumer, perhaps, let's put it this way, is a sample of what other consumers worldwide are going to want. we're going to want and it's all happening right now, how it plays out maybe the topic of a future business Beyond until then thanks for watching, see you soon oh