China's Auto Industry to Grow From Large to Strong

The auto industry is witnessing transformative changes unseen in over a century. Vehicle electrification, which began in recent years, has dismantled the technical barriers surrounding engines and gearboxes, paving the way for new players and brands to thrive. Additionally, the intelligentization of vehicles marks a pivotal moment where technology plays an increasingly critical role in smart EVs, further fueling innovation and shortening the product innovation cycle. This shift has allowed emerging automakers like Tesla to leverage their technological prowess and scale. In response, China's auto sector must adapt to value chain reforms driven by technological innovations to compete not only against Tesla but also against traditional automakers and tech giants entering the industry.

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Thanks to substantial government and policy support, Chinese automobile brands have established a strong foothold regarding scale and technology within the global AFV market. From January to September 2022, the sales volume of China's AFVs reached 4.36 million units, contributing to 62% of global sales. Chinese brands have successfully penetrated international markets, commanding 80% of the domestic AFV market and over 50% globally. It appears that China is on the path to evolving from a significant contender into a leading powerhouse in the automotive space, as its value chain adapts swiftly to these technological advancements while maintaining economies of scale and competitive advantages.

Moreover, navigating the complex landscape of global politics and economic globalization, the auto value chain will be subject to challenges such as the relocation of value chains and a shortage of core technologies. These factors could severely impact China's auto value chain, presenting risks to economies of scale and technological sustainability.

14.2.1

Tesla Leads Innovation in Automotive Technology and Shifts Industry Standards

A thorough examination of auto value chain evolution provides insights into the dynamic shifts occurring globally. Over the past century, the automobile industry has undergone tremendous technological and demand-driven transformations, reshaping the competitive landscape. Automotive products have transitioned from being exclusive luxury items to ubiquitous consumer goods and innovative smart mobile terminals (a contemporary interpretation of current vehicles).

Furthermore, the auto value chain has experienced four significant transformations: (1) early production focused on small, handcrafted batches; (2) Ford's mass production through vertically integrated assembly lines; (3) Toyota’s lean production system that emphasizes efficiency and customization; and (4) the Tesla-driven smart EV revolution, characterized by the integration of renewable energy and advanced AI technologies into auto manufacturing, redefining vehicles as smart mobile platforms.

In the early years of the industry, vehicles were traditionally produced in small quantities, as they were only handmade and not amenable to mass production. This exclusivity made them luxuries reserved for the affluent.

The advent of mass production occurred when Henry Ford introduced standardized assembly lines, dramatically enhancing output and reducing vehicle costs. The production metrics skyrocketed from 100 cars annually to about one vehicle every ten seconds, significantly lowering prices. Up until that time, automobiles were largely luxury items.

Through vertical integration, Ford established extensive production capabilities including everything from raw materials to the final assembly of products. The company executed a standardized system which maximized the benefits associated with scale and cost reduction in the automotive industry.

As the industry evolved into the 21st century, Tesla emerged as a leader, advocating for a vertically integrated smart EV model that meets consumer demands with an efficient and responsive ecosystem. This model enables Tesla to develop and manufacture its own EVs comprehensively while extending its reach to upstream components, challenging the traditional compartmentalized model exemplified by Toyota.

Tesla's groundbreaking approach takes full advantage of technological advancements, introducing three integral parts comprising the electric system: the power battery, drive motor, and electronic control system, alongside a state-of-the-art green energy network (including SolarCity and Supercharging stations). While integrating software and hardware to realize autonomous driving, Tesla capitalizes on computer vision, AI, and machine learning capabilities.

Through planned initiatives like the Dojo supercomputing system and the advancing Optimus humanoid robot, Tesla is poised to redefine technological applications in transportation and energy sectors through its innovative strategies. Their approach creates formidable technological barriers that competitors will struggle to breach in the near future.

The company's commitment to innovation spans R&D, design, manufacturing, and customer service. Tesla stands out as an industry leader characteristic of high efficiency along with robust and cost-effective strategies in the smart EV value chain. With strategies including innovative features like integrated die-casting for battery technology and a unique production framework, Tesla's practices have become benchmarks of success that industry players aim to replicate.

China's advantages in the auto value chain are making significant contributions to Tesla's successful strategies and expansion. Musk's frequent engagements in China to enhance local factory operations demonstrate the impact of the "Made in China" label on production speed and cost-effectiveness.

In summary, the auto value chain that has stabilized for the past century is now being rigorously redefined. The day-to-day operations of the industry are adjusting as innovative changes in product development alter core value chains. There is an anticipated surge in advancements in smart EV technology, shorter product life cycles, and heightened competition.

14.2.2

Failure of Market-For-Technology Strategy; Adapting to Technological Changes; China’s Smart EVs on the Rise

While China did not emerge as a strong competitor in the ICE era, the dawn of the smart EV age presents newfound opportunities. The crucial focus for China's auto value chain is its ability to adapt to the rapid technological shifts towards electrification and intelligence while ensuring competitive advantages in production scale. However, concerns linger regarding the potential overcapacity of ICE vehicles within China's manufacturing base.

The history of China's auto manufacturing landscape showcases significant milestones, revealing progress, current positioning, and future outlooks:

1. 1.

   From the late 1970s to the 1980s, China embraced joint venture models to welcome foreign automotive technologies, leveraging its vast market for local production and assembly. This strategy facilitated the emergence of private automakers like Geely and Great Wall Motor.

2. 2.

   Between 2000 and 2010, increased consumer demand driven by rising incomes and governmental support spearheaded a rapid rise in car sales, reaching 20 million vehicles annually. The synergy between joint venture and domestic brands cultivated an expanding network of auto parts suppliers and industrial clusters.

3. 3.

   Since 2012, China has trapped itself in the AFV race, driven by regulatory policies on electrification and intelligent upgrades. Despite reaching peak sales in 2017, recent trends indicate a resurgence, particularly after the government loosened restrictions and favored foreign investments, contributing to the growth of the AFV supply chain.

In conclusion, despite being a latecomer on the global stage, after four decades, China's auto industry has developed a competitive edge marked by low production costs, high efficiency, and a skilled labor force.

Chinese automakers are rapidly aligning with Tesla's innovations while establishing their distinct advantages. Leading auto manufacturers are progressively launching comprehensive electrification and AI-driven capabilities, aiming at performance excellence and improved infrastructure for EVs. This includes overhauling their approach to charging stations and adopting cutting-edge technologies to fortify their brand position.

Chinese manufacturers are redefining value chain strategies. Companies like BYD stand out, uniquely positioned to mass-produce both core technologies and EVs, thus integrating the entire value chain. Other brands are investing boldly in EV battery technologies through joint ventures and independent R&D.

Moreover, intelligent driving capabilities are progressing significantly, with companies like NIO and XPeng ramping up their development efforts focused on user-centric features, engaging a broader ecosystem built around core electronic and software components. Comparatively, traditional manufacturers still face challenges remapping their technological offerings in an evolving marketplace.

China's auto industry is open to transformative innovations, particularly appealing to younger consumers thanks to the flexibility and responsiveness of its manufacturing capacity and rapid advancements in product offerings. This responsiveness is poised to facilitate China's journey into a leading position within the global auto landscape.

14.2.3

Global Car Industry Faces Horizontal Risks Amid Supply Chain Shortages and Relocalization

The globalization of the auto value chain is challenged by recent disruptions, including trade conflicts, the COVID-19 pandemic, and emerging geopolitical tensions. Such events have altered supply chains considerably, resulting in risks of halted production and escalated costs across the industry. Automakers are continually reevaluating their supply chain strategies in light of these developments which raises serious concerns over continued production stability.

As a key player in this globalized landscape, China faces concurrent challenges and must be mindful of potential shifts in value chain dynamics, especially as foreign enterprises may look to diversify their supply sources away from Chinese manufacturing.

However, several factors suggest that a retreat from the Chinese supply chain network is unlikely in the near future:

1. 1.

   China holds a significant portion of global auto manufacturing and sales, thus remaining a critical market for multinational companies focused on local customer needs.

2. 2.

   The stringent requirements for auto-quality standards foster strong partnerships and dependency between manufacturers and parts suppliers, leading to a preference for diversifying suppliers rather than relocating supply chains.

3. 3.

   Firms driven predominantly by low labor costs are more likely to relocate to other regions than those rooted in technological expertise and manufacturing capability.

4. 4.

   Lack of infrastructure elsewhere inhibits the development of new automotive supply chains as China maintains dominant economies of scale.

Ensuring supply chain security while fostering global expansion must remain a priority for China. Strategies should incorporate diversification, resource optimization, and localized stockpiling to strengthen operational resilience and effectively mitigate risk exposures in future disruptions.

14.2.4

Vertical Risk Management of Core Technologies in Automotive Value Chains

Automobiles, as high-end consumer products, are heavily influenced by upstream suppliers across multiple industries—raw materials, machinery, and advanced technologies such as AI and big data. As functional enhancements transform vehicles into multifunctional smart devices, automakers will likely contend with production disruptions driven by shortages in key components.

Dependency on imports presents challenges for automotive semiconductors. With traditional ICE vehicles containing fewer technologically dependent components, the rapid evolution towards AFVs necessitates an increase in semiconductor integration, underscoring opportunities for innovation within the domestic supply base.

In particular, three types of semiconductor segments will define the future landscape: (1) established markets for power semiconductors and sensors see growth in domestic firms; (2) the SoC domain which is advancing but lacks scale; and (3) highly specialized AI training chips, where international suppliers still dominate this emerging technology.

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