Once upon a time, automotive investments were the lifeblood of foreign direct investment (FDI) and the example of China — one of the most notable FDI success stories of the past 40 years — was no exception.
China has been the greatest recipient of FDI in the automotive sector. Between 2003 and 2020, fDi Markets tracked 442 automotive greenfield projects by original equipment manufacturers and 1165 automotive component projects in China, worth an estimated total capital expenditure of $225bn.
But recently, in line with automotive investments worldwide, the country has witnessed a downward trend in automotive FDI. In a bid to attract foreign investment, the Chinese government removed the industry’s 50% foreign ownership cap in 2018.
Now, like everything else, the automotive industry is going digital thanks to the rise of electric vehicles (EVs) and the prospect of autonomous driving. Galvanised by the government’s subsidies for EVs and support for research and development (R&D), foreign car manufacturers are eyeing China with renewed vigour for both the domestic market and to establish regional hubs.
According to the China Association of Automobile Manufacturers, the country will grow to become the world’s biggest market for electric vehicles this year with a 40% sales increase.
Strong global position
Henrik Henriksson, chief executive of truck manufacturer Scania, told fDi: “China has a very strong global position in areas like autonomous and [electric] vehicles.”
In 2020, Scania, a subsidiary of Volkswagen, announced plans to open a new commercial-vehicle production site in Rugao, in China’s Jiangsu province, and expects the country to replace Brazil as its single largest market by the end of the decade.
“Our operations in China will come to have the same set-up as our European and South American industrial hubs — [in other words] a regional centre for sourcing and component production, as well as final assembly of vehicles for export to other markets in the Asian region,” Mr Henriksson says.
“Regardless of the conditions for investing in R&D, we aim to establish R&D in China to get better access to some of the world’s most innovative ecosystems,” he adds.
In its five-year plan for 2021–2025, the Chinese government targeted 7% annual growth for R&D and has projected sales of new energy vehicles (NEVs) — comprising electric, hybrid and hydrogen-powered vehicles — to constitute 20% of the whole car market by 2025.
Recent data from IHS Markit shows that, in spite of FDI slowdowns, Greater China (including Hong Kong, Macau and Taiwan) has grown considerably as an auto-manufacturing hub over the past decade.
“Some facilities of Western suppliers are more advanced in China than in the West. Greenfield investments lead to more advanced facilities in China than the repurposing of existing factories in Europe,” says Matteo Fini, who leads the automotive supply chain team at IHS Markit.
“China is also really strong in automation,” he notes, adding that this in spite of auto labour costs being 85% lower in China than in the West.
Competition and fragmentation
Doris Fischer, chair of China business and economics at the University of Würzburg in Germany, says that China’s EV strategy is driven by a mixture of reducing dependence on oil imports, reducing pollution levels and a growing desire to be on an equal footing with other automotive powerhouses, such as other countries in east Asia, the EU and the US.
“EV technology has been identified as a field in which China might create real competitive advantage as an early mover, combined with respective government policies and support,” she says.
Chinese companies like CATL already have a global lead in EV battery production, and competition among EV makers is ramping up too. In January, the tech company Baidu announced that it has teamed up with carmaker Geely to produce its standalone EVs. Baidu will retain a majority stake.
Mark Schaub, senior partner at law firm King & Wood Mallesons, says that the EV market is “very fragmented”, as it is occupied by foreign car manufacturers, traditional Chinese car makers and new entrants to the market such as tech companies jumping on the bandwagon.
All of this will make for a “complicated situation” in the coming years, Mr Schaub says, with winners and losers emerging in equal measure. Should there be too much fragmentation in the market, the National Development and Reform Commission — China’s macroeconomic management agency — will try and consolidate the market, he points out.
An added complication is the ‘chip crunch’ – the current imbalance between supply and demand in computer chip manufacturing — which has proved devastating for car makers, as they have become increasingly reliant on digital components. Chinese EV start-up Nio stopped production for five days at its factory in Anhui province in January due to the semiconductor bottleneck affecting the entire industry.
FDI versus market reality
Kaho Yu, senior analyst at Verisk Maplecroft, says that the context for the recent government subsidies and its bid to attract investments in EVs should not be forgotten either. The government is responding to falling consumer demand and the need for economic growth, he says.
Mr Yu differentiates between FDI and the domestic market. “There are two layers: one is the prospect for the domestic market; the other is that this downward trend is actually the reason why the government is relaxing regulation,” he says.
The rise in sales of automotive vehicles in China and its booming EV market is therefore only half of the story. Car ownership in China quadrupled from 59 million vehicles in 2007 to 240 million in 2018, according to a UBS report on innovation in China. But with pandemic pressing down on consumption, it is uncertain whether this will continue.
“The biggest advantage is the market size, but whether the market is going to pick up is another question,” Mr Yu says.
Cars of tomorrow
On the other hand, the past year indicates certain levels of resilience. Thanks to Covid-19 stimulus measures, which saw subsidies and tax breaks extended to 2022, the Chinese automotive market only shrank by 1.9% in 2020, according to industry estimates.
Japanese carmaker Toyota’s sales in China rose by 11% in 2020, as it fixes its gaze on the country’s domestic market. In March 2020, it announced plans to open a $1.2bn factory to produce EVs in China’s city of Tianjin in a joint venture with FAW Group.
While new entrants are able to go into the Chinese market on their own, joint ventures are still expected to emerge as the entry means of choice, especially as the technology and expertise required to produce the cars of tomorrow intensifies.
And as autonomous vehicle production is the natural next step for the future of EVs, Mr Schaub says, problems are unlikely to arise from making the cars or car components, but rather from national security concerns over sensitive issues such as global positioning technology.
“Who will process the data? Where will the data go?” he asks. “I think [China] will be a global market, but there will be some big walls and certain things won’t be able to leave certain jurisdictions.”
This article first appeared in the April/May print edition of fDi Intelligence. View a digital edition of the magazine here.