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Converging forces are impacting the equilibrium in the JV network that includes OEMs, MNCs and Chinese components suppliers
China’s automotive market is at the sharp end of a number of converging pressures: cooling demand in the wake of the pandemic; new liberalization of the market to foreign competitors; increases in public transportation and ride-hailing services, and reduced demand for cars; advances in technological innovation to satisfy increasing local and global demand for electrical vehicles (EVs). Since the first industry JV was signed in 1984, multi-national car manufacturers (MNCs) have exponential growth in JVs with multiple Chinese suppliers, resulting in complex and bureaucratic relationships. Originally, these JVs were well-aligned with foreign companies gaining access to the growing and increasingly lucrative Chinese auto market (now comprising 20 million car sales per year) in exchange for technological know-how and tried and tested operational efficiency. However, that balance is now shifting.
First, Chinese OEMs are far less dependent on MNCs than they were for technology, and China has developed significant strength in battery technology, robotics and AI. Second, Chinese automakers are increasingly successful at selling cars in the domestic market: Chinese branded cars comprised 29% in 2010 and 40% in 2017.1 Third, Local players have set clear ambitions to become global automakers, turning JV partners into potential competitors.
These shifts mean that Chinese and foreign participants in the JV have increasingly divergent interests leading to decision-making inertia. As JV regulations have been lifted, the motivation for disentangling what for many Chinese OEMs are no longer productive relationships, is clear. But rationalizing what for some MNCs were multiple JVs with different Chinese players is not easy. And, underlying structural complexity, is the fundamental issue that MNCs are at risk of diminishing value to their Chinese JV participants.
How can global MNCs restore value to the Chinese market and how can Chinese auto parts suppliers negotiate terms with their global players to accelerate innovation?
The better the answer
A new focus on innovation and streamlined ownership structure is designed to better meet the needs of the local market
EYP was able to harness its deep sector knowledge and the team’s understanding of the Chinese operating environment to map out a path forward for the client. Rationalizing multiple JVs into a better, collaborative model had to take into account both the Central Government and the provincial ones, local supplier networks and a new decentralized innovation model.
The strategy was rooted in the need to invest in technologies to meet the innovation demands of Chinese OEMs and the localization requirements of MNC OEMs in China. But the success of that strategy depended entirely on the tactical implementation of a highly tailored solution. How EYP delivered on the solution was critical to its success. The team deep dived into the automotive market in China/Asia-Pacific to look for OEM potential, technical trends, and engineering service requirements. This led to revisiting the resource strategy in Asia and identifying the key initiatives to optimize the resource allocation to better serve Chinese OEMs and selected MNC OEMs. The whole process was detailed and meticulous.
To ensure success, EYP identified the shortcomings of the foreign MNC’s relationship with its Chinese players and its diminishing returns. Critical to the new collaborative model going forward is an ambitious investment plan, that will see both the Chinese entity and its foreign owners gaining in technological IP and operational improvement.
The better the world works
The platform of collaboration moves from the domestic to the international market and there is a need for balanced interest among players
How EY-Parthenon can Help
EY-Parthenon professionals recognize that CEOs and business leaders are tasked with achieving maximum value for their organizations’ stakeholders in this transformative age. We challenge assumptions to design and deliver strategies that help improve profitability and long-term value.
Read moreM&A activities are often opportunities for re-examining structure and operational efficiencies. But in this case, EYP has forged a new model of the automotive industry collaboration between Chinese and foreign players to overcome market and technology-driven disruptions.
As China’s domestic auto market becomes saturated, local players in global JVs are increasingly looking for growth internationally. This brings pressures to the relationships between foreign and Chinese players as they compete for market share outside China. The platform for collaboration will continue to shift from the domestic to the international market, and both Chinese and foreign players’ interests need to be served.
The automotive JVs between MNCs and Chinese parts suppliers will be increasingly rationalized as regulations are lifted and liberalization gains momentum. International OEMs will be able to increase their presence in China, competing directly with local OEMs, while local players in global JVs capitalize on global growth opportunities. Furthermore, the collaboration between global OEMs and supply chain companies to develop charging infrastructure supporting China’s growing market for new energy vehicles (NEVs) will only increase. The China Association of Automobile Manufacturers (CAAM) forecasts China’s NEV sales will grow by more than 40% each year in the next five years.2
This case study can serve as a playbook for other global car manufacturers with interests in China.
