The Year the Auto Show Was Busiest Is Also the Year Joint-Venture Brands Are Most at Risk
Chinese brands' market share will rise quickly; if a joint-venture partner cannot bring value to the JV, it may become a wholly foreign-owned brand — that is the real reshuffling behind the crowded show floor.
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German colleagues' surprise turned into shock
European colleagues who hadn't been to China in three years expected to be "surprised," but it turned into "shock." Not because of sales figures, but because they saw many models they had never seen in Germany — models they even found competitive — and human-machine interaction they had assumed Germany couldn't yet do, already present in China. What surprised them even more was the design language: they had assumed Chinese luxury-car buyers liked things shiny and bright, leather plus rhinestones, but Chinese carmakers went with minimalist design on EVs, which by Europeans' own standards they liked too. The gap in booth traffic was just as striking — fuel-car booths had no traffic, new-energy booths were packed, and you could feel it on the first day of media previews.
— Zhang JunyiThree thirds — perception and fact are far apart
Wang Xia (王侠) shared three thirds: one third of the show was new-energy vehicles, two thirds conventional-energy vehicles; one third of foreign brands also offered EVs; new-energy vehicle sales already accounted for one third of total sales, and plug-in hybrids and range-extenders made up another third of new-energy vehicles. The most interesting is the first — one third of the products drew far more than two thirds of the attention. This explains why media and audiences felt "there are so many new-energy cars" when the actual exhibit structure was not that way.
— Zhang JunyiThe price cuts are not Tesla's doing alone
Tesla's share of the Chinese market is only six, seven, eight, nine, ten percent — it has a demonstration effect on the price market but not a determining effect. What really caused the price swings in the first half was demand not being as strong as expected, while all carmakers had opened up capacity, so to ship they had to cut prices. More critically, this round of price cuts was no longer a single carmaker's action; it also seeped into government subsidies, so the magnitude was especially large. If Tesla hadn't announced, BYD would have. Tesla itself prices on cost, guaranteeing a certain gross margin while following the market; when material costs rose, Model S/X prices rose too.
— Zhang JunyiThe price war is burning cash to clear inventory — it's about who has deeper pockets
Price cuts are a lose-money-for-attention behavior, unsustainable. Once consumers form expectations of price cuts, the price cuts themselves lose their effect. The more insidious harm is de-contenting: many previously high specifications keep getting stripped, and neither profitability nor technological ambition reaches its peak, which runs counter to expectations of manufacturing upgrading. The essence is burning cash to clear inventory — if you don't sell, you lose money on every car you make, but at least you can hold cash flow and amortize fixed costs. So how big the price cuts are also depends on how deep the local government's pockets are, because the government encouraging price cuts is an investment behavior: the more cars a carmaker sells, the more tax revenue and employment the government gets.
— Zhang JunyiDecision rights taken back to headquarters — not because sales are bad
A mainstream joint-venture model was doing very well in China, yet headquarters got nervous and took product decision rights back to headquarters. The logic is not rational judgment but jobs: if all decisions are made in China, headquarters doesn't need so many people. Corporate resources are limited — whichever side matters more gets more manpower and budget, and the other side inevitably gets less, so everyone fights for the say in product definition. People have their flaws too — having already obtained the power, handing it over might benefit the company but not the individual. Volkswagen is centralized in its decision-making, Wolfsburg is the center of all brains; GM's early success was precisely because R&D and systems were decentralized — for small Asia-Pacific models, China and Korea could decide some things themselves.
— Zhang JunyiLosses and debt won't kill a company — cash flow will
The auto industry has so many linkages that it doesn't need to be consistently profitable — it can affect employment, tax revenue, GDP. The auto industry accounts for ten percent of China's GDP, ten percent of all Chinese employment, ten percent of national tax revenue. In those three ten-percents there is no profit. So whether it makes money in the short term is not the most important thing; whether the industry can stand up is. But losses won't kill a company in the short term, nor will debt — companies die on cash flow: if you can't keep selling cars, you don't have sustained cash flow, and only then does it come down to whether there's profit, or whether you can raise money externally.
— Zhang JunyiThe last thirteen tickets — joint ventures are most at risk
When China Auto News talked with Zhu Xihan (朱熙涵) and Ouyang and others, they raised "thirteen tickets": central SOEs will always be kept, local SOEs that do well will also be kept, a few new companies and new brands may survive, and joint ventures are most at risk. In the 200,000-to-300,000 or even 100,000-plus price band, domestic brands offer better value for money, and joint-venture brands' value projection in new eyes is also challenged. Mid-range models are squeezed from both ends — Chinese brands squeezing upward, BBA squeezing downward. But joint ventures will not fade from the stage of history; as long as China remains an open market, Volkswagen has also made new investments in JAC. The key question becomes: can the Chinese partner bring enough value to the JV, or is it just lying on the partner to earn sales and profit.
— Zhang JunyiChinese car owners are twenty years younger than abroad
The change in women buying cars: in the past the user decision was within the family, and women might be one of the decision points; now women buy cars themselves, and are both user and decision-maker. When pleasing themselves they may not buy a family car or a kid-hauling car — Li Auto instead becomes a dad car. Another difference is age: Chinese luxury-car consumers are far younger than abroad — Aston Martin or Lotus Chinese owners differ from foreign owners by twenty years; the average age of Aston Martin drivers abroad is fifty-five. The reason is more second-generation rich, young entrepreneurs, internet entrepreneurs and founders, consuming ahead of time; in those countries, you might only be able to afford one at retirement.
— Zhang JunyiIn their own words · checked verbatim
Once consumers form expectations of price cuts, your price cuts themselves lose their effect.
一旦消费者建立降价预期的时候，你的降价本身也没有什么效用了。
Zhang Junyi31:50
I have already received this right; making me hand it over may be good for the company, but it is not good for me personally.
我已经收到这个权利，让我把它交出来，可能是对公司有好处，但是对我个人并没有好处。
Zhang Junyi47:16
This year's auto show is a very lively one for carmakers, but it may also be the liveliest edition, because some of the brands sitting here may slowly die out.
今年车企是一个非常热闹的车展，但也有可能是最热闹的一期车展，因为在座的一些品牌，可能就会慢慢的消亡下去。
Zhang Junyi1:11:18
You can't say you're lying on your partner — we also have some joint-venture brands that lie on their partner, earning sales and earning profit, but that's an institutional advantage, not your product advantage.
不能说躺在合作伙伴身上，我们也存在一些合资品牌，是躺在合作伙伴身上，赚取销量，赚取利润，但是那你是个制度优势，并不是你的产品利益优势。
Zhang Junyi1:18:38
Figures
| Tesla's China market share | six, seven, eight, nine, ten percent | 28:03 |
| Auto industry share of China's GDP | ten percent | 59:27 |
| Auto employment share of Chinese employment | ten percent | 59:27 |
| Auto tax revenue share of national tax revenue | ten percent | 59:27 |
| Average age of Aston Martin owners abroad | 55 | 1:22:45 |
| Age gap between Chinese and foreign luxury-car owners | 20 years | 1:22:45 |
| New-energy vehicle share at the auto show | one third | 17:15 |
| New-energy vehicles' share of total sales | one third | 17:52 |
| Porsche's share of sales in China | one third | 42:11 |
Glossary
- just in time
- A production logic of supplying on demand just in time without stockpiling inventory, replaced during the pandemic by just in case.
- OTA
- Fixing or upgrading vehicle functions by pushing software updates remotely.
- For China For China
- A foreign-company slogan meaning defining and developing models specifically for Chinese market needs.
How to listen
Investors watching the auto industry, strategy and product people at carmakers, and founders who want to see China's market competition mechanism rather than car reviews.
1:03:31 to 1:06:32, on supply-chain executives begging for chips — safe to skip.