Have global carmakers sown the seeds of their own destruction in China? 

Have global carmakers sown the seeds of their own destruction in China? 

Reggae legend Bob Marley might have been channelling the Bible when he wrote the lyrics for Zion Train and famously observed, “Don’t gain the world and lose your soul; wisdom is better than silver or gold”. 

Warren Buffett once famously noted, “We’ve never succeeded in making a good deal with a bad person.” 

Unfortunately, global car makers didn’t heed Marley’s or Buffett’s aphorisms, and in pursuing Chinese sales and revenue, they’re now sleeping in the bed they’d have rather not made. 

Over 30 per cent of Volkswagen’s (ETR:VOW3) sales came from China in the first half of this year. Meanwhile, slightly more than 29 per cent of General Motors (NYSE:GM) sales were derived from China, while the country also lays claim to 18.5 per cent of Toyota’s global sales. 

It should be a good news story, but it isn’t. 

In what can only be described as an extraordinary transformation, China has emerged as the dominant automotive producer. Producing over 30 million vehicles in 2023 (40 million expected in 2024), surpassing the U.S. and Japan, and defying expectations that were perhaps bred from arrogance, Chinese carmakers have carved themselves a disruptive presence in the global market. But they couldn’t have done it without the help of the incumbent manufacturers. 

In 1958, China gave birth to its first car, the Dongfeng CA71. Known for mimicry rather than creation and invention, thanks in part to individualism being trained out of students at school, the car’s chassis and four-cylinder engine were reverse-engineered from the Mercedes-Benz W120. The body was based on the French Simca Vedette and the Ford Zephyr Mk2. 

Figure 1. China’s first copycat car – the Dongfeng CA71 

A valuable lesson from this ‘copycatting’ was missed by foreign car manufacturers after China embraced economic reforms and opened its doors to foreign investment in the 1980’s.  

The entry of European brands into the Chinese market in the 1990’s and 2000’s (private car ownership in China only became possible in 2000) was contingent on the establishment of joint venture ‘partnerships’ with Chinese state-owned corporations. Interested in the vast revenues possible from sales to Chinese consumers, foreign car manufacturers blindly trusted their Chinese partners, introducing advanced technologies, managerial expertise, and access to global supply chains.  

In 2020, Steve Saleen, the racing legend and owner of the Saleen car brand, claimed his Chinese joint venture (JV) partner, the government of Rugao and the JV, Jiangsu Saleen Automotive Technologies (JSAT), stole 40 years and US$800 million of intellectual property after he launched his brand in the country. 

Claiming the partnership deal was a “sham”, Saleen outlined how the JV applied for 510 Chinese patents based on his designs, technologies, trade secrets and engineering developments, while failing to list him as an inventor. 

Saleen asserted the government of Rugao attempted to take over the joint venture after it ‘acquired’ his intellectual property and patents. He also claimed the director of corporate affairs for JSAT, Grace Yin Xu, went missing after refusing to lie to local law enforcement, who wanted her to falsely state Saleen’s business partner had provided false information and embezzled money. In addition, the company’s vice president of manufacturing, Frank Sterzer, was allegedly detained for six hours by the authorities. 

In his op-ed in the Wall Street Journal at the time, Saleen stated, “China can no longer go unchecked”, citing a 2019 survey that 20 per cent of North American corporations say the People’s Republic has stolen their intellectual property in the past year.  

Saleen’s experience is one we’ve heard repeated many times. China offers incentives to enter the Chinese market and commence a new partnership. A short time later, another venture, entirely Chinese-owned, opens across the road, churning out an identical product at a cheaper price after stealing the intellectual property (IP). The incentives enjoyed by the joint venture are then removed, with the only recourse being the Chinese courts where human rights are laughed at. 

Saleen’s experience is one the world’s car manufacturers must now contend with. Thanks to the altruism of BMW, Mercedes, Volkswagen, Ford, and others sharing their IP and technologies, and the generous subsidies of China’s Communist Party (CCP), the country now builds cars in direct competition with its joint venture partners.  

Australia, arguably one of the stupidest nations, deems it entirely acceptable to import these Chinese vehicles under the assumption consumers will reflect a government that delivers cheaper goods, and that the absence of a car manufacturing industry locally means we have nothing to protect. Remember, Britain didn’t disrupt Hitler’s march into Austria in 1939 partly because it didn’t want to disturb its trade with Germany. 

Unsurprisingly, the landscape in China for global automakers is shifting, with the consequent increasing domestic competition presenting significant challenges. 

Volkswagen’s CEO, Oliver Blume, recently referred to China as “a major challenge” for the company, while Toyota reported a 73 per cent decline in profit from its Chinese ventures due to lower sales and increased expenses. U.S. automaker General Motors CEO, Mary Barra, described the situation in China as “unsustainable,” prompting the company to restructure its operations there. 

The intense competition, particularly from rapidly growing and heavily subsidised electric vehicle companies like BYD (it seems Buffett and Munger could have cared more about how their money was made), has led to overproduction and a price war, something the Chinese government can sustain longer than foreign automakers. Many Chinese car makers are prioritising production over profitability, resulting in a market where few are making money.  

General Motors’ financial results reflect this struggle, shifting from a US$75 million profit in China in the second quarter of 2023 to a US$104 million loss in the same period in 2024. 

Volkswagen, which lost its status as the top-selling automaker in China, BYD last year, saw a six per cent decline in vehicle sales in the first half of 2024 compared to the previous year. Given China’s critical importance to revenue for Volkswagen, the company is emphasising the need to push innovative technologies, improve cost efficiency, and strengthen local partnerships. 

Volkswagen sounds a bit like the monkey that put its hand into the cookie jar but, even after seeing a leopard approaching, couldn’t let go of the cookie to remove its hand from the jar and get away. 

For others, the predictions are strategically perhaps more sensible. According to some reports, there are automakers that might exit the Chinese market within months, no doubt, hoping that will leave the Chinese to return to making DongFeng CA71s. 

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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