Detroit’s automakers are reassessing their strategies in China — the world’s largest auto market — after being caught flat-footed by increasingly competitive domestic manufacturers there churning out appealing, high-quality and attractively priced electric vehicles.

Ford Motor Co. executives say the Blue Oval would move to a “leaner” model in China, focused on commercial vehicles and exports. General Motors Co. executives are candid about their challenges in China, even as they prepare to launch a bevy of EVS there. Stellantis NV has opted for an “asset-light” approach amid competitive pressure and the threat of sanctions. And other foreign brands, such as once-dominant Volkswagen AG, have seen their market share slip amid the rise of domestic manufacturers such as BYD Co. Ltd.

“When you’ve got BYD, a massive Chinese domestic producer coming in at price points that are half whatever GM and Ford are going in at, with quality vehicles … then you’ve got a difficult-to-beat proposition,” said Mark Barrott, a principal with Plante Moran’s strategy and automotive practice. “And it’s probably the right time for the GMS and Fords to reassess what they’re doing there.”

China’s domestic automakers are outmaneuvering foreign competitors that for years dominated the market after investing heavily in local production, analysts and Detroit auto executives say. They are retaking their home turf by delivering vehicles that Chinese consumers are clamoring to buy, and exploiting legacy automakers’ underestimation of how quickly software-defined electric vehicles would take off.

It remains to be seen how the market will shake out, and to what extent the automakers that are retreating from China will attempt a comeback. But some experts say it’s crucial these brands figure it out if they hope to be globally competitive — even as geopolitical tensions with China and the politics of today’s Washington make big investments riskier.

“I don’t think any leading OEM (original equipment manufacturer) can afford to abandon China,” Barrott said, “and then consider themselves a global entity.”

“Ford and GM are just not getting there aggressively enough with products that the Chinese market wants,” he added. “It’s as simple as that.”

Environment in China is ‘very challenging’

GM has been struggling in China — historically its largest sales market — in recent years. The automaker and its joint ventures there reported that sales in the first quarter declined 25% year-over-year. All of GM’S brands saw sales fall: 35% for Buick, 34% for Chevrolet, 32% for Cadillac, 13% for Wuling, and 87% for Baojun.

In 2022, GM’S China sales dropped 20% to 2.3 million from the 2.89 million reported in 2021. Sales in 2020 were 2.9 million, down 6.2% from 2019 — marking GM’S third straight decline in annual sales in the market.

Meanwhile, GM’S equity income in China slipped by $150 million year-over-year in the first quarter “due to lower volume and pricing pressure, partially offset by cost actions,” Chief Financial Officer Paul Jacobson said on the automaker’s April 25 earnings call.

“The environment in China has been very challenging as the industry navigates continued Covid-related impacts, regulatory changes for both EV and (internal combustion engine) vehicles and greater-than-expected competitive pricing actions,” Jacobson added. “The China team is taking aggressive actions to offset. However, we don’t expect an improvement in equity income until the second half of the year.”

GM’S struggles reflect a broader trend in China. Once-dominant foreign brands, to varying degrees, are getting squeezed out by domestic EV manufacturers like BYD, Nio Inc. and Li Auto Inc. — a shift that is explained by the fast rise of EVS in China. More than a quarter of passenger vehicle sales in China were electric last year, and more than 80% of the EVS sold there last year were made by domestic manufacturers, the New York Times reported.

Legacy automakers’ market share in China fell to 41% in the last quarter of 2022 from 61% in 2020, Bloomberg reported. Since 2019, the share of production from foreign brands in China fell to 47% from 54%, according to LMC Automotive. And domestic brands now account for more than half of China’s auto market.

“Chinese consumers are devouring all-electric vehicles; now they’re over 20% of the vehicles sold,” said David Whiston, an autos equity analyst at Morningstar Research Services. “And it seems the local Chinese players have been more cognizant and more ready for that than the foreign automakers.”

Stellantis CEO Carlos Tavares, speaking at an event in Germany recently, said that China’s automotive industry is essentially establishing what the cost structure of automakers in other markets looks like for EVS.

“Now we have the problem of affordability, and we have our Chinese competitors that are going to challenge us with a very different cost structure,” he said. “We are challenged by our Chinese competitors. They have done the job. So, the question for Europe is very important: Is the only way to compete with our Chinese competitors to use the same cost structure, or can we find another way to compete with them? That is the 1 million euro question.”

The Jeep maker’s money-losing joint venture in China filed for bankruptcy last year following its decision to dissolve the partnership and import its SUVS into the country. Tavares has said Stellantis is pursuing an “asset-light” approach in the country, and that Stellantis could end manufacturing in China.

For GM, meanwhile, 2023 is supposed to be a breakout year for its EV business there. The automaker is planning to deliver more than 20 new and refreshed models in China this year, and one-third of them will be electric. GM has announced plans to roll out more than 15 EVS based on its new Ulitum electric platform after it started delivering the Cadillac Lyriq electric crossover, based on Ulitum, in September.

Buick’s first model based on the Ultium platform — the Electra E5, a five-seat SUV equipped with a virtual cockpit — was made available in April.

“The arrival of the Electra E5 represents the evolution of Buick as well as the brand’s ongoing move toward electrification and intelligent driving in its largest market,” Cesar Toledo, general director of Buick Sales and Marketing at SAIC-GM in Shanghai, said in a statement. “The Electra E5 is tailored for the needs and preferences of mainstream EV buyers in China.”

In an interview with CNBC last week, GM CEO Mary Barra acknowledged that the Chinese auto market is “incredibly difficult from an industry perspective and specifically for GM,” calling the next 1218 months “critical” for GM to introduce “the right EV products in market to really win.”

Barra argued that GM has a competitive advantage in China because of its “strong brand recognition, especially with Cadillac and with Buick, because it’s part of China’s heritage.”

It’s also about “getting the right products with the right range and the right technology, and that’s what we’re going to be launching over this next year or so. It’s a transformation story in China.”

Changing strategies

Experts say that better product — namely, vehicles that are smart, stylish, electric and affordable — will be key to foreign automakers’ efforts to regain their footing in China.

Volkswagen, which had been China’s top-selling auto brand before being dethroned by BYD, announced at the Shanghai Auto Show last month that it would introduce 10 more EVS in China by 2026 and slash the time it takes to develop new models by nearly 40% in a bid to keep up with the domestic competition, Reuters reported.

“What moves Chinese customers today, moves the world tomorrow,” BMW CEO Oliver Zipse reportedly said.

John Zeng, director of Asian forecasting for LMC Automotive, wrote in a note last week that more than two-thirds of the vehicles on display at the show were new energy vehicles. He noted that local brands on display had features like 3D video games and karaoke: “These novel consumer electronic functions are selling points that foreign brands have not yet grasped, because they still tend to see cars only as a means of transportation.”

LMC forecasts that new energy vehicles in the Chinese market will grow to 8.47 million this year, for a penetration rate of 35%. By 2028, analysts expect those numbers to grow to 14.36 million units, with a penetration rate of 52%.

“If foreign auto brands do not want to repeat the mistakes that Nokia made in the mobile phone market,” Zeng wrote, “it is time to make fundamental changes.”

At least for now, Ford appears to be taking a step back from China. It’s a different story for the Dearborn automaker than some of its legacy rivals, as Ford is not a major player there. Its market share hovers around 2%.

CEO Jim Farley and other top Ford executives recently visited China to learn about the EV market there and determine the automaker’s strategy in the region after years of sluggish sales. The trip, Farley said on the company’s first-quarter earnings call, was an “epiphany,” and emphasized his view that the software experience of next-gen vehicles is the key to success.

Farley characterized Ford’s luxury Lincoln brand’s results there as a “success” and noted that the automaker’s internal combustion engine business there is profitable.

“But you have to look at China through the strategy lens,” he said. “It’s not a huge business for us. And we believe that not only is it the biggest EV market in the world, but customers digitally are ahead of the rest of the world. So it’s a really important market for us.”

Ford will decrease its investment level there and move to a “leaner, more focused business in China, with higher returns,” Farley told analysts. That will involve leveraging its joint venture with Chinese manufacturer Jiangling Motors Co. Ltd. to “double down” on Ford’s commercial vehicle business and establish an export hub for affordable EVS and ICE commercial vehicles for markets like Australia and Mexico. The automaker lost $600 million in China last year.

“We’re not going to try to serve everyone,” Farley said. “It’ll be a lower investment, leaner, much more focused business in China, and we’re going to have a team on the ground that will be global resources for the company, because of how important the market is in EV.”

While it makes sense for Ford to take a step back from China, Plante Moran’s Barrott said, it’s an open question what the automaker’s timeline is for developing a more successful strategy for the region. Perhaps it will take a similar approach to what GM did in Europe: Exiting for several years before plotting a return with an all-ev lineup.

“It’s an imperative for them to figure it out,” Barrott said. “And I think it all comes back to a simplified product and platform strategy.”