VW, Mercedes and BMW keep fingers crossed as China risk escalates

Long ago, German automakers went all-in in China, building dozens of factories with local partners with whom they were forced to share technology. The risks have apparently been outweighed by an unprecedented expansion of what has become the world’s largest auto market.

For years, those bets have paid off. Growing demand from a burgeoning middle class and the newly wealthy bolstered revenues and profits for Volkswagen, Mercedes-Benz and BMW. All three now sell more vehicles in China than in any other market. The idea that Beijing would one day pull the rug out from under international business has been dismissed as inciting fear.

One would think that Russia’s abrupt cut off of the gas Germany relied on before Moscow’s invasion of Ukraine would lead to soul-searching about China’s reliance on Wolfsburg, Stuttgart and Munich. If so, it’s not from CEOs Oliver Blume, Ola Kallenius and Oliver Zipse.

In early November, VW’s Blume will join a delegation led by Chancellor Olaf Scholz on their first trip to Beijing since the two assumed their respective roles. While Scholz used his initial speech as Germany’s leader at the United Nations in September to denounce China’s human rights record, including the treatment of Uyghurs in Xinjiang, VW carefully limited his comments on the region to what happens inside the factory it shares with the state. -run SAIC manufacturer. In a letter to the World Uyghur Congress, Blume reiterated that VW does not mistreat any workers, that its presence in the region has a positive effect on the community, and that it will remain in Xinjiang.

Blume’s counterpart, Ola Kallenius, meanwhile suggested that the West’s hands would be tied if Beijing tried to take over Taiwan. “If one thinks that the Chinese economy could be decoupled from the European or the American, it’s a total illusion,” he said in an interview with Die Welt in September. “It would have dramatic consequences for the world economy which would in no way be comparable to those of the war in Ukraine.”

On October 19, BMW CEO Oliver Zipse even went so far as to defend China’s market policies and compare them favorably to how President Joe Biden is changing the rules of the game in the United States. “just right for everyone,” Zipse said in an interview near the BMW plant in Spartanburg, South Carolina. He warned that the Biden administration’s climate law designed to wean the United States off battery materials from China could provoke retaliatory action and trigger a “dangerous” game of trade barriers.

It would be unreasonable for these companies to take rash pre-emptive action before any further escalation in geopolitical tensions. But after having to turn their energy supply strategies into a dime and consider canceling big investments in Russia this year, German automakers are keeping their fingers crossed that they won’t be forced to make much tougher choices about their commercial presence. much more substantial in Russia. the People’s Republic.

President Xi Jinping’s consolidation of power has only heightened concerns that go far beyond the auto industry. Chinese stocks had their worst performance following a Communist Party congress, after this year’s rally dashed hopes for more market-friendly policies.

In the automotive sector, there are fears that the dominance of international automakers in the combustion engine era will spill over into the electric era. Domestic automakers accounted for nearly 80 percent of electric vehicle sales in the first seven months of the year, according to the China Passenger Car Association. VW has had the hardest time coping with what has become a particularly more competitive mass market.

“What we see from VW at the moment is more firefighting mode than innovation leadership in the Chinese market,” said UBS analyst Patrick Hummel. “Volkswagen’s position in the Chinese market is structurally threatened.

Of course, the Germans are not alone. Tesla’s reliance on China has multiplied since the company opened a factory outside Shanghai in early 2020. Earlier in October, CEO Elon Musk told the Financial Times that Taiwan is expected to agree to become a special administrative zone of China to resolve tensions with Beijing, a proposal that has angered Taipei and raised eyebrows in Washington. Democratic Senator Mark Warner said he was frustrated that companies including Tesla seemed to feel China was so big they needed to “turn a blind eye” to abuse.

There is another way. On October 17, Stellantis CEO Carlos Tavares suggested he was ready to stop manufacturing cars in China. The Peugeot and Citroën carmaker could implement an “asset-light” strategy for these brands, repeating a phrase it used earlier in the year when announcing its intention to withdraw from the company’s Jeep manufacturing business.

Stellantis’ withdrawal was made easier by the fact that it wasn’t doing so well there in the first place. VW has a lot more to lose, as it operates more than 40 vehicle and component factories with partners in China. Asked on Oct. 28 about his next trip, Blume said it was important for Berlin and Beijing to contact each other after the party congress to exchange ideas and positions and plan further cooperation.

BMW is doing just that, moving production of mini electric hatchbacks to China from the UK and assembling an SUV model there through its partnership with Great Wall Motor. At Mercedes, well over half of the ultra-luxury – and ultra-profitable – Maybach vehicles the company sells are destined for customers in China, supporting its move upmarket.

“Germans can’t bite the hand of whoever feeds them,” said Matthias Schmidt, a Berlin-based automotive analyst. “For Mr Tavares it’s a different story – he’s probably saying what a lot of other auto executives are thinking.”