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Are Car Companies Becoming Too Reliant on Chinese Exports?

The booming Chinese economy has created export opportunities for all sorts of businesses, not least the motoring industry. It is a vital market for many carmakers, including most in the UK. In fact, for companies like Jaguar Land Rover, China is the biggest single market.

The booming Chinese economy has created export opportunities for all sorts of businesses, not least the motoring industry. It is a vital market for many carmakers, including most in the UK. In fact, for companies like Jaguar Land Rover, China is the biggest single market. Some car makers are going further than simply exporting cars to China and are setting up factories and joint agreements with Chinese companies to manufacture cars in the country. Others, such as Volvo, have been bought over by Chinese companies. It is not just UK companies who are courting Chinese customers. Germany is actively pursuing closer links with the Chinese and Chancellor Angela Merkel has just returned from her seventh trade mission to the country. But is the Chinese market the opportunity it seems to be or are there dangers under the surface?
 
Germany and China are becoming ever more reliant on their trade links with each other, as the Chinese develop a taste for luxury German goods like Audis, BMWs and Mercedes, while Germany depends more on the cash coming in from these exports. German exports to the EU suffered during the economic crisis and China became their number one emerging market. It is no wonder, then, that companies like Siemens and VW had their CEOs on Merkel’s trip. 
 
The trend seems to be ever upward. In June, Audi announced that it sold more than 50,000 cars in China in a single month for the first time. Mercedes says that China is now the biggest market for its S-Class range of luxury saloons and the country is VW’s biggest customer. The Germans are way ahead of the UK in their Chinese exports, with the value of goods almost doubling from 2009 to 2013 to £53 billion. This is around five times the value of Britain’s exports. Such figures mean that China has now overtaken the US as Germany’s biggest trading partner.
 
Close political ties are vital in forging such relationships and Merkel’s seven trade missions to China are evidence of how seriously her country takes the relationship. Indeed, the German Chancellor has met the Chinese president, Xi Jinping, three times already this year. There is, however, some unease about such close ties with a country that has a poor record in human rights. Merkel was openly critical of the Chinese record in this area in her first term as Chancellor but this time around she seems to have adopted previous German Chancellor Gerhard Schroder’s approach when he dealt with Russia, championing pushing change in the country through trade. 
 
Just how effective such a strategy can be, however, remains uncertain. German authorities insist that Merkel remains critical of Chinese human rights issues but they concede that any criticisms will not now be made in public. This change in stance comes after German journalists were booed by German businessmen when they quizzed Chinese officials on human rights during a trade visit to Beijing.
 
The recent crisis in Ukraine highlighted Germany’s dependence on Russian gas and some observers are expressing concern about German reliance on Chinese trade. China still only accounts for 6% of German exports in total, but the figure is much higher for some companies, with some selling 40% of their total output in China. Privately, many German officials are worried that such reliance could be problematic, especially in the event of a Ukraine-like crisis and subsequent trade embargoes. This is not beyond the realms of possibility, as China’s disagreements with Japan over sovereignty issues in the Senkaku islands has long been a bone of contention. 
 
There are also concerns that the benefits of any trade relationships with China could be short term. Chinese companies have repeatedly been accused of reverse-engineering Western technology and engineering solutions, soon moving to make their own products rather than importing foreign goods. 
 
Car companies are somewhat insulated from such issues, as much of the car’s value is in the brand identity. What may be more of an issue is dilution of the Brand’s value. In June, Jaguar Land Rover announced that it is planning to build an engine factory in China, the first such plant outside the UK. Will prospective buyers want a prestige UK or German car that is made in China, or will it be seen as somehow a lesser product? Only time will tell.

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