Hundreds of thousands of visitors descended on Munich, Germany’s third largest city, at the beginning of September, the vast majority of them there to take part in the first IAA Mobility auto show since the onset of COVID-19. 

(Source: Chen Kang Kang)

The return of the massive trade fair should have been a time for Germany’s biggest names in the industry, such as Volkswagen, Mercedes Benz, and BMW, to shine. Instead, Chinese-made electric cars stole the spotlight.

Roughly 40% of the show's 750 exhibitors were from China, including car makers BYD Company and SAIC (Shanghai Automobile Industry Corporation) MG, and battery manufacturer CATL (Contemporary Amperex Technology Co.). 

Their massive presence symbolized a coming-out party for China’s EVs in Europe, leading German media to proclaim “China car makers flex their muscles” and “IAA turns into a Chinese car show.” 

BYD was a main attraction, with its show-opening press event drawing large crowds to its nearly 1,000 square-meter pavilion. The attention rivaled that garnered by the Volkswagen Group.

BYD showroom attracted many people at the automobile fair. (Source: Chen Kang Kang)

“BYD is relatively new. It’s just been 20 years since we started to make cars, but now BYD has already become the global number one in new electric vehicle sales,” said Michael Shu (舒酉星), managing director of BYD Europe. 

The appearance by Wang Chuanfu, the company’s normally low-profile chairman and CEO, at the IAA show left no doubt as to Europe’s importance to BYD. In less than a year, the Chinese company has gained footholds in 15 countries on the continent and set up more than 140 showrooms.

Wang Chuanfu, the chairman and CEO of BYD. (Source: Chen Kang Kang)

Aside from BYD, other Chinese car makers such as SAIC MG, Changan Automobile, and Nio Inc. have also been accelerating their moves into Europe.

Volkswagen Imitating ‘China Speed’

In the first seven months of 2023, Chinese electric cars saw their market share in the European Union rise to 8 percent, according to European Commission statistics, and that share is forecast to reach 15 percent by 2025. That has left German car makers feeling the heat, forcing them to respond.

At an automotive forum in China in July, Volkswagen Group China CEO Ralf Brandstätter said: “Volkswagen is accelerating at China speed.”

What is “China speed”? Mercedes Benz Chief Technology Officer Markus Schäfer explained it bluntly as China is working seven days a week, 24 hours a day because of the fierce competition there. That’s not possible in Germany, Schäfer said, because of its labor laws.

Ralf Brandstätter, German business executive, CEO of Volkswagen Passenger Cars stressed the importance  of cooperating with China. (Source: Chen Kang Kang)

China speed has resulted in Chinese car brands constantly introducing new, cost-effective car models that are equipped with the most advanced batteries and high-tech entertainment systems and feature highly appealing car designs and interiors.

Many Germans are realizing that the once nascent Chinese automotive industry is now leading the way. China, which knew nothing about cars a few decades ago, has emerged as a strong rival in the electric vehicle sector and a country century-old German car manufacturers are seeking to emulate.

Using Toyota’s Strategy to Penetrate Europe

German car brands are actually facing a strong challenge from Chinese electric cars in both the Chinese and European markets.

Sixt, the German rental car company announced to purchase of a hundred thousand BYD EVs. (Source: Chen Kang Kang)

In the first quarter of 2023, BYD’s sales in China outpaced those of Volkswagen, the sales leader in China’s market for the past seven years, to become the best-selling car brand in the country.

“BYD surpassed Volkswagen in China, and a similar competitive situation could appear in Germany,” said Jun Jin, the automotive industry leader for PwC Mainland China and Hong Kong. Jin said both companies focus on the mass market, and competition is inevitable.

A key BYD market advantage is its complete product range, from the most basic of vehicles to high-end seven-seaters, giving it the flexibility to pick the vehicles that are most appropriate for the European market.

“BYD is like HTC and its ‘air and sea tactics’ in its heyday, not relying on any one model to conquer markets,” Jin explained. 

Ultimately, the so-called air and sea tactics of Taiwanese smartphone maker HTC failed, but BYD has used them with some degree of success. The difference is that BYD has fully integrated its supply chain, insisting on manufacturing all core components in house. That means manufacturing considerations support product development, and production quality is embedded in the design process.

A UBS report analyzing BYD’s Seal, a sporty sedan, found that three-quarters of the vehicle’s components, from its battery to power semiconductors, are made by the company, resulting in costs that are 25 percent lower than those for similar models by other brands.

BYD has even been described as the new Toyota by The Economist.

Yet, the Chinese company still faces challenges in gaining a solid foothold in Europe.

“The product needs to be produced in the local market if you want sales to continue to grow,” Jin said. That represents a hurdle for Chinese EVs, which are currently produced in China and exported to Europe.

Even though BYD and SAIC have both said they will open factories in Europe, they have yet to provide a timetable or factory site. And when these Chinese companies start manufacturing there, they are likely to face daunting management challenges operating in a developed economy, much like chipmaker TSMC has faced issues setting up its planned semiconductor foundries in Arizona.

Another issue, Jin observed, is that Chinese companies will not have the same advantages Toyota did when it first set up factories overseas. 

At the time, Toyota could depend on a healthy supply chain of local automotive component suppliers in overseas markets that could support Toyota’s production process, Jin said. In Europe, however, the electric vehicle supply chain, including battery and software development, is not yet mature, which will force Chinese brands to get their suppliers in China to join them in Europe if they want to replicate their production processes, Jin said.

Big German Brands Backed by Chinese Shareholders

Faced with the challenge of Chinese car companies on home soil, German Chancellor Olaf Scholz confidently declared at the Munich auto show’s opening ceremony: “Competition should spur us on, not scare us.”

In fact, Germany is not in a position to stop Chinese vehicles from entering its market. First, China has long been an important source of revenue for German car manufacturers. In 2022, it accounted for at least 30 percent of the car sales of Volkswagen, Mercedes-Benz, and BMW. Second, China has been a major shareholder in German car brands, including Mercedes-Benz, for years and has emerged as an important partner to them.  

From 2021 to the present, Porsche, Mercedes-Benz, Audi, Volkswagen and BMW have all expanded their R&D centers in China. Volkswagen has even collaborated with Chinese technology group ThunderSoft to build entertainment systems for vehicles.

It has also become majority owner of Chinese battery maker Gotion High-Tech to develop the next generation of batteries, and it took a stake in Chinese EV maker XPeng Inc. to jointly design new Volkswagen models. These initiatives suggest German brands not only value the Chinese market and its manufacturing but also respect the competitiveness of China’s R&D capabilities.. 

That could bode well for Chinese electric vehicles in the German market

"Chinese brands that produce locally will be welcomed by most people because that means new jobs," said German management guru Hermann Simon.

However, in the current geopolitical landscape, “collaborating with China brings increased risks due to its political direction," cautioned Mercator Institute analyst Gregor Sebastian.

Wondering if the German brands are making a sound bet, Sebastian said, “If the US imposes more restrictions on Chinese-made automobiles, the collaboration with China may become increasingly challenging. This is a gamble for German carmakers."

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Translated by Luke Sabatier
Uploaded by Ian Huang