Driving Through Uncertainty: Geopolitical Frictions and the Future of Automakers

By: D. Ariaz

In today's global automotive landscape, car manufacturers worldwide are compelled to glean insights from Chinese automotive firms and their consumer base, anticipating the trajectory of the industry's evolution. Similarly, Chinese automakers are diligently studying the dynamics necessary to expand their footprint into Western markets. Much like established giants have established engineering and design hubs in China, Chinese automotive enterprises have reciprocated by establishing their presence in the United States and Europe. However, amidst these developments, foreign car manufacturers find themselves grappling with challenges in the Chinese market, while Chinese aspirations of penetrating global markets face potential impediments amid escalating geopolitical tensions. A deterioration in relations between the United States and China precipitates a landscape marked by heightened geopolitical friction, the imposition of new trade barriers, intensified subsidy competition, evolving supply chains, and stricter controls over access to Western technology and data sharing. Collectively, these factors could culminate in the deglobalization of an industry renowned for its global interconnectedness.


The dwindling market share of foreign firms in China owes much to the perception that the software in their electric vehicles is not as advanced as in their Chinese competitors. Sales of Volkswagen’s ID series of electric vehicles in China have disappointed. Slowing electric vehicle sales as government subsidies were cut prompted Tesla to slash prices, triggering a price war at the start of 2023 that hit less coveted electric vehicles from foreign carmakers. Growing nationalist sentiment among Chinese buyers and greater efforts by the government to encourage domestic firms such as Build Your Dreams (BYD) will make China an even harder place to do business in future.


At the same time, carmakers are reconfiguring supply chains to make them less exposed to geopolitical concerns, with reliance on China a growing issue. The country is one of the world’s biggest exporters of car parts, with a value of over $45bn in 2021, a quarter of which went to America, says a study by Sheffield Hallam University. In 2020, 12 Chinese car parts firms were in the world’s top 100 by revenues. Pandemic-induced snarl-ups sent shipping prices soaring and hit the supply of car parts. China’s zero-covid policy meant widespread lockdowns that caused further delays. However, forming new relationships with suppliers from India, North Africa or Mexico is a lengthy business. Firms usually change suppliers only when they make new models. Yet the process of shifting supply chains away from China is clearly underway.


Restrictions on access to the West’s technology may also have an effect. America’s efforts to bar Chinese firms from advanced technology include a ban by the Commerce Department on exporting certain semiconductors to China. The Chips Act passed last year offers new subsidies for manufacturing semiconductors at home. China’s car firms may lead the world in electric vehicles and automotive software. but they rely almost entirely on chips imported from America, Europe, and Taiwan. To plug the gap carmakers such as BYD and Geely are making their own chips, and startups like Nio, Li Auto, and Xpeng may also do so. The Chinese government plans to spend billions on the domestic chip industry. 

Efforts to pull up the drawbridge will hamper China’s exports, and so might worries about the security of data gathered from users of Chinese-made cars. America already imposes hefty tariffs on Chinese cars: 27.5%, against 10% levied by the EU. That may not hold back the import of Chinese cars forever, as cheaper models could still be competitive. But the effects of America’s Inflation Reduction Act, passed last year, which offers big subsidies to American-made electric vehicles with batteries that use raw materials sourced in America or from close allies, will do more to bring production home.

The results are already evident: Tesla is scaling back European investment to focus on North America and will build a new Gigafactory in Mexico; Ford chose Michigan for a new battery factory; GM will invest in a lithium mine in Nevada; Volkswagen is thinking of relocating a battery factory from Europe, reckoning it could be worth $10bn in subsidies over its lifespan. Few carmakers seem able to resist the American lure, and Europe is intent on responding to America’s lavish handouts, but even without big inducements, the industry will become more regional. Manufacturing batteries, which are bulky and make up a big proportion of a car’s value, is better done close to where cars are made and sold. The EU’s car firms have their own plans to weaken China’s grip on battery-making. New incentives to make batteries locally could mean that Europe will see 40 battery Gigafactories by 2030. Caught between America and the EU, Britain is looking on nervously.

Were China’s sabre-rattling over Taiwan to turn into a full-scale war, this slow regionalisation would speed up rapidly. Russia’s attack on Ukraine shows how fast a country with a small car industry has been affected. Western car firms with manufacturing plants were forced to suspend operations or to pull out entirely: Renault had to sell its operations in Russia; including a 68% stake in Avtovaz, Russia’s biggest carmaker; Volkswagen suspended manufacturing after the invasion and has had its assets frozen by a Russian court; Toyota closed its Russian factory. Ironically Chinese car firms then grabbed a bigger share of the Russian market.


Rising tensions with China would affect many industries besides cars. And even if the broad influence of China on both car making and the experience of driving persists, tastes will still differ between regions. Chinese tech, the American love of large pickups, and Europe’s taste for small cars all show a world that is not entirely uniform. Yet, a more regionalised, more protected, and hence less efficient car industry would not be a better one.