Trade Wars and Chinese Competition Are Fracturing the Automotive Market: How Can Automakers and Their Suppliers Respond?

The United States escalated its trade war action again in March, announcing a 25% tariff on vehicle imports from April 2, and on vehicle part imports from May 3. There is no 100% “American-made” vehicle, so even Original Equipment Manufacturers (OEMs) like Tesla and Rivian, which assemble their vehicles in the United States, will see costs increase eventually. Vehicle models will see price increases of at least US$3,000, with EVs, in particular, expected to become up to US$12,000 more expensive. This tariff action is seen as a protectionist response by the Trump administration to the increasing status of Chinese vehicle offerings across the U.S. and global markets, but the reliance of many OEMs on foreign, and especially Chinese, vehicle components is creating a difficult environment for American consumers, suppliers, and automakers.

Chinese automakers have been expanding their presence in Western markets significantly over the last year, despite tariffs from markets like the United States and European Union (EU). This presence will continue to grow in the future as these OEMs bolster their positions with local manufacturing facilities, such as BYD’s planned EV manufacturing plants in Hungary and Turkey, which are expected to start production in the next 3 years. This expansion is also the case with Chinese suppliers, as well as automakers—most recently, ECARX, a Chinese Tier One supplier, which announced a partnership with Volkswagen for digital cockpit systems in Brazilian and Indian vehicles, and is actively exploring ways to extend this to Škoda vehicles in Europe. There are also some markets, like EV batteries, where stakeholders are reliant on Chinese companies for their operations. However, the opposite (Western companies with strong positions in China) is not the case.

The Chinese market opportunity, the largest automotive market in the world, for foreign automakers and suppliers has been eroded as domestic players like BYD and Geely grow more competitive with their EV and Software-Defined Vehicle (SDV) offerings and adaptation to Chinese consumer preferences. Additionally, a complex regulatory environment, intense competition from local players, and cultural nuances have pushed Western players out from their previously meaningful shares of the market. The growing Chinese foreign presence has built on their domestic dominance, but other markets have enacted protectionist policies that have created a fragmented automotive industry. One part is accessible by Chinese automakers and suppliers, and the other is not (to varying degrees). The United States, for example, has taken a very strong protectionist stance against the Chinese, while the EU has adopted a more “lukewarm” approach, making Europe a market that is still somewhat accessible to Chinese companies, but the opposite is certainly not true.

The U.S. approach will have a direct consequence on automotive production and consumers, lowering industry outlooks for new vehicle sales in the coming years. The eroding profit margins of North American OEMs will further hamper their transitions to new technologies and architectures, including electrification and software-defined vehicle technologies like zone controllers. As electrification targets are delayed and scrapped in various regions across the world, OEMs are scaling back their platform timelines, but these platforms have often been the grounds for their innovations in digital cockpits or SDV features, too.

The divergence of the market into a Chinese-accessible and non-accessible market has an important impact on the trajectory of technology innovation across the world. On one hand, reduced competition and lack of free exchange of ideas will limit innovation as a whole across both halves of the market, but on the other, a domestic market that is shielded from the competitive pressures of Chinese players is intended to allow North American stakeholders to protect their domestic shares and innovation timelines. The significant advantages of Chinese OEMs and suppliers in cost competition and government support have played a large part in their ascent, but other markets aren’t able to replicate these circumstances for their own.

Historically, different technologies grow significantly in localized regions, which then spread this knowledge across their global operations, allowing foreign players to adapt quicker. For connected cars, the United States was an early leader; for active safety, Western Europe; and for EVs and autonomous vehicles, China has been the market leader for innovation. If the U.S. attitude of strong separation to Chinese threats continues, American stakeholders must consider how to stay competitive and ensure access to crucial technologies, such as batteries. A departure from net-zero targets does somewhat delay this need, but the competitiveness of EVs for long-term Total Cost of Ownership makes a transition to electric cars economically advantageous, even with the lack of regulatory support. More importantly, if Western automakers ever want to regain the volumes they once enjoyed in China, they must be EV and AV competitive. The measures that are protecting their domestic markets against Chinese imports have significant consequences for global competitiveness. For Europe, the pursuit of decarbonization has played a part in its softer tariff action against Chinese entrants. In the longer term, Chinese companies will be able to circumvent any new tariff actions as new factories are opened in Europe, and even in North America in the future.

The creation of these two parallel automotive markets with unique consumer preferences and innovation profiles will require adjustments from automakers and their suppliers to remain competitive. To protect against Chinese entrants and regain market share from Chinese companies in the Chinese market, there are several measures that Western stakeholders can take.

Tier One suppliers can:

• Build and strengthen relationships with both Western and Chinese automakers. Understanding their current priorities in technology and end consumer feature offering is critical to tailor a platform and component offering to these two markets, as the end consumer preferences can vary significantly. Early and often engagement to demonstrate market-personalized technology offerings across the domains of digital cockpits, infotainment, or connectivity, among others, are valuable for automakers, i.e., seeing their problems and opportunities coming before they materialize.
  • This requires engagement with government and regulatory bodies to ensure a thorough understanding of quickly changing trade policies, and enables them to advocate for measures that will promote open and stable automotive competition.
• Review the Bill of Materials (BOM) and sourcing strategies for their solutions. Identification of areas of tariff exposure and geopolitical risk exposure, for both current and potential future threats, can allow Tier Ones to build diverse supply chains/sourcing routes that are resilient to changes in the above. This reduces dependencies on specific regions and allows them to support OEMs across all the regions they operate in, or want to operate in.

Automakers can:

• Make investments in EV platforms, next-generation digital cockpits, and sophisticated highway autonomous driving to compete with Chinese companies, both domestically and in China. Especially in the Chinese market, consumers have strong preferences for advanced digital cockpit and infotainment technologies, like gaming (e.g., Volkswagen’s AirConsole partnership) and video-on-demand. By focusing on improving vehicle architectures in the long-term, OEMs better enable themselves and their partners to customize their vehicles over time with new features to meet changing consumer tastes.
  • Doing this in China will require OEMs to forge partnerships with local Chinese domestic suppliers, to navigate geopolitical hurdles and cost pressures, as well as provide expertise on the market that foreign entrants otherwise do not have access to. Joint ventures and strategic alliances for specific technologies or architectures can allow some OEMs to catch up to their Chinese competitors and learn from their technology practices.
• Disentangle their SDV and AV offerings from the EV platforms. As EV targets and government support is scaled back/removed in markets like the United States, it becomes necessary to disentangle technological progress in electrification from progress in SDV architectures and AV features to remain competitive in these other domains. This applies only to markets where this removal of regulatory support is occurring—at the time of writing, this refers to the United States.
• Leverage their strengths in Western and Chinese markets and capitalize on them as differentiators to Chinese OEMs. Building on existing strengths, such as brand reputation or loyalty, build quality, or expertise in a particular infotainment domain, and leveraging already established sales/service networks can bolster an OEM’s domestic operations in the face of Chinese competition. This can also apply to operating in Chinese markets—for example, some OEMs are still popular as luxury choices for more wealthy Chinese consumers, despite the growth in luxury Chinese OEM offerings. Capitalizing on this brand status can allow them to retain a foothold in the market as they rebuild a comprehensive technology offering that keeps up with Chinese competitors.