12.1 Enhancing Auto Industry Competitiveness for Mutual Benefits in BRI Countries

12.1.1 China’s Auto Industry Likely to Enhance Economic Growth in BRI Countries; Prospects Promising

China and BRI countries possess the foundation for establishing mutually beneficial cooperation in the automobile industry. In China’s auto market, domestic auto demand has plateaued, resulting in oversupply. However, auto exports can alleviate such pressure. China’s automobile industry has adopted two models for overseas expansion: Product exports and overseas industry chain expansion. China’s auto exports have increased significantly since 2021. As part of their global outreach, Chinese auto parts companies are shifting their focus from product exports and M&As to building overseas production capacity and R&D centers. Some domestic automakers have strengthened their international presence in production, manufacturing, and marketing services. China’s auto exports deliver high-quality products at affordable prices to BRI countries, which is conducive to improving local living standards.

Furthermore, overseas industry chain expansion involves actions taken by automakers and upstream segments of the industry chain to invest in and build production capacity overseas. This may also support the development of the automobile industry in BRI countries and boost local employment and economic growth. In particular, China’s exports of AFV products and technologies have the potential to expedite the transformation BRI countries toward green economies.

Many BRI countries are experiencing rapid growth in auto demand, yet the industrial foundation of their auto sectors remains weak. A high proportion of BRI countries are low- and middle-income countries with low levels of car ownership. Except for some countries in Southeast Asia, Central & Eastern Europe, and South America, most BRI countries have weak industrial foundations for the auto sector and lack competitive local auto brands. Data from MarkLines indicates that 2022 auto production and sales volume in BRI countries or regions were 16.07 mn units and 11.91 mn units, accounting for 20% and 15% of the global total (Fig. 12.1). Auto demand has strong growth potential amid economic development in BRI countries. For example, sales volume of passenger vehicles (PVs) in Southeast Asia, South America, South Asia, and Oceania grew at double-digit CAGRs over 2020–2022. This is in sharp contrast to sluggish demand globally and in developed regions.

Fig. 12.1
A double-bar chart compares auto sales in 2020 and 2022 versus 11 regions, with S E Asia leading in both years. A chart of C A G R as a share of global auto sales for 11 countries. 2 charts of auto production as a share of global auto production and penetration rate of A F Vs.

Source MarkLines, CICC Research

Auto sales volume in BRI countries or regions demonstrates robust growth momentum. Note The MarkLines database does not cover all BRI countries; the 2022 auto output, sales volume, and AFV penetration data of some countries under the categories of “Other European countries” and “Western Asia” are missing, and are replaced by 2021 data; data for the auto output, sales volume, and AFV penetration of “Central Asia” is replaced by 2020 data.

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China’s auto products are primarily exported to BRI countries and regions, and the country’s auto industry chain is expanding its presence overseas. Data from China Customs shows that over 2017–2022, China’s PV exports to BRI countries rose to 1.15 mn units from about 532,000 units, a CAGR of 24%. With the increase in China’s total exports and structural adjustment of export markets in recent years, the proportion of exports to BRI countries has declined. That said, BRI countries have remained the major markets for China’s auto exports, accounting for more than 50% in recent years.

Chinese auto brands have gained global competitiveness and are moving away from a brand image of selling low-priced and low-quality products. After establishing leading advantages in technologies in electric and intelligent vehicles, Chinese automakers are gaining an edge in the value for money of their products and building a high-tech brand image. Amid scale expansion and brand upgrading, China’s auto industry is seizing the opportunity to shift from product exports to overseas industry chain expansion. We believe that the investment and capacity construction of Chinese firms in overseas regions will promote development of the automobile industry in BRI countries from aspects such as infrastructure improvement, training talent, financial support, and sharing experiences. In addition, many countries are developing AFVs as part of the measures to achieve carbon neutrality. China’s AFV value chain boasts world-leading technologies and products, and we expect the overseas expansion of Chinese AFV firms to prompt BRI countries to pick up the pace towards carbon neutrality.

In the upstream segments of the AFV industry, China can leverage the resource endowments of BRI countries to facilitate local industrial upgrading and promote green transformation. Lithium, cobalt, nickel, and rare earths are major battery metals in the upstream sectors of the AFV industry. While China accounts for a large proportion of global rare earth resources, it lacks lithium, cobalt, and nickel resources. Bolivia, Argentina, and Chile all have rich lithium reserves, and Zimbabwe and the Democratic Republic of the Congo (DRC) also have potential to develop lithium resources. In 2022, the United States Geological Survey (USGS) reported that the DRC was home to 46% of global cobalt reserves and 71% of global cobalt output, and that Chinese firms were operating several cobalt mines in the country. Most of global nickel ore resources are in Australia and Indonesia. Since Indonesia banned the export of unprocessed nickel ore in 2020,Footnote 1 Chinese companies have been expanding their presence in Indonesia’s nickel smelters and downstream sectors along the value chain.

We believe China can deepen cooperation with BRI countries in resource development and localized deep processing, improve its upstream and midstream presence along the value chain, and overcome its weakness in upstream energy metal resources. We think that BRI countries can introduce advanced technologies and production capacity in the AFV sector by leveraging their resource advantages, as well as conducting industrial upgrading and green transformation. This should help them achieve high-quality economic and social development. However, amid the green transition, we also suggest paying attention to the potential risk of rising production costs in technology, energy, capital, and land.

12.1.2 China’s Auto Industry Holds a Competitive Edge on the Global Stage Benefitting from Its Substantial Market Size and Advanced Technologies

China has ranked No. 1 globally in auto production and sales volume since 2009. It became the world’s largest AFV market in 2015, surpassing Germany to become the second largest auto exporter globally in 2022. Each milestone achieved testifies to China’s improving auto manufacturing capabilities, as well as the country’s strengths in product exports and overseas influence. China’s auto industry is now in a new stage of industrial upgrading to overseas industry chain expansion from product exports, and we expect China’s auto sector to play an important role in the BRI.

Previously, the competitive landscape of China’s PV market was dominated by joint-venture (JV) automakers or foreign brands. Due to the limited introduction of technologies and domestic production under the JV model, it took a long time for China’s automakers to accumulate core technologies and manufacturing capabilities independently, and they thus lagged behind competitors. However, China is now transforming from a major auto producer to an auto powerhouse after going through three stages: (1) Expanding the mini-car market at low prices (1949–2009); (2) developing SUVs with good value for money (2009–2015); and (3) building advantages in electric and intelligent vehicles (from 2015 to present). We expect the transformation to accelerate, driven by overseas expansion of the auto industry in countries that have signed BRI cooperation agreements.

The shift to the rise of domestic auto companies from a market dominated by JVs and foreign companies occurred amid a backdrop of the development of the global auto industry and China’s auto sector, as well as the upgrading of auto technologies. However, we should not ignore the notable long-term competitive advantages established by China’s auto industry in an era of electric and intelligent vehicles. According to 2022 data from the International Organization of Motor Vehicle Manufacturers (OICA), China has become the largest global automobile market with top-ranked economies of scale (Fig. 12.2) thanks to its advantages in flexible policies, substantial market demand, and an efficient supply chain.

Fig. 12.2
An arrow flow diagram lists the factors contributing to the competitiveness of China’s P V industry. It includes the industrial advantages of China's automotive industry, industrial opportunities due to changes in core technology, and industrial upgrading with Chinese cars expected to lead the world.

Source CAAM, MarkLines, CICC Research

Competitiveness of China’s PV industry.

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The advancement of electric and intelligent technologies has changed the core technological capabilities of automobiles, resulting in major changes in product form and the core value chain. China has caught up with or surpassed international peers in terms of auto technologies, gaining a competitive advantage in the industry chain. Domestic automakers are seizing opportunities from the rise of electric and intelligent vehicles, and their product and brand competitiveness has notably improved. Automakers are leading China toward becoming an automotive powerhouse while enacting measures to promote high-quality manufacturing in other countries.

Leveraging its industrial advantages, China’s auto industry boasts world-leading economies of scale, manufacturing capabilities, and supply chains. The automobile industry is a pillar industry underpinning China’s national economic development, and automobiles are an important consumer good. Driven by the macro economy and household income growth, the penetration rate of cars in household consumption has gradually increased. Data from the National Bureau of Statistics (NBS) shows that the average car ownership per 100 households in China increased to 43.5 units in 2022 from 16.9 units in 2013. After 28 consecutive years of growth, China’s auto sales volume peaked and fell in 2018, suggesting that the country’s auto market has entered a mature stage following the growth stage. Consumption upgrading has been an important growth driver for the existing auto market, which continuously promotes technological innovation and product quality improvement to ensure high-quality growth of China’s auto market.

The auto industry also makes full use of China’s strong supply chain capabilities, as evidenced by clear cost advantages, high-caliber engineers, and efficient management. In an era of electric and intelligent vehicles, such advantages have become more notable due to significant changes in vehicle powertrains. China’s advanced AFV batteries, motors, and control systems account for as much as 40% of the bill of materials (BOM) costs. China is able to respond to the needs of automakers in a timely manner as it has a well-established domestic automotive battery industry chain cluster with wide coverage in various segments, in-depth cooperation, and strong value chain support. We believe that this lays a solid foundation for scale expansion and continued cost reduction.

China excels in technological innovation, particularly in the advancement of electric and intelligent technologies. Under the growing trend toward electric and intelligent vehicles, the product form and core value of vehicles have changed significantly. AFV batteries, motors, and control systems are replacing traditional powertrains, and intelligent functions are being upgraded to provide a better intelligent cockpit experience as well as a higher level of autonomous driving. We note that electric and intelligent components account for more than 70% of BOM costs of smart electric vehicles as such vehicles do not use the high-value engine and gearbox powertrain system that traditional fossil-fuel-powered vehicles use.Footnote 2 Technological barriers that existed with fossil-fuel-powered vehicles have been broken, and China’s position in the electric and intelligent vehicle value chain as well as its competitive advantages have significantly improved, making it possible for domestic automakers to upgrade their brands.

Domestic automakers emphasize designing new products, optimizing the brand mix, and upgrading their brands. As a result, the competitiveness of their products and brands has significantly improved. Backed by China’s large auto market and educated workforce, the R&D cycle for new vehicles has been reduced to 12–18 months from 28 to 36 months. We see a notable increase in the number of new models released each year as the time to launch models has been shortened. Leading domestic automakers leverage the scale advantage of modularized platforms to broaden product categories and optimize portfolios, meeting the diverse needs of users across various market segments. In addition, in order to overcome the previous low-end brand image, domestic automakers have established distinct high-end electric and smart car brands, which distinguishes these products from their existing mid-range and low-end models. We believe that Chinese automakers are rapidly advancing their journey towards electrification, intelligent upgrading, brand premiumization, and global expansion.

The competitive landscape of China’s auto market that was previously dominated by JV brands has changed. Compulsory auto insurance data shows that Chinese brands were experiencing significant YoY sales volume growth and securing prominent market shares across all price ranges of alternative-fuel PVs in 2022 (Fig. 12.3). Furthermore, the persistent efforts of top-tier domestic automakers to expand overseas are yielding positive results in international markets. China’s auto exports rose 55% YoY in 2022 to 3.11 mn units, meaning that the country surpassed Germany to become the world’s second largest auto exporter, with the proportion of AFV exports also continuing to increase. China’s exports of alternative-fuel PVs soared 126% YoY in 2022 to 650,000 units, and the penetration rate of AFVs in exported vehicles rose to 26% from 8% in 2020 (Fig. 12.4).

Fig. 12.3
A positive-negative bubble chart of year-on-year sales growth of Chinese brands versus sale price. It plots bubbles of varying sizes for the percentage share of Chinese brands. B Y D has the largest bubble with 30 percent share followed by Tesla China 8%.

Source Compulsory auto insurance data, CICC Research

Chinese brands are experiencing significant sales growth and capturing prominent market shares across all price ranges of alternative-fuel PVs.

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Fig. 12.4
A double-bar chart and a line graph compare exports of alternative and non-alternative fuel P Vs and penetration rate of A F Vs versus years from 2010 to 2022. The line starts at 0 in 2015 and fixed until 2017, then rises steeply. Exports of non-alternative fuel P Vs are higher across all years compared to penetration rate of A F Vs.

Source CAAM, CICC Research

China’s exports of PVs have soared since 2021. Note Includes AFVs.

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China introduces advanced AFV technologies to BRI countries for mutual benefits. With domestic automakers having enhanced their manufacturing capabilities and product competitiveness, benefiting from economies of scale and technological advantages, China’s AFV industry has become globally competitive. Therefore, China’s auto industry is now capable of globally exporting high-quality products and cutting-edge technologies, with the AFV industry’s overseas expansion under the BRI framework implying that China’s high-end and advanced technologies, high-quality products and brands, and green and environmentally friendly sectors are going global. We think this is a reflection of the transformation and upgrading of China’s manufacturing industry, and highlights potential benefits for BRI countries. More importantly, China has the capability to introduce cutting-edge AFV technologies to BRI countries, elevate production capacity from low value-added to high value-added, redistribute profits across different segments in the auto value chain, and foster substantial collaboration in the AFV industry. We view this as an innovative approach that generates mutually beneficial outcomes for China and BRI countries.

12.2 Harnessing the Industry Cluster Effect and Intensifying Comprehensive Collaboration for Overseas Expansion

As mentioned above, over the past two decades, China’s automobile industry has seen persistent enhancements in its manufacturing capabilities, enabling the export of products globally and a notable increase in brand awareness overseas. Overall, the auto markets in BRI countries have visible growth potential given their low car ownership and weak auto industry foundations. As China’s auto industry expands globally through the BRI, it can offer good-value-for-money products to BRI countries. This facilitates the widespread adoption of automobiles and contributes to the improvement of people’s livelihoods, employment rates, and the overall economy and taxation in these regions. Moreover, the international expansion of AFVs has the potential to support the green transformation in BRI countries. BRI countries can leverage their resource endowments and venture into the midstream and downstream sectors of the value chain. This strategic approach allows for mutually beneficial and fruitful collaboration with China’s auto industry.

Several companies in China’s auto industry chain are expediting business development in BRI countries across various aspects, including products, production capacity, brands, channels, technologies, and human resources. We interpret this as indicative of the irreversible trend towards overseas expansion of the auto industry. Nevertheless, we assert that Chinese auto companies’ overseas expansion under the BRI framework is still marked by weak policy support and the absence of robust industry clusters. Additionally, there is a lack of connection and cooperation with host countries in terms of systematic capabilities, consumer markets, automotive batteries, and battery metals.

12.2.1 Increased Policy Support Has the Potential to Strengthen the Industry Cluster Effect of China’s Auto Value Chain in BRI Countries

Given the current domestic and international macro environments, we believe it is imperative for China’s auto industry chain to broaden its presence overseas through the BRI. At present, China is grappling with a diminishing demographic dividend, geopolitical tensions, and trade frictions. However, amidst the evolution of electric and intelligent vehicles, new opportunities for technologies, products, and brands are unfolding. The global competitiveness of China’s AFV industry is rising with growing demand for PV in Southeast Asia, particularly in the emerging AFV market. Expecting the overseas expansion of China’s auto industry to align with local market demand in BRI countries and regions, we believe that the BRI will stimulate the growth of local AFV industries and facilitate the export of high-quality products and advanced technologies.

Looking back, China’s policy support for the automobile industry under the BRI framework can be summarized as follows: (1) Encouraging domestic firms to invest in the local auto industry in BRI countries and regions; and (2) facilitating smooth export channels and implementing preferential export trade policies. While the policy guidance has encouraged outbound investment and exports, there has been a notable absence of concrete and practical measures such as comprehensive laws and regulations, fiscal and tax incentives, and financial support. As an illustration, the number of China’s overseas industrial parks experienced gradual growth starting from 2000, with a significant increase observed after 2010. The majority of these parks are located in BRI countries. However, they often exhibit unclear industrial positioning and park planning, coupled with limited capabilities in marketing, investment attraction, property management, and production and operational services. Consequently, these parks have limited appeal to Chinese companies, indicating a need for improvement in the cluster effect of China’s automobile industry chain.Footnote 3

The global expansion of China’s auto value chain has emerged as a prevailing trend. Greenfield investment stands out as the primary method of investment, with Chinese firms establishing numerous production facilities in BRI countries. Chinese domestic automakers have cultivated solid sales and brand recognition in overseas markets over the years, and have established factories in BRI countries such as Thailand, Indonesia, Malaysia, Pakistan, and Russia. Furthermore, since the beginning of the twenty-first century, Chinese auto parts manufacturers have built production bases in Eastern Europe and Southeast Asia while concurrently serving international automakers. Thanks to their advantages in labor cost, geographical location, and transportation, the majority of BRI countries and regions have evolved into host locations for the capacity expansion of China’s auto industry. This expansion has, to some extent, contributed to the development of their automobile industries and improved people’s livelihoods.

Presently, while direct greenfield investment is the primary method of investment for China’s auto industry’s overseas expansion under the BRI framework, other forms of investment such as equity investment in joint ventures and M&As are less prevalent. Additionally, the lack of extensive cooperation between China and BRI countries has resulted in a focus on localization primarily in production and manufacturing, with limited efforts in upstream and downstream processes such as resource processing, R&D, design, and marketing services. Nevertheless, we believe that China has the potential to broaden its auto value chain overseas through various avenues, including greenfield investment, cross-border acquisitions, and investment in joint ventures. This expansion strategy may help deepen resource integration with BRI countries, fostering comprehensive cooperation across the upstream, midstream and downstream segments of the value chain. We believe such measures will stimulate the transformation and upgrading of the AFV industry in BRI countries (Fig. 12.5).

Fig. 12.5
A table of 6 by 12 presents the expansion of production capacity by Chinese automakers and auto parts manufacturers, with years, automakers, presence overseas, year, auto parts manufacturers and main businesses, and presence overseas as the column headers.

Source Company websites, corporate filings, CICC Research

Expansion of production capacity by Chinese automakers and auto parts manufacturers in BRI countries (as of April 2023).

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The overseas footprint of China’s auto industry chain in BRI countries is now fragmented, with a lack of extensive resource sharing and support among Chinese companies; the formation of industry clusters has yet to materialize. The overseas factories established by Chinese automakers such as Great Wall Motor and Chery in BRI countries primarily adopt the knocked-down (KD) manufacturing model. In the KD process, a substantial number of components are transported to overseas regions for local assembly. However, this approach offers only a limited enhancement to upstream supply chain segments and the local auto industry. Chinese auto parts companies have built local factories in BRI regions, including Eastern Europe and Southeast Asia, primarily to meet the demands of international automakers such as Tesla, Ford, and Volkswagen. However, such measures have not generated synergies with Chinese automakers expanding overseas. Furthermore, China’s overseas industrial parks, mostly owned and developed by various local provincial governments and municipalities in China, tend to emphasize infrastructure construction while lacking front-end and back-end service capabilities. We believe that the Chinese government and the development of overseas industrial parks could provide more support to realize the desired industry cluster effect.

The overseas expansion of China’s auto industry under the BRI framework encounters operational challenges such as cross-border transaction costs. Our discussions with Chinese automakers reveal that while they acknowledge the need for international expansion, they are concerned about short-term earnings and operational risks associated with it. As most BRI countries are developing countries, their legal systems, state governance, and educational levels lag those of developed countries. Chinese companies operating in BRI countries might lack experience in communicating with host governments, particularly at the local level, and may encounter specific issues such as unfavorable political and business environments, difficulties in team integration, and inefficient capacity. Overseas factories of some Chinese auto companies have struggled to achieve profitability even after an extended period. We believe that safeguarding the rights and interests of Chinese firms with an overseas presence while simultaneously cutting overseas operating costs poses a long-term challenge for China’s auto industry.

We expect the Chinese government to encourage the overseas expansion of industry chains and the establishment of industrial clusters in BRI countries and regions. This involves developing overseas industrial parks and harnessing the industrial cluster effect to create robust and stable economic benefits over the medium-to-long term. First, to facilitate this, we think that companies can collaborate within China’s overseas industrial parks, sharing comprehensive value chain services such as infrastructure, hydropower and other energy facilities, property management, and production and operation. In this way, Chinese firms can streamline their overseas business operations and integrate their connections with local governments, relevant authorities, energy suppliers, property management companies, and other entities in the host country. This collaborative model enables Chinese firms to conduct overseas business operations with Chinese capital, technologies, and services, ultimately reducing the costs of cross-border transactions and overseas factory construction.

Second, Chinese auto companies have the opportunity to enhance synergies within the manufacturing and financial aspects along the supply chain, fostering a strong ecosystem to expand businesses into international markets. For example, large automakers can establish close horizontal cooperation in financial matters, and secure a stable supply from Chinese auto parts companies. This collaboration can involve standardizing auto parts production through deep integration and connection in the manufacturing process. Such collaboration across the supply chain can lead to a more efficient and competitive auto industry chain, which may ultimately generate greater economic returns.

We now turn to opportunities and challenges facing China’s auto industry in its overseas expansion under the BRI framework across three key perspectives: Complete vehicles, automotive batteries, and AFV metal resources.

12.2.2 Improving Systematic Capabilities at Automakers to Deter Disorderly Investments and Foster Healthy Competition

As China’s auto industry expands globally, it encounters distinct challenges and opportunities. In Southeast Asia, the fossil fuel-powered vehicle market is fiercely competitive, and is dominated by Japanese and South Korean automakers. Moreover, European and North American brands hold dominant positions in the auto markets in Africa and the Americas. Chinese automakers are confronted with challenges stemming from established brands and intense price competition in these regions. However, with the increasing adoption of AFVs in BRI countries, we believe that Chinese automakers should cultivate AFV consumption habits in overseas markets, leveraging their technological strengths in electric and intelligent vehicles to build comprehensive and systematic capabilities.

  1. (1)

    Systematic capabilities of Chinese automakers still in the process of improving as they expand globally

As cars are high-priced durable consumer goods, they come with strong consumer demand for services such as personalized configuration, financial support, after-sales maintenance, and the sale of used cars. This means that when exporting products and production capacity to BRI countries, automakers need to possess systematic capabilities across various domains. This includes R&D centers, sales and service outlets, after-sales services, financial services, and charging and battery swapping infrastructure.

According to some Chinese auto companies, despite their products having solid advantages in value for money, local consumers in some BRI countries may opt for Japanese and South Korean brands which can be purchased with local bank loans due to financial policy considerations. Thus, we believe it is crucial for Chinese automakers to receive guidance and support from the Chinese government in securing resources and obtaining bank credit in overseas regions. Especially for AFVs, consumer concerns about driving range, charging, and after-sales services create a unique set of challenges. Beyond improving the competitiveness and value-for-money of products, the development of comprehensive and systematic capabilities is a significant challenge for domestic automakers seeking to go global, and a key determinant of their success.

For example, we believe that SAIC Motor (SAIC) has become China’s largest auto group by export volume (2022 data from CAAM) due to more than just its overseas expansion of production capacity. SAIC has strategically bolstered its global presence by establishing local R&D centers, expanding marketing service networks, improving after-sales service and charging facilities, and implementing differentiated strategies in local markets. This approach underscores SAIC’s capabilities in global expansion, encompassing both products and services. SAIC Motor has concentrated its overseas production capacity in Southeast Asia and South Asia, operating four production bases or KD factories in Thailand, Indonesia, India, and Pakistan. The company has also established three innovation R&D centers and three design centers in Europe, the US, and Japan.

SAIC has established more than 1800 regional marketing service centers. These centers are in Europe, South America, West Asia, North Africa, Australia, New Zealand, and ASEAN countries, allowing the firm to provide localized after-sales services such as maintenance, loans, and charging infrastructure. In addition, supported by its own logistics arm, Anji Logistics, the company has opened seven self-operated international flight routes to support supply chain management, spanning regions such as Southeast Asia, Mexico, western South America, and Europe. Moreover, SAIC is promoting talent localization by recruiting a large number of local talents in West Asia, India, and Thailand to develop products and services that meet local demand and improve the overall consumer experience.

  1. (2)

    Promote robust competition and mitigate risks associated with disorderly investment and overcapacity

Confronted with competition from well-established brands in BRI countries, Chinese automakers should steer clear of engaging in price wars and disorderly investments. European and North American brands dominate the auto markets in Africa and the Americas. In BRI regions such as Southeast Asia, competition is intense, and Japanese and South Korean brands offer good value-for-money and align with local consumer habits, thus holding leading positions in such markets. Data from MarkLines shows that the market share of Japanese and South Korean automakers in Asia (excl. China, Japan and South Korea) had at one point exceeded 40%, and maintained a level of around 20% from 2006 to 2022. Over the past two decades, Japanese and South Korean automakers have dominated Asian markets, which we attribute to the low fuel consumption and the high quality of their models. They have built cost advantages and established sound supply chain networks in these markets.

In 2022, fossil fuel-powered vehicles accounted for 70% of China’s PV sales volume overseas. Currently, China’s exports of fossil fuel-powered vehicle maintain competitiveness primarily through their good value-for-money. The targeted export countries exhibit fragmentation with limited sales volume and market share within individual countries. In our view, with the potential for domestic brands to expand market shares in various countries amid sales growth, it is necessary for them to carefully consider how to avoid vicious competition, or worse, price wars, with existing market participants in overseas regions.

Looking ahead, we believe China’s AFVs exported to overseas regions are characterized by advanced electric and intelligent features, and mature product design. This is a result of the advantages derived from well-established industry chains, manufacturing capabilities, and a skilled workforce of high-caliber engineers. We expect China’s AFV industry to excel in exporting high-quality products, expanding overseas capacity, and exporting technology, as well as making breakthroughs in BRI countries. However, we think that achieving breakthroughs in overseas AFV markets will take time, and that AFV companies need to be cautious about avoiding disorderly investment and overcapacity. We note that some international automakers are optimizing their global presence and divesting excess production capacity as part of their strategic plans. This presents opportunities for Chinese automakers to acquire and consolidate high-quality assets, alleviate pressure on capex, reduce operational risks, and to benefit employees at factories and upstream and downstream partners.

For example, Thailand has the largest annual output of automobiles in Southeast Asia (2022 MarkLines data), and has attracted international automakers such as Toyota, Nissan, and General Motors, which have established mature auto production facilities in this market. Great Wall Motor in November 2020 took full ownership of General Motors' manufacturing plant in Rayong, Thailand.

12.2.3 Encouraging Global Expansion of Automotive Battery Production Under the BRI Framework to Mitigate Against Risks Associated with International Competition

The transition towards electric and intelligent vehicles has triggered changes in core component systems and technologies, resulting in changes to the auto industry supply chain. The powertrain of fossil fuel vehicles encompassing components such as the engine and the gearbox is a mechanical product mainly manufactured by subsidiaries of automakers and a limited number of component integrators with close affiliations to automakers. In contrast, the core power system of AFVs, including components such as the battery and the electric drive system, spans a more expansive value chain. This involves various upstream chemical and metal materials, and products are mainly manufactured and sold by third-party independent suppliers.

Thus in the global expansion process, fossil fuel automakers can encourage their engine and gearbox subsidiaries to establish localized factories overseas for auto parts production. In contrast, AFV manufacturers must cooperate with external automotive battery suppliers to ensure local supply chains in overseas regions. In particular, numerous BRI countries possess abundant resources in lithium, nickel, and cobalt—the core raw materials for automotive batteries. We believe this will generate robust synergies with overseas expansion of China’s AFV and automotive battery sectors, fostering the development of industry chains in BRI countries.

Anticipating a robust collaboration, we expect China’s automotive battery industry to extensively engage in partnerships in BRI countries, leveraging local resources to diversify value chain presence. Until June 2023, the 151 BRI countries did not have policies that directly restrict the midstream lithium-ion battery (LiB) production segment. Except for Indonesia, which has banned the export of unprocessed nickel ores since 2020, and Chile, which planned to nationalize its lithium industry and take more control of natural resources,Footnote 4 other BRI countries have not devised or implemented any restrictive policies or draft plans related to such resources.

We believe that China’s automotive battery industry can establish mutually beneficial cooperation with BRI countries, leveraging local resources to expand its presence into the midstream and downstream segments of the AFV value chain. This strategy has the potential not to only broaden market demand outside Europe and the US and diversify production capacity, but to also drive the transformation and upgrading of the AFV industry in BRI countries towards cutting-edge technologies and high-end production capacity.

12.2.4 Strengthening Collaboration to Diversify Upstream Supply Sources by Leveraging the Resource Endowments of BRI Countries

Lithium resources play a crucial role as a primary raw material for AFVs, and fluctuations in lithium prices significantly influence the cost of automotive batteries. Amid supply shortage, rising lithium salt prices would lead to a sharp increase in LiB costs. Over 2020–2022, during the shortage of lithium supply due to the rapid expansion in AFV demand, the prices of battery-grade lithium carbonate and lithium hydroxide soared more than tenfold from their lowest point. As cathode materials constitute the largest proportion of LiB costs, their production costs are predominantly affected by lithium salt prices. Consequently, the sharp rise in lithium salt prices translated into higher LiB costs, exerting upstream cost pressure that was passed on to the downstream sectors of the value chain. The resulting spike in battery costs has thus weakened the profitability of AFV manufacturers, limiting the potential for price cuts in the Chinese AFV market.

We think this underscores the necessity for China to cooperate with BRI countries in securing supplies of lithium resources. Given China’s weak cost competitiveness in lithium and heavy dependence on foreign lithium resources, we think the upward trend in lithium prices will lead to higher battery costs, restricting the potential for price cuts in the Chinese AFV market. Overseas lithium mining companies equipped with their own high-quality resources hold a cost advantage, and their long-term agreements with non-Chinese AFV companies enhance their competitive positions.

12.3 Reflections and Insights

We expect China’s auto industry to play a crucial role in the BRI, achieving comprehensive expansion in BRI countries across various dimensions, including product exports, production capacity, brands, technologies, and human resources.

12.3.1 Promoting International Expansion Through Various Means

Chinese AFV makers can broaden their global presence through various methods, including direct exports, investment in joint ventures, cross-border acquisitions, and greenfield investment. Investing in joint ventures and pursuing cross-border acquisitions offer a strategy to mitigate policy risks in host countries as foreign enterprises could leverage local resources and export technologies to gain market share. Greenfield investment can help companies sustain their technological and management advantages. Given the diverse characteristics of BRI countries, we believe that Chinese companies in the auto industry can adopt various global expansion approaches. This includes direct exports, joint ventures, cross-border acquisitions, and greenfield investment. Through such methods, Chinese auto companies would strike a balance between leveraging local resources, reducing political risks, and preserving their competitive edge. For example, they can opt to export products directly to smaller markets or form joint ventures with local companies, while investing in upstream and downstream sectors, establishing local industry chains, or exporting key technologies to acquire core resources in large markets.

Especially in regions characterized by political risks, we believe Chinese firms can pursue expansion through technology licensing and operational cooperation. For example, CATL and Ford have announced plans to build a battery factory in North America.Footnote 5 Under the arrangement, Ford will have full ownership of the production facility, while CATL will license its technology and oversee factory operations. This approach helps mitigate risks associated with international competition. We believe that in BRI countries and regions characterized by elevated policy risks and challenges related to international competition, Chinese companies could pursue overseas expansion by adopting novel cooperation models, e.g., technology licensing, and offering operation services and support.

We advocate for efforts to generate an industry cluster effect in the overseas expansion of China’s auto industry. Currently, various segments along China’s auto value chain lack full cooperation, mutual support, and resource sharing in their global expansion efforts. Individual companies face high costs associated with cross-border transactions and policy risks. Chinese companies can enhance collaboration by forging stronger ties among themselves, fostering industrial clusters through methods such as equity cooperation, establishing supporting factories, and allocating additional resources, thereby improving operational efficiency and competitiveness in the global market.

12.3.2 Emphasizing the Importance of Cooperation and Building Partnerships for Resource Development Under the BRI Framework

The lithium brine project in Argentina of Ganfeng Lithium, a leading Chinese lithium company, serves as a successful example of resource cooperation between Chinese companies and BRI countries. Ganfeng Lithium’s technological and financial advantages complement Argentina’s resource endowments. The company has expanded its presence along the lithium extraction value chain and fostered strong relationships with the local lake-salt industry. By signing a memorandum of understanding with the provincial government of Jujuy and the Ministry of Productive Development of Argentina, Ganfeng Lithium has been exploring the possibility of establishing a battery assembly plant in Jujuy, Argentina. Moreover, Ganfeng Lithium’s lithium extraction project from salt lakes in Argentina has not only created additional job opportunities for local residents, but has also helped the company integrate into local communities. By establishing a welfare foundation and implementing a donation program for communities where it operates, Ganfeng Lithium has garnered support from these communities. The company has also invested in building essential facilities to foster a harmonious relationship between industrial production and the local communities.

Ganfeng Lithium’s operations in Argentina offer valuable insights and experience in resource cooperation between China and BRI countries. First, we think Chinese enterprises should carefully consider the complementarity between their unique strengths and the requirements of local economic development. By offering funds and technologies for investment in BRI countries’ resources, they can foster mutually beneficial cooperation. Second, China could strengthen collaboration among companies in all segments of the AFV industry chain as they expand overseas. Extending the industry chain should align with the long-term development needs of local industries. Third, Chinese enterprises should be encouraged to embrace social responsibility, emphasizing environmental protection and fostering community relations throughout the resource development process. We believe this approach is conducive to fostering sustainable and enduring partnerships.

12.3.3 Developing and Executing Plans for Overseas Expansion Under the BRI Framework Tailored to Local Conditions to Foster Mutually Beneficial Cooperation

For China’s auto industry to expand globally under the BRI framework, it is crucial to consider various factors in host countries, including local demand, industry and policy environment, and production factor endowments. Measures should be tailored and implemented based on the specific conditions of each locality. We use the Porter Diamond Model to assess the competitive advantages of BRI countries. From a macro perspective, we recognize that different countries exhibit variations in demand conditions, economic environments, industrial policies, and production factor endowments, as well as the development needs of their automobile industries. Given such factors, we believe companies in China’s auto industry should craft and implement plans for overseas expansion tailored to the specific local conditions in BRI countries.

The auto industry as a whole is characterized by its capital and technology intensity, involving substantial upfront investment, high fixed costs, and significant economies of scale. We believe that companies should prioritize markets with substantial potential demand and favorable competitive landscapes. Meanwhile, these firms should decide on which products to introduce overseas and determine the method of introduction. This process requires consideration of supporting infrastructure along the industry chain, resources, costs, and policies.

Western Europe and South Korea have large AFV markets and high AFV penetration rates, but Chinese companies may face intense competition and policy risks due to the dominance of local automakers and supporting segments of the AFV industry chain in these markets. We believe that while breaking through in fossil fuel-powered vehicles might be difficult for Chinese automakers, opportunities still exist for competitive AFV models to make inroads in these markets, as exemplified by the MG brand’s significant share in the AFV market in Western Europe in 2022. Given the relatively high labor and land costs in these markets, it may be more cost effective for Chinese automakers to build production capacity in neighboring regions. However, Europe has clear policy guidance on the localization of the AFV industry chain. Automotive battery manufacturers may carefully consider building factories in local regions to mitigate policy risks and align with the regulatory framework in place.

In contrast to Western Europe and South Korea, the Southeast Asian market has greater growth potential, with extensive industry chain support for fossil fuel-powered vehicles and a continuing increase in AFV penetration. The market landscape in Southeast Asia is characterized by the dominance of Japanese firms and the emergence of local brands. We believe that companies can enter both the fossil fuel-powered vehicle and the AFV segments, and that products with economic efficiency or a high level of intelligence may be more appealing. Either way, we think Chinese firms stand to benefit from the rising penetration rate of AFVs in Southeast Asia. To expand in this region, companies could establish localized production facilities, leveraging the advantage of lower labor costs and comprehensive supply of auto parts. Notably, firms like SAIC, GWM, BYD, and Neta have already established factories in Thailand. The Thai government’s strong support for AFV consumption through subsidies and tax incentives such as income tax reduction, customs duties exemptions, and investment incentive funds, further encourages investment from automakers and auto parts companies.

Indonesia also supports the development of the AFV industry but has imposed specific requirements on local production or procurement of vehicles and parts. With Indonesia’s abundant nickel resources and favorable policies, we foresee Thailand and Indonesia becoming major destinations for expansion of China’s auto industry chain in Southeast Asia through investment and capacity expansion. Apart from meeting local demand, we believe that developing businesses in Thailand and Indonesia would facilitate Chinese auto firms’ expansion further into Southeast Asia, as well as into Australia and New Zealand. We believe that Thailand and Indonesia will become important interchange hubs for the overseas expansion of Chinese automakers under the BRI framework.

Furthermore, West Asia, Russia, and South America also have substantial auto markets. However, we see limited immediate growth drivers for the penetration rate of AFVs in these regions. We suggest entering these three markets by introducing fossil fuel-powered vehicle products and establishing relevant production facilities. Notably, South America has abundant upstream resources, which companies can leverage by incorporating technologies. In this region, we think firms should prioritize their environmental, social, and governance (ESG) performance while also focusing on expanding their industry chain expansion.

Central and Eastern Europe is a relatively small market, but it is located in the middle of the Eurasian continent and has supporting infrastructure for the automobile industry. We expect this region to become an important base for China’s overseas construction of automobile production capacity. In regions with smaller auto markets, we believe it may be more efficient in the near term to rely on exports and capacity expansion in neighboring regions.