(Bloomberg) — Ryan Xu was a dream customer for German automakers. The Guangdong-based entrepreneur and her husband own a Porsche 911 and a Mercedes-Benz G-Class and were among the first buyers of the electric Porsche Taycan.
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But her views on German cars have soured as Chinese consumers increasingly prioritize technical sophistication over traditional selling points like horsepower and handling. The software systems in the Taycan, which cost more than $100,000, were “terrible,” the 36-year-old mother of three said. It was “just an electrified Porsche – and that was it.”
Her assessment does not stand alone. As China moves away from combustion engine cars, Volkswagen AG, Mercedes-Benz Group AG and BMW AG are struggling to offer electric vehicles that appeal to customers in their largest and most lucrative market. the line.
The latest warning signs came last week, when all three German manufacturers reported declining sales in China for the third quarter. BMW posted its steepest sales decline there in more than four years, down 30%, and Mercedes deliveries fell 13% due to poor demand for its most expensive cars, including S-Class and Maybach limousines.
Porsche sales in China fell 19% to the worst third-quarter performance in a decade, while global demand for the Taycan almost halved. Volkswagen – the parent company of Porsche and Audi – reported a decline of 15%. “The competitive situation in China is particularly intense,” said Marco Schubert, who oversees VW sales.
After dominating the gas guzzler era, German manufacturers became complacent, underestimated the threats from new rivals and were reluctant to give up the profits generated by big-engine cars. Tesla Inc. stated this. and local manufacturers led by BYD Co. able to quickly get by with tech-savvy and affordable plugins, and now China no longer needs or wants them there.
“The turning point is happening now for these automakers,” said Stephen Dyer, a Shanghai-based managing director at consultant AlixPartners. “They need to drastically change their strategy in the market.”
The next challenge can already be seen at this week’s Paris auto show, where Chinese manufacturers are stepping up their efforts to gain market share in Europe. Companies like BYD and Xpeng Inc. will present their latest technology at the largest European automotive event this year.
At least one response attempt did not go as planned. The microphone and slide show went out for several minutes during Volkswagen’s presentation on future electric vehicles, leaving sales and marketing chief Martin Sander visibly frustrated.
It’s an emotion shared by drivers in China. After facing braking and other quality issues, the Xu family sold their Taycan and bought an ET5 from Chinese brand Nio Inc. The car was about a third cheaper than a Mercedes EQE, which Xu also considered, but offered a more luxurious interior design. smooth voice control and greeted their children by name as they boarded.
“German cars can hardly match that level of technology,” said Xu, who runs a company with her husband. Mercedes, BMW and Audi “can hardly be seen as luxury cars these days.”
While German carmakers still hold almost 15% of the Chinese market, that is less than a quarter before the pandemic, and worse, their electric car share is less than 10%. Without a quick turnaround, the crisis threatens to turn into defeat and plunge Germany’s Big Three into an existential struggle. As it stands now, VW, Mercedes and BMW are each worth only about half of BYD’s stock market value.
Even more than other international peers, German car manufacturers have gone all-in on China. While some rivals have cut their losses, the Germans are not giving up and are shifting more resources in an effort to regain their market share. But it appears to be an uphill battle as Beijing actively tries to build up its own manufacturers.
Volkswagen plans to play the long game. A spokesperson for the Wolfsburg-based company said the Chinese car market is characterized by steep discounts and the company does not want to buy market share at the expense of profitability.
The company plans to continue its ‘in China, for China’ strategy to protect its long-term prospects. BMW and Mercedes also plan to stick with a localization approach to appeal to buyers there.
The reasons for the doubling are clear. With the European car market likely past its peak and the US saturated, there is no viable alternative to China for comparable levels of volumes and profits.
That’s a concern given their huge footprint in China. As a group, German automakers operate a network of more than 40 factories – more than in their home country. That’s too much investment to simply give up — and explains why they’re opposing the European Union’s plans to slap tariffs on China’s cheap electric cars.
A withdrawal from China – as General Motors Co. and the smaller Japanese brands Suzuki Motor Corp. and Mitsubishi Motors Corp. have done – is almost unthinkable. And any restructuring would be complicated, as its operations are caught in a complex web of relationships with government agencies. That puts an emphasis on developing the kind of features that Chinese customers want.
The urgency started to increase at the end of 2022. After Ralf Brandstätter, Volkswagen’s Chinese chief, warned the supervisory board that Chinese carmakers had made a leap forward, the company then chartered flights to send hundreds of employees to the Shanghai auto show in April 2023 – the first time after years of Covid lockdowns – to see for yourself.
It was a sobering reality check. German executives faced a rapid rollout of affordable Chinese models, technology-rich products and an intensifying price war. There was also a slew of gimmicky innovations, like a jumping sports car and in-car karaoke, that may have been quirky but reset the bar for Chinese consumers about the source of car trends.
Since then, there has been an intense backlash from the competition. A few weeks after the car show, VW CEO Oliver Blume fired the head of software unit Cariad in the latest attempt to speed up and improve the technology. In addition to new Chinese partnerships for autonomous driving, infotainment and user experience, VW also invested in Guangzhou-based Xpeng to support a plan to build cars using the startup’s EV expertise.
After a profit warning in September, one of Mercedes CEO Ola Källenius’ first actions was to fly to China to check on progress in overhauling its presence there, including tapping CATL for batteries and Tencent Holdings Ltd. for digital services. BMW responded by joining forces with Great Wall Motor Co. to build electric vehicles for its Mini brand.
The cumulative result is that German cars will become less and less German in their largest market. The expansion is also the exact opposite of the government’s goal of reducing exposure to China, said Gregor Sebastian, an analyst at Rhodium Group.
Holding on to their position in China is “a huge gamble,” he said, noting that the German state may have to bail them out if it all goes wrong. “They hope they are too big to fail.”
While China eagerly bought German cars for years, the market has changed and the challenge is to recapture that enthusiasm from a customer base that is younger and more technology-oriented than in Europe. With the move to electric systems, local brands have shown that they can match VW, BMW and Mercedes on quality and beat them on price and technology.
What this means for Germany can be seen in a production hall at the Mercedes location in Sindelfingen, near Stuttgart. It is home to the flagship S-Class, long a favorite of China’s nouveau riche. But demand has fallen and production has been reduced to one shift for the first time.
While cost cuts are starting to impact the German auto industry – especially with VW’s threats to close factories at home – its Chinese operations are still isolated. It’s a sign that executives are hoping for a turnaround. But they also have little choice.
Downsizing operations in China are difficult because large-scale job losses often need to be discussed with domestic partners and approved by local authorities, who have little incentive to cooperate. More drastic changes, such as closing a factory, are even more difficult.
Land in China is owned by the government, which means a factory cannot simply be closed and sold – even if a buyer is found. The case of the departure of Hyundai Motor Co. from a factory in Chongqing illustrates the risk. After several attempts to sell the factory building and machinery, the Korean automaker finally accepted an offer from the local state industrial zone for one-fifth of its investment.
That puts pressure on German carmakers to revive sales, but the playing field has been tilted in favor of domestic players. Beijing has ordered several key state-owned carmakers, including VW partner FAW Group, to prioritize technology and market share over profitability. That is hardly an option for the German listed car manufacturers.
Despite the structural headwinds, the downturn could perhaps have been prevented by more forward-looking investments in the Chinese market. But after decades at the top of the auto industry, Chinese rivals were no longer taken seriously and local insight was bypassed as decisions were funneled through boardrooms thousands of miles away.
Not enough attention was also paid to the fact that the move to electric vehicles involved more than replacing one powertrain with another, and early software was buggy. For example, VW only managed to enable over-the-air updates years after launching its first Chinese electric model in 2020.
That meant owners had to send their cars to dealers for in-store upgrades, which could sometimes take days. To overcome resistance, some dealers offered cash incentives to encourage customers to fix mistakes.
Zhou, an IT engineer living in Wuhan, faced the frustration after purchasing an ID.4 in early 2022. Because the screens went black several times while driving, he got glitches instead of German quality. Updates were also regularly behind schedule or were only available through the dealer.
He is now looking for a replacement. It will be another EV, but this time “I will not visit German dealers,” he said. “I only go for local brands, or Tesla.”
–With help from Stefan Nicola and Monica Raymunt.
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