Automotive Production Trends Post-COVID-19: China

COVID-19’s spread rapidly accelerated trends in robotics and electric vehicles that will greatly change the Chinese automotive scheme. Even before the pandemic, by 2018, China had increased its purchase of robots by 15%-20%...
May 17, 2021

In 2018, the Chinese government introduced its “Made in China 2025” plan that prioritizes the development of high-end machine tools, auto parts, and cars (Cyrill, 2018). To do so, China changed its investment policies to allow more favorable terms of investment, such as allowing foreign investors "to own more than 50% shareholding of an entity … to manufacture commercial vehicles from 2020" (Yang, 2019). This has involved a further opening of the Chinese auto market, as detailed by Chinese President Xi Jinping, along with easier terms of entry. The Chinese government envisages itself shortly as the end market of most manufactured goods, contributing the most to value-added.

AMT can take advantage of this trend toward higher-end manufacturing by exporting high-end machine tool parts to China. The Chinese will be pushing to understand and build these models in the future, and a favorable relationship can be built. Providing this technology to the Chinese will push the revenues of companies and enhance the technological profile of China. It is important to mention, though, that political pressure to prevent China from enhancing its technological profile may stale the sale of these goods.

COVID-19’s spread rapidly accelerated trends in robotics and electric vehicles (EVs) that will greatly change the Chinese automotive scheme. Even before the pandemic, by 2018, China had increased its purchase of robots by 15%-20% each year and was one of the principal drivers of growth in the industry (Yamazaki, 2018). In the near term, these trends will only accelerate. Similarly, Chinese interest in EVs has grown, and the Chinese government has committed $388 million to further building battery infrastructure during the current epidemic (Cheng, 2020). China already produces and purchases half of the EVs produced globally (Thornton, 2019). This EV production, coupled with its control of lithium supply, demonstrates the outsized advantage that Chinese automakers have developed (Egan, 2020). 

To compete with Chinese companies, AMT can take multiple actions. The Chinese desire for high-end machinery such as robotics provides an area that AMT can supply. To truly take advantage of Industry 4.0, AMT must find areas where computers and humans complement each other, coupling human dynamic thinking with the numerical advantage of computers. This is where additions in labor productivity will come from in the near term. To remain competitive against Chinese EVs, AMT should prioritize finding other supplies of lithium. China already controls roughly 51% of the lithium market, giving it an outsized say and control over the primary ingredient in the development of EVs (Egan, 2020). The ability to develop longer-lasting batteries will determine the winners in the electric vehicle market. China's interest in several high-end technologies will be the area where AMT can take the biggest advantage.

China Supply Chain Operational Shifts

The push to localize supply chains will moderately affect China because of its dependence on auto part exports to bring in revenue. The IMF predicts roughly 28% of the world’s economic growth will come from China between 2019 and 2024 (Kemp, 2019). Household consumption is expected to grow 6% annually, along with 180 million people being lifted from lower-income levels into the middle class (Lannes et al., 2018). These consumers will, for the first time, have enough money to buy a car. Of the vehicles produced in China in 2019, only 3% of passenger vehicles made were destined for export, making that area of the automotive industry resilient to localization considerations (Ma, 2021). While Chinese cars enjoy a 95% localization rate, auto part makers are heavily dependent on exports that account for $34.8 billion in trade (SNECI, 2020). This area will be heavily exposed to localization efforts, given that $11.7 billion is exported to the United States (Richter, 2020).

China's manufacturing currently focuses on the low-to-middle-end value parts of manufacturing. This exposes the industry to movements of production to countries such as Mexico and Vietnam. Because of its inclusion in the USMCA, Mexico has lower labor costs and expertise in machine parts production. Vietnam is a possibility because of its strong economic growth and proximity to China. "A March [2020] survey by UBS Group of Japanese, Korean and Taiwanese companies that produce in China and sell to the rest of the world found that 85 percent had already relocated or intended to shift some capacity out of China” (Wei, 2020). However, the extensive movement of production from China to nearby countries will take time. Countries like Vietnam lack ports and the deeply integrated supply chain in China (Rusli, 2020). China's share of global container throughput is 33% compared to Vietnam's 2%, demonstrating the infrastructure investments that still need to take place for other countries to develop their auto industries (Rusli, 2020). While these countries have diminished labor costs compared to China, they experience higher transportation costs due to weaker infrastructure. Thus, China has several favorable factors that will require multiple years of investment in other developing countries that are currently outside of the four-to-five-year scope adopted.

The information provided in this article is based on research and report provided by George Washington University – CIBER Bootcamp and commissioned by IBDGi on behalf of AMT.


References

Cheng, E. (2020, May 4). Electric cars take the spotlight in China’s post-coronavirus stimulus plans. CNBC. Retrieved from https://www.cnbc.com/2020/05/04/electric-cars-take-the-spotlight-in-chinas-post-coronavirus-stimulus-plans.html.

Cyrill, M. (2018, December 28). What is Made in China 2025, and Why is the World So Nervous?China Briefing News. Retrieved from https://www.china-briefing.com/news/made-in-china-2025-explained/.

Egan, T. (n.d.). Beating China at the lithium game—Can the U.S. secure supplies to meet its renewables targets? Utility Dive. Retrieved from https://www.utilitydive.com/news/beating-china-at-the-lithium-game-can-the-us-secure-supplies-to-meet-its/572307/.

Kemp, J. (2019, November 5). China has replaced U.S. as a locomotive of global economy: Kemp. Reuters. https://www.reuters.com/article/us-economy-global-kemp-column-%20idUSKBN1XF211.

Lannes, B., Hatherall, R., Ding, J., Han, W., & Booker, M. (2018, June 13). Consumption in China: Ten Trends for the Next 10 Years. Bain. https://www.bain.com/insights/consumption-in-china-ten-trends-for-the-next-ten-years/.

Thornton, A. (n.d.). China is winning the electric vehicle race. World Economic Forum. Retrieved from https://www.weforum.org/agenda/2019/02/china-is-winning-the-electric-vehicle-race/.

Richter, F. (n.d.). Infographic: U.S. Car Industry Most Reliant on Chinese Parts. Statista Infographics. Retrieved from https://www.statista.com/chart/20913/chinese-exports-of-motor-vehicle-parts-and-accessories/.

Rusli, A. (n.d.). Supply chain resilience. Retrieved from  https://eightateeight.wordpress.com/author/amnirusli/.

SNECI News. Coronavirus and the automotive market: what are the implications? SNECI. Retrieved from https://www.sneci.com/coronavirus-and-the-automotive-market-what-are-the-implications/.

Wei, L. (2020, August 12). WSJ News Exclusive | China’s Xi Speeds Up Inward Economic Shift. Wall Street Journal. Retrieved from https://www.wsj.com/articles/chinas-xi-speeds-up-inward-economic-shift-11597224602.

Yamazaki, M. (2018, October 18). China robot market growth to slump this year as trade war weighs. Reuters. Retrieved from https://www.reuters.com/article/us-usa-trade-china-robotics-idUSKCN1MS0L7.

Ma, Yihan (2021, Jan 27). Automotive industry in China: imports and exports - statistics & facts. Statista. Retrieved from https://www.statista.com/topics/1013/car-imports-and-exports-in-china/#dossierSummary.

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