By Nick Carey and Giulio Piovaccari
LONDON/MILAN (Reuters) – The bankruptcy of Stellanti’s Jeep joint venture in China could spell trouble for other global carmakers whose output has fallen over the past five years in the world’s biggest auto market, as domestic players quickly take over.
The first joint venture failure by a foreign brand in the electric vehicle (EV) era, the Oct. 31 bankruptcy filing marks a turning point as Chinese automakers begin to outpace the long-dominant international brands in giving consumers what they want.
“I don’t expect Stellantis to be an isolated case,” said Marco Santino, partner at management consultants Oliver Wyman. “Presumably, almost all Western car manufacturers will have to review the industrial logic of their presence in China.”
A spokesman for Stellantis said Jeep would operate through an “asset light” strategy in China, importing vehicles through a distribution model profitable for its Maserati and Alfa Romeo brands.
“Jeep remains fully committed to its existing and future customers in China,” the spokesman said, adding that Stellanti’s dealer network in China remains fully operational.
Some elements of the Jeep joint venture’s failure are particular to Stellantis – and the former car groups that are among its 14 brands. But data compiled for Reuters by consultancy LMC Automotive reveals a problem shared by a number of other global automakers: declining Chinese plant utilization.
The fewer cars a factory produces, the more likely it is to make a loss.
Graphic: Global Automakers’ China Production Struggle – https://graphics.reuters.com/AUTOS-CHINA/STELLANTIS/lbpggnzgzpq/chart.png
The Jeep failure in China occurred less than two years after Stellantis was formed through the merger of PSA and Fiat Chrysler.
Before the deal, CEO Carlos Tavares had said that no automaker could afford not to be in China and the expectation was that the two companies together would be better equipped to make progress there.
But Stellantis said earlier this year it would end its venture with local partner Guangzhou Automobile Group (GAC), just months after saying it would raise its stake to 75% from 50%.
The U-turn leaves the world’s No. 3 carmaker by sales with only limited Peugeot and Citroen production in China, which it has said could also be shut down, although it has yet to decide on that.
Tavares, the carmaker’s outspoken Portuguese CEO, has complained that “political influence is growing every day” in China and has accused Stellanti’s joint-venture partner GAC of not acting in good faith.
The GAC has said it was “deeply shocked” by critical comments made by Stellantis.
According to LMC data, Stellanti’s projected full-year capacity utilization at its Chinese assembly plants will fall to 13% in 2022 from 43% in 2017.
Other mainstream brands, including Volkswagen, General Motors, Ford, Mitsubishi and Hyundai, have also seen plant utilization decline by anywhere from over 30 to more than 50 percentage points over the past five years.
Some – notably premium brands Mercedes and BMW – have seen significantly smaller declines.
Meanwhile, global automakers’ sales in China have fallen as local rivals have gained momentum as Chinese automakers have embraced electric cars and consumer-centric in-car software much more quickly.
“In the last five years, (China’s) market has definitely changed from where foreign companies have the right to win because of their foreignness to where there is a much more level playing field,” said Bill Russo, head of consultancy Automobility Ltd in Shanghai and a former Chrysler executive.
“Chinese companies actually have an early-mover advantage because they adopted electrification faster than the foreign companies were willing to,” he added.
While all-electric cars make up an average of 5% of models sold by foreign automakers in China, they account for 30% of Chinese automakers’ models, according to LMC data. Graphic: Tesla and Chinese brands lead electric race – https://graphics.reuters.com/AUTOS-CHINA/STELLANTIS/znpnbenzbpl/chart.png
COMPETITION IS HEATING UP IN EUROPE
Some Chinese rivals such as BYD who have more EV models in their ranges are also aiming to grow in Europe.
This means that as global giants Volkswagen, Ford and GM work to bring more EV models to market, they face stiff competition from younger Chinese rivals that have quickly adapted to changing consumer tastes.
“They are miles behind compared to the (Chinese) households,” said Justin Cox, LMC’s head of global production.
They must also overcome an image rooted in internal combustion engine technology.
GM is counting on a wide range of electric cars to rebuild profits from its China operations – which fell 44% to $477 million in the first nine months of this year – to $2 billion by 2030.
“I wouldn’t draw any conclusions about China based on 2022,” Chief Financial Officer Paul Jacobson told reporters earlier this month. “We still feel good about where we’re going.”
Volkswagen said in a statement that China has been in a “special situation” due to the pandemic, the global semiconductor shortage and the “accelerated transition towards electric mobility” that has affected production capacity across the industry.
“Volkswagen continuously evaluates these special factors and adjusts its production planning at an early stage if necessary,” the automaker said.
Ford said it was working to overcome production challenges caused by Covid-19 and the semiconductor shortage.
SMART PHONE ON WHEELS?
The Jeep brand was originally brought to China by American Motors Corp before being taken over by Chrysler in 1987. It sold the same lone Jeep Cherokee model for 20 years.
Automobility’s Russo said Chrysler, Fiat and Peugeot – which are all part of Stellantis and all had their own Chinese joint ventures – had struggled over the years before becoming part of the same car group.
“These are companies that really never quite figured out the formula that leads to success in China,” Russo said.
Michael Dunne, CEO of California-based consulting firm ZoZo Go and a former GM executive, said that as domestic automakers grow in China, international brands will find it more difficult to obtain local licenses and will not have the same access to loans from state-owned banks.
“Stellantis is a canary in the coal mine,” Dunne said. “Forever, the foreign brands were the favorite sons in China.”
As the formula for success in China has changed, consumers want electric cars that resemble smartphones on wheels where the emphasis is on connectivity and apps rather than performance – to the extent that electric car makers such as the Nio have a built-in selfie camera in some models to appeal to younger buyers.
So far, Mercedes and BMW have had their appeal, partly because they maintain a good image as aspirational brands in China, but also because Chinese automakers have yet to turn their attention to producing luxury electric cars.
LMC’s Cox said other international brands could possibly claw their way back to higher market shares in China, but it would take time and a lot of investment in new products.
“When a brand is damaged or at least looks stuffy or old-fashioned or unappealing, then it’s very difficult to hit any home runs,” Cox said. “Some of the companies with a clear mainstream positioning may have a very hard time coming back.”
(Reporting by Nick Carey and Giulio Piovaccari, additional reporting by Paul Lienert and Joe White in Detroit and Victoria Waldersee in Berlin; Editing by Ben Klayman and Barbara Lewis)