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11 Oct 18

Why China is destiny for German carmakers

How Germany and China are shaping the future of mobility

One in three cars made by German manufacturing groups VW, BMW and Daimler is sold in China. And one in five of the 24 million cars sold in China is German. Who is benefiting most from this remarkable symbiosis? How will it affect the future of mobility? And what will be the impact on the fleet industry? Global Fleet examines.

  1. Why China is ‘destiny’ for German car makers
  2. Chinese rules, German opportunities
  3. Is the future of electric mobility more Chinese than German?
  4. How China is catching up, and why Germany could still win the mobility race

When Chinese premier Li Keqiang visited German chancellor Angela Merkel in Berlin last July, both leaders made a point of attending a demonstration of self-driving cars. It symbolises how central automotive collaboration and innovation is to Sino-German relations. It’s no exaggeration to say that the car industries of China and Germany will determine the future of mobility worldwide.

Like Schadenfreude and Weltschmerz, ‘Schicksalsmarkt’ is one of those hard-to-translate German words. It expresses what German industry thinks of China, especially the German automotive industry. ‘Main market’ does not entirely convey the meaning, although that too is true.

24 million cars

For not only is China Germany’s third most important export market overall, and its leading source of imports, it’s also the number one export market for German automobiles. One in three cars produced by VW, BMW and Daimler is sold to China. Inversely, one in five of all cars sold in China is German – a bigger market share than any other foreign country has in China.

In 2013, China's light-vehicle market overtook the American one to become the largest in the world. The market more than doubled from 11.3 million vehicles at the beginning of the decade to 24.2 million in 2017. The forecast for 2018 is 24.7 million.

Compare that to the European market: 14 million (of which 3 million in Germany), and stagnant. In the U.S., German car sales are even trending downwards.

China’s market is not just huge, it’s also got huge potential for German OEMs. In fact, German car sales in China are progressing even faster than the market itself. Chinese light-vehicle sales grew by nearly 4% in Q1 2018 to around 6 million new units. German brands in China increased their sales at almost double that rate, by 8.6%, to 1.28 million.

Model offensive

In the car segment, German OEMs sold more than 1 million new units (+5%), their sales growing much faster than China's overall car market (+1%). But German sales growth was especially strong in the SUV segment: it grew 11% in Q1 to nearly 2.7 million units, while German-brand SUV sales grew by 26%.

“This shows that our manufacturers' model offensive in China is going down well,” said Bernhard Mattes, President of VDA, the German Automotive Industry Association.

Currently, about 10% of cars sold in China are premium (compared to 15% in Europe). The prediction is that this segment will grow strongly, favouring premium brands – such as the German ones.

By 2025, car sales in China could hit 30 million. German manufacturers want to get in on that growth. VW subsidiary Audi, for instance, over that same period wants to double its sales in China to 1.2 million units.

Future-oriented projects

But for German OEMs and suppliers, China is more than a major export location. Increasingly, it's where they research, develop, produce and test their vehicles. The motivation is not just the size of the market, but also its direction: China’s economy is state-led, and its automotive policy is geared towards mandating an ever-increasing degree of electric and connected mobility in the near future – providing OEMS with both stronger challenges and more certainty concerning innovation than in the West.

At the Sino-German summit in Berlin, carmaker BMW signed a framework with China’s Brilliance Group to expand their joint venture, increase volumes to 520K units per annum and produce the all-electric iX3, while Volkswagen and China’s Anhui Jianghuai Automobile Group signed a memorandum of understanding on a joint R&D centre and a car platform. In all, VW will be spending €15 billion with Chinese partners on future-oriented projects like electric and autonomous mobility.

China also gave Daimler the go-ahead to begin testing its self-driving cars on the streets of Beijing. Daimler is working with Baidu, “China’s Google”, to produce an open-source autonomous driving platform called Apollo. Germany’s Bosch and Continental are part of the consortium. And in Wuxi, one-sixth of the city’s intersections will be outfitted with the smart traffic light technology from Audi, China Mobile and Huawei.

Horror scenario

So, a more precise translation of Schicksalsmarkt is ‘Market of Destiny’. German OEMs realise that the Chinese car market is where they can consolidate their own dominance of the global automotive industry. In an ideal scenario, it’s where German quality and creativity meets Chinese quantity and quota, and both will benefit.

China’s government is leading the country towards global leadership in electric and connected mobility, and German OEMs want to be as big a part of that as possible. The horror scenario for Germany is a China that manages to copy the German formulas for excellence, eventually outcompeting its car industry into obsolescence.

Beijing had some reassuring news for Germany’s car industry. The Chinese government announced that it would be relaxing its attitude towards foreign businesses, by lowering taxes on imported cars on the one hand and on the other hand by dropping the requirement for OEMs who want to set up production in China to partner with a local company in a joint venture of which they can own no more than 50%.

Dalai Lama

While those measures were cheered by the German car industry, there are signs that its intense fixation on the Middle Kingdom may not be universally positive. EY recently warned that the German car industry is at risk of becoming “overly dependent on a single market” (i.e. China).

An incident last February is indicative of the power dynamic between Germany and China. Daimler used a Dalai Lama quote on Instagram to promote its Mercedes Benz cars, but almost immediately withdrew the commercial. The quote – ironically: 'Look at situations from all angles, and you will become more open' – angered the Chinese government, which considers the Dalai Lama a persona non grata.

Daimler launched an apology on the Chinese microblogging site Weibo, expressing its “deepest regret” for offending the sentiments of the Chinese people. Echoing the re-education campaigns of earlier times in China, Daimler promised to “take concrete steps to increase (its) understanding of China’s culture and outlook on the world”.

In a letter to the Chinese ambassador in Berlin, Daimler CEO Dieter Zetsche and Hubertus Troschka, his deputy in Beijing, apologised for the “hurt and sorrow” their “negligent and tactless error” had caused the Chinese people. This despite the fact that Instagram is blocked in China itself – the message therefore was not available to the 1.4 billion inhabitants of the People’s Republic (at least not officially – there are plenty of Chinese who use VPN connections to access censored web content).

The manufacturer was scorned for its obsequious apologies, but in truth, it can’t afford to offend the Communist regime in Beijing: one in every four Daimlers is sold in China…

Image: Chinese premier Li Keqiang and German chancellor Angela Merkel

Authored by: Frank Jacobs