China’s Auto Parts Makers Muscling In; One Raided By Homeland

The central planners in Beijing know that countries with a native auto industry are among the most industrially powerful in the world:  The U.S., Japan, Germany, France and the latest newcomer beginning in the 1980s – Korea.  No country has really added new players to the list of global auto brands – until China.  

Gone are the days when your average Chinese worker rode a bike to work. Global automakers envisioned these workers trading in their two wheels for four, with power steering and anti-lock brakes. They partnered with Chinese companies to establish joint ventures, setting up manufacturing plants and selling cars locally.

These joint venture partners were fast-tracked into learning how to make Western cars.  These ventures spawned their own supply base of Chinese components suppliers and subcomponent suppliers (commonly referred to as Tier I and Tier II suppliers in industry lingo).  Chinese companies subsequently built their own brands, and when they didn’t build, they acquired existing ones, such as Volvo in 2010, which is now majority-owned by Geely, a Chinese automaker.

After a generation of making cars with Western automakers, China has evolved into an electric vehicle (EV) force to be reckoned with.  In 2023, China produced over 30.1 million vehicles, with Chinese-owned brands contributing 21.7 million units. Of these, 9.1 million were electric vehicles. In comparison, the U.S. produced 10.6 million vehicles, including 1.2 million EVs.

They not only possess EV auto brands, but also a tiered supply base producing essential components like steel and aluminum structures, glass windshields, tires, transmissions, interiors, lithium ion batteries and all the other electronics, pumps and pipes that go into an EV.  

The stated aim of the Made in China 2025 industrial policy is to elevate new energy vehicles and nine other critical industry sectors to global powerhouse status.  Similar to its strategy with solar panels – from the production of polysilicon to ingots, solar wafers and finally solar panels – Chinese state-sponsored industrial expansion in the EV industry seeks to control the entire value chain.  

According to a forthcoming Center for Strategic and International Studies report, the Chinese EV industry including the tiered supply base received over $140 billion in direct subsidies between 2009 and 2021, not including tax deductions, public procurement, land provision, cheap energy and low-interest loans.  Coupled with IP appropriation and import protection from competition, these measures have enabled manufacturers across China’s EV value chain to realize technical competency, unmatched economies of scale, oversized capacity and the ability to offer product at artificially low costs.

When traditional car makers come under increased pressure from Chinese EV manufacturers, as we’ve seen in the news recently, it logically follows that the traditional automotive parts manufacturers face equivalent challenges from their Chinese counterparts. While competition at this next level might not grab as many headlines, the economic impact of such competition is equally subversive to the health of the overall auto industry.   

In 2023, the global Tier One auto parts supplier industry generated $1.9 trillion in revenue, and the global auto aftermarket parts industry generated $700 billion. The U.S. market comprises approximately 25% of each, representing $650 billion in annual revenue.