12 Oct 18

How China is catching up, and why Germany could still win the mobility race

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

A few weeks ago, the Bundesbank warned that Germany must count on increasing competition from China, because of the increasing quality of their products. This is true in general, but especially so for the crucial domain of electric mobility, the BuBa said. But not all is lost: the German car industry might still win the mobility race with China.

A recent study released by PwC quantifies China’s catch-up in the automotive industry. In 2017, 35 automotive OEMs worldwide introduced 1,223 innovations. While German manufacturers maintained their comfortable lead with 32% of that total, their Chinese competitors shot to second place, with 18%.

Beyond plagiarism

That’s double the share they had just two years previously. And it's not just Geely, Chery and BYD, but also OEMs less well known in the west, such as NextEV. This is an indication that the Chinese domestic car industry is moving beyond the 'plagiarism' phase, especially in EV and connectivity, presenting real challenges to German and other foreign OEMs.

At the end of last year, three giant Chinese state-owned OEMs - Chang’an Automobile, FAW Group and Dongfeng Motor Corporation – agreed to cooperate on generic tech and the full automotive value chain and go global together. Each has joint ventures with global OEMs: Chang’an with Ford and Suzuki, FAW with VW and Toyota, and Dongfeng with Renault, Peugeot and Honda.

The fact that China is moving from high-quantity to high-quality manufacturing is also good news for German carmakers, the Bundesbank says. Manufacturing wages in China have increased from a monthly average of $160 in 2005 to $800 in 2017. While that is still only a quarter of the U.S. average, it signals bigger opportunities for German products, which are typically high-end and high-price. That includes German cars.

Major caveat

But the German central bank adds a major caveat to the good news for German OEMs: because they have such a relatively small stake in EV manufacturing, as opposed to the massive involvement of Chinese companies, it is to be expected that China will become a major exporter of EVs soon.

According to research by PwC, German manufacturers will launch 29 new EVs by 2020. Meanwhile, Chinese manufacturers will launch 33 new EV models by that time. That’s on top of the 66 EV models already manufactured in China.

Germany’s chancellor Angela Merkel herself has waded into the battery-cell controversy (see previous article), but Daimler, BMW and VW aren’t too bothered by the fact that battery-cells are an Asian oligopoly. For one, they buy their cells from multiple sources: Chinese as well as Korean and Japanese. These suppliers are engaging in mutual competition, guaranteeing optimal pricing. Moreover, the German OEMs generally build the fuel cells into the finished batteries themselves. And finally, the know-how involved remains German, with the suppliers executing German designs.

Global overcapacity

The German manufacturers have not excluded getting back into fuel-cell production themselves, but experts say that it could soon be too late: by 2025, Asia could have built up enough know-how to go it alone. That could put the German car industry at their mercy… but only if EVs become a resounding success.

Despite China’s efforts to force their breakthrough in its domestic market, the jury is still out on that one. EVs remain marginal in Europe, North America and elsewhere – so much so that battery production is currently suffering from global overcapacity. By 2021, the industry will still turn out a third more batteries than are required. Even by 2025, overproduction may still be the norm.

So, who will come out on top – the Chinese auto industry, powered by a successful switch to electric mobility? Or the German car manufacturers, by continuing to bet on internal-combustion engines, as well as on their own EV ranges?

Some arguments for a Chinese win:

  • With 1.4 billion people, it is the biggest market on earth. The car market has exploded from virtually zero 20 years ago to around 25 million today and is predicted to be around 50 million in another 20 years – more than half the global volume.
  • If the future is electric, then it will be Chinese. That’s the thesis of the Chinese government, which is pushing e-mobility like no other government on earth.
  • China is achieving its goals by setting strict targets (10% EVs from 2019) and increasing them (by 2 percentage points per year afterwards).
  • In 2017, there were 1.197 million new EVs on the road globally, an increase of 58% over 2016. Half of the total was registered in China, only 285,000 in Europe (and just under 110,000 in Germany).

And some arguments against:

  • China’s native automotive industry lacks innovative potential and export-worthy product. The leading design, development and production techniques are all foreign – often German.
  • The forced march towards battery-based mobility is a mirage. ICE vehicles will remain necessary, and especially diesel. Hybrid is the way forward. Only when diesel fails, does China have a shot at becoming a global automotive leader (via EVs).
  • Barring that, China is going to become an EV world power, but not an automotive world power.
  • Using China’s scale to grow even more important at a global level, the German car industry will become increasingly important.

Two-sided dynamic

But perhaps the question whether Germany or China will benefit more will become academic, as the car industries from both countries are getting more and more intertwined. It’s not just German companies entering into joint ventures with Chinese counterparts. More and more, the dynamic is two-sided.

Geely is not only the owner of Volvo, but with a 10% stake also the biggest shareholder in Daimler. Last year, Shanghai-based Fosun Group and Nanjing Nangang Iron and Steel United, jointly acquired a major stake in Koller, a lightweight German automotive company. If and when the EV boom happens, in Europe and elsewhere, the question whether the electric cars of the future are German or Chinese may have become academic: they may be both…

Authored by: Frank Jacobs