Japanese automaker Mitsubishi Motors has announced that it will withdraw from its joint venture with Guangzhou Automobile Group (GAC) in October 2023 due to declining sales and increasing competition from electric and hybrid vehicles. The decision highlights the broader challenges foreign automakers face in China and the major changes in the global auto sector.
GAC is one of China’s leading automakers that serves as a local partner for several Japanese automakers, including Toyota, Honda, and Subaru. These joint ventures opened China’s vast automobile market to foreign manufacturers while increasing GAC’s production capacity. The partnership is in line with the government’s ‘Technology to Market’ strategy introduced in the 1990s to strengthen the domestic automotive industry.
As a result, car production has skyrocketed, from just 500,000 in 1998 to more than 10 million in 2009, and is expected to reach 30 million by the end of 2023. Electric vehicles (EVs) are a major driver of this growth. China is one of the world’s leading EV producing countries and boasts the largest EV market, accounting for nearly 60% of all EVs in the world. The country’s strong patent position and advantages in battery supply further strengthen its position.
Mitsubishi Motors’ withdrawal from China is a result of this market shifting away from traditional internal combustion engine vehicles. As China becomes a dominant player in the EV supply chain and production, it could disrupt the countries that rely on the auto manufacturing industry and the embedded network of parts and component suppliers.
Outside of the mid- and high-end market segments, foreign automakers face significant pressure from domestic competition. By September 2022, about 50% of vehicles on China’s roads will be made by foreign brands, down from 62% in 2020 and 56% in 2021. The main driver of this reallocation is EVs, which is consistent with China’s goals of strengthening energy security and reducing energy consumption. These include reducing carbon emissions and creating niche markets for local car brands.
The government introduced a subsidy scheme for EVs in 2009, which pushed EV sales from just 5,000 units to a staggering 6.89 million units in 2022. These subsidies supported production through direct financial support to EV manufacturers, R&D investments, and energy credits. China has also targeted the consumer side, offering benefits such as tax rebates and priority license plates to EV buyers.
The government phased out these subsidies from 2020 onwards, sidelining automakers that were heavily dependent on subsidies. This change has created an opportunity for competitive EV brands such as BYD, Xpeng, Aion, NIO, and Li Auto to grow. Aion, a brand owned by GAC, was the third best-selling EV brand in China through the first three quarters of 2023, behind BYD and Tesla.
Many global automakers are grappling with an evolving landscape as China rises in the EV space. The country’s automotive production capacity reflects its advanced manufacturing acumen. However, the rich experience of Japanese automakers and their established supply chains have paradoxically weighed them down somewhat, making it difficult for them to quickly adapt to the rapid uptake of EVs.
Paradigm shifts in the automotive industry highlight the evolving nature of production methods. China’s EV production is characterized by a highly flexible, customizable, hyper-connected and widely distributed supply chain, potentially paving the way for pioneering vehicle production methods. This could mimic the paradigm shift seen in Ford’s assembly line production and Toyota’s just-in-time strategy.
Mitsubishi Motors has responded to this challenge by exiting the market, but other companies are hoping to take advantage of the transformation of China’s auto industry. Toyota and BYD will launch their first jointly developed EV model in 2022. In July 2023, Volkswagen entered into a technical partnership with Xiaopeng Automobile with the aim of launching two Class B EVs in China. In this “reverse technology transfer” agreement, Xiaopeng will impose a “technical service fee” on Volkswagen, marking a pivotal change in China’s auto sector.
Meanwhile, major German companies such as Mercedes-Benz and BMW are considering moving European EV production to China, attracted by technological advantages and cost-effective supply chains. Stellantis CEO Carlos Tavares said such measures could reduce production costs by up to 40 percent thanks to economies of scale and innovation in production.
Mitsubishi Motors’ exit from the growing Chinese car market may not be primarily due to “unfair” competition from government-backed domestic brands, but rather an inability to quickly adapt to evolving market dynamics.
Going forward, it will be critical for China to continue to open its market to foreign automakers, especially in the competitive EV sector.
For foreign automakers to succeed in the Chinese market, they must be nimble and adaptable. A pragmatic approach needs to be taken in joint research and development (R&D) and product design efforts with Chinese companies. Innovation and cost efficiency in production are determined by market size, and China occupies a dominant position in this regard.
This article was originally published on East Asia Forum.
Marina Yue Chan is an Associate Professor at the Institute of Australia-China Relations at the University of Technology Sydney.