China’s Auto Industry to Grow From Large to Strong

The auto industry’s competitiveness relies heavily on economies of scale and technological advantages. As it pursues these twin goals, the auto industry has witnessed a century of production model transformations in brands ranging from Ford to Toyota to Tesla. Deglobalization has posed major challenges to the global auto value and supply chains. The auto value chain is large and complex, relying heavily on global market demand and the integration of technology. As a result, trade frictions, the COVID-19 pandemic, and geopolitical conflicts may cause supply shortages in the global value chain, resulting in short-term production halts. China’s auto industry plays a vital role in the global value chain, and in the near term, we think its main goal will be to improve supply chain resilience and maintain scale advantage. In the long term, the auto industry is undergoing restructuring as disruptive innovation is changing the industry’s technological foundation and market landscape. The smart electric vehicle (EV) technology revolution repositions vehicles as intelligent mobile terminals, overcoming traditional automakers’ technological barriers in engine and gearbox. In our view, an industrial landscape that is dominated by the traditional giants of the auto industry, including those headquartered in Germany, Japan, the US, and South Korea, is changing. This is creating opportunities for the emergence of China’s auto industry on the global stage, but we believe it may also cause overcapacity of outdated production model. To develop its auto industry in the era of internal combustion engine (ICE) vehicles, China adopted a joint-venture (JV) strategy, attracting core automotive technologies and capabilities with its large market and localizing the production and assembly of overseas models. However, the Chinese auto value chain currently lacks core technologies, in our opinion, making it large but not strong. In the alternative fuel vehicle (AFV) era, China has boosted domestic demand for AFVs through fiscal and tax policies, and by accelerating technological innovation and market competition in related fields, enabling its AFVs to gain scale and technological advantages globally. China now exports AFVs worldwide. In January–September 2022, the country accounted for 62% of global AFV sales volume, with Chinese brands accounting for more than 50% of the global AFV market. In the future, we believe that China may continue to leverage its economies of scale as a large economy and strengthen the technological accumulation of the auto industry by improving the national innovation system. In our opinion, these developments would cement the Chinese auto industry chain’s importance in the global market. Amidst the backdrop of deglobalization, the Chinese auto industry’s weaknesses in key technologies are becoming more obvious. To improve China’s prowess in cutting edge technologies, the government and the market could work together. The technological transformation of the automobile industry will involve bulk raw materials, basic chemicals, machinery equipment, semiconductors, artificial intelligence (AI), and big data. Auto chips in particular may face a supply shortage. China's automotive semiconductor industry still faces challenges such as the low output of low-end products, mid-range capacity shortages, and a lack of advanced technology in high-end products. Improvements in these areas require advances in domestic technologies.