Despite warnings from European leaders like German Chancellor Olaf Scholz and European Commission President Ursula von der Leyen about the need to “derisk” from China, the country remains an irresistible market for global car manufacturers.

The calls to reduce dependence on China, driven by growing geopolitical tensions, particularly in the Taiwan Strait, have not deterred the automotive industry, particularly German carmakers, from deepening their ties with the Chinese market. Here’s why China remains indispensable to the global automotive industry.

The Sheer Size of the Chinese Market

China is the largest market for new car sales in the world by a significant margin. In 2023, China registered 25.6 million new cars, far outpacing the United States with 15.5 million, the European Union with 12.9 million, and India with 4.1 million, according to Statista. For any global car manufacturer, the sheer volume of sales potential in China makes it an indispensable market. The notion is simple: if you’re not in China, you’re not playing on the global stage.

German automakers, in particular, have doubled down on their investments in China, with direct investments reaching €7.3 billion in the first half of 2024 alone, compared to €6.5 billion for the entire year of 2023. The trend shows no sign of slowing down, with investments accelerating in 2024. This investment is driven not just by the current market size but by the recognition that China will likely continue to shape the future of both car consumption and production for years to come.

The Shift Towards Electric Vehicles (EVs)

One of the most significant changes in the Chinese automotive market has been the rapid adoption of Electric Vehicles (EVs). In recent years, EV sales have surged, with Chinese brands dominating this segment. In mid-2023, Chinese-owned and led car makers overtook foreign brands to claim the majority market share, and by 2024, research from Dunne Insights showed that Chinese brands held a 62% market share.

This shift towards EVs has caught many foreign manufacturers off guard, especially those still heavily invested in combustion engine technology. Chinese brands have capitalized on the growing demand for EVs, supported by significant government subsidies and a strong domestic supply chain, particularly in battery manufacturing.

Companies like CATL, a leading battery manufacturer, have received substantial government support, further strengthening the position of Chinese EV manufacturers.

Foreign automakers that have historically profited from joint ventures in China are now facing a tougher market. The combination of patriotic consumer sentiment, particularly against US brands amidst ongoing trade tensions, and the technological shift towards EVs has eroded the market share of foreign car makers.

For instance, General Motors, which sold 4.1 million units in China in 2017, saw its sales plummet to 1.8 million in 2024, leading the company to announce its withdrawal from China. This move is seen not as a strategic retreat due to geopolitical risks but rather as a defeat in the face of stiff domestic competition.

Geopolitical Risks vs. Market Reality

While the geopolitical risks associated with China’s relationship with Taiwan are real and significant, they are not yet a primary concern for global car manufacturers. The immediate threats to these companies are more existential – namely, the rapid evolution of the Chinese market towards EVs and the rise of formidable domestic competitors. For now, the potential economic gains from maintaining and expanding operations in China outweigh the long-term risks posed by geopolitical instability.

The automotive industry’s deep entrenchment in the Chinese market is also a reflection of the complex global supply chains that are difficult to untangle. German carmakers, for example, rely heavily on Chinese raw materials and components, making a complete decoupling from China both economically unfeasible and strategically unwise. The costs of such a move would be staggering, not just in terms of lost market share but also in the disruption of global production networks.

The Future of Global Automotive Strategy

As much as European leaders advocate for a reduction in economic dependency on China, the reality for car manufacturers is that China remains a crucial market. The ongoing evolution of the Chinese automotive market, particularly in the EV sector, means that global manufacturers cannot afford to ignore or retreat from it.

While the specter of a Chinese EV invasion into foreign markets may be overblown, the dominance of Chinese brands within their own market is a clear signal that foreign automakers need to adapt quickly if they want to stay competitive. This may involve greater investments in EV technology, deeper integration into the Chinese supply chain, and perhaps even more aggressive joint ventures with Chinese firms.

In conclusion, while the geopolitical concerns raised by figures like Olaf Scholz and Ursula von der Leyen are valid and warrant attention, they are not the immediate concern for car manufacturers. The need to stay relevant in the world’s largest automotive market and to navigate the rapid shifts in consumer demand and technology within China are far more pressing issues. As long as China remains the world’s largest car market, it will continue to be irresistible to global car manufacturers, regardless of the geopolitical risks.