News in Charts: The rise of the Chinese automotive industry

A remarkable transformation has taken place in the global automotive export market in the past few years, with some of the biggest names in the industry left in the dust. China, a net importer of motor vehicles until 2018, whose automotive industry primarily existed to serve domestic markets, has accelerated its way into the forefront group of global exporters.

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China’s domestic production was already significant before that date — data from Wards Intelligence suggest that China has been the largest producer of vehicles since the Global Financial Crisis — but little of that found its way to the rest of the world. That all began to change in the latter half of 2020, when exports started to surge; and since then the country’s exports have risen roughly six-fold.

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It is not only traditional internal combustion engine vehicles that China appears to have mastered — in recent years it appears to have cracked electric vehicles (EVs) too, with sales surging both domestically and internationally. EVs now represent around one quarter of China’s total passenger car production. The way the country’s firms have reached the technological frontier was no accident but owes a great deal to their ability to learn from others, by adapting and refining existing technologies. Using this knowhow the automotive industry has repeated the typical pattern that many of China’s most successful industries have followed: grow a sector in China’s large domestic marketplace (where barriers to competition from foreign firms are high) and then focus on exporting to the rest of the world, once capacity has been grown and economies of scale can be exploited.

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Of course, China’s new-found export prowess will affect the industry’s incumbent producers. The chart below shows the importance of the transport equipment sector to countries’ economies. Four countries stand out as particularly vulnerable to Chinese competition — Mexico, Germany, Japan and South Korea — with the manufacture of transport equipment representing 3% (or more) of their respective GDPs. For most other major producers, the total value of their domestic production is in the 1–2% range.

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One thing to note here is the distinction between the output of the car companies themselves and how that is recorded in national accounts data. GDP (gross domestic product) is by definition a domestic concept and so is designed to capture domestic production (including that which is later exported), but not overseas production. For example, the output of a Japanese carmaker’s European factory would be counted in Europe’s GDP rather than Japan’s (although it would however be captured in Japan’s gross national product — GNP). It turns out that this distinction is particularly important for the major German and Japanese carmakers, for whom ‘international sales’ — defined as ‘sales generated from operations in foreign countries’, excluding exports — are around 80% of their total revenue^.[1] (For US and Chinese autos firms, the share of international sales is less than half this number, although the proportion is rising rapidly for Chinese companies.) Competition from China will therefore also have consequences for the countries to which autos production is outsourced. If a large portion of employment in those countries is linked to producing German- or Japanese-designed cars, then GDP and jobs could in turn suffer as Chinese car production increasingly dominates global export markets — especially as, at least for now, the majority of China’s production is domestic.

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Often the overseas production of established players reflects joint ventures set up in foreign markets, partnering with local producers. China itself was one of the main targets for such joint ventures after its accession to the WTO. As the chart below shows, leading automakers had significant operations within the PRC during the 2010s. This peaked in 2018, when around 10 million vehicles were produced through these joint ventures, roughly one-third of the country’s total production, but the production numbers have fallen sharply since then. It was around this time that the output of many of China’s own homegrown producers started to surge. Undoubtedly these joint ventures played a role in upskilling China in this area — in part through training the local workforce on the factory floor, but also because access to western technology will have caused knowhow to diffuse to the engineers and designers of domestic car companies.

The global auto industry is currently at a critical juncture. China’s emergence as a major exporter of motor vehicles is a challenge to the incumbent players and one that is unlikely to go away. The new vehicle tariffs imposed by the EU, US and Canada are obviously a response to that threat, but it may be a trend that is hard to be put into reverse.

[1]       The following companies were used for each country. Japan: Toyota, Honda, Nissan and Suzuki. Germany: Volkswagen, BMW and Mercedes. US: General Motors, Ford and Tesla. China: BYD, Saic Motor and Geely Automobile.

The views expressed in this article are the views of the author, not necessarily those of LSEG.

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