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Will technology disruption end the foreign dominance in China’s automotive industry? (1/2)

Exclusive Interview with Prof. Dudenhöffer, Director of the Center for Automotive Research (CAR)

· automobile

{{{Marco Brizzolara and Maxi Pethö-Schramm}}}

Few industries in China are so closely intertwined with foreign players, as is the automotive industry. As we have outlined in our interview with Prof. Carl Hahn, CEO of Volkswagen (1982-1993), foreign OEMs were among the first companies entering China after the start of the Reform & Opening-up in the 1980s.

On the one hand, China overtook the US as the world’s largest passenger car market ten years ago. One the other hand, setting up plants and Joint Ventures made China a key manufacturing location for many foreign automotive players. For instance, in Q2, 2020, Volkswagen Group sold 53% of its vehicles in China. Mercedes-Benz and BMW come close with 45% and 44%, respectively.

However, the dominance of foreign OEMs might be threatened. Chinese car manufacturers are moving up the value chain into R&D. With the trend towards autonomous, connected, electric, and shared connectivity (ACES), Chinese companies might, for the first time, have a realistic opportunity to leapfrog foreign companies.

China's Big 4 state-owned automotive companies (i.e. SAIC, FAW, Dongfeng, Changan) entered the ranks of the largest automotive companies in the world. Private automotive companies such as Geely, NIO, and Great Wall Motors are emerging as sizable and innovative players. Simultaneously, many cutting edge companies, including AI unicorns Momenta and Horizon Robotics, large technology companies such as Huawei, and internet companies such as Didi and JD, are actively pushing the industry forward.

To shed more light on China's automotive industry, we interviewed Prof. Dudenhöffer, one of the leading automotive experts in Germany, and an active observer of the Chinese automotive industry. We split the interview into two parts – in the first part, we talk about the evolution of the Chinese automotive industry and the potential for collaboration between China and Germany. In the second part, we ask Prof. Dudenhöffer about China's role in the emerging EV industry.

About Prof. Dudenhöffer

 

Prof. Dudenhöffer is a leading automotive expert, and well-regarded among practitioners and academia. He is an expert on EVs, on the Chinese automotive market, and organizes some of the significant automotive conferences between China and Germany, attended by the CEOs of Germany's and China's largest OEMs and suppliers.

Interview On the Air

How did your fascination with the Chinese automotive industry develop, and why are you dedicated to researching the Chinese market and facilitating exchange between German and Chinese automotive leaders at all levels?

In 2010, China surpassed the US to become the world's largest automotive production and sales country. Nearly all major foreign car manufacturers have set up production facilities in China, with Elon Musk's Tesla plant opening in Shanghai last year as a recent example. Today, we see that the Chinese automotive industry moves beyond Joint Ventures (JVs) with foreign players. In this context, Chinese companies' role was limited to manufacturing cars, which have been developed in Western Headquarters. More recently, China is moving up the value chain into research, engineering, and design.

The heart of the future automotive industry is currently being developed in China. First, China has established significant capacities for lithium batteries required for EVs. Players like CATL are creating tomorrow's supplier industry, whereas companies in countries like Japan and Korea have supplied a significant share of lithium batteries in the past. Second, Chinese companies like Huawei are pioneering autonomous driving technology. China is likely one of the first countries with 5G infrastructure, an essential foundation for autonomous driving. Overall, if you look at cities like Shenzhen, the technology fueling tomorrow's automotive industry will increasingly be made in China rather than Silicon Valley.

Despite China's increasing technology leadership, in recent statements, you seem to be worried about the Chinese automotive industry's current state, citing concerns about overcapacity. What is your market outlook?

The Chinese automotive industry saw rapid growth until 2018. Then, the trade war started, and exports to the US crumbled due to high tariffs on Chinese cars. It's a problem that is politically founded. There was already a downtown in the global car market when the COVID-19 pandemic started in China nearly a year ago. Thus, we have two big crises that have to be handled for growth to get back on track.

There are a few arguments on why growth in the Chinese car market will continue once we get back to normalcy. In China, the density of cars is about 121 passenger cars per 1,000 inhabitants. If you look at the US, it's about 840 passenger cars, and in Germany, 560. In closing the car ownership gap, China could become a market with 50 million new vehicles sold per year.

As traffic returns to the roads, do you think there will be lasting changes to the automotive industry due to the COVID-19 pandemic?

At the onset of the pandemic, supply chain chaos was a big issue. Some companies had to stop production because they sourced key inputs only from Wuhan. In contrast, a modern sourcing strategy should involve multiple suppliers across regions to manage risk. In my view, the globalization of supply chains will be critical going forward, and the Belt and Road Initiative is an integral part of this.

If you imagine the global supply chains of the future, what countries and regions do you think will be the winners and losers of this transition?

In my view, the US will be the biggest loser in the next decade due to their isolation. The situation in the UK is similar. Then we have to look at countries with turmoil and political unrest. Turkey, which is at the moment an important part of car production, is one example. The Middle East, as well as South America, are also unstable. In our point of view, Asia will become more important due to its relative stability. Therefore, we see new connections between Asia and Europe, which is also stable, and potentially to parts of Africa.

You are urging German automotive companies to be more open to collaborating with Chinese companies. In your view, what are the prospects of international cooperation, and how do you expect Germany automotive companies to adapt their global strategies?

The German public and government are cautious about getting closer to China. Of course, the problem is that China has a different political system, which does not reflect our ideas about democracy. But we believe that China will step-by-step become more open and democratic, despite the problems we see at the moment. This transition is critical for greater international collaboration in the future. Given the current lack of a basis for a stable partnership with the US, it is fascinating for Germany to go into the future together with a China that is open, has technology leadership, and huge market volume and capacity.

Also, China shows a strong interest in helping developing regions to improve economically. The Belt and Road Initiative is a crucial part of this. The train stops in Duisburg, Germany, and in Kenya and other countries, providing critical trade infrastructure. In our view, a joint approach and a close relationship with China could improve the welfare of many countries in the world.

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