China is forcing out foreign car companies

On Dec. 23, Japan’s Honda and Nissan announced they would work toward a merger. If the effort is successful, the pair will form the world’s third-largest car company by sales. The two companies also announced that Nissan’s alliance partner, Mitsubishi Motors, will join the consolidation talks.

China was one of the important factors pushing the three firms to contemplate a merger. This year has been troubling for almost all foreign carmakers in that country, which boasts the world’s largest car market.

Honda and Nissan believe that together they can cut costs and pool resources to catch up to companies such as BYD of China and America’s Tesla, with its gigafactory in Shanghai, as they “devour market share.”

Japanese companies are not the only ones concerned about being devoured. For a quarter century, General Motors competed with Volkswagen for the No. 1 spot in China.

Now, that iconic American brand is in 16th place.

“GM’s sales in China have entered a death spiral, falling 42.5 percent in the first 11 months of this year,” the New York Times reported.

The company took a $5 billion charge against profits last month due to what the paper termed a “dizzying collapse of its China business.” GM lost $347 million in China over the first three quarters of this year.

Volkswagen is not in much better shape.

“Chinese consumers see VW as the king of yesteryear, an era when global brands reigned supreme,” Michael Dunne, an automotive consultant in China since the 1990s, told Autoblog, which in November suggested the German giant might not survive in the Chinese market.

Other foreign carmakers also have problems. Most notably, the joint venture that made Jeeps with Europe’s Stellantis filed for bankruptcy in 2022.

As Jeff Schuster of auto researcher GlobalData told CNN, “Every international brand is suffering in China.” In five years, Chinese brands went from 38 percent of the Chinese car market to about 70 percent now.

There is no mystery about how foreign brands lost their way.

“Vice President Al Gore traveled to Beijing in March 1997 to witness the inking of a joint venture agreement for General Motors to build 100,000 Buicks a year,” Washington, D.C.-based trade analyst Alan Tonelson told me.

“Then, everyone thought the Chinese would be content to merely buy American parts and assemble them. That view proved to be disastrously wrong.”

Moreover, Chinese rules forced technology transfers from foreign companies to joint ventures. Then, Chinese joint venture partners took the tech and started building vehicles of their own.

That is exactly what Shanghai Automotive Industry Corp., GM’s partner to make Buicks in 1997, did. SAIC, as GM’s Chinese partner is known, transferred engineers working for its joint venture with GM to its own operations to build SAIC-branded vehicles.

Chinese carmakers also got help from the government when it became clear that, despite everything, they could not compete with foreign brands in building gasoline-powered vehicles. Beijing simply changed the rules, effectively mandating a switch to EVs and plug-in hybrids.

The foreigners were slow to make the change — their fault — but China’s officials made sure they fell behind.

“Beijing limited or blocked government subsidies for cars built by foreign companies,” the New York Times reports.

Furthermore, China’s state-owned banks and local governments heavily subsidized domestic makers, further tilting the scales.

Local help to local companies has been substantial. According to Autoblog, Chinese firms like BYD can sell their cars at prices 50 percent below production costs.

Dunne believes that most Western brands “will be forced to exit the market in the next five years if not sooner.”

“Losing China would be catastrophic for any automotive enterprise,” Bill Russo of the Shanghai-based advisory Automobility told CNN.

That assessment at first glance looks correct. After all, which company could afford not to be in a market that had 30.1 million unit sales in 2023?

Nonetheless, being forced out of the China market will probably not be as bad as everyone believes.

For one thing, competition will be gruesome for quite some time. The most recent EV price war has lasted almost two years, and there is no end in sight. Xi Jinping does not believe deflation is a bad thing — “Don’t people like it when things are cheaper?” he asked advisors according to the Wall Street Journal — so he will continue to support policies resulting in price reductions.

BYD, by far and away the largest seller of EVs and plug-in hybrids in China, is profitable, but the price war has taken its toll. Consultancy Alixpartners predicts only 19 of the current 137 Chinese EV brands will be in the black by the end of this decade.

So the profit outlook for most foreign companies — Tesla may be an exception — is not good. Moreover, no car company in China, domestic or foreign, should count on using China as a manufacturing base for other markets.

“For all China’s EV success in its own market, its strategy of stoking overcapacity and profiting from exports is running into deep trouble, as major economies from the United States to the European Union, to India, and to Canada are either raising trade barriers to these Chinese vehicles or mulling such measures,” said Tonelson, who blogs on trade and geopolitical matters at RealityChek.

Countries are fast putting up barriers.

The Biden administration, for instance, has effectively blocked Chinese EVs with its 100 percent Section 301 tariffs imposed in May and its proposed Commerce Department rule, announced in September, banning key Chinese hardware and software in connected vehicles. The European Union in October imposed tariffs of up to 35.3 percent on Chinese EVs.

Even Global South countries are moving to keep out Chinese EVs. In June, Turkey placed an additional 40 percent tariff on vehicles from China, and in September it imposed restrictions on Chinese plug-in hybrids.

As a result of these actions, the value of China’s EV exports fell 42 percent in November.

Countries are not going to allow China, with its predatory and criminal practices, to decimate local industries. Chinese companies, to get around trade barriers, are now building factories in countries that are parties to trade agreements with the U.S. and Europe.

Yet going abroad is not a sure-fire strategy. Authorities in Brazil’s northeastern state of Bahia just stopped construction on a BYD plant due to worker conditions comparable to “slavery.”

Honda and Nissan hope to complete their merger and list on the Tokyo Stock Exchange by August 2026. Perhaps by then no foreign car company will want to remain in China.

Gordon G. Chang is the author of “Plan Red: China’s Project to Destroy America” and “The Coming Collapse of China.” Follow him on X @GordonGChang.

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