China a major player in auto business

By now, people are aware of the significant progress the Chinese automotive industry has made over the last decade or so. In 2024, China became the world's largest automotive market, with over 31.4 million units sold, accounting for 34.7 percent of global sales. It is also the largest export base, with 6.41 million units exported in 2024.

China has been at the forefront of the new energy vehicle revolution, leveraging electrification and digital technology to lead the world in intelligent, connected electric vehicles. By the end of 2024, EVs accounted for over 40 percent of its new vehicle sales, and this trend continues to grow. Chinese automakers have expanded rapidly, competing with each other and international brands. Today, a plethora of Chinese brands have become prominent not only in the Chinese market but also overseas. BYD, once known as a maker of cheap cars, has become a dominant EV company within only 15 or 20 years. Others such as Geely, Li Auto, XPeng and Nio are also coming up strongly.

Tesla, which built its Shanghai gigafactory in 2019, remains active in China. However, most foreign brands have struggled. Once dominant in China's auto market, they have failed to keep pace in the intelligent, connected EV era. Some claim that the Chinese government favors local players, making it harder for foreign original equipment manufacturers, or OEMs. Some even say foreign players can't get a "Chinese passport", implying that somehow foreign players are disadvantaged because of some man-made reasons.

But is it? Before the intelligent, connected EV revolution, foreign OEMs competed in China much like the way they did elsewhere. This is notwithstanding that in China they needed to compete through their joint ventures with local partners, but in most cases, the joint venture vehicles were branded under international brands.

While many were focusing on competition in the old game, they had not paid enough attention to what was going on outside their sphere of comfort.

In 2014, I met with the most senior figure of a major foreign OEM in China. While he was interested in knowing more about the Chinese government's subsidy on EVs, he had little idea about the upcoming impact of digital technology and by implication, software, on vehicles. And even with EVs, it was pretty clear to me that he wasn't totally convinced of its future potential in China.

Foreign OEMs can now run their operations on a wholly-owned basis. However, many have chosen to form new partnerships with Chinese players who would bring specific capabilities to bear. In July 2023, Volkswagen invested $700 million for a 4.99 percent stake in XPeng to codevelop two Volkswagen-branded midsize EVs based on XPeng's G9 platform, targeting a 2026 launch in China. Similarly, in 2021, General Motors invested $300 million in Momenta, a Chinese autonomous driving technology company. The partnership aims to accelerate the creation of intelligent mobility solutions tailored to the Chinese market.

These new partnerships highlight foreign OEMs' growing reliance on Chinese players for EV technology and supply chain capabilities. Beyond the local market, these partnerships are becoming increasingly international in scope. As battery tech, software, sensors and artificial intelligence become central to the industry, traditional OEMs and suppliers face a steep learning curve.

Some foreign OEMs have exited or downsized in China. But some have also chosen to return after a short absence. Renault Group left China's passenger car market in 2020 but re-entered in 2023 via imports. In 2024, it established a development center for EVs in Shanghai. By January, Renault had formed partnerships with local players Geely, Dongfeng Motor, CATL, Minth Group and WeRide to codevelop battery tech, hybrid vehicles, lightweight materials and autonomous driving.

Similarly, Stellantis initially scaled back its China operations in 2021 but re-entered in 2023, investing 1.5 billion euros ($1.57 billion) for about a 21 percent stake in Leapmotor, a local EV player. It also formed a joint venture to expand Leapmotor's EVs internationally, with Stellantis holding a 51 percent stake.

Some foreign OEMs will continue to build new capabilities to compete in the new game. While some attempts were made to develop new capabilities independently, some will also supplement what they can't fill by themselves by forming new relationships with partners, often Chinese, who can bring the needed capabilities.

Some are making new investments to remain competitive. BMW established its largest research and development network in China outside Germany with R&D centers in Beijing, Shanghai, Shenyang in Liaoning province, and Nanjing in Jiangsu province. Volkswagen launched a dedicated facility in Hefei, Anhui province, focusing on research, innovation and procurement of intelligent connected EVs. In February, Toyota announced a wholly-owned Shanghai subsidiary for Lexus EV R&D and production, set to begin operations in 2027.

Can foreign OEMs succeed? It depends on their ability to acquire new capabilities in the new environment both in China and beyond. While that's challenging, it is not impossible.

As China becomes an automotive innovation epicenter, foreign players increasingly realize they cannot afford to leave. Without access to China's technological advancements, they risk falling behind in competition in their home market and internationally.

Ford CEO Jim Farley admits he needs to get the company "fully fit" to compete with Chinese automakers. That means staying in China in order to stay smart and informed. In February, he endorsed Li Auto's range-extender technology, revealing Ford's plans to develop range-extended SUVs and pickups.

For many foreign automakers, their China strategy will continue to center on "how to do business in China" because of the importance of the Chinese market. But that's not necessarily the case for every foreign OEM.However, China's influence is becoming widespread in terms of geography, technology, supply chain and business model. So for all global auto players, their China strategy will be about "how to do business with China".

So is China an existential threat to foreign automakers? If you think it is, it could be. However, if you think it can be a source of knowledge and capabilities, then it is not. Often, one's destiny is decided by one's mind.

The author is founder and CEO of Gao Feng Advisory Company, a strategy and management consulting firm with roots in China.