China: Advice to Legacy Automakers

Fresh off my panel at last week's Automotive News Congress in Detroit, I wanted to capture a few thoughts while the discussion is still fresh in my mind.

The panel was titled "China's Growing Influence on the Global Auto Industry."

The Chinese have a term they call "Involution."

Involution describes a kind of hyper-competitive, zero-sum rivalry in which companies relentlessly undercut one another on price, compress margins, and race to out-innovate competitors.

We've seen this playbook before in Chinese consumer electronics.

Now it is being applied to the automotive industry.

For decades, Chinese automakers benefited from joint ventures with global legacy manufacturers. Those partnerships gave them deep exposure to Western automotive design, engineering, manufacturing, supply chains, and operating practices.

But rather than simply copy what they learned, Chinese companies took the opportunity to start with a clean sheet of paper.

They weren't burdened by 100-year-old manufacturing systems, legacy architectures, dealer structures, organizational silos, or established ways of doing things.

They rebuilt the process from the ground up.

The result is an industry that increasingly leads with technology, develops vehicles faster, and produces them at significantly lower cost.

Without a dramatic rethink of how vehicles are designed, engineered, and manufactured - with the explicit goal of removing both time and cost - legacy automakers face a precarious future.

And we are already seeing the consequences in markets around the world.

Chinese brands now account for roughly 12% of European vehicle sales and 16% of UK sales, and those numbers continue to grow.

Dealer profit margins in the UK are approximately one-third of what dealers earn in the United States.

Australia may be an even more instructive example. With no domestic automotive manufacturing industry left to protect, Chinese brands have grown from roughly 3% of the market to around 30% in just three years. At the same time, Toyota dealership valuations have reportedly fallen from roughly 6x earnings to 3x.

Meanwhile, European automakers are rapidly retreating from China while simultaneously coming under increasing pressure from Chinese competitors in their home markets.

And that pressure is only going to intensify.

We should view these developments as warning signs for what could eventually happen in the United States.

What's the solution?

Legacy automakers may need to take a page from the playbook China used against them three decades ago.

They need to understand, in much greater detail, how Chinese automakers are developing and producing vehicles faster and at lower cost.

And one of the best ways to learn may be to co-opt them through partnerships and joint ventures - much like the structures that originally allowed Western automakers to enter China.

Stellantis' partnership with Leapmotor is a good example. Beyond gaining access to products and technology, Stellantis also gets a much closer look at how a highly competitive Chinese automaker operates.

There are legitimate national security and data-security concerns that needto be addressed. But those challenges do not strike me as insurmountable.

What seems far more dangerous is simply hoping legacy automakers will independently figure out how to match the speed and cost structure that Chinese companies have developed.

The final question on the panel was:

"If you had one minute with a CEO, what would you advise?"

My answer was simple:

We're playing the wrong game.

We remain too fixated on the rules, structures, and assumptions of the past.

Instead, we need to understand where the industry is headed - and be willing to take the painful steps necessary to leapfrog into the future.

I would focus on three things:

1. Co-opt.
Structure partnerships and joint ventures that allow us to learn how Chinese automakers are developing and producing vehicles faster and cheaper.

2. Neutralize.
Slow the Chinese onslaught that is already squeezing legacy automakers in virtually every major market outside the United States.

3. Compete.
Figure out how to shift the game back to our advantage.

Legacy automakers dominated the global auto industry for nearly a century. Only recently have they come under serious attack from Chinese competitors operating with an entirely different playbook.

Trying to beat them by playing yesterday's game is unlikely to work.

It is time to rethink what the future of the industry should look like - and change the game.

How do we get there?

Tariffs are a short-term Band-Aid that are simply buying us some time. They can help protect the U.S. market, but they are not a long-term strategy.

What we need is alignment among automakers, suppliers, the U.S. Government, and regulators around a coherent strategy that allows our legacy manufacturers to take dramatic steps, rethink their operating models, and potentially leapfrog Chinese competitors.

That cannot happen with policies and strategies that change every few years.

The Chinese have an important structural advantage here: they can think in 10- and 20-year time horizons.

American companies are often forced to operate quarter to quarter, while U.S. industrial policy can swing dramatically with each election cycle.

Unless we develop a more coordinated, long-term approach, I fear that some of the automotive brands we know and love simply may not survive the next chapter of this industry.

China has already changed the game.

The question now is whether we are willing to change with it.